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EX-32.1 - EXHIBIT 32.1 - Okta, Inc.okta-10312018_ex321.htm
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EX-31.1 - EXHIBIT 31.1 - Okta, Inc.okta-10312018_ex311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________ 
FORM 10-Q
_____________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-38044
_____________________________________ 
Okta, Inc.
(Exact Name of Registrant as Specified in Its Charter)
_____________________________________ 
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
 
 
 
26-4175727
(I.R.S. Employer
Identification Number)
 
 
301 Brannan Street
San Francisco, California 94107
(Address of Principal executive offices)
 
 
Registrant’s telephone number, including area code: (888) 722-7871
___________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨ 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes ý No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
 
 
 
Accelerated filer 
¨
Non-accelerated filer 
ý
 
 
 
 
Smaller reporting company 
¨
 
 
 
 
 
 
Emerging growth company
ý
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨ No  ý
As of November 30, 2018, the number of shares of registrant’s Class A common stock outstanding was 98,611,070 and the number of shares of the registrant’s Class B common stock outstanding was 11,827,554.



Okta, Inc.
Table of Contents

 
 
Page No.
 
 
 
 
 
 




FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements regarding our financial outlook and market positioning. These forward-looking statements are made as of the date they were first issued and were based on current expectations, estimates, forecasts and projections as well as the beliefs and assumptions of management. Words such as “expect,” “anticipate,” “should,” “believe,” “hope,” “target,” “project,” “goals,” “estimate,” “potential,” “predict,” “may,” “will,” “might,” “could,” “intend,” “shall” and variations of these terms or the negative of these terms and similar expressions are intended to identify these forward-looking statements. The forward-looking statements are contained principally in “Management’s Discussion and Analysis of Financial Condition and Result of Operations” and “Risk Factors.”
Forward-looking statements contained in this Form 10-Q include, but are not limited to, statements about:
our future financial performance, including our revenue, costs of revenue, gross profits, margins and operating expenses;
trends in our key business metrics;
the sufficiency of our cash and cash equivalents, investments, credit facility and cash provided by sales of our products and services to meet our liquidity needs;
market or other opportunities arising from business combinations; and
the impact of recent accounting pronouncements on our financial statements.
Forward-looking statements are subject to a number of risks and uncertainties, many of which involve factors or circumstances that are beyond our control. Our actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including but not limited to, risks detailed in “Risk Factors” in this Quarterly Report on Form 10-Q as well as other documents that may be filed by us from time to time with the Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.




PART I
Item. 1 Financial Statements
OKTA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(unaudited)
 
October 31, 2018
 
January 31, 2018
 
 
As Adjusted (1)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
195,898

 
$
127,949

Short-term investments
350,105

 
101,765

Accounts receivable, net of allowances of $1,425 and $1,472
70,136

 
52,248

Deferred commissions
21,695

 
17,755

Prepaid expenses and other current assets
20,280

 
17,781

Total current assets
658,114

 
317,498

Property and equipment, net
44,251

 
12,540

Deferred commissions, noncurrent
47,756

 
40,755

Intangible assets, net
14,989

 
11,761

Goodwill
18,074

 
6,282

Other assets
13,525

 
10,427

Total assets
$
796,709

 
$
399,263

Liabilities and stockholders’ equity
 

 
 
Current liabilities:
 

 
 
Accounts payable
$
12,085

 
$
9,566

Accrued expenses and other current liabilities
6,305

 
6,187

Accrued compensation
20,250

 
12,374

Deferred revenue
206,146

 
159,816

Total current liabilities
244,786

 
187,943

Convertible senior notes, net
267,665

 

Deferred revenue, noncurrent
4,977

 
4,963

Other liabilities, noncurrent
34,778

 
7,017

Total liabilities
552,206

 
199,923

Commitments and contingencies (Note 9)


 


Stockholders’ equity:
 

 
 
Preferred stock, par value $0.0001 per share; 100,000 shares authorized, no shares issued and outstanding as of October 31, 2018 and January 31, 2018.



Class A Common stock, par value $0.0001 per share; 1,000,000 shares authorized as of October 31, 2018 and January 31, 2018; 98,518 and 70,610 shares issued and outstanding as of October 31, 2018 and January 31, 2018, respectively.
10

 
7

Class B Common stock, par value $0.0001 per share; 120,000 shares authorized as of October 31, 2018 and January 31, 2018; 11,828 and 33,361 shares issued and outstanding as of October 31, 2018 and January 31, 2018, respectively.
1

 
3

Additional paid-in capital
706,810

 
565,653

Accumulated other comprehensive income (loss)
(918
)
 
391

Accumulated deficit
(461,400
)
 
(366,714
)
Total stockholders’ equity
244,503

 
199,340

Total liabilities and stockholders’ equity
$
796,709

 
$
399,263

(1)  
See Note 2 for a summary of adjustments.
See Notes to Condensed Consolidated Financial Statements.

4



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2018
 
2017
 
2018
 
2017
 
 
As Adjusted (1)
 
 
As Adjusted (1)
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
Subscription
$
97,698

 
$
61,863

 
$
262,393

 
$
165,459

Professional services and other
7,878

 
5,048

 
21,390

 
14,036

Total revenue
105,576

 
66,911

 
283,783

 
179,495

Cost of revenue:
 

 
 

 
 
 
 
Subscription
20,265

 
13,553

 
55,808

 
37,401

Professional services and other
9,435

 
7,570

 
26,227

 
20,867

Total cost of revenue
29,700

 
21,123

 
82,035

 
58,268

Gross profit
75,876

 
45,788

 
201,748

 
121,227

Operating expenses:
 

 
 

 
 
 
 
Research and development
27,596

 
19,190

 
72,354

 
51,472

Sales and marketing
56,911

 
47,567

 
165,408

 
120,761

General and administrative
19,848

 
13,546

 
55,873

 
37,133

Total operating expenses
104,355

 
80,303

 
293,635

 
209,366

Operating loss
(28,479
)
 
(34,515
)
 
(91,887
)
 
(88,139
)
Other income (expense), net
(1,705
)
 
509

 
(4,682
)
 
872

Loss before provision for (benefit from) income taxes
(30,184
)
 
(34,006
)
 
(96,569
)
 
(87,267
)
Provision for (benefit from) income taxes
(667
)
 
(940
)
 
(1,883
)
 
(463
)
Net loss
$
(29,517
)
 
$
(33,066
)
 
$
(94,686
)
 
$
(86,804
)
 
 

 
 

 
 
 
 
Net loss per share attributable to common stockholders, basic and diluted
$
(0.27
)
 
$
(0.35
)
 
$
(0.89
)
 
$
(1.13
)
 
 

 
 

 
 
 
 
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted
108,776

 
95,474

 
106,587

 
76,950

(1)
See Note 2 for a summary of adjustments.
See Notes to Condensed Consolidated Financial Statements.


5



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2018
 
2017
 
2018
 
2017
 
 
As Adjusted (1)
 
 
As Adjusted (1)
 
 
 
 
 
 
 
 
Net loss
$
(29,517
)
 
$
(33,066
)
 
$
(94,686
)
 
$
(86,804
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Net change in unrealized losses on available-for-sale securities
4

 
(58
)
 
(44
)
 
(70
)
Foreign currency translation adjustments
(442
)
 
(81
)
 
(1,265
)
 
168

Other comprehensive income (loss)
(438
)
 
(139
)
 
(1,309
)
 
98

Comprehensive loss
$
(29,955
)
 
$
(33,205
)
 
$
(95,995
)
 
$
(86,706
)
(1)
See Note 2 for a summary of adjustments.
See Notes to Condensed Consolidated Financial Statements.


6



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Nine Months Ended October 31,
 
2018
 
2017
 
 
As Adjusted (1)
 
 
 
 
Cash flows from operating activities:
 
 
 
Net loss
$
(94,686
)
 
$
(86,804
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Stock-based compensation
53,899

 
35,292

Depreciation, amortization and accretion
5,824

 
5,111

Amortization of debt discount and issuance costs
10,315

 

Amortization of deferred commissions
14,963

 
10,911

Deferred income taxes
(2,269
)
 
(960
)
Non-cash charitable contributions
1,008

 
708

Other
153

 
997

Changes in operating assets and liabilities, net of business combination:
 
 
 
Accounts receivable
(17,539
)
 
(12,742
)
Deferred commissions
(25,907
)
 
(16,230
)
Prepaid expenses and other assets
(4,238
)
 
(2,353
)
Accounts payable
1,354

 
6,255

Accrued compensation
7,973

 
5,931

Accrued expenses and other liabilities
8,182

 
(1,545
)
Deferred revenue
46,036

 
30,034

Net cash provided by (used in) operating activities
5,068

 
(25,395
)
Cash flows from investing activities:
 

 
 

Capitalization of internal-use software costs
(2,329
)
 
(4,072
)
Purchases of property and equipment
(14,253
)
 
(5,570
)
Purchases of securities available for sale
(478,138
)
 
(95,344
)
Proceeds from maturities of securities available for sale
219,650

 
21,985

Proceeds from sales of securities available for sale
12,470

 
1,538

Payments for business acquisition, net of cash acquired
(15,616
)
 

Net cash used in investing activities
(278,216
)
 
(81,463
)
Cash flows from financing activities:
 
 
 

Proceeds from initial public offering, net of underwriters' discounts and commissions

 
199,948

Proceeds from issuance of convertible senior notes, net of issuance costs
334,980

 

Purchase of convertible senior notes hedge
(80,040
)
 

Proceeds from issuance of warrants related to convertible notes
52,440

 

Payments of deferred offering costs

 
(4,038
)
Proceeds from stock option exercises, net of repurchases
28,524

 
25,800

Proceeds from shares issued in connection with employee stock purchase plan
6,654

 

Other
(206
)
 
(343
)
Net cash provided by financing activities
342,352

 
221,367

Effects of changes in foreign currency exchange rates on cash and cash equivalents
(990
)
 
53

Net increase in cash, cash equivalents and restricted cash
68,214

 
114,562

Cash, cash equivalents and restricted cash at beginning of period
136,233

 
23,282

Cash, cash equivalents and restricted cash at end of period
$
204,447

 
$
137,844

 
 
 
 
Supplementary cash flow disclosure:
 
 
 
Non-cash investing and financing activities:
 
 
 
Vesting of early exercised common stock options
629

 
986

Issuance of common stock in connection with warrant exercises

 
272

Common stock issued as charitable contribution
1,008

 
708

Property and equipment acquired through tenant improvement allowance
22,237

 

Property and equipment and other accrued but not yet paid
1,431

 
710

Issuance of common stock in connection with business combination

 
2,160

Conversion of redeemable convertible preferred stock to common stock

 
228,362

Reconciliation of cash, cash equivalents and restricted cash within the condensed consolidated balance sheets to the amounts shown in the statements of cash flows above:
 
 
 
Cash and cash equivalents
$
195,898

 
$
137,575

Restricted cash, noncurrent included in other assets
8,549

 
269

Total cash, cash equivalents and restricted cash
$
204,447

 
$
137,844

 
 
 
 
(1)
See Note 2 for a summary of adjustments.
 See Notes to Condensed Consolidated Financial Statements.

7



OKTA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Overview and Basis of Presentation
Description of Business
Okta, Inc. (the Company) is the leading independent provider of identity for the enterprise. The Okta Identity Cloud enables the Company’s customers to securely connect people to technology, anywhere, anytime and from any device. The Company was incorporated in January 2009 as Saasure Inc., a California corporation, and was later reincorporated in April 2010 under the name Okta, Inc. as a Delaware corporation. The Company is headquartered in San Francisco, California.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements, which include the accounts of the Company and its wholly owned subsidiaries, have been prepared in conformity with U.S. generally accepted accounting principles (GAAP). All intercompany balances and transactions have been eliminated in consolidation.
The condensed consolidated balance sheet as of January 31, 2018, included herein, was derived from the audited financial statements as of that date. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the balance sheet, statements of operations, statements of comprehensive loss and the statements of cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ending January 31, 2019 or any future period.
The Company’s fiscal year ends on January 31. References to fiscal 2019, for example, refer to the fiscal year ending January 31, 2019.
The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Form 10-K filed with the Securities and Exchange Commission (SEC) on March 12, 2018.
Effective February 1, 2018, the Company adopted the requirements of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers as discussed in Note 2. All amounts and disclosures set forth in this Form 10-Q have been updated to comply with this standard, as indicated by references to "as adjusted" in these condensed consolidated financial statements and related notes.
Initial Public Offering
In April 2017, the Company completed an initial public offering (IPO), in which the Company issued and sold 12,650,000 shares of its Class A common stock at a public offering price of $17.00 per share. The Company received aggregate proceeds of $200.0 million from the IPO, net of underwriters’ discounts and commissions, before deducting offering costs of approximately $5.6 million. Immediately prior to the completion of the IPO, all shares of common stock then outstanding were reclassified as Class B common stock, and all shares of redeemable convertible preferred stock then outstanding were converted into 59,491,640 shares of common stock on a one-to-one basis and then reclassified into Class B common stock.
Convertible Senior Notes
In February 2018, the Company issued $345.0 million aggregate principal amount of 0.25% convertible senior notes due February 15, 2023 in a private offering, including the initial purchasers’ exercise in full of their option to purchase additional notes (2023 Notes). The Company received aggregate proceeds of $345.0 million, before deducting costs of issuance of $10.0 million. See Note 8 for additional details.

8



Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances. Actual results could vary from those estimates. The Company’s most significant estimates include the stand alone selling price (SSP) for each distinct performance obligation included in customer contracts with multiple performance obligations, the determination of the period of benefit for deferred commissions, the determination of the effective interest rate of the liability components of the 2023 Notes, the valuation of deferred income tax assets and contingencies and the valuation of acquired intangible assets.
2. Accounting Standards and Significant Accounting Policies
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) Topic 605, Revenue Recognition (Topic 605), and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, the Company refers to Topic 606 and Subtopic 340-40 as "ASC 606."
The Company adopted the requirements of ASC 606 as of February 1, 2018, utilizing the full retrospective method of transition. Adoption of ASC 606 resulted in changes to the Company’s accounting policies for revenue recognition and deferred commissions as detailed below. The Company applied ASC 606 using a practical expedient where the consideration allocated to the remaining performance obligations or an explanation of when the Company expects to recognize that amount as revenue for all reporting periods presented before the date of the initial application is not disclosed.
The impact of adopting ASC 606 on fiscal 2018 and 2017 revenue is not material. The primary impact of adopting ASC 606 relates to the deferral of incremental commission costs of obtaining contracts. Under Topic 605, the Company deferred only direct and incremental commission costs to obtain a contract and amortized those costs on a straight-line basis over the term of the related contract, which was generally one to three years. Under ASC 606, the Company defers all incremental commission costs to obtain the contract. The Company amortizes these costs on a straight-line basis over a period of benefit, determined to be generally five years or the related contractual renewal term.
The Company adjusted its condensed consolidated financial statements from amounts previously reported due to the adoption of ASC 606. Select condensed consolidated statement of operations line items, which reflect the adoption of ASC 606, are as follows (in thousands except per share data):

9


 
Three Months Ended October 31, 2017
 
Nine Months Ended October 31, 2017
 
As Reported
 
Adjustments
 
As Adjusted
 
As Reported
 
Adjustments
 
As Adjusted
 
(unaudited)
 
(unaudited)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Subscription
$
62,705

 
$
(842
)
 
$
61,863

 
$
167,142

 
$
(1,683
)
 
$
165,459

Professional services and other
5,533

 
(485
)
 
5,048

 
15,098

 
(1,062
)
 
14,036

Total revenue
68,238

 
(1,327
)
 
66,911

 
182,240

 
(2,745
)
 
179,495

Gross profit
47,115

 
(1,327
)
 
45,788

 
123,972

 
(2,745
)
 
121,227

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
49,606

 
(2,039
)
 
47,567

 
126,383

 
(5,622
)
 
120,761

Total operating expenses
82,342

 
(2,039
)
 
80,303

 
214,988

 
(5,622
)
 
209,366

Loss before income taxes
(34,718
)
 
712

 
(34,006
)
 
(90,144
)
 
2,877

 
(87,267
)
Net loss
(33,778
)
 
712

 
(33,066
)
 
(89,681
)
 
2,877

 
(86,804
)
Net loss per share, basic and diluted
(0.35
)
 

 
(0.35
)
 
(1.17
)
 
0.04

 
(1.13
)
Select condensed consolidated balance sheet line items, which reflect the adoption of ASC 606, are as follows (in thousands):
 
As of January 31, 2018
 
As Reported
 
Adjustments
 
As Adjusted
 
(unaudited)
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Deferred commissions
$
16,481

 
$
1,274

 
$
17,755

Prepaid expenses and other current assets
16,973

 
808

 
17,781

Total current assets
315,416

 
2,082

 
317,498

Deferred commissions, noncurrent
10,971

 
29,784

 
40,755

Total assets
367,397

 
31,866

 
399,263

 
 
 
 
 
 
Liabilities and stockholders’ equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Deferred revenue
$
162,633

 
$
(2,817
)
 
$
159,816

Total current liabilities
190,760

 
(2,817
)
 
187,943

Deferred revenue, noncurrent
6,034

 
(1,071
)
 
4,963

Total liabilities
203,811

 
(3,888
)
 
199,923

Accumulated deficit
(402,468
)
 
35,754

 
(366,714
)
Total stockholders’ equity
163,586

 
35,754

 
199,340

Total liabilities and stockholders’ equity
367,397

 
31,866

 
399,263

The adoption of ASC 606 had no impact on cash provided by or used in operating, financing, or investing activities in the Company’s condensed consolidated statement of cash flows. Additionally, the adoption of ASC 606 did not have a material impact on the provision for (benefit from) income taxes. The adoption adjustments impacted the deferred income taxes pertaining to the U.S. entity which are subject to a full valuation allowance.
Significant Accounting Policies
The Company’s significant accounting policies are discussed in “Note 2. Summary of Significant Accounting Policies” in Item 8. Financial Statements and Supplementary Data of its Form 10-K for the fiscal year ended January

10


31, 2018. Except for the accounting policies for revenue recognition and deferred commissions that were updated below as a result of adopting ASC 606, and the accounting policies for convertible senior notes, there have been no significant changes to these policies for the nine months ended October 31, 2018.
Revenue Recognition
The Company derives revenue from subscription fees (which include support fees) and professional services fees. The Company sells subscriptions to its platform through arrangements that are generally one to five years in length. The Company’s arrangements are generally noncancelable and nonrefundable. Furthermore, if a customer reduces the contracted usage or service level, the customer has no right of refund. The Company’s subscription arrangements do not provide customers with the right to take possession of the software supporting the platform and, as a result, are accounted for as service arrangements. This revenue recognition policy is consistent for sales generated directly with customers and sales generated indirectly through channel partners.
The Company determines revenue recognition through the following steps:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, the Company satisfies a performance obligation
Subscription Revenue
Subscription revenue, which includes support, is recognized on a straight-line basis over the noncancelable contractual term of the arrangement, generally beginning on the date that the Company’s service is made available to the customer.
Professional Services Revenue
The Company’s professional services principally consist of customer-specific requests for application integrations, user interface enhancements and other customer-specific requests. Revenue for the Company’s professional services is recognized as services are performed in proportion with their pattern of transfer.
Contracts with Multiple Performance Obligations
Some of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative SSP basis. The Company determines SSP based on, if available, observable prices for those related services when sold separately. When observable prices are not available, the Company determines SSP based on overarching pricing objectives and strategies, taking into consideration market conditions and other factors, including customer size, volume purchased, market and industry conditions, product-specific factors and historical sales of the deliverables.

11


Geographic Information
Revenue by location is determined by the billing address of the customer. The following table sets forth revenue in dollars by geographic area (in thousands): 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2018
 
2017
 
2018
 
2017
 
 
As Adjusted (1)
 
 
As Adjusted (1)
 
 
 
 
 
 
 
 
United States
$
88,704

 
$
56,215

 
$
239,459

 
$
152,185

International
16,872

 
10,696

 
44,324

 
27,310

Total
$
105,576

 
$
66,911

 
$
283,783

 
$
179,495

 
 
 
 
 
 
 
 
_______________________________
(1)  
The prior periods presented above have been adjusted to reflect the adoption of ASC 606.
Other than the United States, no individual country exceeded 10% of total revenue for the three and nine months ended October 31, 2018 and 2017.
Accounts Receivable and Allowances
Accounts receivable are recorded at the invoiced amount, net of allowances. These allowances are based on the Company’s assessment of the collectability of accounts by considering the age of each outstanding invoice and the collection history of each customer and an evaluation of potential risk of loss associated with delinquent accounts. Amounts deemed uncollectible are recorded to these allowances in the condensed consolidated balance sheets with an offsetting decrease in related deferred revenue or a charge in the condensed consolidated statement of operations.
For the three and nine months ended October 31, 2018 and 2017, write-offs were not material.
Deferred Commissions
Sales commissions earned by the Company’s sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for new revenue contracts, including incremental sales to existing customers, are deferred and then amortized on a straight-line basis over a period of benefit, which the Company has determined to be generally five years. The Company determined the period of benefit by taking into consideration its customer contracts, its technology and other factors. Sales commissions for renewal contracts (which are not considered commensurate with sales commissions for new revenue contracts and incremental sales to existing customers) are deferred and then amortized on a straight-line basis over the related period of benefit, which is generally the related contract renewal term. Amortization expense is included in sales and marketing expenses in the accompanying condensed consolidated statements of operations.
Sales commissions capitalized as contract costs totaled $11.7 million and $6.7 million in the three months ended October 31, 2018 and 2017, respectively, and $25.9 million and $16.2 million in the nine months ended October 31, 2018 and 2017, respectively. Amortization of contract costs was $5.4 million and $3.9 million for the three months ended October 31, 2018 and 2017, respectively, and $15.0 million and $10.9 million for the nine months ended October 31, 2018 and 2017, respectively. There was no impairment loss in relation to the costs capitalized.
Convertible Senior Notes
The 2023 Notes are accounted for in accordance with FASB ASC Subtopic 470‑20, Debt with Conversion and Other Options. Pursuant to ASC Subtopic 470‑20, issuers of certain convertible debt instruments, such as the 2023 Notes, that have a net settlement feature and may be settled wholly or partially in cash upon conversion are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of the instrument is computed by estimating the fair value of a similar liability without the conversion option. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the instrument. The difference between the principal amount and the liability component represents a debt discount that is amortized to interest expense over the respective term of the 2023 Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the

12


conditions for equity classification. In accounting for the issuance costs related to the 2023 Notes, the allocation of issuance costs incurred between the liability and equity components was based on their relative values.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02 (Topic 842). Topic 842 amends a number of aspects of lease accounting, including requiring lessees to recognize leases with a term greater than one year as a right-of-use asset and corresponding liability, measured at the present value of the lease payments. In July 2018, the FASB issued supplemental adoption guidance and clarification to Topic 842 within ASU 2018-10 “Codification Improvements to Topic 842, Leases” and ASU 2018-11 “Leases (Topic 842): Targeted Improvements.” The new guidance aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. A modified retrospective application is required with an option to not restate comparative periods in the period of adoption. This guidance is effective for the Company on February 1, 2019 with early adoption permitted. The adoption of this standard will result in the recognition of right-of-use assets and lease liabilities that were not previously recognized, which will increase total assets and liabilities on the Company’s consolidated balance sheets.
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). Under existing U.S. GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income (loss) are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income (loss) to retained earnings (accumulated deficit) for stranded income tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the Tax Act). The amendments in this ASU also require certain disclosures about stranded income tax effects. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption in any period is permitted. The Company’s provisional adjustments recorded in fiscal year 2018 to account for the impact of the Tax Act did not result in stranded tax effects. Accordingly, the Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13), which amends ASC 820, Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. This guidance is effective for the Company on February 1, 2020, with early adoption permitted for the removal and modification of disclosures and delayed adoption until February 1, 2020 permitted for the new disclosures. The removed and modified disclosures will be adopted on a retrospective basis, and the new disclosures will be adopted on a prospective basis. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15), which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset. This guidance is effective for the Company on February 1, 2020 with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
3. Business Combinations
Stormpath
On February 17, 2017, the Company acquired the rights to hire certain employees and a non-exclusive intellectual property license from Stormpath, Inc. (Stormpath), a privately-held technology company which had built a user management and authentication service for software development teams. The transaction was accounted for as a business combination. The total consideration of $3.7 million, consisting of 200,000 shares of common stock valued at $2.2 million, at the time of the transaction, issued to Stormpath and replacement awards of $1.5 million issued to the hired employees, was recognized as goodwill.
In addition, the Company issued to Stormpath an incremental 800,000 shares of restricted common stock valued at $8.6 million, at the time of the transaction, which is being recognized as post-combination stock-based compensation expense. See Note 10 for further details.

13



ScaleFT
On July 13, 2018, the Company acquired all issued and outstanding capital stock of ScaleFT, Inc. (ScaleFT), a “zero trust” security company which provides access solutions for the modern workforce. The preliminary acquisition date cash consideration transferred for ScaleFT was $15.6 million, net of $0.6 million in cash received. The Company recorded $4.6 million for developed technology intangible assets with estimated useful life of three years and $11.8 million of goodwill which is primarily attributed to the assembled workforce as well as the integration of ScaleFT’s technology and the Company’s technology. The Company incurred $1.1 million of acquisition related costs, which were recorded in the quarter ended July 31, 2018.
The business combination did not have a material impact on the condensed consolidated financial statements and therefore historical and proforma disclosures have not be presented.
4. Cash Equivalents and Short-Term Investments
The amortized cost, unrealized gain (loss) and estimated fair value of the Company’s cash equivalents and short-term investments as of October 31, 2018 and January 31, 2018 were as follows (in thousands):  
 
As of October 31, 2018
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value 
 
 
 
 
 
 
 
 
 
(unaudited)
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
158,639

 
$

 
$

 
$
158,639

Commercial paper
4,982

 

 

 
4,982

Total cash equivalents
$
163,621

 
$

 
$

 
$
163,621

Short-term investments:
 

 
 

 
 

 
 

Commercial paper
$
99,039

 
$

 
$

 
$
99,039

U.S. treasury securities
211,344

 

 
(188
)
 
211,156

Corporate debt securities
39,968

 

 
(58
)
 
39,910

Total short-term investments
350,351

 

 
(246
)
 
350,105

Total
$
513,972

 
$

 
$
(246
)
 
$
513,726

 
As of January 31, 2018
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
90,770

 
$

 
$

 
$
90,770

Total cash equivalents
$
90,770

 
$

 
$

 
$
90,770

Short-term investments:
 
 
 

 
 

 
 

Commercial paper
$
15,946

 
$

 
$

 
$
15,946

U.S. treasury securities
61,896

 

 
(158
)
 
61,738

Corporate debt securities
24,125

 

 
(44
)
 
24,081

Total short-term investments
101,967

 

 
(202
)
 
101,765

Total
$
192,737

 
$

 
$
(202
)
 
$
192,535

All short-term investments were designated as available-for-sale securities as of October 31, 2018 and January 31, 2018.

14



The following tables present the contractual maturities of the Company’s short-term investments as of October 31, 2018 and January 31, 2018 (in thousands):
 
 
As of October 31, 2018
 
As of January 31, 2018
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
 
(unaudited)
Due within one year
$
350,351

 
$
350,105

 
$
93,421

 
$
93,237

Due between one to five years

 

 
8,546

 
8,528

 
$
350,351

 
$
350,105

 
$
101,967

 
$
101,765

 
 
 
 
 
 
 
 
The Company had 48 and 23 short-term investments in unrealized loss positions as of October 31, 2018 and January 31, 2018, respectively. There were no material gross unrealized gains or losses from available-for-sale securities and no material realized gains or losses from available-for-sale securities that were reclassified out of accumulated other comprehensive income for the three and nine months ended October 31, 2018 or 2017.
For available-for-sale debt securities that have unrealized losses, the Company evaluates whether (i) the Company has the intention to sell any of these investments and (ii) it is not more likely than not that the Company will be required to sell any of these available-for-sale debt securities before recovery of the entire amortized cost basis. Based on this evaluation, the Company determined that there were no other-than-temporary impairments associated with short-term investments as of October 31, 2018 and January 31, 2018.
5. Fair Value Measurements
The Company measures its financial assets at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Three levels of inputs may be used to measure as follows:
Level 1-Valuations based on observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
Level 2-Valuations based on inputs that are directly or indirectly observable in the marketplace.
Level 3-Valuations based on unobservable inputs that are supported by little or no market activity.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis using the above input categories (in thousands):  


15



 
As of October 31, 2018
 
Level 1
 
Level 2 
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
(unaudited)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
158,639

 
$

 
$

 
$
158,639

Commercial paper

 
4,982

 

 
4,982

Total cash equivalents
$
158,639

 
$
4,982

 
$

 
$
163,621

Short-term investments:
 

 
 

 
 

 
 

Commercial paper
$

 
$
99,039

 
$

 
$
99,039

U.S. treasury securities

 
211,156

 

 
211,156

Corporate debt securities

 
39,910

 

 
39,910

Total short-term investments

 
350,105

 

 
350,105

Total cash equivalents and short-term investments
$
158,639

 
$
355,087

 
$

 
$
513,726

 
As of January 31, 2018
 
Level 1
 
Level 2 
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
90,770

 
$

 
$

 
$
90,770

Total cash equivalents
$
90,770

 
$

 
$

 
$
90,770

Short-term investments:
 

 
 

 
 

 
 

Commercial paper
$

 
$
15,946

 
$

 
$
15,946

U.S. treasury securities

 
61,738

 

 
61,738

Corporate debt securities

 
24,081

 

 
24,081

Total short-term investments

 
101,765

 

 
101,765

Total cash equivalents and short-term investments
$
90,770

 
$
101,765

 
$

 
$
192,535

The Company had no transfers between levels of the fair value hierarchy of its assets measured at fair value.
The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable and accounts payable approximate fair value due to their short-term maturities and are excluded from the fair value table above.
Fair Value Measurements of Other Financial Instruments
The following table presents the carrying amounts and estimated fair values of our financial instruments that are not recorded at fair value on the condensed consolidated balance sheets (in thousands):
 
As of October 31, 2018
 
Net Carrying Amount Before Unamortized Debt Issuance Costs
 
Estimated
Fair Value 
 
 
 
 
 
(unaudited)
Convertible senior notes
$
274,576

 
$
471,256

The difference between the principal amount of the 2023 Notes, $345.0 million, and the net carrying amount before unamortized debt issuance costs represents the unamortized debt discount (See Note 8 for additional details).

16



The estimated fair value of the 2023 Notes, which the Company has classified as Level 2 financial instruments, was determined based on the quoted bid price of the convertible senior notes in an over-the-counter market on the last trading day of the reporting period. As of October 31, 2018, the difference between the net carrying amount of the 2023 Notes and estimated fair value represents the equity conversion value premium the market assigned to the 2023 Notes. Based on the closing price of our common stock of $58.36 on October 31, 2018, the if-converted value of the 2023 Notes exceeded the principal amount of $345.0 million.
6. Goodwill and Intangible Assets, net
Goodwill
As of October 31, 2018 and January 31, 2018, goodwill was $18.1 million and $6.3 million, respectively. During the nine months ended October 31, 2018, the Company recorded $11.8 million of goodwill in connection with the ScaleFT acquisition that was completed in July 2018. See Note 3 for further details. No goodwill impairments were recorded during the three and nine months ended October 31, 2018 and 2017.
Intangible Assets, net
Intangible assets consisted of the following (in thousands):  
 
As of October 31, 2018
 
Gross
 
Accumulated Amortization
 
Net
 
 
 
 
 
 
 
(unaudited)
Capitalized internal-use software costs
$
19,202

 
$
(8,684
)
 
$
10,518

Purchased developed technology
5,170

 
(1,019
)
 
4,151

Software licenses
1,023

 
(703
)
 
320

 
$
25,395

 
$
(10,406
)
 
$
14,989

 
 
 
 
 
 
 
As of January 31, 2018
 
Gross
 
Accumulated Amortization
 
Net
Capitalized internal-use software costs
$
16,434

 
$
(5,172
)
 
$
11,262

Software licenses
1,057

 
(558
)
 
499

Purchased developed technology
570

 
(570
)
 

 
$
18,061

 
$
(6,300
)
 
$
11,761

 
 
 
 
 
 

The Company capitalized $0.7 million and $1.7 million of internal-use software costs in the three months ended October 31, 2018 and 2017, respectively, and $2.8 million and $5.0 million of internal-use software costs in the nine months ended October 31, 2018 and 2017, respectively. Included in the total amount capitalized is stock-based compensation expense of $0.1 million and $0.3 million for the three months ended October 31, 2018 and 2017, respectively, and $0.4 million and $0.9 million for the nine months ended October 31, 2018 and 2017, respectively. The Company reversed $0.5 million of previously capitalized internal-use software costs in the three months ended October 31, 2017 as they were not realizable. The resulting charge was recognized in research and development in the condensed consolidated statements of operations.
In addition, during the nine months ended October 31, 2018, the Company recorded $4.6 million of purchased developed technology from the ScaleFT acquisition. See Note 3 for further details.
Intangible amortization expense was $1.8 million and $0.8 million for the three months ended October 31, 2018 and 2017, respectively, and $4.1 million and $2.1 million for the nine months ended October 31, 2018 and 2017, respectively.
     

17



7. Deferred Revenue and Performance Obligations

Deferred Revenue
Deferred revenue, which is a contract liability, consists primarily of payments received in advance of revenue recognition under the Company’s contracts with customers and is recognized as the revenue recognition criteria are met.
Subscription revenue recognized during the three months ended October 31, 2018 and 2017 that was included in the deferred revenue balances at the beginning of the respective periods was $81.6 million and $53.4 million, respectively, and $147.0 million and $95.2 million for the nine months ended October 31, 2018 and 2017, respectively. Professional services and other revenue recognized in the three and nine months ended October 31, 2018 and 2017 from deferred revenue balances at the beginning of the respective periods was not material.
Transaction Price Allocated to the Remaining Performance Obligations
Transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue for subscription contracts that have been invoiced and will be recognized as revenue in future periods.
As of October 31, 2018, total remaining noncancelable performance obligations under the Company’s subscription contracts with customers was approximately $614.4 million, and the Company expects to recognize revenue on approximately 55% of these remaining performance obligations over the next 12 months, with the balance to be recognized thereafter. Revenue from remaining performance obligations for professional services and other contracts as of October 31, 2018 was not material.
Unbilled Receivables
The Company receives payments from customers based on billing schedules as established in its contracts. Unbilled receivables, which are contract assets, relate to the Company’s rights to consideration for performance obligations satisfied but not billed at the reporting date. As of October 31, 2018 and January 31, 2018, unbilled receivables were $1.6 million and $0.8 million, respectively, which are included in prepaid expenses and other current assets in the condensed consolidated balance sheets. Unbilled receivables are transferred to accounts receivable when the rights become unconditional.
8. Debt and Financing Arrangements
Convertible Senior Notes
The 2023 Notes are senior, unsecured obligations of the Company, and bear interest at a fixed rate of 0.25% per year. Interest is payable in cash semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2018. The 2023 Notes mature on February 15, 2023 unless earlier repurchased or converted. The Company may not redeem the 2023 Notes prior to maturity. The total net proceeds from the 2023 Notes, after deducting initial purchasers’ discounts and debt issuance costs, was approximately $335.0 million.
The terms of the 2023 Notes are governed by an Indenture by and between the Company and Wilmington Trust, National Association, as Trustee (the Indenture). Upon conversion, the 2023 Notes may be settled in cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at the Company’s election. It is the Company’s current intent to settle the principal amount of the 2023 Notes with cash.
The 2023 Notes are convertible at an initial conversion rate of 20.6795 shares of Class A common stock per $1,000 principal amount of 2023 Notes, which is equal to an initial conversion price of approximately $48.36 per share of Class A common stock, subject to adjustment under certain circumstances in accordance with the terms of the Indenture. Prior to the close of business on the business day immediately preceding October 15, 2022, holders of the 2023 Notes may convert all or a portion of their 2023 Notes only in multiples of $1,000 principal amount, under the following circumstances:
during any fiscal quarter commencing after the fiscal quarter ending on April 30, 2018 (and only during such fiscal quarter), if the last reported sale price of Class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading

18



day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the 2023 Notes on each applicable trading day;
during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2023 Notes for each trading day of that five consecutive trading day period was less than 98% of the product of the last reported sale price of Class A common stock and the conversion rate on such trading day; or
upon the occurrence of specified corporate events, as described in the Indenture.
On or after October 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2023 Notes regardless of the foregoing circumstances. As of October 31, 2018, the conditions allowing holders of the 2023 Notes to convert were not met.
Holders of the 2023 Notes who convert their 2023 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the Indenture) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the Indenture), holders of the 2023 Notes may require the Company to repurchase all or a portion of their 2023 Notes at a price equal to 100% of the principal amount of the 2023 Notes being repurchased, plus any accrued and unpaid interest.
In accounting for the issuance of the 2023 Notes, the Company separated the 2023 Notes into liability and equity components. The carrying amounts of the liability components were calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amount of the equity components representing the conversion option were determined by deducting the fair value of the liability component from the par value of the 2023 Notes. The Company bifurcated the conversion option of the 2023 Notes from the debt instrument, classified the conversion option in equity and will accrete the resulting debt discount as interest expense over the contractual term of the 2023 Notes using the effective interest rate method. The equity component is not remeasured as long as the Notes continue to meet the conditions for equity classification.
The effective interest rate of the liability component of the 2023 Notes is 5.68%. This interest rate was based on the interest rates of similar liabilities held by other companies with similar credit risk ratings at the time of issuance that did not have associated convertible features. The following table sets forth total interest expense recognized related to the 2023 Notes (in thousands):
 
Three Months Ended October 31, 2018
 
Nine Months Ended October 31, 2018
 
(unaudited)
Contractual interest expense
$
215

 
$
577

Amortization of debt issuance costs
299

 
777

Amortization of debt discount
3,604

 
9,539

Total
$
4,118

 
$
10,893

 
 
 
 
Total issuance costs of $10.0 million related to the 2023 Notes were allocated between liability and equity in the same proportion as the allocation of the total proceeds to the liability and equity components. Issuance costs attributable to the liability component are being amortized to interest expense over the respective term of the 2023 Notes using the effective interest rate method. The issuance costs attributable to the equity component were netted against the respective equity component in Additional paid-in capital. The Company recorded liability issuance costs of $7.7 million and equity issuance costs of $2.3 million.

19



The 2023 Notes, net consisted of the following (in thousands):
 
As of October 31, 2018
 
(unaudited)
Liability component:
 
Principal
$
345,000

Less: unamortized debt issuance costs and debt discount
(77,335
)
Net carrying amount
$
267,665

 
 
 
At Issuance
 
(unaudited)
Equity component:
 
2023 Notes
$
79,962

Less: issuance costs
(2,320
)
Carrying amount of the equity component(1)
$
77,642

 
 
(1) Included in the condensed consolidated balance sheets within Additional paid-in capital.
Note Hedges
In connection with the pricing of the 2023 Notes, the Company entered into convertible note hedge transactions with respect to its Class A common stock (the Note Hedges). The Note Hedges are purchased call options that give the Company the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2023 Notes, approximately 7.1 million shares of its Class A common stock for $48.36 per share (subject to adjustment), corresponding to the approximate initial conversion price of the 2023 Notes, exercisable upon conversion of the 2023 Notes. The Note Hedges will expire in 2023, if not exercised earlier. The Note Hedges are intended to offset potential dilution to the Company’s Class A common stock and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount upon any conversion of the 2023 Notes under certain circumstances. The Note Hedges are separate transactions and are not part of the terms of the 2023 Notes.
The Company paid an aggregate amount of $80.0 million for the Note Hedges. The amount paid for the Note Hedges was recorded as a reduction to Additional paid-in capital in the condensed consolidated balance sheets.
See Note 11 for the tax impacts of the 2023 Notes and Note Hedges.
Warrants
In connection with the issuance of the 2023 Notes, the Company also entered into separate warrant transactions pursuant to which it sold net-share-settled (or, at the Company’s election subject to certain conditions, cash-settled) warrants (the Warrants) to acquire, subject to anti-dilution adjustments, up to approximately 7.1 million shares over 80 scheduled trading days beginning in May 2023 of the Company’s Class A common stock at an initial exercise price of $68.06 per share (subject to adjustment). If the Warrants are not exercised on their exercise dates, they will expire. If the market value per share of the Company’s Class A common stock exceeds the applicable exercise price of the Warrants, the Warrants could have a dilutive effect on the Company’s Class A common stock unless, subject to the terms of the Warrants, the Company elects to cash settle the Warrants. The Warrants are separate transactions and are not part of the terms of the 2023 Notes or the Note Hedges.
The Company received aggregate proceeds of $52.4 million from the sale of the Warrants in connection with the 2023 Notes. The proceeds from the sale of the Warrants was recorded as an increase to Additional paid-in capital in the condensed consolidated balance sheets.
Loan and Security Agreement
The Company has available a line of credit (Revolving Line) with Silicon Valley Bank (SVB) in the amount of $40.0 million, with a maturity date of November 21, 2018. The available amount, not to exceed $40.0 million, is based on certain revenue metrics and is reduced by letters of credit totaling $4.2 million as of October 31, 2018 established

20



in connection with facility lease agreements. As of October 31, 2018, $35.8 million was available under the Revolving Line.
Proceeds from loans made under the Revolving Line may be borrowed, repaid and reborrowed until November 21, 2018. Repayment of any outstanding proceeds are payable on November 21, 2018, but may be prepaid without penalty. Borrowings under the Revolving Line bear interest at an annual rate based on the one-year Prime rate plus a spread of 0.75%. Interest is payable quarterly. The Company is required to pay a quarterly facility fee to SVB of 0.15% per annum on the average undrawn portion available under the facility plus balances of outstanding letters of credits. Additionally, the Company is required to pay an upfront, one-time, commitment fee of $0.1 million and annual anniversary fees of $0.1 million on the amendment’s first and second anniversary dates.
As of October 31, 2018 and January 31, 2018, no amounts had been drawn under the Revolving Line and the Company was in compliance with all covenants pursuant to the loan and security agreement.
9. Commitments and Contingencies
Leases
The Company leases office space under noncancelable operating leases for its San Francisco, California headquarters, as well as its offices in various cities in the United States, United Kingdom, Australia and Canada. These office leases expire on various dates through October 2028.
Deferred rent was $34.1 million and $5.5 million as of October 31, 2018 and January 31, 2018, respectively, which is included in accrued expenses and other current liabilities and other liabilities, noncurrent in the condensed consolidated balance sheets. Rent expense was $7.0 million and $3.0 million for the three months ended October 31, 2018 and 2017, respectively and $16.2 million and $7.6 million for the nine months ended October 31, 2018 and 2017, respectively.
In conjunction with the execution of leases, letters of credit in the aggregate amount of $12.5 million and $12.2 million were issued and outstanding as of October 31, 2018 and January 31, 2018, respectively. No draws have been made under such letters of credit. The Company secured its new corporate headquarters lease in San Francisco with an $8.0 million letter of credit, which is designated as restricted cash and included in other assets on its condensed consolidated balance sheet as of October 31, 2018.
In June 2018, the Company signed an agreement to sublease the premises at 634 2nd Street, San Francisco, California (2nd Street Sublease), which, together with the premises at 301 Brannan Street, San Francisco, California, comprise the Company’s current headquarters. The term of the 2nd Street Sublease agreement commences on January 31, 2019. The 2nd Street Sublease and the master lease both expire in September 2024. The Company’s future income under the terms of the 2nd Street Sublease agreement will be approximately equal to the amount required to be paid by the Company to its landlord under the terms of the master lease. The Company and the sub-lessee executed a standby letter of credit amounting to $3.0 million to be held by the Company to secure the 2nd Street Sublease in the event of uncured default by the sub-lessee.
Pursuant to a termination agreement pertaining to the Company’s lease of the premises at 301 Brannan Street, San Francisco, California, the non-cancellable lease term for those premises now expires in January 2019 instead of July 2019.
Other Contractual Commitments
In September 2018, the Company entered into a non-cancellable contractual agreement with a third-party provider of datacenter hosting facilities with a term of four years. The total future commitment of $60.0 million is ratable over the four-year term of this agreement. This agreement superseded a prior agreement that was signed in July 2017 with a total commitment of $30.0 million over its three-year term. The agreement is on the third-party provider’s standard terms and conditions.
Legal Matters
From time to time in the normal course of business, the Company may be subject to various legal matters such as threatened or pending claims or proceedings. There were no such material matters as of October 31, 2018.

21



10. Employee Incentive Plans
The Company’s equity incentive plans provide for granting stock options, restricted stock units (RSUs) and restricted stock awards to employees, consultants, officers and directors. In addition, the Company offers an Employee Stock Purchase Plan (ESPP) to eligible employees.
Stock-based compensation expense was recorded in the following cost and expense categories in the Company’s condensed consolidated statements of operations (in thousands):  
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
(unaudited)
 
 
 
 
Cost of revenue
 
 
 
 
 
 
 
Subscription
$
2,383

 
$
1,421

 
$
5,813

 
$
3,163

Professional services and other
1,305

 
979

 
3,277

 
2,186

Research and development
6,291

 
5,174

 
15,776

 
12,913

Sales and marketing
6,228

 
3,894

 
15,852

 
9,290

General and administrative
5,335

 
2,940

 
13,181

 
7,740

Total
$
21,542

 
$
14,408

 
$
53,899

 
$
35,292

 
 
 
 
 
 
 
 
Stock-based compensation expense recorded to research and development in the condensed consolidated statements of operations excludes amounts that were capitalized related to internal-use software for the three and nine months ended October 31, 2018 and 2017. See Note 6 for further details.
Equity Incentive Plans
The Company has two equity incentive plans: the 2009 Stock Plan (2009 Plan) and the 2017 Equity Incentive Plan (2017 Plan). Upon the completion of the Company’s IPO in April 2017, the Company ceased granting equity under the 2009 Plan, and all shares that remained available for future issuance under the 2009 Plan at that time were transferred to the 2017 Plan. As of October 31, 2018, options to purchase 18,451,057 shares of Class B common stock and 863,277 shares of Class A common stock remain outstanding.
Shares of common stock reserved for future issuance are as follows:
 
As of
 
October 31, 2018
 
(unaudited)
Stock options and unvested RSUs outstanding
24,250,317

Available for future stock option and RSU grants
12,651,706

Available for ESPP
3,035,697

 
39,937,720

 
 

22



Stock Options
A summary of the Company’s stock option activity and related information is as follows:  
 
Number of
Options 
 
Weighted-
Average
Exercise
Price 
 
Weighted-
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic Value
(in thousands)
Outstanding as of January 31, 2018
24,917,045

 
$
7.37

 
7.6
 
$
550,173

Granted
684,500

 
39.21

 
 
 
 
Exercised
(5,184,832
)
 
5.51

 
 
 
 
Canceled
(1,102,379
)
 
8.53

 
 
 
 
Outstanding as of October 31, 2018 (unaudited)
19,314,334

 
$
8.93

 
7.2
 
$
954,692

As of October 31, 2018
 
 
 
 
 
 
 
Vested and exercisable (unaudited)
9,897,397

 
$
6.54

 
6.7
 
$
512,889

 No stock options were granted in the three months ended October 31, 2018. The weighted-average grant-date fair value of options granted was $12.27 for the three months ended October 31, 2017. The weighted-average grant-date fair value of options granted was $17.21 and $5.37 during the nine months ended October 31, 2018 and 2017, respectively. The total grant-date fair value of stock options vested was $4.8 million and $5.9 million during the three months ended October 31, 2018 and 2017, respectively, and $18.2 million and $18.9 million for the nine months ended October 31, 2018 and 2017, respectively. The intrinsic value of the options exercised, which represents the difference between the fair market value of the Company’s common stock on the date of exercise and the exercise price of each option, was $70.2 million and $139.4 million for the three months ended October 31, 2018 and 2017, respectively, and $225.3 million and $158.7 million for the nine months ended October 31, 2018 and 2017, respectively.
As of October 31, 2018, there was a total of $43.4 million of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted-average period of 2.1 years.
The Company used the Black-Scholes option pricing model to estimate the fair value of stock options granted with the following assumptions:
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
(unaudited) 
Expected volatility
 
41%
 
40%
 
40% - 41%
Expected term (in years)
 
6.3
 
6.3
 
6.3 - 6.4
Risk-free interest rate
 
1.87%
 
2.70%
 
1.87% - 2.21%
Expected dividend yield
 
 
 

23



Restricted Stock Units
A summary of the Company’s RSU activity and related information is as follows:  
 
Number of
RSUs
 
Weighted-
Average
Grant Date Fair Value Per Share
 
 
 
 
Outstanding as of January 31, 2018
2,862,929

 
$
24.38

Granted
3,133,189

 
53.27

Vested
(741,253
)
 
23.56

Forfeited
(318,882
)
 
33.28

Outstanding as of October 31, 2018 (unaudited)
4,935,983

 
$
42.27

As of October 31, 2018, there was $189.1 million of unrecognized stock-based compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of 3.3 years based on vesting under the award service conditions.
Equity Awards Issued in Connection with Business Combination
In connection with the Stormpath transaction in February 2017, the Company issued 800,000 shares of restricted common stock to Stormpath with an aggregate fair value of $8.6 million at the time of the transaction to be recognized as post combination stock-based compensation. The restricted common stock vests ratably on the first and second anniversaries of the transaction date upon achievement of the respective performance conditions, of which 400,000 shares vested during the nine months ended October 31, 2018. As of October 31, 2018, there was $0.6 million of unrecognized compensation expense related to restricted common stock which is expected to be recognized over the remaining weighted average life of 0.3 years.
The Company separately entered into retention arrangements with certain employees of Stormpath and issued 598,500 restricted stock awards under the 2009 Plan with an aggregate fair value of $6.6 million at the time of the transaction with performance conditions. Additionally, the Company granted 518,900 service-based stock options under the 2009 Plan to certain Stormpath employees with an aggregate fair value of $2.5 million to vest ratably over the requisite four-year service period. Of the $9.1 million total aggregate fair value of the awards, $1.5 million was related to pre-combination service and was recognized as goodwill and a reduction to the post-combination compensation expense. The post-combination expenses for the restricted stock awards and stock options are $5.5 million and $2.1 million, respectively. The expense related to the restricted stock awards is being recognized over two or three years based on an accelerated attribution method. The expense for the stock options is being recognized ratably over the requisite service period.
During the nine months ended October 31, 2018, 210,850 shares of restricted stock awards vested. As of October 31, 2018, there was $1.0 million of unrecognized compensation expense related to unvested restricted stock awards, which is expected to be recognized over the remaining weighted average life of 0.8 year.
As of October 31, 2018, there was $1.2 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over the remaining weighted average life of 1.7 years. The related stock options expense and activity are included within the Stock Options section above.
Employee Stock Purchase Plan
Except for the initial offering period, the ESPP provides for 12-month offering periods beginning June 21 and December 21 of each year, and each offering period consists of up to two six-month purchase periods. The initial offering period began April 7, 2017 and ended on June 20, 2018.

24



The Company estimated the fair value of ESPP purchase rights using a Black-Scholes option pricing model with the following assumptions:
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
(unaudited) 
Expected volatility
 
 
39% - 40%
 
32% - 37%
Expected term (in years)
 
 
0.5 -1.0
 
0.5 - 1.2
Risk-free interest rate
 
 
2.12% - 2.34%
 
0.95% - 1.22%
Expected dividend yield
 
 
 
During the three and nine months ended October 31, 2018, the Company’s employees purchased 434,640 shares of its Class A common stock under the ESPP. The shares were purchased at a weighted-average purchase price of $15.31 with proceeds of $6.7 million.
As of October 31, 2018, there was $3.7 million of unrecognized stock-based compensation expense related to ESPP that is expected to be recognized over an average vesting period of 0.5 years.
Awards Issued as Charitable Contributions
The Company did not grant any common stock as a charitable contribution for the three months ended October 31, 2018. During the nine months ended October 31, 2018, the Company granted 20,000 shares of Class A common stock as charitable contributions and recognized $1.0 million as general and administrative expense in the condensed consolidated statement of operations. During the three and nine months ended October 31, 2017, the Company granted 24,287 shares of Class A common stock as charitable contributions and recognized $0.7 million as general and administrative expense in the condensed consolidated statement of operations.

11. Income Taxes
For the three and nine months ended October 31, 2018, the Company recorded a tax benefit of $0.7 million and $1.9 million, respectively, on pretax losses of $30.2 million and $96.6 million, respectively. The effective tax rate for the three and nine months ended October 31, 2018 was 2.2% and 1.9%, respectively. The effective tax rate differs from the statutory rate primarily as a result of not recognizing deferred tax assets for U.S. losses due to a full valuation allowance against U.S. deferred tax assets, release of the valuation allowance in the United States in connection with the ScaleFT acquisition and excess tax benefits from stock-based compensation in the United Kingdom. The tax benefit was partially offset by income tax expense in profitable foreign jurisdictions and U.S. state taxes.
For the three and nine months ended October 31, 2017, the Company recorded a tax benefit of $0.9 million and $0.5 million, respectively, on pretax losses of $34.0 million and $87.3 million, respectively. The effective tax rate for the three and nine months ended October 31, 2017 was 2.8% and 0.5%, respectively. The effective tax rate differs from the statutory rate primarily as a result of not recognizing a deferred tax asset for U.S. losses due to having a full valuation allowance against U.S. deferred tax assets.
The difference between the book and tax bases of the 2023 Notes, Note Hedges and debt issuance costs resulted in deductible temporary differences and corresponding deferred tax assets of $0.6 million as of October 31, 2018, which are subject to a full valuation allowance.
On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease to 21% effective for tax years beginning after December 31, 2017, and changes to how the United States imposes income tax on multinational corporations.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The Company recorded a provisional amount of $61.0 million as of January 31, 2018 related to the remeasurement of certain deferred tax balances before valuation allowance. For the nine months ended October 31, 2018, the Company has not made a material adjustment to the provisional

25



amount. The Company will continue to analyze and refine the calculations to the measurement of these balances. The Company expects to complete its analysis within the measurement period in accordance with SAB 118.
The United Kingdom tax authority completed its examination of fiscal year 2016 income tax returns for the Company’s UK subsidiary during the three months ended April 30, 2018. As a result, the Company’s UK subsidiary is no longer subject to examination for fiscal years prior to 2017.
12. Net Loss Per Share
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):  
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2018
 
2017
 
2018
 
2017
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(unaudited)
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss (1)
$
(26,502
)
 
$
(3,015
)
 
$
(8,672
)
 
$
(24,394
)
 
$
(79,991
)
 
$
(14,695
)
 
$
(16,366
)
 
$
(70,438
)
Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic and diluted
97,665

 
11,111

 
25,039

 
70,435

 
90,045

 
16,542

 
14,508

 
62,442

Net loss per share attributable to common stockholders, basic and diluted
$
(0.27
)
 
$
(0.27
)
 
$
(0.35
)
 
$
(0.35
)
 
$
(0.89
)
 
$
(0.89
)
 
$
(1.13
)
 
$
(1.13
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)  
Net loss for the three and nine months ended October 31, 2017 has been adjusted. See Note 2 for a summary of adjustments.
As the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share as the inclusion of all potential common shares outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows (in thousands):  
 
As of October 31,
 
2018
 
2017
 
 
 
 
 
(unaudited)
Unvested restricted common stock issued and outstanding
400

 
800

Stock options issued and outstanding
19,314

 
27,118

Unvested RSUs issued and outstanding
4,936

 
2,506

Unvested restricted stock awards issued and outstanding
388

 
599

Shares related to convertible senior notes
7,134

 

Shares committed under the ESPP
359

 
1,082

Unvested shares subject to repurchase
67

 
248

 
32,598

 
32,353

The Company expects to settle the principal amount of the 2023 Notes in cash, and therefore, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion option on diluted net income per share, if applicable. The conversion option will have a dilutive impact on net income per share of common stock when the average market price per share of the Company’s Class A common stock for a given period exceeds the conversion price of the 2023 Notes of $48.36 per share. During the three months ended October 31, 2018, the weighted average price per share of the Company’s Class A common stock exceeded the conversion price of the 2023 Notes; however, since the Company is in a net loss position there was no dilutive effect during any period presented.

26



Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 ends January 31.
Overview
Okta is the leading independent provider of identity for the enterprise. The Okta Identity Cloud is our category-defining platform that enables our customers to securely connect people to technology, anywhere, anytime and from any device. Every day, people use Okta to securely access a wide range of cloud applications, websites, mobile applications and services from a multitude of devices. Workforces sign into our platform to seamlessly access the applications they need to do their most important work. Organizations use our platform to provide their customers with more modern experiences online and via mobile devices, and to connect with partners to streamline their operations. Developers leverage our platform to securely embed identity into their software.
Our approach to identity eliminates duplicative, sprawling credentials and disparate authentication policies, allowing our customers to simplify and scale their IT and security infrastructures more efficiently as the number of users, devices, clouds and other technologies in their ecosystem grows. Our customers are able to achieve fast time to value, lower costs and increased efficiency while improving compliance and providing security that is persistent, perimeter-less and context-aware. These benefits are delivered through multiple products on a unified platform, our superior cloud architecture and a vast and increasing network of integrations.
We founded the company in 2009 to reinvent identity for the modern cloud era, where identity is the critical foundation for connection and trust between users and technology. Since our inception, we have consistently innovated to enhance our platform and our product offerings.
In parallel to this product innovation, we have rapidly expanded the breadth and depth of the Okta Integration Network, which provides customers with a pre-integrated set of cloud, mobile and web applications that spans the functionality of our products. As of October 31, 2018, we had over 5,500 integrations with cloud, mobile and web applications and IT infrastructure providers.
We employ a SaaS business model. We focus on acquiring and retaining our customers and increasing their spending with us through expanding the number of users who access our platform and up-selling additional products. We sell our products directly through our field and inside sales teams, as well as indirectly through our network of independent software vendors, or ISVs, and channel 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. Our customers use our platform to manage and secure their extended enterprise (employees, contractors and partners), which we previously referred to as the internal use case. Organizations also use our platform to manage and secure their customers' identities via the powerful APIs we have developed, which we previously referred to as the external use case. We typically invoice customers in advance in annual installments for subscriptions to our platform.
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. We generate subscription fees pursuant to noncancelable contracts. 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. We recognize subscription revenue ratably over the term of the subscription period beginning on the date access to our platform is provided.

27



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 expect capitalized internal-use software costs and related amortization to 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 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 revenue as our 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 and other professional fees, charitable contributions, and all other supporting corporate expenses not allocated to other departments.

28



We expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), and increased expenses for insurance, investor relations and professional services. We expect our general and administrative expenses will increase in absolute dollars as our business grows.
Other Expense, Net
Other expense, net consists of interest income from our investment holdings and interest expense, which primarily includes amortization of debt discount and issuance costs and contractual interest expense for our $345.0 million aggregate principal amount of 0.25% convertible senior notes due February 15, 2023 (2023 Notes).
Provision for (Benefit from) for 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.
Results of Operations
The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our revenue:
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2018
 
2017
 
2018
 
2017
 
 
As Adjusted (1)
 
 
As Adjusted (1)
 
 
 
 
 
 
 
 
 
(in thousands)
Revenue:
 
 
 
 
 
 
 
Subscription
$
97,698

 
$
61,863

 
$
262,393

 
$
165,459

Professional services and other
7,878

 
5,048

 
21,390

 
14,036

Total revenue
105,576

 
66,911

 
283,783

 
179,495

Cost of revenue:
 

 
 

 
 
 
 
Subscription(2)
20,265

 
13,553

 
55,808

 
37,401

Professional services and other(2)
9,435

 
7,570

 
26,227

 
20,867

Total cost of revenue
29,700

 
21,123

 
82,035

 
58,268

Gross profit
75,876

 
45,788

 
201,748

 
121,227

Operating expenses:
 

 
 

 
 
 
 
Research and development(2)
27,596

 
19,190

 
72,354

 
51,472

Sales and marketing(2)
56,911

 
47,567

 
165,408

 
120,761

General and administrative(2)
19,848

 
13,546

 
55,873

 
37,133

Total operating expenses
104,355

 
80,303

 
293,635

 
209,366

Operating loss
(28,479
)
 
(34,515
)
 
(91,887
)
 
(88,139
)
Other income (expense), net
(1,705
)
 
509

 
(4,682
)
 
872

Loss before provision for (benefit from) income taxes
(30,184
)
 
(34,006
)
 
(96,569
)
 
(87,267
)
Provision for (benefit from) income taxes
(667
)
 
(940
)
 
(1,883
)
 
(463
)
Net loss
$
(29,517
)
 
$
(33,066
)
 
$
(94,686
)
 
$
(86,804
)
_______________________________
(1)  
See Note 2 to our condensed consolidated financial statements for a summary of adjustments.  
(2) 
Includes stock-based compensation expense as follows:

29



 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
(in thousands)
Cost of subscription revenue
$
2,383

 
$
1,421

 
$
5,813

 
$
3,163

Cost of professional services and other revenue
1,305

 
979

 
3,277

 
2,186

Research and development
6,291

 
5,174

 
15,776

 
12,913

Sales and marketing
6,228

 
3,894

 
15,852

 
9,290

General and administrative
5,335

 
2,940

 
13,181

 
7,740

Total stock-based compensation expense
$
21,542

 
$
14,408

 
$
53,899

 
$
35,292

 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2018
 
2017
 
2018
 
2017
 
 
As Adjusted (1)
 
 
As Adjusted (1)
Revenue
 
 
 
 
 
 
 
Subscription
93
 %
 
92
 %
 
92
 %
 
92
 %
Professional services and other
7

 
8

 
8

 
8

Total revenue
100

 
100

 
100

 
100

Cost of revenue
 
 
 
 
 
 
 
Subscription
19

 
20

 
20

 
21