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 ofJuly 31, 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 userswho 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 , theWHO 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 and six months endedJuly 31, 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 29 -------------------------------------------------------------------------------- also seeing 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. SinceMarch 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, interest income from our investment holdings and loss on
early extinguishment of debt.
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 Operations
The following table sets forth our results of operations for the periods
presented in dollars:
Three Months Ended July 31, Six Months Ended July 31,
2020 2019 2020 2019
(in thousands)
Revenue:
Subscription $ 190,689 $ 132,494 $ 364,470 $ 249,657
Professional services and other 9,757 7,986 18,835 16,046
Total revenue 200,446 140,480 383,305 265,703
Cost of revenue:
Subscription(1) 39,501 27,917 76,658 52,457
Professional services and other(1) 11,646 10,863 22,975 21,418
Total cost of revenue 51,147 38,780 99,633 73,875
Gross profit 149,299 101,700 283,672 191,828
Operating expenses:
Research and development(1) 53,866 40,045 102,360 74,077
Sales and marketing(1) 98,322 78,385 202,365 160,497
General and administrative(1) 42,499 26,887 76,534 52,653
Total operating expenses 194,687 145,317 381,259 287,227
Operating loss (45,388 ) (43,617 ) (97,587 ) (95,399 )
Interest expense (16,931 ) (4,304 ) (27,695 ) (8,545 )
Interest income and other, net 3,960 3,464 8,859 6,364
Loss on early extinguishment of debt (2,174 ) - (2,174 ) -
Interest and other, net (15,145 ) (840 ) (21,010 ) (2,181 )
Loss before benefit from income taxes (60,533 ) (44,457 ) (118,597 ) (97,580 )
Benefit from income taxes (433 ) (1,477 ) (835 ) (2,634 )
Net loss $ (60,100 ) $ (42,980 ) $ (117,762 ) $ (94,946 ) (1) Includes stock-based compensation expense as follows:
Three Months Ended July 31, Six Months Ended July 31,
2020 2019 2020 2019
(in thousands)
Cost of subscription revenue
9,139 $ 5,533
Cost of professional services and
other revenue 2,000 1,873 3,811 3,392
Research and development 14,953 9,082 26,888 15,428
Sales and marketing 13,165 9,236 24,325 16,022
General and administrative 13,112 7,972 21,959 13,584
Total stock-based compensation
expense $ 48,394 $ 31,274 $ 86,122 $ 53,959
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The following table sets forth our results of operations for the periods presented as a percentage of total revenue:
Three Months Ended July 31 ,
Six Months Ended
2020 2019 2020 2019
Revenue
Subscription 95 % 94 % 95 % 94 %
Professional services and other 5 6 5 6
Total revenue 100 100 100 100
Cost of revenue
Subscription 20 20 20 20
Professional services and other 6 8 6 8
Total cost of revenue 26 28 26 28
Gross profit 74 72 74 72
Operating expenses
Research and development 27 28 27 28
Sales and marketing 49 56 52 60
General and administrative 21 19 20 20
Total operating expenses 97 103 99 108
Operating loss (23 ) (31 ) (25 ) (36 )
Interest expense (8 ) (3 ) (7 ) (3 )
Interest income and other, net 2 2 2 2
Loss on early extinguishment of debt (1 ) - (1 ) -
Interest and other, net (7 ) (1 ) (6 ) (1 )
Loss before benefit from income taxes (30 ) (32 ) (31 ) (37 )
Benefit from income taxes - (1 ) - (1 )
Net loss (30 )% (31 )% (31 )% (36 )%
Comparison of the Three Months Ended July 31, 2020 and 2019
Revenue
Three Months Ended July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Revenue:
Subscription $ 190,689 $ 132,494 $ 58,195 44 %
Professional services and other 9,757 7,986 1,771 22
Total revenue $ 200,446 $ 140,480 $ 59,966 43 %
Percentage of revenue:
Subscription 95 % 94 %
Professional services and other 5 6
Total 100 % 100 %
Subscription revenue increased by
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Professional services and other revenue increased by $1.8 million , or 22%, for
the three months ended July 31, 2020 compared to the three months ended July 31,
2019 . The increase in professional services revenue was primarily related to an
increase in implementation and other services associated with an increase in the
number of new customers purchasing our subscription services.
Cost of Revenue, Gross Profit and Gross Margin
Three Months Ended July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Cost of revenue:
Subscription $ 39,501 $ 27,917 $ 11,584 41 %
Professional services and other 11,646 10,863 783 7
Total cost of revenue $ 51,147 $ 38,780 $ 12,367 32 %
Gross profit $ 149,299 $ 101,700 $ 47,599 47 %
Gross margin:
Subscription 79 % 79 %
Professional services and other (19 ) (36 )
Total gross margin 74 72
Cost of subscription revenue increased by $11.6 million , or 41%, for the three
months ended July 31, 2020 compared to the three months ended July 31, 2019 ,
primarily due to an increase of $8.1 million in employee compensation costs
related to higher headcount to support the growth in our subscription services,
an increase of $1.5 million in software license costs and an increase of $1.1
million in third-party hosting costs as we increased capacity to support our
growth.
Our gross margin for subscription revenue remained consistent at 79% for the
three months ended July 31, 2020 compared to the three months ended July 31,
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 July 31, 2020 , compared to the three months ended
July 31, 2019 , due to a number of immaterial changes.
Our gross margin for professional services and other revenue improved to (19)%
during the three months ended July 31, 2020 from (36)% during the three months
ended July 31, 2019 , primarily due to increases in professional services and
other revenue.
Operating Expenses
Research and Development Expenses
Three Months Ended July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Research and development $ 53,866 $ 40,045 $ 13,821 35 %
Percentage of revenue 27 % 28 %
Research and development expenses increased $13.8 million , or 35%, for the three
months ended July 31, 2020 compared to the three months ended July 31, 2019 . The
increase was primarily due to an increase of $12.6 million in employee
compensation costs due to higher headcount.
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Three Months Ended July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Sales and marketing $ 98,322 $ 78,385 $ 19,937 25 %
Percentage of revenue 49 % 56 %
Sales and marketing expenses increased $19.9 million , or 25%, for the three
months ended July 31, 2020 compared to the three months ended July 31, 2019 . The
increase was primarily due to an increase of $17.1 million in employee
compensation costs related to headcount growth, offset by a decrease of $5.0
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 $3.5 million primarily due to increases
in demand generation programs, advertising and brand awareness efforts aimed at
acquiring new customers.
General and Administrative Expenses
Three Months Ended July 31,
2020 2019 $ Change % Change
(dollars in thousands)
General and administrative $ 42,499 $ 26,887 $ 15,612 58 %
Percentage of revenue 21 % 19 %
General and administrative expenses increased $15.6 million , or 58%, for the
three months ended July 31, 2020 compared to the three months ended July 31,
2019 . The increase was primarily due to an increase of $11.3 million in employee
compensation costs primarily related to higher headcount to support our
continued growth.
Interest and Other, Net
Three Months Ended July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Interest expense $ (16,931 ) $ (4,304 ) (12,627 ) 293 %
Interest income and other, net 3,960 3,464 496 14
Loss on early extinguishment of debt (2,174 ) - (2,174 ) -
Interest and other, net $ (15,145 ) $ (840 ) $ (14,305 ) 1,703 %
Interest expense increased $12.6 million , or 293%, for the three months ended
July 31, 2020 compared to the three months ended July 31, 2019 , due to an
increase of $9.3 million and $6.5 million for the 2025 Notes and 2026 Notes,
respectively, offset by a decrease of $3.2 million for the 2023 Notes, due to
the 2023 Notes Partial Repurchases.
Loss on early extinguishment of debt increased $2.2 million for the three months
ended July 31, 2020 compared to the three months ended July 31, 2019 due to the
Second Partial Repurchase of 2023 Notes.
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Comparison of the Six Months Ended July 31, 2020 and 2019
Revenue
Six Months Ended July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Revenue:
Subscription $ 364,470 $ 249,657 $ 114,813 46 %
Professional services and other 18,835 16,046 2,789 17
Total revenue $ 383,305 $ 265,703 $ 117,602 44 %
Percentage of revenue:
Subscription 95 % 94 %
Professional services and other 5 6
Total 100 % 100 %
Subscription revenue increased by $114.8 million , or 46%, for the six months
ended July 31, 2020 compared to the six months ended July 31, 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 $2.8 million , or 17%, for
the six months ended July 31, 2020 compared to the six months ended July 31,
2019 . The increase in professional services revenue was primarily related to an
increase in implementation and other services associated with an increase in the
number of new customers purchasing our subscription services.
Cost of Revenue, Gross Profit and Gross Margin
Six Months Ended July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Cost of revenue:
Subscription $ 76,658 $ 52,457 $ 24,201 46 %
Professional services and other 22,975 21,418 1,557 7
Total cost of revenue $ 99,633 $ 73,875 $ 25,758 35 %
Gross profit $ 283,672 $ 191,828 $ 91,844 48 %
Gross margin:
Subscription 79 % 79 %
Professional services and other (22 ) (33 )
Total gross margin 74 72
Cost of subscription revenue increased by $24.2 million , or 46%, for the six
months ended July 31, 2020 compared to the six months ended July 31, 2019 ,
primarily due to an increase of $15.8 million in employee compensation costs
related to higher headcount to support the growth in our subscription services,
an increase of $2.7 million in software license costs and an increase of $2.5
million in third-party hosting costs as we increased capacity to support our
growth.
Our gross margin for subscription revenue remained consistent at 79% during the
six months ended July 31, 2020 compared to the six months ended July 31, 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 $1.6 million , or
7%, for the six months ended July 31, 2020 , compared to the six months ended
July 31, 2019 , primarily due to an increase of $1.2 million in employee
compensation costs related to higher headcount.
Our gross margin for professional services and other revenue improved to (22)%
during the six months ended July 31, 2020 from (33)% during the six months ended
July 31, 2019 primarily due to increases in professional services and other
revenue.
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Operating Expenses
Research and Development Expenses
Six Months Ended July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Research and development $ 102,360 $ 74,077 $ 28,283 38 %
Percentage of revenue 27 % 28 %
Research and development expenses increased $28.3 million , or 38%, for the six
months ended July 31, 2020 compared to the six months ended July 31, 2019 . The
increase was primarily due to an increase of $26.8 million in employee
compensation costs due to higher headcount.
Sales and Marketing Expenses
Six Months Ended July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Sales and marketing $ 202,365 $ 160,497 $ 41,868 26 %
Percentage of revenue 52 % 60 %
Sales and marketing expenses increased $41.9 million , or 26%, for the six months
ended July 31, 2020 , compared to the six months ended July 31, 2019 . The
increase was primarily due to an increase of $37.2 million in employee
compensation costs related to headcount growth and an increase of $2.4 million
in allocated overhead costs, offset by a decrease of $8.4 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 $11.0 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
Six Months Ended July 31,
2020 2019 $ Change % Change
(dollars in thousands)
General and administrative $ 76,534 $ 52,653 $ 23,881 45 %
Percentage of revenue 20 % 20 %
General and administrative expenses increased $23.9 million , or 45%, for the six
months ended July 31, 2020 compared to the six months ended July 31, 2019 . The
increase was primarily due to an increase of $20.0 million in employee
compensation costs related to higher headcount to support our continued growth.
Interest and Other, Net
Six Months Ended July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Interest expense $ (27,695 ) $ (8,545 ) $ (19,150 ) 224 %
Interest income and other, net 8,859 6,364 2,495 39
Loss on early extinguishment of debt (2,174 ) - (2,174 ) -
Interest and other, net $ (21,010 ) $ (2,181 ) $ (18,829 ) 863 %
Interest expense increased $19.2 million , or 224%, for the six months ended July
31, 2020 compared to the six months ended July 31, 2019 , primarily related to an
increase of $18.5 million and $6.5 million for the 2025 Notes and
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2026 Notes, respectively, offset by a decrease of $5.9 million for the 2023
Notes, due to the 2023 Notes Partial Repurchases.
Interest income and other, net increased $2.5 million , or 39%, for the six
months ended July 31, 2020 compared to the six months ended July 31, 2019 ,
primarily due to interest income earned on higher cash and cash equivalents and
short-term investment balances. We expect interest income earned on our
investments to decrease in relation to our overall portfolio balance in fiscal
2021 due to decreases in interest rates.
Loss on early extinguishment of debt increased $2.2 million for the six months
ended July 31, 2020 compared to the six months ended July 31, 2019 due to the
Second Partial Repurchase of 2023 Notes.
Key Business Metrics
We review a number of operating and financial metrics, including the following
key metrics, to evaluate our business, measure our performance, identify trends
affecting our business, formulate business plans, and make strategic decisions.
As of July 31,
2020 2019
(dollars in thousands)
Customers with annual contract value (ACV) above
1,222
Dollar-based net retention rate for the trailing 12 months ended
121 % 118 %
Current remaining performance obligations $ 684,515 $ 461,147
Remaining performance obligations $ 1,426,722 $ 913,573
Three Months Ended July 31, Six Months Ended July 31,
2020 2019 2020 2019
(in thousands)
Calculated billings $ 198,083 $ 155,764 $ 407,588 $ 302,959
Total Customers and Number of Customers with Annual Contract Value Above
$100,000
As of July 31, 2020 , we had over 8,950 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 1,685 and 1,222 as of July 31, 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.
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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.
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 27% in the three months ended July 31, 2020 over
the three months ended July 31, 2019 , and increased 35% in the six months ended
July 31, 2020 , over the six months ended July 31, 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 with U.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.
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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 July 31, Six Months Ended July 31,
2020 2019 2020 2019
(dollars in thousands)
Gross profit $ 149,299 $ 101,700 $ 283,672 $ 191,828
Add:
Stock-based compensation expense
included in cost of revenue 7,164 4,984 12,950 8,925
Amortization of acquired intangibles 1,594 1,785 3,187 2,548
Non-GAAP gross profit $ 158,057 $ 108,469 $ 299,809 $ 203,301
Gross margin 74 % 72 % 74 % 72 %
Non-GAAP gross margin 79 % 77 % 78 % 77 %
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
and acquisition-related expenses.
Three Months Ended July 31, Six Months Ended July 31,
2020 2019 2020 2019
(dollars in thousands)
Operating loss $ (45,388 ) $ (43,617 ) $ (97,587 ) $ (95,399 )
Add:
Stock-based compensation expense 48,394 31,274 86,122 53,959
Non-cash charitable contributions 1,881 652 2,417 652
Amortization of acquired intangibles 1,594 1,785 3,187 2,548
Acquisition-related expenses(1) - - - 3,449
Non-GAAP operating income (loss)
(5,861 ) $ (34,791 )
Operating margin (23 )% (31 )% (25 )% (36 )%
Non-GAAP operating margin 3 % (7 )% (2 )% (13 )%
(1) We define acquisition-related expenses as costs associated with
acquisitions, including transaction costs and other non-recurring
incremental costs incurred.
Non-GAAP Net Income (Loss) and Non-GAAP Net Margin
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-related expenses, amortization of debt discount and debt issuance
costs and loss on early extinguishment of debt.
40
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Three Months Ended July 31, Six Months Ended July 31,
2020 2019(1) 2020 2019(1)
(dollars in thousands)
Net loss $ (60,100 ) $ (42,980 ) $ (117,762 ) $ (94,946 )
Add:
Stock-based compensation expense 48,394 31,274 86,122 53,959
Non-cash charitable contributions 1,881 652 2,417 652
Amortization of acquired intangibles 1,594 1,785 3,187 2,548
Acquisition-related expenses(2) - - - 3,449
Amortization of debt discount and
debt issuance costs(3) 15,973 4,088 26,330 8,113
Loss on early extinguishment of
debt(4) 2,174 - 2,174 -
Non-GAAP net income (loss) $ 9,916 $ (5,181 ) $ 2,468 $ (26,225 )
Net margin (30 )% (31 )% (31 )% (36 )%
Non-GAAP net margin 5 % (4 )% 1 % (10 )%
(1) Prior periods have been adjusted to conform to the current presentation. See
footnotes (3) and (4) for additional details.
(2) We define acquisition-related expenses as costs associated with
acquisitions, including transaction costs and other non-recurring incremental
costs incurred.
(3) Amortization of debt issuance costs is an adjustment to non-GAAP net income
(loss), effective the three and six months ended July 31, 2020 . Debt issuance
costs included are $0.8 million and $1.4 million for the three and six months
ended July 31, 2020 , respectively, and $0.3 million and $0.6 million for the
three and six months ended July 31, 2019 , respectively.
(4) Loss on early extinguishment of debt is calculated inclusive of write-offs
of debt issuance costs, effective the three and six months ended July 31, 2020 .
The amounts of these write-offs are $1.0 million for the three and six months
ended July 31, 2020 , respectively, and nil for the three and six months ended
July 31, 2019 , respectively.
Non-GAAP Net Income (Loss) per share, basic and diluted
We define non-GAAP net income (loss) per share, basic, as non-GAAP net income
(loss) divided by GAAP weighted-average shares used to compute net loss per
share, basic and diluted.
We define non-GAAP net income (loss) per share, diluted, as non-GAAP net income
(loss) divided by GAAP weighted-average shares used to compute net loss per
share, basic and diluted adjusted for the potentially dilutive effect of (i)
employee equity incentive plans, excluding the impact of unrecognized
stock-based compensation expense, and (ii) convertible senior notes outstanding
and related warrants. In addition, non-GAAP net income (loss) per share,
diluted, includes the anti-dilutive impact of the Company's note hedge and
capped call agreements on convertible senior notes outstanding, which fully
reduced the potential dilutive effect of the convertible senior notes
outstanding. Accordingly, the Company did not record any adjustments to non-GAAP
net income (loss) for the potential impact of the convertible senior notes
outstanding under the if-converted method.
41
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Three Months Ended July 31, Six Months Ended July 31,
2020 2019(1) 2020 2019(1)
(dollars in thousands)
Net loss $ (60,100 ) $ (42,980 ) $ (117,762 ) $ (94,946 )
Add:
Stock-based compensation expense 48,394 31,274 86,122 53,959
Non-cash charitable contributions 1,881 652 2,417 652
Amortization of acquired intangibles 1,594 1,785 3,187 2,548
Acquisition-related expenses(2) - - - 3,449
Amortization of debt discount and
debt issuance costs(3) 15,973 4,088 26,330 8,113
Loss on early extinguishment of
debt(4) 2,174 - 2,174 -
Non-GAAP net income (loss) $ 9,916 $ (5,181 ) Weighted-average shares used to compute net loss per share, basic and diluted 126,319 115,033 124,922 114,042 Non-GAAP weighted-average effect of potentially dilutive securities 15,936 - 16,281 - Non-GAAP weighted-average shares used to compute non-GAAP net income (loss) per share, diluted 142,255 115,033
141,203 114,042
Net loss per share, basic and diluted$ (0.48 ) $ (0.37 ) $ (0.94 ) $ (0.83 ) Non-GAAP net income (loss) per share, basic(5)$ 0.08 $ (0.05 ) $ 0.02 $ (0.23 ) Non-GAAP net income (loss) per share, diluted(5)$ 0.07 $ (0.05 )
(1) Prior periods have been adjusted to conform to the current presentation. See footnotes (3), (4) and (5) for additional details. (2) We define acquisition-related expenses as costs associated with acquisitions, including transaction costs and other non-recurring incremental costs incurred. (3) Amortization of debt issuance costs is an adjustment to non-GAAP net income (loss), effective the three and six months endedJuly 31, 2020 . Debt issuance costs included are$0.8 million and$1.4 million for the three and six months endedJuly 31, 2020 , respectively, and$0.3 million and$0.6 million for the three and six months endedJuly 31, 2019 , respectively. (4) Loss on early extinguishment of debt is calculated inclusive of write-offs of debt issuance costs, effective the three and six months endedJuly 31, 2020 . The amounts of these write-offs are$1.0 million for the three and six months endedJuly 31, 2020 , respectively, and nil for the three and six months endedJuly 31, 2019 , respectively. (5) The total impact of the adjustments noted in footnotes (3) and (4) and for the periods noted in footnote (1) above on non-GAAP net income (loss) per share, basic and diluted is nil and$0.01 for the three and six months endedJuly 31, 2019 , respectively. 42
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Free Cash Flow and Free Cash Flow Margin
We define Free Cash Flow as net cash provided by (used in) operating activities,
less cash used for purchases of property and equipment, net of sales proceeds,
and capitalized internal-use software costs. Free cash flow margin is calculated
as free cash flow divided by total revenue.
Three Months Ended July 31 ,
Six Months Ended
2020 2019 2020 2019
(dollars in thousands)
Net cash provided by (used in) operating activities$ 10,930 $ (1,134 ) $ 49,627 $ 20,128 Less: Purchases of property and equipment (2,739 ) (2,207 ) (10,669 ) (9,917 ) Capitalization of internal-use software costs (1,326 ) (961 ) (2,326 ) (1,330 ) Free cash flow $ 6,865$ (4,302 ) $ 36,632 $ 8,881 Net cash used in investing activities$ (722,865 ) $ (22,383 ) $ (672,261 ) $ (147,990 ) Net cash provided by financing activities$ 1,047,080 $ 23,070 $ 1,061,247 $ 36,332 Free cash flow margin 3 % (3 )% 10 % 3 %
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 July 31, Six Months Ended July 31,
2020 2019 2020 2019
(in thousands)
Total revenue $ 200,446 $ 140,480 $ 383,305 $ 265,703
Add:
Deferred revenue (end of period) 396,820 291,193 396,820 291,193
Unbilled receivables (beginning of
period) 1,121 799 1,026 1,457
Less:
Unbilled receivables (end of period) (2,113 ) (1,004 ) (2,113 ) (1,004 ) Deferred revenue (beginning of period) (398,191 ) (275,704 ) (371,450 ) (254,390 ) Calculated billings$ 198,083 $ 155,764 $ 407,588 $ 302,959 Liquidity and Capital Resources As ofJuly 31, 2020 , our principal sources of liquidity were cash, cash equivalents and short-term investments totaling$2,514.5 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. 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. 43 -------------------------------------------------------------------------------- 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 2025 Capped Calls. Concurrent with the private offering of the 2025 Notes, we repurchased$224.4 million principal amount of the 2023 Notes in privately-negotiated transactions for aggregate consideration of$604.8 million , including approximately$224.4 million in cash and approximately 3.0 million shares of Class A common stock. We also terminated a portion of our existing Note Hedges and Warrants in amounts corresponding to the principal amount of the First Partial Repurchase of 2023 Notes for net proceeds of$47.2 million . InJune 2020 , we completed our private offering of the 2026 Notes and received aggregate proceeds of$1,150.0 million , before deducting issuance costs of approximately$15.1 million . In connection with the 2026 Notes, we entered into Capped Call transactions with respect to our Class A common stock. We used an aggregate amount of$134.0 million of the net proceeds from the sale of the 2026 Notes to purchase the 2026 Capped Calls. Concurrent with the private offering of the 2026 Notes, we repurchased$69.9 million principal amount of the 2023 Notes in privately-negotiated transactions for aggregate consideration of$260.5 million , including approximately 1.4 million shares of Class A common stock and$0.2 million in cash. We also terminated a portion of our existing Note Hedges and Warrants in amounts corresponding to the principal amount of the Second Partial Repurchase of 2023 Notes for net proceeds of$19.6 million . While the potential impacts of the COVID-19 pandemic may 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 ofJuly 31, 2020 , we had deferred revenue of$396.8 million , of which$391.2 million was recorded as a current liability and is expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria have been met. Cash Flows The following table summarizes our cash flows for the periods indicated: Six Months Ended July 31, 2020 2019 (in thousands) Net cash provided by operating activities$ 49,627 $ 20,128 Net cash used in investing activities (672,261 ) (147,990 ) Net cash provided by financing activities 1,061,247
36,332
Effects of changes in foreign currency exchange rates on cash, cash equivalents and restricted cash
578 (1,187 )
Net increase (decrease) in cash, cash equivalents and
restricted cash $ 439,191 $ (92,717 )
44-------------------------------------------------------------------------------- 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 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 inFebruary 2018 ,September 2019 andJune 2020 , respectively, and from our IPO inApril 2017 . During the six months endedJuly 31, 2020 , cash provided by operating activities was$49.6 million primarily due to our net loss of$117.8 million , adjusted for non-cash charges of$147.3 million and net cash inflows of$20.1 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$25.4 million increase in deferred revenue, a$18.6 million decrease in accounts receivable, a$15.9 million increase in accounts payable and accrued compensation and a$9.0 million decrease in operating lease right-of-use assets, partially offset by a$30.3 million increase in deferred commissions, a$7.7 million decrease in operating lease liabilities, a$7.6 million increase in prepaid expenses and other assets and a$3.1 million decrease in accrued expenses and other liabilities. During the six months endedJuly 31, 2019 , cash provided by operating activities was$20.1 million primarily due to our net loss of$94.9 million , adjusted for non-cash charges of$80.9 million and net cash inflows of$34.2 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, offset by non-cash income from deferred income taxes. The primary drivers of the changes in operating assets and liabilities related to a$36.2 million increase in deferred revenue, a$7.4 million increase in accounts payable, accrued compensation, and accrued other expenses, a$4.5 million decrease in accounts receivable, a$1.5 million decrease in prepaid expenses and other assets and a$6.2 million decrease in operating lease right-of-use assets, partially offset by a$21.4 million increase in deferred commissions. Investing Activities Net cash used in investing activities during the six months endedJuly 31, 2020 of$672.3 million was primarily attributable to purchases of investments of$1,029.3 million partially offset by proceeds from the sales and maturities of investments of$370.0 million , purchases of property and equipment of$10.7 million to support additional office space and headcount and the capitalization of internal-use software costs of$2.3 million associated with the development of additional features and functionality of our platform. Net cash used in investing activities during the six months endedJuly 31, 2019 of$148.0 million was primarily attributable to the purchases of investments of$237.7 million , payment of$44.2 million , net of cash acquired, in connection with our Azuqua acquisition, payment of$8.5 million in connection with the purchase of developed technology intangible assets, purchases of property and equipment of$9.9 million to support additional office space and headcount, and the capitalization of internal-use software costs of$1.3 million associated with the development of additional features and functionality of our platform. These activities were offset by proceeds from the sales and maturities of investments of$153.7 million . Financing Activities Cash provided by financing activities during the six months endedJuly 31, 2020 of$1,061.2 million was primarily attributable to the issuance of 2026 Notes for proceeds of$1,135.4 million , net of issuance costs and proceeds from the termination of existing Note Hedges of$195.0 million , offset by payments for the termination of existing Warrants of$175.4 million and the purchase of 2026 Capped Calls of$134.0 million . Other items impacting cash provided by financing activities include proceeds from the exercise of stock options of$27.5 million and proceeds from employee purchases under our ESPP of$12.8 million . Cash provided by financing activities during the six months endedJuly 31, 2019 of$36.3 million was primarily attributable to proceeds from the exercise of stock options, net of repurchases, of$27.5 million and proceeds from employee purchases under our ESPP of$9.0 million . 45 -------------------------------------------------------------------------------- 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. Off-Balance Sheet Arrangements As ofJuly 31, 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 six months endedJuly 31, 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. 46
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