OKTA, INC. 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K. As discussed in the section titled "Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" under Part II, Item 1A in this Quarterly Report on Form 10-Q and Part I, Item 1A in our Annual Report on Form 10-K. Our fiscal year endsJanuary 31 . Overview Okta is the leading independent identity management platform for the enterprise. The Okta Identity Cloud is our category-defining platform that enables our customers to securely connect the right people to the right technologies at the right time. Every day, millions of people use Okta to securely access a wide range of cloud, mobile and web applications, on premise servers, application program interfaces, or APIs, IT infrastructure providers and services from a multitude of devices. 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 experiences online and via mobile devices. Developers leverage our platform to securely and efficiently embed identity into their software, allowing them to focus on their core mission. Our approach to identity allows our customers to simplify and efficiently scale their security infrastructures across internal IT systems and external customer facing applications. We have rapidly expanded the breadth and depth of the Okta Integration Network, which provides customers with integrations to cloud, mobile and web applications and IT infrastructure providers that spans the functionality of our products. As ofApril 30, 2020 , we had over 6,500 integrations with these cloud, mobile and web applications and IT infrastructure providers. We employ a SaaS business model. We focus on acquiring and retaining our customers and increasing their spending with us through expanding the number of users who access our platform and upselling 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. Our subscription fees include the use of our service and our technical support and management of our platform. We base subscription fees primarily on the products used and the number of users on our platform. The Okta Identity Cloud is used by our customers to manage and secure their employees, contractors and partners, which we refer to as workforce identity. Our platform is also used to manage and secure the identities of an organization's own customers via the powerful APIs we have developed, which we refer to as customer identity. We typically invoice customers in advance in annual installments for subscriptions to our platform. Impact of Coronavirus (COVID-19) Pandemic InDecember 2019 , a novel coronavirus (COVID-19) was reported inChina , inJanuary 2020 , theWorld Health Organization (WHO) declared it a Public Health Emergency of International Concern and inMarch 2020 , the WHO declared it a pandemic. This contagious disease outbreak has continued to spread across the globe and is impacting worldwide economic activity and financial markets. The extent of the impact of COVID-19 on our future operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, related public health measures, 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 over 95% of total revenue for the three months endedApril 30, 2020 . 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. Our allowance for doubtful accounts and sales reserves have increased primarily due to an increase in overall uncertainty in our forecasts of future economic conditions and concession requests. While we see risks associated with more highly impacted companies and industries, we are also seei 25 -------------------------------------------------------------------------------- ng new interest from other organizations, driven by rapidly changing work and business environments. As workforces have transitioned to working from home in a distributed model,Zero Trust has become an increasingly important 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. As ofMarch 2020 , we have put in place mandatory work-from-home procedures for all of our global office locations, and our employees have the necessary tools and technology to remain connected and productive. In addition, we shifted our annual user conference, Oktane20 Live, to a virtual-only experience, resulting in cost savings. We have further benefited from cost savings, driven by reduced growth in employee compensation costs due to slower hiring, reductions in employee-related expenses as our sales and marketing activities shift to an online only sales format and a shift to work-from-home procedures.
See Risk Factors for further discussion of the potential impact of COVID-19 and its related public health measures on our business.
Components of Results of OperationsRevenue
Subscription Revenue. Subscription revenue primarily consists of fees for
access to and usage of our cloud-based platform and related support.
Subscription revenue is driven primarily by the number of customers, the number
of users per customer and the products used. We typically invoice customers in
advance in annual installments for subscriptions to our platform.
Professional Services and Other. Professional services revenue includes fees
from assisting customers in implementing and optimizing the use of our products.
These services include application configuration, system integration and
training services.
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.
Overhead Allocation and Employee Compensation Costs
We allocate shared costs, such as facilities (including rent, utilities and
depreciation on assets shared by all departments), 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 operating expense category and sales
commissions for sales and marketing.
Cost of Revenue and Gross Margin
Cost of Subscription. Cost of subscription primarily consists of expenses
related to hosting our services and providing support. 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, travel-related costs, amortization expense associated
with capitalized internal-use software and acquired technology, and allocated
overhead.
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 capitalized internal-use software costs
and related amortization may increase. We expect our investment in technology to
expand the capability of our platform enabling us to improve our gross margin
over time. The level and timing of investment in these areas could affect our
cost of subscription revenue in the future.
Cost of Professional Services and Other. Cost of professional services consists
primarily of employee-related costs for our professional services delivery team,
travel-related costs, and costs of outside services associated with
supplementing our professional services delivery team. The cost of providing
professional services has historically been higher than the associated revenue
we generate.
Gross Margin. Gross margin is gross profit expressed as a percentage of total
revenue. Our gross margin may fluctuate from period to period as our revenue
fluctuates, and 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
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stock-based compensation expenses, as well as the amortization of costs
associated with capitalized internal-use software and acquired intangible
assets.
Operating Expenses
Research and Development. Research and development expenses consist primarily
of employee compensation costs and allocated overhead. 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. Sales and marketing expenses consist primarily of employee
compensation costs, costs of general marketing activities and promotional
activities, travel-related expenses and allocated overhead. 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. However, we expect our sales and marketing expenses to decrease as a
percentage of our total revenue as our total revenue grows.
General and Administrative. General and administrative expenses consist
primarily of employee compensation costs for finance, accounting, legal and
human resources personnel. In addition, general and administrative expenses
include non-personnel costs, such as legal, accounting and other professional
fees, charitable contributions, and all other supporting corporate expenses not
allocated to other departments. We expect our general and administrative
expenses will increase in absolute dollars as our business grows.
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 Notes, and interest income from our investment holdings.
Provision for (Benefit from) Income Taxes
Our provision for (benefit from) income taxes consists of federal and state
income taxes in the United States and income taxes in certain foreign
jurisdictions, and is determined for interim periods using an estimate of our
annual effective tax rate, adjusted for discrete items occurring in the quarter.
The primary difference between our effective tax rate and the federal statutory
rate relates to the net operating losses in jurisdictions with a valuation
allowance against related deferred tax assets.
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Results of OperationsThe following table sets forth our results of operations for the periods presented in dollars and as a percentage of our revenue:
Three Months Ended April 30,
2020 2019
(in thousands)
Revenue:
Subscription $ 173,781 $ 117,163
Professional services and other 9,078 8,060
Total revenue 182,859 125,223
Cost of revenue:
Subscription(1) 37,157 24,540
Professional services and other(1) 11,329 10,555
Total cost of revenue 48,486 35,095
Gross profit 134,373 90,128
Operating expenses:
Research and development(1) 48,494 34,032
Sales and marketing(1) 104,043 82,112
General and administrative(1) 34,035 25,766
Total operating expenses 186,572 141,910
Operating loss (52,199 ) (51,782 )
Interest expense (10,764 ) (4,241 )
Interest income and other, net 4,899 2,900
Interest and other, net (5,865 ) (1,341 )
Loss before benefit from income taxes (58,064 ) (53,123 )
Benefit from income taxes (402 ) (1,157 )
Net loss $ (57,662 ) $ (51,966 ) (1) Includes stock-based compensation expense as follows:
Three Months Ended April 30,
2020 2019
(in thousands)
Cost of subscription revenue $ 3,975 $ 2,422
Cost of professional services and other revenue 1,811 1,519
Research and development 11,935 6,346
Sales and marketing 11,160 6,786
General and administrative 8,847 5,612
Total stock-based compensation expense $ 37,728 The following table sets forth our results of operations for the periods presented as a percentage of total revenue:
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Three Months Ended April 30,
2020 2019
Revenue
Subscription 95 % 94 %
Professional services and other 5 6
Total revenue 100 100
Cost of revenue
Subscription 21 20
Professional services and other 6 8
Total cost of revenue 27 28
Gross profit 73 72
Operating expenses
Research and development 26 27
Sales and marketing 57 65
General and administrative 19 21
Total operating expenses 102 113
Operating loss (29 ) (41 )
Interest expense (6 ) (3 )
Interest income and other, net 3 2
Interest and other, net (3 ) (1 )
Loss before benefit from income taxes (32 ) (42 )
Benefit from income taxes - (1 )
Net loss (32 )% (41 )%
Comparison of the Three Months Ended April 30, 2020 and 2019
Revenue
Three Months Ended April 30,
2020 2019 $ Change % Change
(dollars in thousands)
Revenue:
Subscription $ 173,781 $ 117,163 $ 56,618 48 %
Professional services and other 9,078 8,060 1,018 13
Total revenue $ 182,859 $ 125,223 $ 57,636 46 %
Percentage of revenue:
Subscription 95 % 94 %
Professional services and other 5 6
Total 100 % 100 %
Subscription revenue increased by $56.6 million , or 48%, for the three months
ended April 30, 2020 compared to the three months ended April 30, 2019 . The
increase was primarily due to the addition of new customers as well as an
increase in users and sales of additional products to existing customers.
Professional services and other revenue increased by $1.0 million , or 13%, for
the three months ended April 30, 2020 compared to the three months ended
April 30, 2019 . The increase in professional services revenue primarily related
to an increase in implementation and other services associated with an increase
in the number of new customers purchasing our subscription services.
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Three Months Ended April 30,
2020 2019 $ Change % Change
(dollars in thousands)
Cost of revenue:
Subscription $ 37,157 $ 24,540 $ 12,617 51 %
Professional services and other 11,329 10,555 774 7
Total cost of revenue $ 48,486 $ 35,095 $ 13,391 38 %
Gross profit $ 134,373 $ 90,128 $ 44,245 49 %
Gross margin:
Subscription 79 % 79 %
Professional services and other (25 ) (31 )
Total gross margin 73 72
Cost of subscription revenue increased by $12.6 million , or 51%, for the three
months ended April 30, 2020 compared to the three months ended April 30, 2019 ,
primarily due to an increase of $7.7 million in employee compensation costs
related to higher headcount to support the growth in our subscription services,
an increase of $1.4 million in third-party hosting costs as we increased
capacity to support our growth, and an increase of $1.3 million in software
license costs.
Our gross margin for subscription revenue remained consistent at 79% for the
three months ended April 30, 2020 compared to the three months ended April 30,
2019 . 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 increase over time as we achieve additional economies of scale.
Cost of professional services and other revenue increased by $0.8 million , or
7%, for the three months ended April 30, 2020 , compared to the three months
ended April 30, 2019 , primarily due to an increase of $0.9 million in employee
compensation costs.
Our gross margin for professional services and other revenue improved to (25)%
during the three months ended April 30, 2020 from (31)% during the three months
ended April 30, 2019 , primarily due to increases in professional services and
other revenue.
Operating Expenses
Research and Development Expenses
Three Months Ended April 30,
2020 2019 $ Change % Change
(dollars in thousands)
Research and development $ 48,494 $ 34,032 $ 14,462 42 %
Percentage of revenue 26 % 27 %
Research and development expenses increased $14.5 million , or 42%, for the three
months ended April 30, 2020 compared to the three months ended April 30, 2019 .
The increase was primarily due to an increase of $14.2 million in employee
compensation costs due to higher headcount.
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Three Months Ended April 30,
2020 2019 $ Change % Change
(dollars in thousands)
Sales and marketing $ 104,043 $ 82,112 $ 21,931 27 %
Percentage of revenue 57 % 65 %
Sales and marketing expenses increased $21.9 million , or 27%, for the three
months ended April 30, 2020 compared to the three months ended April 30, 2019 .
The increase was primarily due to an increase of $20.1 million in employee
compensation costs related to headcount growth, offset by a decrease of $3.5
million in employee-related expenses primarily due to reduced travel-related
expenditures resulting from our temporary shift to an online only sales format.
Marketing and event costs increased by $7.5 million primarily due to increases
in demand generation programs, advertising, and brand awareness efforts aimed at
acquiring new customers, offset by a decrease of $4.9 million due to a change to
a virtual format for our annual customer conference in the first quarter of
fiscal 2021 compared to an in-person format in the first quarter of fiscal 2020.
General and Administrative Expenses
Three Months Ended April 30,
2020 2019 $ Change % Change
(dollars in thousands)
General and administrative $ 34,035 $ 25,766 $ 8,269 32 %
Percentage of revenue 19 % 21 %
General and administrative expenses increased $8.3 million , or 32%, for the
three months ended April 30, 2020 compared to the three months ended April 30,
2019 . The increase was primarily due to an increase of $8.7 million in employee
compensation costs primarily related to higher headcount to support our
continued growth and an increase of $0.9 million in costs from professional
services. The increase was offset by a decrease of $3.4 million due to
acquisition-related expenses incurred in the first quarter of fiscal 2020, but
not in the first quarter of fiscal 2021.
Interest and Other, Net
Three Months Ended April 30,
2020 2019 $ Change % Change
(dollars in thousands)
Interest expense $ (10,764 ) $ (4,241 ) (6,523 ) 154 %
Interest income and other, net 4,899 2,900 1,999 69
Interest and other, net $ (5,865 ) $ (1,341 ) $ (4,524 ) 337 %
Interest expense increased $6.5 million , or 154%, for the three months ended
April 30, 2020 compared to the three months ended April 30, 2019 , due to an
increase of $9.2 million for the 2025 Notes offset by a decrease of $2.7 million
for the 2023 Notes, due to the 2023 Notes Partial Repurchase. Interest income
and other, net increased $2.0 million , or 69%, for the three months ended
April 30, 2020 compared to the three months ended April 30, 2019 . The increase
was primarily due to interest and other income earned on higher cash and
short-term investment balances despite a decrease in interest rates in the three
months ended April 30, 2020 . We expect interest income for our short-term
investment portfolio to decrease in fiscal 2021 due to decreases in interest
rates.
Key Business Metrics
We review a number of operating and financial metrics, including the following
key metrics, to evaluate our business, measure our performance, identify trends
affecting our business, formulate business plans, and make strategic decisions.
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As of April 30,
2020 2019
(dollars in thousands)
Customers with annual contract value (ACV) above
$100,000 1,580 1,142
Dollar-based net retention rate for the trailing 12 months ended
121 % 119 %
Current remaining performance obligations $ 619,104 $ 416,043
Remaining performance obligations$ 1,240,224 $ 792,047 Three Months Ended April 30, 2020 2019 (in thousands) Calculated billings$ 209,505 $ 147,195 Total Customers and Number of Customers with Annual Contract Value Above$100,000 As ofApril 30, 2020 , we had over 8,400 customers on our platform. We believe that our ability to increase the number of customers on our platform is an indicator of our market penetration, the growth of our business, and our potential future business opportunities. 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 revenue, which has contributed to an increase in average revenue per customer. The number of customers who have greater than$100,000 in annual contract value, or ACV, with us was 1,580 and 1,142 as ofApril 30, 2020 and 2019, respectively. We expect this trend to continue as larger enterprises recognize the value of our platform and replace their legacy identity access management, or IAM infrastructure. We define a customer as a separate and distinct buying entity, such as a company, an educational or government institution, or a distinct business unit of a large company that has an active contract with us or one of our partners to access our platform. 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. 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. We assess our performance in this area by measuring our Dollar-Based Net Retention Rate. Our Dollar-Based Net Retention Rate measures our ability to increase revenue across our existing customer base through expansion of users and products associated with a customer as offset by churn and contraction in the number of users and/or products associated with a customer. Our Dollar-Based Net Retention Rate is based upon our ACV which is calculated based on the terms of that customer's contract and represents the total contracted annual subscription amount as of that period end. We calculate our Dollar-Based Net Retention Rate as of a period end by starting with the ACV from all customers as of twelve months prior to such period end, or Prior Period ACV. We then calculate the ACV from these same customers as of the current period end, or Current Period ACV. Current Period ACV includes any upsells and is net of contraction or churn over the trailing twelve months but excludes revenue from new customers in the current period. We then divide the total Current Period ACV by the total Prior Period ACV to arrive at our Dollar-Based Net Retention Rate. Our strong Dollar-Based Net Retention Rate is primarily attributable to an expansion of users and upselling additional products within our existing customers. Larger enterprises often implement a limited initial deployment of our platform before increasing their deployment on a broader scale. Remaining Performance Obligations Remaining performance obligations, or RPO, represent all future, noncancelable, contracted revenue under our subscription contracts with customers that has not yet been recognized, inclusive of deferred revenue that has been invoiced and noncancelable amounts that will be invoiced and recognized as revenue in future periods. 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. 32 -------------------------------------------------------------------------------- Calculated Billings Calculated Billings represent our total revenue plus the change in deferred revenue and less the change in unbilled receivables in the period. Calculated Billings in any particular period reflects 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 42% in the three months endedApril 30, 2020 over the three months endedApril 30, 2019 . As our Calculated Billings continue to grow in absolute terms, we expect our Calculated Billings growth rate to trend down over time. Non-GAAP Financial Measures In addition to our results determined in accordance withU.S. generally accepted accounting principles, or 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 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. 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 and amortization of acquired intangibles. Three Months Ended April 30, 2020 2019 (dollars in thousands) Gross profit$ 134,373 $ 90,128 Add: Stock-based compensation expense included in cost of revenue 5,786 3,941 Amortization of acquired intangibles 1,593 763 Non-GAAP gross profit$ 141,752 $ 94,832 Gross margin 73 % 72 % Non-GAAP gross margin 78 % 76 % 33
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Non-GAAP Operating Loss and Non-GAAP Operating Margin We define non-GAAP operating loss and non-GAAP operating margin as GAAP operating loss and GAAP operating margin, adjusted for stock-based compensation expense, charitable contributions, amortization of acquired intangibles and acquisition-related expenses.
Three Months Ended April 30,
2020 2019
(dollars in thousands)
Operating loss $ (52,199 ) $ (51,782 )
Add:
Stock-based compensation expense 37,728 22,685
Charitable contributions 536 -
Amortization of acquired intangibles 1,593 763
Acquisition-related expenses(1) - 3,449
Non-GAAP operating loss $ (12,342 ) $ (24,885 )
Operating margin (29 )% (41 )%
Non-GAAP operating margin (7 )% (20 )%
(1) We define acquisition-related expenses as costs associated with
acquisitions, including transaction costs and other non-recurring
incremental costs incurred.
Non-GAAP Net Loss and Non-GAAP Net Margin
We define non-GAAP net loss and non-GAAP net margin as GAAP net loss and GAAP
net margin, adjusted for stock-based compensation expense, charitable
contributions, amortization of acquired intangibles, acquisition-related
expenses, amortization of debt discount and loss on early extinguishment of
debt, net of debt issuance costs.
Three Months Ended April 30,
2020 2019
(dollars in thousands)
Net loss $ (57,662 ) $ (51,966 )
Add:
Stock-based compensation expense 37,728 22,685
Charitable contributions 536 -
Amortization of acquired intangibles 1,593 763
Acquisition-related expenses(1) - 3,449
Amortization of debt discount 9,724 3,706
Non-GAAP net loss $ (8,081 ) $ (21,363 )
Net margin (32 )% (41 )%
Non-GAAP net margin (4 )% (17 )%
(1) We define acquisition-related expenses as costs associated with acquisitions, including transaction costs and other non-recurring incremental costs incurred.
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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.
Three Months Ended April 30,
2020 2019
(dollars in thousands)
Net cash provided by operating activities $ 38,697 $ 21,262
Less:
Purchases of property and equipment (7,930 ) (7,710 )
Capitalization of internal-use software costs (1,000 ) (369 )
Free cash flow $ 29,767 $ 13,183
Net cash provided by (used in) investing activities $ 50,604 $ (125,607 )
Net cash provided by financing activities $ 14,167 $ 13,262
Free cash flow margin 16 % 11 %
Calculated Billings We define Calculated Billings as total revenue plus the change in deferred revenue and less the change in unbilled receivables during the period.
Three Months Ended April 30,
2020 2019
(in thousands)
Total revenue $ 182,859 $ 125,223
Add:
Deferred revenue (end of period) 398,191 275,704
Unbilled receivables (beginning of period) 1,026
1,457
Less:
Unbilled receivables (end of period) (1,121 ) (799 ) Deferred revenue (beginning of period) (371,450 ) (254,390 ) Calculated billings$ 209,505 $ 147,195 Liquidity and Capital Resources As ofApril 30, 2020 , our principal sources of liquidity were cash, cash equivalents and short-term investments totaling$1,446.8 million , which were held for working capital purposes. Our cash equivalents and investments consisted primarily ofU.S. treasury securities, money market funds and corporate debt securities. Historically, we have generated significant operating losses and both positive and negative cash flows from operations as reflected in our accumulated deficit and condensed consolidated statements of cash flows. 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. 35 -------------------------------------------------------------------------------- InFebruary 2018 , we completed our private offering of the 2023 Notes and received aggregate proceeds of$345.0 million , before deducting costs of issuance of$10.0 million . In connection with the issuance of the 2023 Notes, we entered into convertible 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 in connection with the issuance of the 2023 Notes. InSeptember 2019 , we completed our private offering of the 2025 Notes and received aggregate proceeds of$1,060.0 million , before deducting issuance costs of approximately$19.3 million . In connection with the 2025 Notes, we entered into Capped Call transactions 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 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 2023 Notes Partial Repurchase for net proceeds of$47.2 million . While we expect the potential impacts of the COVID-19 pandemic to create near-term headwinds for cash flow caused by factors such as delays in customer payments and delays in deals closing, we believe our existing cash and cash equivalents, our short-term investments and cash provided by sales of our products and services will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. 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. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies this could reduce our ability to compete successfully and harm our results of operations. A significant majority of our customers pay in advance for annual subscriptions. Therefore, a substantial source of our cash is from our deferred revenue, which is included on our condensed consolidated balance sheet as a liability. Deferred revenue consists of the unearned portion of billed fees for our subscriptions, which is recognized as revenue in accordance with our revenue recognition policy. As ofApril 30, 2020 , we had deferred revenue of$398.2 million , of which$392.1 million was recorded as a current liability and is expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria have been met. Cash Flows The following table summarizes our cash flows for the periods indicated: Three Months Ended April 30, 2020 2019 (in thousands) Net cash provided by operating activities$ 38,697 $ 21,262 Net cash provided by (used in) investing activities 50,604 (125,607 ) Net cash provided by financing activities 14,167
13,262
Effects of changes in foreign currency exchange rates on cash, cash equivalents and restricted cash
(1,128 ) (282 )
Net increase (decrease) in cash, cash equivalents and
restricted cash $ 102,340 $ (91,365 )
Operating Activities
Our largest source of operating cash is cash collections from our customers for
subscription and professional services. Our primary uses of cash from operating
activities are for employee-related expenditures, marketing expenses
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and third-party hosting costs. In recent periods, we have supplemented working
capital requirements through net proceeds from the issuance of the 2023 and 2025
Notes in February 2018 and September 2019 , respectively, and from our IPO in
April 2017 .
During the three months ended April 30, 2020 , cash provided by operating
activities was $38.7 million primarily due to our net loss of $57.7 million ,
adjusted for non-cash charges of $62.8 million and net cash inflows of $33.6
million provided by changes in our operating assets and liabilities. Non-cash
charges primarily consisted of stock-based compensation, amortization of debt
discount and issuance costs, amortization of deferred commissions and
depreciation, amortization and accretion of property and equipment, intangible
assets and short-term investments. The primary drivers of the changes in
operating assets and liabilities related to a $26.7 million increase in deferred
revenue, a $18.3 million decrease in accounts receivable, a $6.9 million
increase in accounts payable and accrued compensation, and a $4.1 million
increase in operating lease right-of-use assets, partially offset by a $11.9
million increase in deferred commissions, a $4.3 million decrease in operating
lease liabilities, a $3.5 million increase in prepaid expenses and other assets
and a $2.8 million decrease in accrued expenses and other liabilities.
During the three months ended April 30, 2019 , cash provided by operating
activities was $21.3 million primarily due to our net loss of $52.0 million ,
adjusted for non-cash charges of $35.0 million and net cash inflows of $38.3
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 and
depreciation and amortization of property and equipment and intangible assets.
The primary drivers of the changes in operating assets and liabilities related
to a $20.7 million increase in deferred revenue, a $5.8 million increase in
accounts payable and accrued compensation, a $9.3 million decrease in accounts
receivable, a $6.0 million decrease in prepaid expenses and other assets and a
$3.1 million decrease in operating lease right-of-use assets, partially offset
by a $9.8 million increase in deferred commissions and a $3.3 million decrease
in accrued expenses and other liabilities.
Investing Activities
Net cash provided by investing activities during the three months ended
April 30, 2020 of $50.6 million was primarily attributable to proceeds from the
sales and maturities of investments of $188.6 million , partially offset by
purchases of investments of $129.1 million , purchases of property and equipment
of $7.9 million to support additional office space and headcount, and the
capitalization of internal-use software costs of $1.0 million associated with
the development of additional features and functionality of our platform.
Net cash used in investing activities during the three months ended April 30,
2019 of $125.6 million was primarily attributable to the purchases of
investments of $146.5 million , payment of $44.2 million , net of cash acquired,
in connection with our Azuqua acquisition and purchases of property and
equipment of $7.7 million to support additional office space and headcount.
These activities were offset by proceeds from the sales and maturities of
investments of $73.2 million .
Financing Activities
Cash provided by financing activities during the three months ended April 30,
2020 of $14.2 million was primarily attributable to proceeds from the exercise
of stock options.
Cash provided by financing activities during the three months ended April 30,
2019 of $13.3 million was primarily attributable to proceeds from the exercise
of stock options, net of repurchases, of $13.4 million .
Indemnification Agreements
In the ordinary course of business, we enter into agreements of varying scope
and terms pursuant to which we agree to indemnify customers, vendors, lessors,
business partners and other parties with respect to certain matters, including,
but not limited to, losses arising out of the breach of such agreements,
services to be provided by us or from intellectual property infringement claims
made by third parties. 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 condensed consolidated balance sheets, condensed
consolidated statements of operations and comprehensive loss, or condensed
consolidated statements of cash flows.
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Off-Balance Sheet Arrangements
As of April 30, 2020 , we did not have any relationships with unconsolidated
organizations or financial partnerships, such as structured finance or special
purpose entities that would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in accordance with
GAAP. In the preparation of these condensed consolidated financial statements,
we are required to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, costs and expenses, and related
disclosures. To the extent that there are material differences between these
estimates and actual results, our financial condition or results of operations
would be affected. 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.
Our significant accounting policies are discussed in "Notes to Consolidated
Financial Statements - Note 2. Summary of Significant Accounting Policies" in
our Form 10-K. There have been no significant changes to these policies for the
three months ended April 30, 2020 , except as described in Note 2 to our
condensed consolidated financial statements "Accounting Standards and
Significant Accounting Policies".
Recent Accounting Pronouncements
See Note 2 to our condensed consolidated financial statements "Accounting
Standards and Significant Accounting Policies" for more information.
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