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 powered by our category-defining platform that enables our customers to securely connect the right people to the right technologies and services at the right time. Every day, thousands of organizations and millions of people use Okta to securely access a wide range of cloud, mobile and web applications, on-premises servers, application program interfaces ("APIs"), IT infrastructure providers and services from a multitude of devices. Developers leverage our platform to securely and efficiently embed identity into the software they build, allowing them to focus on their core mission. Employees and contractors sign into the Okta Identity Cloud to seamlessly and securely access the applications they need to do their most important work. Organizations use our platform to collaborate with their partners, and to provide their customers with more modern and secure experiences online and via mobile devices. Given the growth trends in the number of applications and cloud adoption, and the movement to remote workforces, identity is becoming the most critical layer of an organization's security. Our approach to identity allows our customers to simplify and efficiently scale their security infrastructures across internal IT systems and external customer facing applications. As ofApril 30, 2021 , more than 10,650 customers across nearly every industry used the Okta Identity Cloud to secure and manage identities around the world. Our customers consist of leading global organizations ranging from the largest enterprises, to small and medium-sized businesses, universities, non-profits and government agencies. We also partner with leading application, IT infrastructure and security vendors through our Okta Integration Network. As ofApril 30, 2021 , we had over 7,000 integrations with these cloud, mobile and web applications and IT infrastructure and security vendors. We employ a Software-as-a-Service ("SaaS") business model, and generate revenue primarily by selling multi-year subscriptions to our cloud-based offerings. We focus on acquiring and retaining our customers and increasing their spending with us through expanding the number of users who access the Okta Identity Cloud and up-selling additional products. We 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. 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 , the 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 96% of total revenue for the three months
ended
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impacts on revenue growth and other key metrics on a trailing basis. Our
allowance for doubtful accounts and sales reserves have increased slightly from
pre-pandemic levels primarily due to an increase in overall uncertainty in our
forecasts of future economic conditions and risks. While we see risks associated
with more highly impacted companies and industries, we are also seeing new
interest from other organizations, driven by rapidly changing work and business
environments. As workforces have transitioned to working from home in a
distributed model, Zero Trust has become an increasingly important security
model and identity an increasingly critical service.
We believe we will be able to continue to deliver our cloud-based platform and
support to our customers, without compromising our employees' safety. Since
March 2020 , we have put in place mandatory work-from-home procedures for our
global office locations, and our employees have the necessary tools and
technology to remain connected and productive. In addition, in fiscal 2021 we
shifted our customer, employee and industry events, including our annual user
conference to virtual-only formats, resulting in cost savings. We further
experienced cost savings driven by reductions in employee-related expenses as
our sales and marketing activities shifted primarily to an online-only sales
format and our employees shifted to work-from-home procedures. As we anticipate
returning to in-person sales formats and experiences for future annual user
conferences, we expect our future costs to increase.
See Risk Factors for further discussion of the potential impact of COVID-19 and its related public health measures on our business.
Acquisition of
OnMay 3, 2021 , we completed the acquisition ofAuth0 . We provided total consideration, net of acquired cash and subject to final adjustments, of approximately$6.5 billion , including approximately 20.4 million shares of the Company's Class A common stock as Stock Consideration,$268.7 million in cash, and equity awards convertible into shares with a fair market value of$700.2 million based upon our closing stock price as ofApril 30, 2021 . Approximately$325.0 million of the consideration was held back by us to secure the indemnification obligations of theAuth0 securityholders arising during the twelve months following the closing. In addition, we established a retention pool in an aggregate amount of approximately$25.0 million that will be allocated to certainAuth0 employees in accordance with the terms of the Merger Agreement. The retention awards will vest consistent with Okta's standard RSU vesting periods and terms. The following discussion and analysis of our results of operations and our liquidity and capital resources focuses on our existing operations exclusive of the impact of the acquisition ofAuth0 . Any forward-looking statements contained herein do not take into account the impact of the acquisition. Components of Results of Operations
Revenue
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 costs (including rent, utilities
and depreciation on assets shared by all departments), certain information
technology costs, and recruiting costs to all departments based on headcount. As
such, allocated shared costs are reflected in each cost of revenue and operating
expense category. Employee compensation costs include salaries, bonuses,
benefits and stock-based compensation for each cost of revenue and operating
expense category, sales commissions for sales and marketing and any compensation
related taxes.
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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, 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 that 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, allocated overhead 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 a result of the
timing and amount of investments to expand our hosting capacity, our continued
efforts to build platform support and professional services teams, increased
stock-based compensation expenses, as well as the amortization of costs
associated with capitalized internal-use software and acquired intangible
assets.
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 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 and as we return
to in-person sales formats and experiences for future annual user conferences.
However, over time, 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,
information technology and human resources personnel. In addition, general and
administrative expenses include acquisition-related costs, non-personnel costs,
such as legal, accounting and other professional fees, charitable contributions,
and all other supporting corporate expenses, such as information technology, not
allocated to other departments. We expect our general and administrative
expenses will increase in absolute dollars as our business grows.
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 the Notes, interest income from our investment holdings, gains and
losses from our strategic investments and loss on early extinguishment and
conversion 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
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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.
Results of Operations
The following table sets forth our results of operations for the periods
presented in dollars:
Three Months Ended
April 30,
2021 2020
(in thousands)
Revenue:
Subscription $ 240,058 $ 173,781
Professional services and other 10,948 9,078
Total revenue 251,006 182,859
Cost of revenue:
Subscription(1) 52,398 37,157
Professional services and other(1) 13,725 11,329
Total cost of revenue 66,123 48,486
Gross profit 184,883 134,373
Operating expenses:
Research and development(1) 68,863 48,494
Sales and marketing(1) 146,521 104,043
General and administrative(1) 60,180 34,035
Total operating expenses 275,564 186,572
Operating loss (90,681) (52,199)
Interest expense (22,760) (10,764)
Interest income and other, net 4,355 4,899
Loss on conversion of debt (136) -
Interest and other, net (18,541) (5,865)Loss before provision for (benefit from) income taxes (109,222) (58,064) Provision for (benefit from) income taxes
10 (402)
Net loss $ (109,232) $ (57,662) (1) Includes stock-based compensation expense as follows:
Three Months Ended
April 30,
2021 2020
(in thousands)
Cost of subscription revenue $ 7,250 $ 3,975 Cost of professional services and other revenue 2,342 1,811 Research and development
20,093 11,935
Sales and marketing 21,066 11,160
General and administrative 13,361 8,847
Total stock-based compensation expense $ 64,112 $ 37,728
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--------------------------------------------------------------------------------The following table sets forth our results of operations for the periods presented as a percentage of our total revenue:
Three Months Ended
April 30,
2021 2020
Revenue
Subscription 96 % 95 %
Professional services and other 4 5
Total revenue 100 100
Cost of revenue
Subscription 21 21
Professional services and other 5 6
Total cost of revenue 26 27
Gross profit 74 73
Operating expenses
Research and development 28 26
Sales and marketing 58 57
General and administrative 24 19
Total operating expenses 110 102
Operating loss (36) (29)
Interest expense (9) (6)
Interest income and other, net 1 3
Loss on conversion of debt - -
Interest and other, net (8) (3)
Loss before provision for (benefit from) income taxes (44) (32)
Provision for (benefit from) income taxes - -
Net loss (44) % (32) %
Comparison of the Three Months Ended April 30, 2021 and 2020
Revenue
Three Months Ended
April 30,
2021 2020 $ Change % Change
(dollars in thousands)
Revenue:
Subscription $ 240,058 $ 173,781 $ 66,277 38 %
Professional services and other 10,948 9,078 1,870 21
Total revenue $ 251,006 $ 182,859 $ 68,147 37 %
Percentage of revenue:
Subscription 96 % 95 %
Professional services and other 4 5
Total 100 % 100 %
Subscription revenue increased by $66.3 million , or 38%, for the three months
ended April 30, 2021 compared to the three months ended April 30, 2020 . 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 $1.9 million , or 21%, for
the three months ended April 30, 2021 compared to the three months ended
April 30, 2020 . The increase in professional services revenue
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--------------------------------------------------------------------------------was primarily related to an increase in implementation and other services associated with growth in the number of new customers purchasing our subscription services. Cost of Revenue, Gross Profit and Gross Margin
Three Months Ended
April 30,
2021 2020 $ Change % Change
(dollars in thousands)
Cost of revenue:
Subscription $ 52,398 $ 37,157 $ 15,241 41 %
Professional services and other 13,725 11,329 2,396 21
Total cost of revenue $ 66,123 $ 48,486 $ 17,637 36 %
Gross profit $ 184,883 $ 134,373 $ 50,510 38 %
Gross margin:
Subscription 78 % 79 %
Professional services and other (25) (25)
Total gross margin 74 73
Cost of subscription revenue increased by $15.2 million , or 41%, for the three
months ended April 30, 2021 compared to the three months ended April 30, 2020 ,
primarily due to an increase of $10.2 million in employee compensation costs
related to higher headcount to support the growth in our subscription services,
an increase of $2.2 million in third-party hosting costs as we expanded capacity
to support our growth and $1.7 million in software license costs.
Our gross margin for subscription revenue decreased to 78% for the three months
ended April 30, 2021 from 79% during the three months ended April 30, 2020 .
While our gross margins for subscription revenue may fluctuate in the near-term
as we invest in our growth, we expect our subscription revenue gross margin to
improve over the long-term as we achieve additional economies of scale.
Cost of professional services and other revenue increased by $2.4 million , or
21%, for the three months ended April 30, 2021 , compared to the three months
ended April 30, 2020 , due to an increase of $2.0 million in employee
compensation costs due to higher headcount.
Our gross margin for professional services and other revenue remained consistent
at (25)% during the three months ended April 30, 2021 and 2020.
Operating Expenses
Research and Development Expenses
Three Months Ended
April 30,
2021 2020 $ Change % Change
(dollars in thousands)
Research and development $ 68,863 $ 48,494 $ 20,369 42 %
Percentage of revenue 28 % 26 %
Research and development expenses increased $20.4 million , or 42%, for the three
months ended April 30, 2021 compared to the three months ended April 30, 2020 .
The increase was primarily due to an increase of $17.1 million in employee
compensation costs due to higher headcount.
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Sales and Marketing Expenses
Three Months Ended
April 30,
2021 2020 $ Change % Change
(dollars in thousands)
Sales and marketing $ 146,521 $ 104,043 $ 42,478 41 %
Percentage of revenue 58 % 57 %
Sales and marketing expenses increased $42.5 million , or 41%, for the three
months ended April 30, 2021 compared to the three months ended April 30, 2020 .
The increase was primarily due to an increase of $27.2 million in employee
compensation costs related to higher headcount, partially offset by a decrease
of $2.0 million in employee-related expenses primarily due to reduced
travel-related expenditures resulting from our temporary shift of our sales and
marketing activities to a primarily online-only format. Marketing and event
costs increased by $13.5 million primarily due to increases in demand generation
programs, advertising, and brand awareness efforts aimed at acquiring new
customers, as well as higher production and advertising costs for our virtual
format annual customer conference.
General and Administrative Expenses
Three Months Ended
April 30,
2021 2020 $ Change % Change
(dollars in thousands)
General and administrative $ 60,180 $ 34,035 $ 26,145 77 %
Percentage of revenue 24 % 19 %
General and administrative expenses increased $26.1 million , or 77%, for the
three months ended April 30, 2021 compared to the three months ended April 30,
2020 . The increase was primarily due to an increase of $12.4 million in employee
compensation costs primarily related to higher headcount to support our
continued growth and an increase of $7.1 million due to acquisition-related
costs incurred in the first quarter of fiscal 2022, but not in the first quarter
of fiscal 2021.
Interest and Other, Net
Three Months Ended
April 30,
2021 2020 $ Change % Change
(dollars in thousands)
Interest expense $ (22,760) $ (10,764) (11,996) 111 %
Interest income and other, net 4,355 4,899 (544) (11)
Loss on conversion of debt (136) - (136) -
Interest and other, net
Interest expense increased$12.0 million , or 111%, for the three months endedApril 30, 2021 compared to the three months endedApril 30, 2020 , due to an increase of$12.7 million and$0.4 million for the 2026 Notes and 2025 Notes, respectively, partially offset by a decrease of$1.1 million for the 2023 Notes, due to the Second Partial Repurchase of 2023 Notes and other conversion activity. Interest income and other, net decreased$0.5 million , or (11)%, for the three months endedApril 30, 2021 compared to the three months endedApril 30, 2020 , primarily due to a decrease of$3.4 million in interest income resulting from lower interest rates, despite higher cash and cash equivalents and short-term investment balances. 34
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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 April 30,
2021 2020
(dollars in thousands)
Customers with annual contract value ("ACV") above $100,000 2,075 1,580
Dollar-based net retention rate for the trailing 12 months ended 120 %
121 %
Current remaining performance obligations $ 898,530 $ 619,104
Remaining performance obligations $ 1,889,805 $ 1,240,224
Three Months Ended
April 30,
2021 2020
(in thousands)
Calculated billings $ 364,030 $ 209,505
Total Customers and Number of Customers with Annual Contract Value Above
$100,000
As of April 30, 2021 , we had over 10,650 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 total revenue, which has contributed to an increase in
average revenue per customer. The number of customers who have greater than
$100,000 in annual contract value ("ACV") with us was 2,075 and 1,580 as of
April 30, 2021 and 2020, respectively. We expect this trend to continue as
larger enterprises recognize the value of our platform and replace their legacy
identity access management ("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 ("Prior Period ACV").
We then calculate the ACV from these same customers as of the current period end
("Current Period ACV"). Current Period ACV includes any upsells and is net of
contraction or churn over the trailing twelve months but excludes ACV from new
customers in the current period. We then divide the Current Period ACV by the
Prior Period ACV to arrive at our Dollar-Based Net Retention Rate.
Our strong Dollar-Based Net Retention Rate is primarily attributable to gross
retention, 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.
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Remaining Performance Obligations (RPO)
RPO represent all future, non-cancelable, contracted revenue under our
subscription contracts with customers that has not yet been recognized,
inclusive of deferred revenue that has been invoiced and non-cancelable 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 reflect sales to new customers plus
subscription renewals and upsells to existing customers, and represent amounts
invoiced for subscription, support and professional services. We typically
invoice customers in advance in annual installments for subscriptions to our
platform.
Calculated Billings increased 74% in the three months ended April 30, 2021 over
the three months ended April 30, 2020 . We implemented operational changes to our
billings process in the three months ended April 30, 2021 pursuant to which we
billed customers earlier than we would have under our historical billing
practices. These changes had a favorable effect on billings in the three months
ended April 30, 2021 . Absent the impact of the billings process changes,
calculated billings would have grown 40% year-over-year. As our Calculated
Billings continue to grow in absolute terms, we expect our Calculated Billings
growth rate to trend down over time. See the section titled "Non-GAAP Financial
Measures" for additional information and a reconciliation of Calculated Billings
to total revenue.
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 included in
cost of revenue and amortization of acquired intangibles.
Three Months Ended
April 30,
2021 2020
(dollars in thousands)
Gross profit $ 184,883 $ 134,373
Add:
Stock-based compensation expense included in cost of revenue 9,592 5,786
Amortization of acquired intangibles 1,593 1,593
Non-GAAP gross profit $ 196,068 $ 141,752
Gross margin 74 % 73 %
Non-GAAP gross margin 78 % 78 %
Non-GAAP Operating Loss and Non-GAAP Operating Margin
We define non-GAAP operating loss and non-GAAP operating margin as GAAP
operating loss and GAAP operating margin, adjusted for stock-based compensation
expense, non-cash charitable contributions, amortization of acquired intangibles
and acquisition-related expenses.
Three Months Ended
April 30,
2021 2020
(dollars in thousands)
Operating loss $ (90,681) $ (52,199)
Add:
Stock-based compensation expense 64,112 37,728
Non-cash charitable contributions 2,024 536
Amortization of acquired intangibles 1,593 1,593
Acquisition-related expenses(1) 7,054 -
Non-GAAP operating loss $ (15,898) $ (12,342)
Operating margin (36) % (29) %
Non-GAAP operating margin (6) % (7) %
(1) Acquisition-related expenses include transaction costs and other non-recurring incremental costs incurred through the one-year anniversary of transaction close.
Non-GAAP Net Loss, Non-GAAPNet Margin and Non-GAAP Net Loss Per Share, Basic and Diluted We define non-GAAP net loss and non-GAAP net margin as GAAP net loss and GAAP net margin, adjusted for stock-based compensation expense, non-cash charitable contributions, amortization of acquired intangibles, acquisition-related expenses, amortization of debt discount and debt issuance costs and loss on conversion of debt. We define non-GAAP net loss per share, basic, as non-GAAP net loss divided by GAAP weighted-average shares used to compute net loss per share, basic and diluted. 37 -------------------------------------------------------------------------------- We define non-GAAP net loss per share, diluted, as non-GAAP net loss divided by GAAP weighted-average shares used to compute net loss per share, basic and diluted adjusted for the potentially dilutive effect of (i) employee equity incentive plans, excluding the impact of unrecognized stock-based compensation expense, and (ii) convertible senior notes outstanding and related warrants. In addition, non-GAAP net loss per share, diluted, includes the anti-dilutive impact of the Company's note hedge and capped call agreements on convertible senior notes outstanding. Accordingly, the Company did not record any adjustments to non-GAAP net loss for the potential impact of the convertible senior notes outstanding under the if-converted method. Three Months Ended April 30, 2021 2020(1) (dollars in thousands) Net loss$ (109,232) $ (57,662) Add: Stock-based compensation expense 64,112 37,728 Non-cash charitable contributions 2,024 536 Amortization of acquired intangibles 1,593 1,593 Acquisition-related expenses(2) 7,054 - Amortization of debt discount and debt issuance costs(3) 21,331 10,357 Loss on conversion of debt 136 - Non-GAAP net loss$ (12,982) $ (7,448) Net margin (44) % (32) % Non-GAAP net margin (5) % (4) %
Weighted-average shares used to compute net loss per share, basic and diluted
131,777 123,494
Non-GAAP weighted-average effect of potentially dilutive securities
- -
Non-GAAP weighted-average shares used to compute non-GAAP net loss per share, diluted
131,777 123,494
Net loss per share, basic and diluted $ (0.83) $ (0.47)
Non-GAAP net loss per share, basic and diluted(4) $
(0.10)
(1) Prior period has been adjusted to conform to the current presentation. See footnote (3) and (4) for additional details. (2) Acquisition-related expenses include transaction costs and other non-recurring incremental costs incurred through the one-year anniversary of transaction close. (3) Amortization of debt issuance costs is an adjustment to non-GAAP net loss, effectiveJuly 31, 2020 . Debt issuance costs included are$0.9 million for the three months endedApril 30, 2021 and$0.6 million for the three months endedApril 30, 2020 . (4) The total impact of the adjustments noted in footnote (3) for the period noted in footnote (1) above on non-GAAP net loss per share, basic and diluted is$0.01 for the three months endedApril 30, 2020 . 38 -------------------------------------------------------------------------------- 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 EndedApril 30, 2021 2020 (dollars in thousands)
Net cash provided by operating activities
Less:
Purchases of property and equipment (3,259) (7,930)
Capitalization of internal-use software costs (10) (1,000)
Free cash flow $ 52,806 $29,767
Net cash provided by investing activities
Net cash provided by financing activities $ 16,179 $ 14,167
Free cash flow margin 21 % 16 %
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,
2021 2020
(in thousands)
Total revenue $ 251,006 $ 182,859
Add:
Deferred revenue (end of period) 624,912 398,191
Unbilled receivables (beginning of period) 2,604 1,026
Less:
Unbilled receivables (end of period) (894) (1,121)
Deferred revenue (beginning of period) (513,598) (371,450)
Calculated billings $ 364,030 $ 209,505
Liquidity and Capital Resources
As of April 30, 2021 , our principal sources of liquidity were cash, cash
equivalents and short-term investments totaling $2,690.1 million , which were
held for working capital and general corporate purposes, including potential
future acquisition activity. Our cash equivalents and investments consisted
primarily of U.S. 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.
In February 2018 , we completed our private offering of the 2023 Notes due on
February 15, 2023 and received aggregate proceeds of $345.0 million , before
deducting costs of issuance of $10.0 million . The interest rate on the 2023
Notes is fixed at 0.25% per annum and is payable semi-annually in arrears on
February 15 and August 15 of each year, beginning on August 15, 2018 . In
connection with the issuance of the 2023 Notes, we entered into the 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 in connection with the issuance of the 2023
Notes.
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In September 2019 , we completed our private offering of the 2025 Notes due on
September 1, 2025 and received aggregate proceeds of $1,060.0 million , before
deducting issuance costs of approximately $19.3 million . The interest rate on
the 2025 Notes is fixed at 0.125% per annum and is payable semi-annually in
arrears on March 1 and September 1 of each year, beginning on March 1, 2020 . In
connection with the 2025 Notes, we entered into the 2025 Capped Calls. 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 .
In June 2020 , we completed our private offering of the 2026 Notes due on June
15, 2026 and received aggregate proceeds of $1,150.0 million , before deducting
issuance costs of approximately $15.2 million . The interest rate on the 2026
Notes is fixed at 0.375% per year and is payable semi-annually in arrears on
June 15 and December 15 of each year, beginning on December 15, 2020 . In
connection with the 2026 Notes, we entered into the 2026 Capped Calls. We used
an aggregate amount of $134.0 million of the net proceeds from the sale of the
2026 Notes to purchase the 2026 Capped Calls.
Concurrent with the private offering of the 2026 Notes, we repurchased $69.9
million principal amount of the 2023 Notes in privately-negotiated transactions
for aggregate consideration of $260.5 million , including approximately 1.4
million shares of Class A common stock and $0.2 million in cash. We also
terminated a portion of our existing Note Hedges and Warrants in amounts
corresponding to the principal amount of the Second Partial Repurchase of 2023
Notes for net proceeds of $19.6 million .
Through April 30, 2021 , we converted and settled approximately $27.6 million
principal amount of 2023 Notes (not in connection with the 2023 Notes Partial
Repurchases) and exercised and net-share-settled Note Hedges corresponding to
approximately $17.9 million principal amount of 2023 Notes. In connection with
these transactions, we issued approximately 0.6 million shares of Class A common
stock and received approximately 0.3 million shares of Class A common stock,
accompanied by immaterial cash payments.
During the three months ended April 30, 2021 , we received additional conversion
requests, and approximately $2.9 million aggregate principal amount of the 2023
Notes were primarily settled in shares of Class A common stock during the three
months ending July 31, 2021 . No requests to convert material amounts of 2023
Notes or 2025 Notes are currently outstanding.
As of April 30, 2021 , we exercised Note Hedges corresponding to approximately
$9.6 million principal amount of 2023 Notes expected to be settled in the second
quarter of fiscal 2022, and subsequent to April 30, 2021 , we further exercised
an immaterial amount of Note Hedges.
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 investments and cash provided by sales of our products and services will be
sufficient to meet our short-term and long-term projected working capital and
capital expenditure needs for the foreseeable future. Our future capital
requirements will depend on many factors, including our subscription growth
rate, subscription renewal activity, billing frequency, the timing and extent of
spending to support development efforts, the expansion of sales and marketing
activities, the expansion of our international operations, the introduction of
new and enhanced product offerings, 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 of April 30, 2021 , we had deferred revenue of
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$624.9 million , of which $613.2 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.
On March 3, 2021 , we and Auth0 entered into the Merger Agreement, pursuant to
which, effective on the Closing Date, Auth0 became a direct, wholly owned
subsidiary. The effect the Acquisition had on our liquidity, financial condition
and results of operations will be reflected in our financial information
beginning in the second quarter of fiscal 2022.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Three Months Ended
April 30,
2021 2020
(in thousands)
Net cash provided by operating activities $ 56,075 $ 38,697
Net cash provided by investing activities 151,905 50,604
Net cash provided by financing activities 16,179 14,167
Effects of changes in foreign currency exchange rates on cash, cash equivalents and restricted cash
647 (1,128)
Net increase in cash, cash equivalents and restricted cash
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 initial public offering ("IPO") inApril 2017 . During the three months endedApril 30, 2021 , cash provided by operating activities was$56.1 million primarily due to our net loss of$109.2 million , adjusted for non-cash charges of$107.9 million and net cash inflows of$57.4 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation, amortization of debt discount and issuance costs, depreciation, amortization and accretion of property and equipment, intangible assets and short-term investments and amortization of deferred commissions. The primary drivers of the changes in operating assets and liabilities related to a$111.3 million increase in deferred revenue and a$5.1 million decrease in operating lease right-of-use assets, partially offset by a$22.7 million increase in accounts receivable, a$14.9 million increase in deferred commissions, a$11.2 million decrease in accounts payable, accrued compensation and accrued other expenses, a$6.3 million decrease in operating lease liabilities and a$3.9 million increase in prepaid expenses and other assets. During the three months endedApril 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 decrease 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. Investing Activities Net cash provided by investing activities during the three months endedApril 30, 2021 of$151.9 million was primarily attributable to proceeds from the sales and maturities of investments of$344.8 million , partially offset by 41 -------------------------------------------------------------------------------- purchases of investments of$189.5 million and purchases of property and equipment of$3.3 million to support additional office space and headcount. Net cash provided by investing activities during the three months endedApril 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. Financing Activities Cash provided by financing activities during the three months endedApril 30, 2021 of$16.2 million was primarily attributable to proceeds from the exercise of stock options of$16.2 million . Cash provided by financing activities during the three months endedApril 30, 2020 of$14.2 million was primarily attributable to proceeds from the exercise of stock options. 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 ofApril 30, 2021 , 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 endedApril 30, 2021 , 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. 42
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