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Item 7. Management’s Discussion and Analysis

2024-03-01 compared with 2023-03-03 · 110 added, 191 removed, 341 unchanged (47% of the section changed)

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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.

Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section titled “Risk Factors” under Part I, Item 1A in this Annual Report on Form 10-K.

Our fiscal year ends January 31.

References to fiscal 2024, for example, refer to the fiscal year ended January 31, 2024.

Okta is the leading independent identity provider.

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.

Okta is the leading independent identity partner.

Our Workforce Identity Cloud and Customer Identity Cloud, powered by Auth0, enable 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.

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

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

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

As organizations shift from network-based security models to a Zero Trust security model focusing on adaptive and context-aware controls, identity has become the most reliable way to manage user access and protect digital assets.

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

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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.

We focus on acquiring and retaining our customers and increasing the value we provide to our customers over time, and thus their spending with us through expanding the number of users who access our Workforce Identity Cloud and Customer Identity Cloud and up-selling additional product offerings.

We sell our product offerings 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.

Our subscription fees include the use of our service and our technical support and management of our platform.

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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.

Acquisition of Auth0

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.

Impact of Cybersecurity Incidents

In the past we have experienced cybersecurity incidents, such as the January 2022 incident involving one of our third-party service providers and the October 2023 incident where a threat actor gained unauthorized access to and stole information from our third-party customer support system, that harmed our reputation and customer relations, adversely impacted our financial results and may create additional liabilities.

While we expect the impact of these security incidents to adversely affect our future financial performance, we cannot predict the extent of such impact with certainty.

Due to the nature of our business, the announcement of any security incidents, even if not significant, could have these impacts.

Impact of Current Economic Conditions

Worldwide economic uncertainties and negative trends, including financial and credit market fluctuations, uncertainty in the banking sector, rising interest rates, inflation and other impacts from the macroeconomic environment have, and could continue to, adversely affect our business operations or financial results.

As we continue to monitor the direct and indirect impacts of these circumstances, the broader implications of these macroeconomic events on our business, results of operations and overall financial position remain uncertain.

See the section titled “ Risk Factors '' included under Part I, Item 1A above for further discussion of the possible impact of these factors and other risks on our business.

Financial Information and Segments

We operate our business as one reportable segment.

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 2024, 2023 and 2022, our revenue was $2,263 million, $1,858 million and $1,300 million, respectively, representing a growth rate of 22% and 43% in fiscal 2024 and 2023, respectively.

For fiscal 2024, 2023 and 2022, we generated net losses of $355 million, $815 million and $848 million, respectively.

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Remaining performance obligations $ 3,385 $ 3,007 $ 2,694

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

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

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Dollar-Based Net Retention Rate

Our ability to generate revenue is dependent upon our ability to maintain our relationships with our customers and to increase their utilization of our platform.

Part of our ability to generate revenue is dependent upon our ability to maintain our relationships with our customers and to increase their utilization of our platform.

We believe we can achieve these goals by focusing on delivering value and functionality that enables us to both retain our existing customers and expand the number of users and products used within an existing customer.

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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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Larger enterprises often implement a limited initial deployment of our platform before increasing their deployment on a broader scale.

The decrease in our Dollar-Based Net Retention Rate as of January 31, 2024, compared to January 31, 2023, was primarily a result of the macroeconomic environment, with ACV from existing customers increasing at a slower rate in the current period.

Remaining Performance Obligations ("RPO")

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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

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

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

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

Calculated Billings increased 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.

Components of Results of Operations

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We generally invoice customers as the work is performed for time-and-materials arrangements, and up front for fixed fee arrangements.

All professional services revenue is recognized as the services are performed.

Professional services revenue is recognized as the services are performed.

Overhead Allocation and Employee Compensation Costs

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Additionally included 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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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.

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

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.

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Gross margin is gross profit expressed as a percentage of total revenue.

Our gross margin may fluctuate from period to period as a result of the timing and amount of investments to expand our hosting capacity, our continued efforts to build platform support and professional services teams, increased stock-based compensation expenses, as well as the amortization of costs associated with capitalized internal-use software and acquired intangible assets.

Our gross margin may fluctuate from period to period as a result of the timing and amount of investments to expand our hosting capacity and our continued efforts to build platform support and professional services teams.

Operating Expenses

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Interest and Other, Net

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.

Interest and other, net consists of interest expense, which primarily includes amortization of debt issuance costs and contractual interest expense for our convertible senior notes, interest income from our investment holdings, gains on early extinguishment of debt and gains and losses from our strategic investments.

Provision for (Benefit from) Income Taxes

Our provision for (benefit from) income taxes consists of federal and state income taxes in the United States and income taxes in certain foreign jurisdictions where we operate.

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.

The difference between our effective tax rate and the federal statutory rate is primarily due to a valuation allowance against U.S.

deferred tax assets, the tax effect of foreign operations and state taxes.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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Interest income and other, net 81 22 9

Loss on early extinguishment and conversion of debt — — (2)

Gain on early extinguishment of debt

Interest and other, net 179 11 (82)

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Interest income and other, net 4 2 1

Loss on early extinguishment and conversion of debt — — —

Gain on early extinguishment of debt

Interest and other, net 8 1 (6)

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Total 100 % 100 %

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.

For fiscal 2024, 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.

The increase in revenue was attributable to a 8% increase in total customers, from over 17,600 as of January 31, 2023, to over 18,950 as of January 31, 2024, and revenue from existing customers as reflected in our Dollar-Based Net Retention Rate of 111% as of January 31, 2024.

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.

For fiscal 2024, the decrease in professional services and other revenue was due to lower bookings associated with professional services.

Cost of Revenue, Gross Profit and Gross Margin

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Total gross margin 74 % 71 %

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.

For fiscal 2024, cost of subscription revenue increased primarily due to an increase of $22 million in employee compensation costs, an increase of $7 million in software costs and an increase of $5 million in third-party hosting costs as we expanded capacity to support our growth.

Our gross margin for subscription revenue improved from 74% to 77% during fiscal 2024.

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

For fiscal 2024, cost of professional services and other revenue decreased slightly.

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.

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.

Our gross margin for professional services and other revenue decreased to (36)% during fiscal 2024 from (27)% during fiscal 2023 primarily due to a decrease in professional services and other revenue.

Operating Expenses

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Percentage of revenue 29 % 33 %

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

For fiscal 2024, research and development expenses increased primarily due to an increase of $39 million in employee compensation costs.

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

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Percentage of revenue 46 % 58 %

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.

For fiscal 2024, sales and marketing expenses decreased primarily due to a decrease in marketing costs of $15 million and a decrease in amortization expense of $9 million for acquired customer relationships and trade names.

The decrease in sales and marketing expenses as a percentage of total revenue was primarily driven by improved spend efficiency.

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

We expect sales and marketing expenses as a percentage of total revenue to decrease as our total revenue grows.

General and Administrative Expenses

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Percentage of revenue 20 % 22 %

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.

For fiscal 2024, general and administrative expenses increased primarily due to an increase of $26 million in employee compensation costs.

We expect general and administrative expenses as a percentage of total revenue to decrease as our total revenue grows.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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Percentage of revenue 2 % 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.

For fiscal 2024, restructuring and other charges increased primarily due to an increase of $14 million in lease impairment charges and an increase of $13 million in severance and termination benefit costs.

Interest and Other, Net

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Interest income and other, net 81 22 59 265

Gain on early extinguishment of debt

Interest and other, net $ 179 $ 11 $ 168 1,571 %

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

For fiscal 2024, the change in interest and other, net was primarily due to the gain on early extinguishment of debt related to repurchases of convertible senior notes and an increase in interest income from our short-term investments.

Provision for Income Taxes

Year Ended January 31,

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(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 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.

We believe that non-GAAP financial information, when taken collectively with GAAP financial measures, may be helpful to investors because it provides consistency and comparability with past financial performance, and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results.

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.

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

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 millions)

Gross profit $ 1,312 $ 904 $ 617

Stock-based compensation expense included in cost of revenue 83 61 30

Amortization of acquired intangibles 46 34 7

Acquisition and integration-related expenses 1 2 —

Non-GAAP gross profit $ 1,442 $ 1,001 $ 654

Gross margin 71 % 70 % 74 %

Non-GAAP gross margin 78 % 77 % 78 %

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 millions)

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

Stock-based compensation expense 677 566 195

Non-cash charitable contributions 4 8 9

Amortization of acquired intangibles 85 64 7

Acquisition and integration-related expenses 7 56 —

Restructuring costs 29 — —

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

Operating margin (44) % (59) % (24) %

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

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 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 millions, shares in thousands, except per share data)

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

Stock-based compensation expense 677 566 195

Non-cash charitable contributions 4 8 9

Amortization of acquired intangibles 85 64 7

Acquisition and integration-related expenses 7 56 —

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

Net margin (44) % (65) % (32) %

Non-GAAP net margin — % (5) % 2 %

Weighted-average shares used to compute net loss per share, basic and diluted 158,023 148,036 127,212

Non-GAAP weighted-average effect of potentially dilutive securities — — 15,171

Non-GAAP weighted-average shares used to compute non-GAAP net income (loss) per share, diluted 158,023 148,036 142,383

Net loss per share, basic and diluted $ (5.16) $ (5.73) $ (2.09)

Non-GAAP net income (loss) per share, basic $ (0.04) $ (0.46) $ 0.13

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

Free Cash Flow and Free Cash Flow Margin

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.

Year Ended January 31,

Provision for income taxes

$ 18 $ 14 $ 4 31 %

(dollars in millions)

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

Purchases of property and equipment (12) (13) (13)

Capitalization of internal-use software costs (9) (4) (4)

Free cash flow $ 65 $ 87 $ 111

Net cash used in investing activities $ (130) $ (367) $ (1,305)

Net cash provided by financing activities $ 48 $ 89 $ 1,092

Free cash flow margin 3 % 7 % 13 %

For fiscal 2024, income tax expense resulted primarily from income in profitable foreign jurisdictions, federal and state taxes resulting from tax attribution utilization limitations, and the tax impact of shortfalls from stock-based compensation in the United Kingdom.

The Organization for Economic Cooperation and Development ("OECD") and many countries have proposed to reallocate some portion of profits of large multinational companies with global revenues exceeding EUR 20 billion to markets where sales arise ("Pillar One"), as well as enacted a global minimum tax rate of at least 15% for multinationals with global revenues exceeding EUR 750 million ("Pillar Two"), with additional countries considering or intending to adopt these proposals.

In December 2022, the Council of the European Union ("EU") formally adopted the EU Minimum Tax Directive, which would require member states to adopt Pillar Two into their domestic law.

The directive requires the rules to initially become effective for fiscal years starting on or after December 31, 2023.

Certain jurisdictions in which we operate have enacted Pillar Two legislation, with other countries considering changes to their tax laws to adopt the OECD's proposals.

The enactment of Pillar Two legislation is not expected to have a material adverse effect in fiscal 2025, on our effective tax rate, financial position, results of operations and cash flows.

We will continue to monitor and reflect the impact of such legislative changes in future financial statements as appropriate.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Calculated Billings

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

Year Ended January 31,

2023 2022 2021

(dollars in millions)

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

Deferred revenue (end of period) 1,260 996 514

Unbilled receivables (beginning of period) 3 3 1

Acquired unbilled receivables — 2 —

Deferred revenue (beginning of period) (996) (514) (371)

Unbilled receivables (end of period) (2) (3) (3)

Acquired deferred revenue — (66) —

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

Liquidity and Capital Resources

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

treasury securities, corporate debt securities and money market funds.

treasury securities, money market funds, corporate debt securities and certificates of deposit.

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

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 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 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.

Recent macroeconomic events, including rising interest rates, global inflation and bank failures, have led to further economic uncertainty in the global economy.

To mitigate risk, our cash and cash equivalents are distributed across large financial institutions.

In addition, we have policy restrictions in place on the types of securities that can be purchased as part of our available-for-sale securities portfolio.

These restrictions take credit quality, liquidity and diversification into consideration among other criteria.

We continue to monitor the impacts of this situation;

however, there can be no assurances that conditions in the banking sector and in global financial markets will not worsen and/or adversely affect us.

Effective the first quarter of fiscal 2025, we intend to satisfy employee payroll tax withholding due upon the vesting of share-based compensation awards with our own funds under the "net share settlement" approach.

Previously, payroll tax withholding was satisfied via the sale of shares of our common stock in the open market.

The net share settlement approach reduces our equity dilution rate by covering such withholding tax obligations from existing cash reserves and impacts future liquidity.

The cash outflow to cover these tax obligations is classified as a financing activity in the statement of cash flows.

In September 2019, we completed our private offering of the 2025 convertible senior notes ("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 year 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.

In June 2020, we completed our private offering of the 2026 convertible senior notes ("2026 Notes") due on June 15, 2026 and received aggregate gross 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 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.

In connection with this acquisition, consideration included cash of $150 million, net of cash acquired of $107 million, and approximately 19 million shares of our common stock with an estimated fair value of $5,176 million.

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

In the ordinary course of our business, we may, at any time and from time to time, seek to extinguish our outstanding Notes through cash purchases and/or exchanges for equity, in open-market purchases, privately negotiated transactions or otherwise.

Such extinguishments, if any, will be conducted on such terms and at such prices as we may determine, and will depend on our evaluation of the prevailing market conditions, trading price of the 2025 Notes and 2026 Notes (collectively, "the Notes"), our liquidity requirements, legal and contractual restrictions and other factors.

During fiscal 2024, we repurchased $508 million principal amount of the 2025 Notes for $462 million in cash and $542 million principal amount of the 2026 Notes for $475 million in cash, which resulted in an aggregate gain on early extinguishment of debt of $106 million.

The 2025 Capped Calls and 2026 Capped Calls remained outstanding notwithstanding such repurchase.

We may, however, elect to terminate the 2025 Capped Calls or 2026 Capped Calls, in full or in part.

In connection with any such termination, the option counterparties or their respective affiliates are expected to modify their hedge positions, which activity could affect the market price of our Class A common stock or the trading price of the Notes that remain outstanding.

See Note 8 to our consolidated financial statements “Convertible Senior Notes, Net” and the section titled “Transactions relating to our Notes may affect the value of our Class A common stock” in “ Risk Factors ” included under Part I, Item 1A of this Annual Report on Form 10-K for additional information.

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.

Of this amount, $13 million of consideration was held back as partial security for any adjustments and indemnification obligations and was paid during fiscal 2024.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

On February 1, 2024, we completed the acquisition of Spera Cybersecurity, Inc.

and its subsidiary ("Spera").

Total net consideration, subject to final adjustments, consists of approximately $80 million of cash and our Class A common stock.

See Note 16 to our consolidated financial statements "Subsequent Events" for additional information.

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

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Net cash provided by operating activities $ 512 $ 86 $ 104

Net cash used in investing activities (130) (367) (1,305)

Net cash provided by financing activities 48 89 1,092

Net cash provided by (used in) investing activities

441 (130) (367)

Net cash provided by (used in) financing activities (883) 48 89

Effects of changes in foreign currency exchange rates on cash, cash equivalents and restricted cash 1 (6) (2)

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

Net increase (decrease) in cash, cash equivalents and restricted cash

$ 71 $ (2) $ (176)

Operating Activities

1 unchanged sentence

Our primary uses of cash from operating activities are for employee-related expenditures, marketing expenses and third-party hosting costs.

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 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.

During fiscal 2024, cash provided by operating activities was $512 million, an increase of $426 million compared to fiscal 2023.

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

Investing Activities

During fiscal 2024, cash provided by investing activities was $441 million, compared to cash used in investing activities of $130 million during fiscal 2023.

The change was primarily attributable to an increase in cash provided from investment maturities and sales, net of purchases, partially offset by cash paid for business acquisitions, net of cash acquired.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Investing Activities

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

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").

During fiscal 2024, cash used in financing activities was $883 million, compared to cash provided by financing activities of $48 million during fiscal 2023.

The change was primarily attributable to payments made for repurchases of the Notes.

Material Cash Requirements

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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.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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.

23 unchanged sentences

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

If the initial accounting for a business combination is not complete following the acquisition date, we report provisional amounts for the known assets, liabilities, equity interests, or items of consideration for which the accounting is incomplete at the end of the financial reporting period.

Provisional accounting is inherently subjective and judgmental.

The objective of the measurement period is to provide a reasonable period of time to obtain the information necessary to complete all aspects of business combination accounting with a high level of confidence.

During the measurement period, which may be up to one year from the acquisition date, adjustments to the reported

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.

provisional amounts may be recorded for which the accounting was incomplete, with the corresponding offset to goodwill.

Should the accounting for a business combination be incomplete by the end of a reporting period that falls within the measurement period, we report provisional amounts in our financial statements, disclosing them as provisional, and any material measurement period adjustments are identified as such.

Additional assets acquired or liabilities assumed in an acquisition that were not recognized at the acquisition date might be identified during 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, no further adjustments are made.

Loss Contingencies

14 unchanged sentences

Recent Accounting Pronouncements

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

See Note 2 to our consolidated financial statements “Summary of Significant Accounting Policies — Recent Accounting Pronouncements Not Yet Adopted" 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