Form 10-Q Okta, Inc. For: Oct 31

December 7, 2017 6:05 AM
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, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 MOR 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 
¨
(Do not check if a 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, 2017, the number of shares of registrant’s Class A common stock outstanding was 40,488,329 and the number of shares of the registrant’s Class B common stock outstanding was 61,435,859.




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 are subject to a number of risks and uncertainties, many of which involve factors or circumstances that are beyond Okta’s control. Okta’s 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 the Company 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)
 
October 31, 2017
 
January 31, 2017
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
137,575

 
$
23,282

Short-term investments
86,043

 
14,390

Accounts receivable, net of allowances of $976 and $1,306
46,882

 
34,544

Deferred commissions
14,134

 
13,549

Prepaid expenses and other current assets
10,038

 
7,025

Total current assets
294,672

 
92,790

Property and equipment, net
13,122

 
11,026

Deferred commissions, noncurrent
9,163

 
10,050

Intangible assets, net
11,455

 
9,155

Goodwill
6,282

 
2,630

Other assets
2,463

 
4,984

Total assets
$
337,157

 
$
130,635

Liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)
 

 
 
Current liabilities:
 

 
 
Accounts payable
$
12,875

 
$
9,387

Accrued expenses and other current liabilities
4,955

 
8,363

Accrued compensation
14,671

 
9,866

Deferred revenue
138,460

 
108,012

Total current liabilities
170,961

 
135,628

Deferred revenue, noncurrent
3,188

 
5,711

Other liabilities, noncurrent
6,553

 
4,947

Total liabilities
180,702

 
146,286

Commitments and contingencies (Note 8)


 


Redeemable convertible preferred stock

 
227,954

Stockholders’ equity (deficit):
 

 
 
Preferred stock



Class A common stock
2

 

Class B common stock
8

 
2

Additional paid-in capital
534,304

 
44,469

Accumulated other comprehensive loss
(69
)
 
(167
)
Accumulated deficit
(377,790
)
 
(287,909
)
Total stockholders’ equity (deficit)
156,455

 
(243,605
)
Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)
$
337,157

 
$
130,635

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,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
Subscription
$
62,705

 
$
38,123

 
$
167,142

 
$
99,125

Professional services and other
5,533

 
4,160

 
15,098

 
12,381

Total revenue
68,238

 
42,283

 
182,240

 
111,506

Cost of revenue
 

 
 

 
 
 
 
Subscription
13,553

 
8,597

 
37,401

 
24,523

Professional services and other
7,570

 
5,506

 
20,867

 
15,739

Total cost of revenue
21,123

 
14,103

 
58,268

 
40,262

Gross profit
47,115

 
28,180

 
123,972

 
71,244

Operating expenses
 

 
 

 
 
 
 
Research and development
19,190

 
9,706

 
51,472

 
28,127

Sales and marketing
49,606

 
32,442

 
126,383

 
87,264

General and administrative
13,546

 
7,922

 
37,133

 
21,009

Total operating expenses
82,342

 
50,070

 
214,988

 
136,400

Operating loss
(35,227
)
 
(21,890
)
 
(91,016
)
 
(65,156
)
Other income, net
509

 
50

 
872

 
138

Loss before income taxes
(34,718
)
 
(21,840
)
 
(90,144
)
 
(65,018
)
Provision (benefit) for income taxes
(940
)
 
91

 
(463
)
 
267

Net loss
$
(33,778
)
 
$
(21,931
)
 
$
(89,681
)
 
$
(65,285
)
 
 

 
 

 
 
 
 
Net loss per share attributable to common stockholders, basic and diluted
$
(0.35
)
 
$
(1.14
)
 
$
(1.17
)
 
$
(3.46
)
 
 

 
 

 
 
 
 
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted
95,474

 
19,174

 
76,950

 
18,850

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,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net loss
$
(33,778
)
 
$
(21,931
)
 
$
(89,681
)
 
$
(65,285
)
Net change in unrealized gains (losses) on available-for-sale securities
(58
)
 
(20
)
 
(70
)
 
14

Foreign currency translation adjustments
(81
)
 
(89
)
 
168

 
(144
)
Other comprehensive income (loss)
(139
)
 
(109
)
 
98

 
(130
)
Comprehensive loss
$
(33,917
)
 
$
(22,040
)
 
$
(89,583
)
 
$
(65,415
)

See Notes to Condensed Consolidated Financial Statements.


6



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Nine Months Ended October 31,
 
2017
 
2016
 
 
 
 
Cash flows from operating activities:
 
 
 
Net loss
$
(89,681
)
 
$
(65,285
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation, amortization and accretion
5,111

 
3,177

Stock-based compensation
35,292

 
11,869

Amortization of deferred commissions
12,798

 
9,926

Deferred income taxes
(960
)
 

Non-cash charitable contributions
708

 
129

Other
997

 
173

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(12,742
)
 
(3,606
)
Deferred commissions
(12,495
)
 
(11,207
)
Prepaid expenses and other current and noncurrent assets
(2,989
)
 
(2,312
)
Accounts payable
6,255

 
2,453

Accrued compensation
5,931

 
(1,268
)
Accrued expenses and other current and noncurrent liabilities
(1,545
)
 
259

Deferred revenue
27,925

 
20,293

Net cash used in operating activities
(25,395
)
 
(35,399
)
Cash flows from investing activities:
 

 
 

Capitalization of internal-use software costs
(4,072
)
 
(3,992
)
Purchases of property and equipment and other
(5,570
)
 
(4,647
)
Purchases of securities available for sale
(95,344
)
 

Proceeds from sales of securities available for sale
1,538

 
6,207

Proceeds from maturities and redemption of securities available for sale
21,985

 
5,000

Net cash provided by (used in) investing activities
(81,463
)
 
2,568

Cash flows from financing activities:
 

 
 

Proceeds from initial public offering, net of underwriters' discounts and commissions
199,948

 

Payments of deferred offering costs
(4,038
)
 
(990
)
Proceeds from stock option exercises, net of repurchases, and other
25,800

 
1,665

Principal payments on financing arrangements
(343
)
 
(213
)
Net cash provided by financing activities
221,367

 
462

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

 
(144
)
Net increase (decrease) in cash, cash equivalents and restricted cash
114,562

 
(32,513
)
Cash, cash equivalents and restricted cash at beginning of period
23,282

 
58,081

Cash, cash equivalents and restricted cash at end of period
$
137,844

 
$
25,568

 
 
 
 
Supplementary cash flow disclosure:
 

 
 

Non-cash investing and financing activities:
 
 
 
Vesting of early exercised common stock options
$
986

 
$
997

Issuance of common stock in connection with warrant exercises
272

 

Common stock issued as charitable contribution
708

 
129

Deferred offering costs, accrued but not yet paid

 
438

Property and equipment and other, accrued but not yet paid
710

 
990

Issuance of common stock in connection with business combination
2,160

 

Conversion of redeemable convertible preferred stock to common stock
228,362

 

Cash paid for taxes
668

 
90

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
$
137,575

 
$
20,134

Restricted cash, current

 
1,039

Restricted cash, noncurrent included in other assets
269

 
4,395

Total cash, cash equivalents and restricted cash
$
137,844

 
$
25,568

 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) pioneered identity in the cloud. The Okta Identity Cloud enables customers to secure their users and connect them to technology, anywhere, anytime and from any device. The Company was originally incorporated in January 2009 as SaaSure Inc., a California corporation, and, in April 2010, the Company reincorporated in Delaware as Okta, Inc. The Company is headquartered in San Francisco, California.
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 newly authorized Class A common stock, which included 1,650,000 shares sold pursuant to the exercise by the underwriters’ option to purchase additional shares 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. See Note 9 for additional details.
As of October 31, 2017, 39,290,132 shares of the Company’s Class A common stock and 62,081,326 shares of Class B common stock were outstanding. The Class A common stock outstanding includes the shares issued in the IPO and shares converted from Class B common stock.
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) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications of prior period amounts have been made in our condensed consolidated balance sheets and condensed consolidated statements of of cash flows to conform to the current period presentation.
The condensed consolidated balance sheet as of January 31, 2017, 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, 2018 or any future period.
The Company’s fiscal year ends on January 31. References to fiscal 2018, for example, refer to the fiscal year ending January 31, 2018.
The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on April 7, 2017 (the Prospectus).

8


2. Summary of Significant Accounting Policies
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 and judgments involve revenue recognition with respect to the determination of the relative selling prices for the Company’s services, determination of the fair value of the Company’s common stock prior to the completion of the IPO, valuation of the Company’s stock-based awards, valuation of deferred income tax assets and contingencies.
Significant Accounting Policies
The Company’s significant accounting policies are discussed in “Index to Consolidated Financial Statements-Note 2. Summary of Significant Accounting Policies” in the Prospectus. There have been no significant changes to these policies for the nine months ended October 31, 2017, except as noted below:
Stock-Based Compensation
All stock-based compensation to employees, including the purchase rights issued under the Company's 2017 Employee Stock Purchase Plan (ESPP), is based on the fair value of the awards on the date of grant. Prior to the IPO, the fair value of the Company’s common stock was determined by the estimated fair value of the Company’s common stock at the time of grant. After the IPO, the fair value is determined using the market closing price of its Class A common stock on the date of grant. The Company uses the Black-Scholes option pricing model to measure the fair value of its stock options granted to employees and non-employees and the purchase rights issued under the ESPP to employees. The unvested options issued to non-employees are remeasured to fair value at the end of each reporting period. This cost is recognized as an expense following the straight-line attribution method, over the requisite service period, for stock options, restricted stock units (RSUs) and restricted stock, and over the offering period, for the purchase rights issued under the ESPP. Prior to adoption of ASU 2016-09, the stock-based compensation was recorded net of estimated forfeitures.
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This new guidance was intended to simplify several areas of accounting for stock-based compensation arrangements, including the accounting for income taxes, the classification of excess tax benefits on the statement of cash flows and the accounting for forfeitures. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company adopted this guidance in the three months ended April 30, 2017. The new guidance allows entities to account for forfeitures as they occur. The Company elected to account for forfeitures as they occur and adopted this provision on a modified retrospective basis. An adjustment of $0.2 million representing cumulative prior years’ impact was recognized as an adjustment to decrease retained earnings in the period of adoption. The adoption of the amendments related to the accounting for income taxes and classification of excess tax benefits on the statement of cash flows were adopted prospectively. See Note 11 for further details of the effects of adoption of the new accounting standard on income taxes. Adoption of all other changes in the new guidance did not have a significant impact on the Company's consolidated financial statements.
Net Loss per Share
The Company computes basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for participating securities. Under the two-class method, basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase, without consideration for potentially dilutive securities as they do not share in losses. The diluted net loss per share attributable to common stockholders is computed giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, options to purchase common stock, unvested RSUs, purchase rights issued under the ESPP, shares subject to repurchase from early exercised options, and common stock and restricted stock issued in connection with certain business combinations are

9


considered common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as the effect is antidilutive.
Since the Company's IPO, Class A and Class B common stock are the only outstanding equity of the Company. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to 10 votes per share. Shares of Class B common stock may be converted into Class A common stock at any time at the option of the stockholder on a one-for-one basis, and are automatically converted into Class A common stock upon sale or transfer, subject to certain limited exceptions. Shares of Class A common stock are not convertible.
New Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09) and has modified the standard thereafter. The standard replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. ASU 2014-09, as amended, becomes effective for the Company on February 1, 2018. The standard permits the use of either the retrospective or modified retrospective transition method. Under the retrospective transition method, the standard applies to contracts in all reporting periods presented. Under the modified retrospective transition method, the standard applies only to contracts still open as of February 1, 2018, recognizing in beginning retained earnings an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous standards. The Company is currently evaluating the retrospective transition method.
The Company believes that the new standard will impact the following policies and disclosures:
removal of the current limitation on contingent revenue will result in revenue being recognized earlier for certain contracts;
revenue for all professional services, including fixed fee, will be recognized based on a proportional performance basis;
required disclosures including information about the transaction price allocated to remaining performance obligations and related timing of revenue recognition; and
accounting for deferred commissions including costs that qualify for deferral and the amortization period.
The requirement to defer incremental contract acquisition costs and recognize them over the contract period or expected customer life will affect the Company’s determination of the related period of benefit for amortization purposes and have a material impact on accounting for sales commissions for the periods presented. The Company has assigned internal resources, engaged a third-party service provider and is currently evaluating the impacts of systems implementations. The Company will continue to evaluate and analyze all other aspects of Topic 606 that may impact it.
In January 2016, the FASB issued ASU No. 2016-01 (Subtopic 825-10), Financial Instruments Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which primarily affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting for other financial instruments, such as loans, investments in debt securities and financial liabilities is largely unchanged. ASU 2016-01 is effective for fiscal years, beginning after December 15, 2018 and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 (Topic 842), Leases (ASU 2016-02), which supersedes the guidance in topic ASC 840, Leases. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company will be required to recognize and measure leases

10


existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within subsequent fiscal years. Early adoption is permitted. The Company is currently evaluating both the timing and the impact of the adoption of this standard on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business (ASU 2017-04), which amends the guidance of FASB Accounting Standards Codification Topic 805, “Business Combinations,” adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted under certain circumstances. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (ASU 2017-04), which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019 and will be applied prospectively. Early adoption is permitted for annual or any interim impairment tests with a measurement date on or after January 1, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718) Scope of Modification Accounting (ASU 2017-09), which clarifies which changes to the terms or conditions of a share-based payment award are subject to the guidance on modification accounting. Entities would apply the modification accounting guidance unless the value, vesting requirements and classification of a share-based payment award are the same immediately before and after a change to the terms or conditions of the award. This guidance is effective for annual and interim periods beginning after December 15, 2017, and would be applied prospectively to awards modified on or after the effective date. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
3. Business Combinations
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 has been accounted for as a business combination and is expected to enhance the Company’s product offerings and service by leveraging the talents of the engineering teams. The total consideration of $3.7 million, consisting of 200,000 shares of common stock valued at $2.2 million issued to Stormpath and replacement awards of $1.5 million issued to the hired employees, was recognized as goodwill. See Note 10 for further details on replacement awards issued in this transaction. Goodwill is not deductible for tax purposes.
Pro forma results of operations for the transaction have not been presented as they were not material to the condensed consolidated statements of operations.
In addition, the Company issued an incremental 800,000 shares of restricted common stock valued at $8.6 million to Stormpath in connection with the transaction. These shares of restricted common stock will vest ratably on the first and second anniversaries of the transaction date upon achieving the respective performance conditions, including the continued employment of certain employees with Okta and the wind down of the Stormpath, Inc. entity. The aggregate fair value, as determined on the date of the transaction, of the shares of restricted common stock will be recognized as post-combination stock-based compensation in the statement of operations over two years based on an accelerated attribution method. See Note 10 for further details.

11



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, 2017 and January 31, 2017 were as follows (in thousands):
 
 
As of October 31, 2017
 
(unaudited)
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
115,939

 
$

 
$

 
$
115,939

Total cash equivalents
$
115,939

 
$

 
$

 
$
115,939

Investments:
 

 
 

 
 

 
 

Commercial paper
16,973

 

 

 
16,973

U.S. treasury securities
46,570

 

 
(57
)
 
46,513

Corporate debt securities
22,570

 

 
(13
)
 
22,557

Total short-term investments
86,113

 

 
(70
)
 
86,043

Total
$
202,052

 
$

 
$
(70
)
 
$
201,982


 
As of January 31, 2017
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
10,565

 
$

 
$

 
$
10,565

Total cash equivalents
$
10,565

 
$

 
$

 
$
10,565

Investments:
 
 
 

 
 

 
 

Asset-backed securities
1,538

 

 

 
1,538

Corporate debt securities
12,842

 
13

 
(3
)
 
12,852

Total short-term investments
14,380

 
13

 
(3
)
 
14,390

Total
$
24,945

 
$
13

 
$
(3
)
 
$
24,955

All short-term investments were designated as available-for-sale securities as of October 31, 2017 and January 31, 2017.
The Company had 17 and five short-term investments in unrealized loss positions as of October 31, 2017 and January 31, 2017, respectively. There were no material gross unrealized gains or losses from available-for-sale securities and no 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, 2017 or 2016.
For available-for-sale debt securities that have unrealized losses, the Company evaluates whether (i) it has the intention to sell any of these investments and (ii) whether it is not more likely than not that it 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, 2017 and January 31, 2017.


12



The following tables present the contractual maturities of the Company’s short-term investments as of October 31, 2017 and January 31, 2017 (in thousands):
 
 
As of October 31, 2017
 
(unaudited)
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
$
73,602

 
$
73,553

Due between one to five years
12,511

 
12,490

 
$
86,113

 
$
86,043

 
As of January 31, 2017
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
$
12,842

 
$
12,852

Due between one to five years
1,538

 
1,538

 
$
14,380

 
$
14,390

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.
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):   
 
As of October 31, 2017
 
(unaudited)
 
Level 1
 
Level 2 
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
115,939

 
$

 
$

 
$
115,939

Total cash equivalents
$
115,939

 
$

 
$

 
$
115,939

Short-term investments:
 

 
 

 
 

 
 

Commercial paper
$

 
$
16,973

 
$

 
$
16,973

U.S. treasury securities

 
46,513

 

 
46,513

Corporate debt securities

 
22,557

 

 
22,557

Total short-term investments

 
86,043

 

 
86,043

Total cash equivalents and short-term investments
$
115,939

 
$
86,043

 
$

 
$
201,982



13



 
As of January 31, 2017
 
Level 1
 
Level 2 
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
10,565

 
$

 
$

 
$
10,565

Total cash equivalents
$
10,565

 
$

 
$

 
$
10,565

Short-term investments:
 

 
 

 
 

 
 

Asset-backed securities
$

 
$
1,538

 
$

 
$
1,538

Corporate debt securities

 
12,852

 

 
12,852

Total short-term investments

 
14,390

 

 
14,390

Total cash equivalents and short-term investments
$
10,565

 
$
14,390

 
$

 
$
24,955

Liabilities:
 
 
 
 
 
 
 
Series B redeemable convertible preferred stock warrant
$

 
$

 
$
304

 
$
304

Level 3 instruments consist solely of the Company’s Series B redeemable convertible preferred stock warrant liability. During the three months ended April 30, 2017, the Series B redeemable convertible preferred stock warrant liability that was outstanding as of January 31, 2017 was exercised. The corresponding warrant liability was remeasured to fair value and reclassified to additional paid-in capital. The expense resulting from remeasurement was recognized in other income, net in the condensed consolidated statements of operations.
The change in the fair value of the Series B redeemable convertible preferred stock warrant liability was as follows (in thousands):
Balance at January 31, 2017
$
304

Increase in fair value of warrant through exercise date
103

Reclassification of remaining warrant liability to additional paid-in capital
(407
)
Balance at October 31, 2017
$

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, accounts payable and the financing arrangements (see Note 7) approximate fair value due to their short-term maturities and are excluded from the fair value table above.
6. Goodwill and Intangible Assets, net
Goodwill
During the three months ended April 30, 2017, the Company recorded $3.7 million of goodwill related to its transaction with Stormpath (see Note 3). As of October 31, 2017 and January 31, 2017, goodwill was $6.3 million and $2.6 million, respectively. No goodwill impairments were recorded during the three and nine months ended October 31, 2017 and 2016, respectively.

14



Intangible Assets, net
Intangible assets consisted of the following (in thousands):  
 
As of October 31, 2017
 
(unaudited)
 
Gross
 
Accumulated Amortization
 
Net
Capitalized internal-use software costs
$
15,344

 
$
(4,446
)
 
$
10,898

Software licenses
1,023

 
(466
)
 
557

Purchased developed technology
570

 
(570
)
 

 
$
16,937

 
$
(5,482
)
 
$
11,455

 
As of January 31, 2017
 
Gross
 
Accumulated Amortization
 
Net
Capitalized internal-use software costs
$
10,859

 
$
(2,487
)
 
$
8,372

Software licenses
1,093

 
(314
)
 
779

Purchased developed technology
570

 
(566
)
 
4

 
$
12,522

 
$
(3,367
)
 
$
9,155

The Company capitalized $1.7 million and $1.9 million of internal-use software costs in the three months ended October 31, 2017 and 2016, respectively, and $5.0 million and $4.4 million in the nine months ended October 31, 2017 and 2016, respectively. Included in the total amounts capitalized are stock-based compensation expense of $0.3 million and $0.2 million in the three months ended October 31, 2017 and 2016, respectively, and $0.9 million and $0.4 million in the nine months ended October 31, 2017 and 2016, respectively. The Company reversed $0.5 million of previously capitalized costs in the three months ended October 31, 2017 as they were not realizable. The charge was recognized in research and development in the condensed consolidated statements of operations.
Amortization expense was $0.8 million and $0.5 million for the three months ended October 31, 2017 and 2016, respectively, and $2.1 million and $1.3 million for the nine months ended October 31, 2017 and 2016, respectively.
7. Debt and Financing Arrangements
Loan and Security Agreement
On March 10, 2014, the Company entered into a line of credit and term loan agreement with Silicon Valley Bank (SVB) in the amounts of $5.0 million and $10.0 million, respectively. On June 17, 2015, the Company expanded its line of credit from $5.0 million to $20.0 million and extended the term by one year to mature on March 10, 2017. The term loan facility expired during the year ended January 31, 2015 and no amounts were drawn. On November 21, 2016, the Company amended the agreement to extend the maturity date to November 21, 2018 and increase the borrowing capacity of the line of credit (Revolving Line) to $40.0 million. The available amount, not to exceed $40.0 million, is based on certain revenue metrics and is reduced by letters of credit totaling $4.4 million as of October 31, 2017 established in connection with facility lease agreements. As of October 31, 2017, $35.6 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, 2017 and January 31, 2017, 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.

15



As part of the initial loan agreement, upon closing, the Company granted SVB a warrant to purchase 187,500 shares of common stock at $1.40 per share, with a potential to acquire up to an additional 112,500 shares of common stock at the same price, which right would be triggered upon future amounts drawn under the loan agreement. No additional amounts were drawn under the credit facility and as such, the conditional warrant to acquire up to an additional 112,500 shares was not issued. The fair value of the common stock warrant at the time of issuance was recorded as debt issuance costs. Upon exercise of the warrant in March 2017, 168,750 shares were issued and 18,750 shares were withheld by the Company in lieu of cash exercise.
Financing Arrangements
In May 2015, the Company purchased software and related maintenance and support from a third party under a financing arrangement with a gross value of $0.9 million at an implicit interest rate of 5.0%. The financed obligation will be due in April 2018, and as of October 31, 2017 and January 31, 2017, $0.1 million and $0.4 million, respectively, was outstanding under this obligation.
In January 2017, the Company acquired additional software licenses from a third party under a separate financing arrangement with a gross value of $0.4 million at an implicit interest rate of 4.5%. The financed obligation will be due in January 2019 and as of October 31, 2017 and January 31, 2017, $0.3 million and $0.4 million respectively, was outstanding under this obligation.
8. Commitments and Contingencies
In July 2017, the Company entered into a non-cancellable contractual agreement with a third-party provider of datacenter hosting facilities for a period of three years. Future annual commitments under this agreement are $10.0 million.
Leases
The Company leases office space under noncancelable operating leases for its San Francisco, California headquarters, as well as its offices in San Jose, California; Bellevue, Washington; London, England; Sydney, Australia; and Toronto, Canada. These office leases expire on various dates through August 2026.
Certain facility lease agreements contain rent holidays, allowances and rent escalation provisions. For these leases, the Company recognizes the related rental expense on a straight-line basis over the lease period of the facility and records the difference between amounts charged to operations and amounts paid as deferred rent. These rent holidays, allowances and rent escalations are considered in determining the straight-line expense to be recorded over the lease term. Deferred rent was $5.0 million and $4.8 million as of October 31, 2017 and January 31, 2017, respectively, and the current and noncurrent portions are included in accrued expenses and other current liabilities and other liabilities, noncurrent, respectively, in the condensed consolidated balance sheets. Rent expense was $3.0 million and $1.9 million for the three months ended October 31, 2017 and 2016, respectively, and $7.6 million and $5.5 million for the nine months ended October 31, 2017 and 2016, respectively.
In August 2017, the Company executed an amendment to its San Jose lease to add space and extend the lease term through August 2024. The incremental commitment for the additional space is $6.3 million with a tenant improvement allowance of up to $0.8 million. Rental payments will commence in August 2018.
In conjunction with the execution of the leases, letters of credit in the aggregate amount of $4.4 million and $5.4 million were issued and outstanding as of October 31, 2017 and January 31, 2017, respectively. No draws have been made under such letters of credit.

16



As of October 31, 2017, the future minimum lease payments by fiscal year under the financing arrangements and various operating leases are as follows (in thousands):  
 
Financing
Arrangements 
 
Operating
Leases
 
Purchase Obligations
 
Total
Remainder of 2018
$
212

 
$
2,968

 
$
2,595

 
$
5,775

2019
212

 
12,343

 
10,401

 
22,956

2020

 
9,441

 
10,301

 
19,742

2021

 
6,088

 
4,167

 
10,255

2022

 
5,749

 

 
5,749

Thereafter

 
13,896

 

 
13,896

Total minimum lease payments
$
424

 
$
50,485

 
$
27,464

 
$
78,373

Less: amount representing interest
(29
)
 

 

 
(29
)
Present value of minimum lease payments
$
395

 
$
50,485

 
$
27,464

 
$
78,344

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, 2017.
9. Stockholders’ Equity (Deficit)
Redeemable Convertible Preferred Stock
Immediately prior to the completion of the IPO, 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 immediately reclassified into Class B common stock. As of October 31, 2017, there were no shares of redeemable convertible preferred stock issued and outstanding.
Common Stock
Immediately prior to the completion of the IPO, all shares of common stock then outstanding were reclassified into Class B common stock. Shares offered and sold in the IPO consisted of the newly authorized shares of Class A common stock.
As of October 31, 2017, the Company had authorized 1,000,000,000 shares of Class A common stock and had authorized 120,000,000 shares of Class B common stock, each with par value $0.0001 per share. As of January 31, 2017, the Company had authorized 120,000,000 shares of common stock with par value $0.0001 per share. As of October 31, 2017, 39,290,132 shares of Class A common stock and 62,081,326 shares of Class B common stock were issued and outstanding.
Holders of Class A and Class B common stock are entitled to one vote per share and 10 votes per share, respectively, and the shares of Class A common stock and Class B common stock are identical, except for voting and conversion rights.
Awards Issued as Charitable Contributions
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. During the three and nine months ended October 31, 2016, the Company granted 13,935 shares of Class B common stock as a charitable contribution and recognized $0.1 million as general and administrative expense in the condensed consolidated statement of operations.
10. Employee Incentive Plans
The Company’s equity incentive plans provide for granting stock options, RSUs and restricted stock awards to employees, consultants, officers and directors. In addition, the Company offers an ESPP to eligible employees.
Stock-based compensation expense by award type was as follows (in thousands):

17



 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2017
 
2016
 
2017
 
2016
Stock options
$
6,162

 
$
4,836

 
$
18,313

 
$
11,869

RSUs
3,587

 

 
5,088

 

ESPP
2,146

 

 
4,946

 

Restricted stock awards
880

 

 
2,400

 

Restricted common stock
1,633

 

 
4,545

 

Total
$
14,408

 
$
4,836

 
$
35,292

 
$
11,869

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,
 
2017
 
2016
 
2017
 
2016
Cost of revenue
 
 
 
 
 
 
 
Subscription
$
1,421

 
$
578

 
$
3,163

 
$
1,417

Professional services and other
979

 
304

 
2,186

 
890

Research and development
5,174

 
808

 
12,913

 
2,162

Sales and marketing
3,894

 
1,619

 
9,290

 
4,385

General and administrative
2,940

 
1,527

 
7,740

 
3,015

Total
$
14,408

 
$
4,836

 
$
35,292

 
$
11,869

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, 2017 and 2016. 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, 2017, 27,052,658 options to purchase Class B common stock granted under the 2009 Plan remain outstanding and 65,000 options to purchase Class A common stock granted under the 2017 Plan remain outstanding.

18



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, 2017
32,866,862

 
$
6.01

 
8.2
 
$
145,570

Granted
2,661,568

 
11.48

 
 
 
 
Exercised
(7,205,213
)
 
3.58

 
 
 
 
Canceled
(1,205,559
)
 
7.67

 
 
 
 
Outstanding as of October 31, 2017
27,117,658

 
$
7.12

 
7.9
 
$
591,162

As of October 31, 2017
 
 
 
 
 
 
 
Vested and exercisable
10,699,293

 
$
4.86

 
6.9
 
$
257,446


The weighted-average grant-date fair value of options granted was $12.27 and $4.19 for the three months ended October 31, 2017 and 2016, respectively, and $5.37 and $3.93 for the nine months ended October 31, 2017 and 2016, respectively. The aggregate fair value of stock options vested was $5.9 million, and $3.9 million for the three months ended October 31, 2017 and 2016, respectively, and $18.9 million and $9.5 million for the nine months ended October 31, 2017 and 2016, 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 $139.4 million and $2.6 million for the three months ended October 31, 2017 and 2016, respectively, and $158.7 million and $4.5 million for the nine months ended October 31, 2017 and 2016, respectively.
As of October 31, 2017, there was a total of $60.6 million of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted-average period of 2.8 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,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(unaudited) 
Expected volatility
41.4%
 
40.9%-41.6%
 
40.4%-41.4%
 
40.9%-44.3%
Expected term (in years)
6.3
 
5.8-6.1
 
6.3-6.4
 
5.8-6.4
Risk-free interest rate
1.87%
 
1.22%-1.42%
 
1.87%-2.21%
 
1.13%-1.54%
Expected dividend yield
 
 
 
Options Subject to Early Exercise
Prior to the IPO, at the discretion of the board of directors, certain options were exercisable immediately at the date of grant but subject to a repurchase right, under which the Company may buy back any unvested shares at their original exercise price in the event of an employee’s termination prior to full vesting. The consideration received for an exercise of an unvested option is considered to be a deposit of the exercise price and the related dollar amount is recorded as a liability. The liabilities are reclassified into equity as the awards vest. As of October 31, 2017 and January 31, 2017, the Company had $1.4 million and $2.2 million, respectively, recorded in accrued expenses and other current liabilities related to early exercises of options to acquire 248,083 and 467,180 shares of Class B common stock, respectively.

19



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, 2017

 
$

Granted
2,567,667

 
24.08

Vested

 

Forfeited
(61,451
)
 
23.68

Outstanding as of October 31, 2017
2,506,216

 
$
24.08

The Company granted 347,740 and 2,567,667 RSUs with an aggregate fair value of $10.2 million and $61.8 million in the three and nine months ended October 31, 2017, respectively, of which all are unvested and outstanding as of October 31, 2017. As of October 31, 2017, there was $55.1 million of unrecognized stock-based compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of 3.6 years based on vesting under the award service conditions.
Equity Awards Issued in Connection with Business Combinations
In connection with the Stormpath transaction, the Company issued 800,000 shares of restricted common stock to Stormpath with an aggregate fair value of $8.6 million to be recognized as post combination stock-based compensation. The restricted common stock will vest ratably on the first and second anniversaries of the transaction date upon achievement of the respective performance conditions, including the continued employment of certain employees with the Company and the wind down of the Stormpath, Inc. entity. The stock-based compensation expense related to the restricted common stock has a requisite service period of two years and will be recognized using an accelerated attribution method due to the existence of performance conditions.
As of October 31, 2017, there was $4.1 million of unrecognized compensation expense related to restricted common stock which is expected to be recognized over the remaining weighted average life of 1.0 years. These shares of restricted common stock were separately authorized by the Company’s board of directors, and did not reduce the number of shares available for future issuance under the 2009 Plan or the 2017 Plan.
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 with performance conditions, including continued employment of certain employees with the Company and the wind down of the Stormpath, Inc. entity. The restricted stock awards will vest ratably over two or three years from the transaction date. 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.
The restricted stock awards and stock options offered directly to Stormpath employees for employment with the Company are deemed replacement awards and a portion of such awards are considered compensation for pre-combination service. Of the $9.1 million total aggregate fair value of the awards, $1.5 million is related to pre-combination service and is 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 will be recognized over two or three years based on an accelerated attribution method. The expense for the stock options will be recognized ratably over the requisite service period.
As of October 31, 2017, there was $3.1 million of unrecognized compensation expense related to unvested restricted stock awards, which is expected to be recognized over the remaining weighted average life of 1.5 years.
As of October 31, 2017, there was $1.8 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over the remaining weighted average life of 2.4 years. The related stock options expense and activity are included within the Stock Options section above.

20



All of these shares are outstanding as of October 31, 2017.
Employee Stock Purchase Plan
In February 2017, the Company’s board of directors adopted, and in March 2017, the Company’s stockholders approved the 2017 Employee Stock Purchase Plan, or the ESPP, which became effective prior to the completion of the IPO. The ESPP initially reserves and authorizes the issuance of up to a total of 3,000,000 shares of Class A common stock to participating employees. 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 will consist of two six-month purchase periods. The initial offering period began April 7, 2017 and will end on June 20, 2018.
On each purchase date, eligible employees will purchase the shares at a price per share equal to 85% of the lesser of (1) the fair market value of our stock on the offering date or (2) the fair market value of our stock on the purchase date.
As of October 31, 2017, there was $6.0 million of unrecognized stock-based compensation expense related to the ESPP that is expected to be recognized over the remaining term of the initial offering period.
The Company estimated the fair value of ESPP purchase rights using a Black-Scholes option pricing model with the following assumptions:
 
 
Nine Months Ended October 31,
 
 
2017
 
 
 
 
(unaudited)
Expected volatility
 
31.8%-37.4%
Expected term (in years)
 
0.5-1.2
Risk-free interest rate
 
0.95%-1.22%
Expected dividend yield
 
11. Income 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 on a pretax loss of $34.7 million and $90.1 million, respectively. The effective tax rate for the three and nine months ended October 31, 2017 was 2.7% and 0.5%, respectively. The effective tax rates differ from the statutory rates primarily as a result of tax benefits from stock-based compensation in the United Kingdom and providing no benefit on pretax losses incurred in the United States, as the Company has determined that the benefit of the losses is not more likely than not to be realized.
For the three and nine months ended October 31, 2016, the Company recorded a tax provision of $0.1 million and $0.3 million on a pretax loss of $21.8 million and $65.0 million, respectively. The effective tax rate for the three and nine months ended October 31, 2016 was (0.4)%. The effective tax rates differ from the statutory rates primarily as a result of providing no benefit on pretax losses incurred in the United States, as the Company has determined that the benefit of the losses is not more likely than not to be realized.
The Company adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718), effective February 1, 2017. Upon adoption, the Company recorded a retrospective increase of $0.3 million in gross U.S. deferred tax assets for previously unrecognized excess tax benefits that existed as of January 31, 2017, and a corresponding increase of $0.3 million in valuation allowance against these deferred tax assets, as the Company’s U.S. deferred tax assets are subject to a full valuation allowance. As such, the net impact to the Company’s retained earnings was zero. The adopted guidance requires all of the tax effects related to share-based payments to be recorded through the income statement. The Company’s effective tax rate reflected $1.2 million of tax benefit from stock-based compensation as a result of exercised options in the current period. The Company’s income tax rate may fluctuate based upon its stock price and the amount of stock options exercised and equity awards vested in a particular quarter.

21



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,
 
2017
 
2016
 
Class A
 
Class B
 
Class A
 
Class B
 
 
 
 
 
 
 
 
 
(unaudited)
Numerator:
 
 
 
 
 
 
 
Net loss
$
(8,858
)
 
$
(24,919
)
 
$

 
$
(21,931
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic and diluted
25,039

 
70,435

 

 
19,174

Net loss per share attributable to common stockholders - basic and diluted:
$
(0.35
)
 
$
(0.35
)
 
$

 
$
(1.14
)
 
Nine Months Ended October 31,
 
2017
 
2016
 
Class A
 
Class B
 
Class A
 
Class B
 
 
 
 
 
 
 
 
 
(unaudited)
Numerator:
 
 
 
 
 
 
 
Net loss
$
(16,908
)
 
$
(72,773
)
 
$

 
$
(65,285
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic and diluted
14,508

 
62,442

 

 
18,850

Net loss per share attributable to common stockholders - basic and diluted:
$
(1.17
)
 
$
(1.17
)
 
$

 
$
(3.46
)
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,
 
2017
 
2016
 
 
 
 
Conversion of convertible preferred stock

 
59,465

Conversion of common stock warrant

 
188

Conversion of convertible preferred stock warrant

 
29

Restricted common stock issued and outstanding
800

 

Issued and outstanding stock options
27,118

 
32,160

Unvested RSUs issued and outstanding
2,506

 

Unvested restricted stock awards issued and outstanding
599

 

Shares committed under the ESPP
1,082

 

Unvested shares subject to repurchase
248

 
540

 
32,353

 
92,382


22



13. Related Party Transactions
Certain members of the board of directors serve as directors of and/or are executive officers of and, in some cases, are investors in, companies that are customers or vendors of the Company. Certain of the Company’s executive officers also serve as directors of or serve in an advisory capacity to companies that are customers or vendors of the Company. Related party transactions were not material as of and for the three and nine months ended October 31, 2017 and 2016.
14. Subsequent Events

On December 2, 2017, the Company entered into an office lease (Lease) to lease approximately 207,066 rentable square feet in an office building in San Francisco, California (Premises) expected to become the Company’s new corporate headquarters. The Premises will be delivered in phases during the total term of the Lease. One floor, or approximately 19,060 square feet, of the Premises is scheduled to be delivered on or about February 1, 2018, as phase one, and nine floors, or approximately 188,006 square feet, of the Premises are scheduled to be delivered on or about June 1, 2018, as phase two. The lease payments associated with phases one and two will be approximately $170.6 million, and annual lease payments are approximately $1.3 million and $8.7 million for the first and second year, respectively (net of 11 and eight months of rent abatement in the first year related to phase one and phase two, respectively, and five months of rent abatement in the second year related to phase two). The Lease has a 10 year term, which is expected to expire in October 2028. The Company is entitled to two five-year options to extend the Lease, subject to certain requirements.

In addition, the landlord will provide a tenant improvement allowance of up to $20.7 million for leasehold improvements in phases one and two, as the phases are delivered, beginning in February 2018.

Subject to certain terms and conditions, the Lease requires the Company to lease two and a half additional floors, or approximately 47,939 square feet, of the Premises, beginning in February 2020, as phase three. The lease payments associated with phase three will be approximately $35.6 million, and annual lease payments for the first year are approximately $2.2 million (net of five months of rent abatement). In addition, the landlord will provide a tenant improvement allowance of up to $4.0 million for leasehold improvements in phase three.

The Company has obtained a standby letter of credit (Letter of Credit) in the amount of $8.0 million, which may be drawn down by the landlord to be applied for certain purposes upon the Company’s breach of any provisions under the Lease. Subject to certain terms and conditions, the Lease requires the Company to increase the amount of the Letter of Credit by $1.9 million in connection with phase three. Restricted cash of $8.0 million has been pledged for the Letter of Credit.

23



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 Prospectus. As discussed in the section titled “Note About 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 in our Prospectus. Our fiscal year ends January 31.
Overview
Okta is the leading independent provider of identity for the enterprise. Okta pioneered identity in the cloud. 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 business day, over three million 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 infrastructures more efficiently as the number of users, devices, clouds and other technologies in their ecosystem grows. With the Okta Identity Cloud, our customers are able to achieve fast time to value, lower costs and increase 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, superior cloud architecture and our vast and increasing network of integrations.
We founded the company in 2009 to reinvent identity for the modern cloud era. From the beginning, we recognized that identity is the foundation for connections and trust between users and technology. Since our inception, we have consistently innovated to enhance our platform and expand 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, 2017, we had over 5,000 integrations with third-party software applications.
We offer our platform through a SaaS business model. We focus on adding and retaining 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 solution directly through our field and inside sales teams, as well as indirectly through 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 for both internal and external use cases, which we refer to as the extended enterprise and Customer Identity Management, respectively. 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 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, provided all other revenue recognition criteria have been met.

24



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 monthly as the work is performed for time and materials arrangements. We generally have standalone value for our professional services and recognize revenue for the estimated fair value as a separate unit of accounting as services are performed or for those fixed-fee contracts, upon completion of the services.
Overhead Allocation and Employee Compensation Costs
We allocate shared costs, such as facilities (including rent, utilities and depreciation on equipment 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 Revenue.    Cost of subscription revenue primarily consists of expenses related to hosting our services and providing support. These expenses include employee-related costs for employees 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 to have increased capitalized internal-use software costs and related amortization. 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 internal staff. 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 overhead allocation. 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 direct and incremental and can be associated specifically with a noncancelable subscription contract are deferred and amortized over the same period that revenue is recognized for the related noncancelable contract. 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.

25



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, and all other supporting corporate expenses not allocated to other departments.
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 Income, Net
Other income, net consists of interest income from our investment holdings, interest expense and expenses resulting from the revaluation of our redeemable convertible preferred stock warrant liability.
Provision (Benefit) for Income Taxes
Our income tax provision or benefit for interim periods is determined 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.
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,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Revenue
 
 
 
 
 
 
 
Subscription
$
62,705

 
$
38,123

 
$
167,142

 
$
99,125

Professional services and other
5,533

 
4,160

 
15,098

 
12,381

Total revenue
68,238

 
42,283

 
182,240

 
111,506

Cost of revenue
 

 
 

 
 
 
 
Subscription(1)
13,553

 
8,597

 
37,401

 
24,523

Professional services and other(1)
7,570

 
5,506

 
20,867

 
15,739

Total cost of revenue
21,123

 
14,103

 
58,268

 
40,262

Gross profit
47,115

 
28,180

 
123,972

 
71,244

Operating expenses
 

 
 

 
 
 
 
Research and development(1)
19,190

 
9,706

 
51,472

 
28,127

Sales and marketing(1)
49,606

 
32,442

 
126,383

 
87,264

General and administrative(1)
13,546

 
7,922

 
37,133

 
21,009

Total operating expenses
82,342

 
50,070

 
214,988

 
136,400

Operating loss
(35,227
)
 
(21,890
)
 
(91,016
)
 
(65,156
)
Other income, net
509

 
50

 
872

 
138

Loss before income taxes
(34,718
)
 
(21,840
)
 
(90,144
)
 
(65,018
)
Provision (benefit) for income taxes
(940
)
 
91

 
(463
)
 
267

Net loss
$
(33,778
)
 
$
(21,931
)
 
$
(89,681
)
 
$
(65,285
)

26



_______________________________
(1)     Includes stock-based compensation expense as follows:
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Cost of subscription revenue
$
1,421

 
$
578

 
$
3,163

 
$
1,417

Cost of professional services and other
979

 
304

 
2,186

 
890

Research and development
5,174

 
808

 
12,913

 
2,162

Sales and marketing
3,894

 
1,619

 
9,290

 
4,385

General and administrative
2,940

 
1,527

 
7,740

 
3,015

Total stock-based compensation expense
$
14,408

 
$
4,836

 
$
35,292

 
$
11,869

 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2017
 
2016
 
2017
 
2016
Revenue
 
 
 
 
 
 
 
Subscription
92
 %
 
90
 %
 
92
 %
 
89
 %
Professional services and other
8

 
10

 
8

 
11

Total revenue
100

 
100

 
100

 
100

Cost of revenue
 
 
 
 
 
 
 
Subscription
20

 
20

 
21

 
22

Professional services and other
11

 
13

 
11

 
14

Total cost of revenue
31

 
33

 
32

 
36

Gross profit
69

 
67

 
68

 
64

Operating expenses
 
 
 
 
 
 
 
Research and development
28

 
23

 
28

 
25

Sales and marketing
73

 
77

 
70

 
78

General and administrative
20

 
19

 
20

 
19

Total operating expenses
121

 
119

 
118

 
122

Operating loss
(52
)
 
(52
)
 
(50
)
 
(58
)
Other income, net
1

 

 
1

 

Loss before income taxes
(51
)
 
(52
)
 
(49
)
 
(58
)
Provision (benefit) for income taxes
(1
)
 

 

 

Net loss
(50
)%
 
(52
)%
 
(49
)%
 
(58
)%

27



Comparison of the Three Months Ended October 31, 2017 and 2016
Revenue
 
Three Months Ended October 31,
 
 
 
2017
 
2016
 
$ Change
 
% Change  
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Revenue:
 
 
 
 
 
 
 
Subscription
$
62,705

 
$
38,123

 
$
24,582

 
64
%
Professional services and other
5,533

 
4,160

 
1,373

 
33

Total revenue
$
68,238

 
$
42,283

 
$
25,955

 
61

 
 
 
 
 
 
 
 
Percentage of revenue:
 

 
 
 
 

 
 

Subscription
92
%
 
90
%
 
 

 
 

Professional services and other
8

 
10

 
 

 
 

Total
100
%
 
100
%
 
 

 
 

Subscription revenue increased by $24.6 million, or 64%, for the three months ended October 31, 2017 compared to the three months ended October 31, 2016. 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 $1.4 million, or 33%, for the three months ended October 31, 2017 compared to the three months ended October 31, 2016. The increase in professional services revenue primarily related to an increase in implementation services priced on a time and material basis, associated with an increase in the number of new customers purchasing our subscription services.
Cost of Revenue, Gross Profit and Gross Margin
 
Three Months Ended October 31,
 
 
 
2017
 
2016
 
$ Change
 
% Change  
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Cost of revenue:
 
 
 
 
 
 
 
Subscription
$
13,553

 
$
8,597

 
$
4,956

 
58
%
Professional services and other
7,570

 
5,506

 
2,064

 
37

Total cost of revenue
$
21,123

 
$
14,103

 
$
7,020

 
50

Gross profit
$
47,115

 
$
28,180

 
$
18,935

 
67

 
 
 
 
 
 
 
 
Gross margin:
 

 
 
 
 

 
 

Subscription
78
 %
 
77
 %
 
 

 
 

Professional services and other
(37
)
 
(32
)
 
 

 
 

Total gross margin
69

 
67

 
 

 
 

Cost of subscription revenue increased by $5.0 million, or 58%, for the three months ended October 31, 2017 compared to the three months ended October 31, 2016, primarily due to an increase of $2.7 million in employee compensation costs related to higher headcount to support the growth in our subscription services and an increase of $1.1 million in data center costs as we increased capacity to support our growth.
Our gross margin for subscription revenue increased from 77% during the three months ended October 31, 2016 to 78% during the three months ended October 31, 2017, due to economies of scale as our subscription revenue increased. While our gross margins for subscription revenue may fluctuate in the near-term as we invest in our growth, we expect our subscription revenue gross margin to increase over time as we achieve additional economies of scale.
Cost of professional services and other revenue increased by $2.1 million, or 37%, for the three months ended October 31, 2017, compared to the three months ended October 31, 2016, primarily due to an increase of $1.9 million in employee compensation costs related to higher headcount.

28



Our gross margin for professional services and other revenue decreased to (37)% during the three months ended October 31, 2017 from (32)% during the three months ended October 31, 2016 due to the continued shift that began during fiscal year 2016 to price our professional services on a time and materials basis. Professional services and other revenue during the three months ended October 31, 2017 included $1.1 million, or 20% of total professional services and other revenue, of professional services that were predominately recognized on a time and materials basis, for which the related costs were incurred in the same period. Professional services and other revenue during the three months ended October 31, 2016 included $1.4 million, or 34% of total professional services and other revenue, of professional services that were recognized on a completed contract basis, for which a significant portion of the related costs were incurred in earlier periods.
Operating Expenses
Research and Development Expenses
 
Three Months Ended October 31,
 
 
 
2017
 
2016
 
$ Change
 
% Change  
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Research and development
$
19,190

 
$
9,706

 
$
9,484

 
98
%
Percentage of revenue
28
%
 
23
%
 
 

 
 

Research and development expenses increased $9.5 million, or 98%, for the three months ended October 31, 2017 compared to the three months ended October 31, 2016. The increase was primarily due to an increase of $7.7 million in employee compensation costs due to higher headcount and the post combination compensation expense related to the equity awards issued in connection with business combination and a decrease of $0.7 million of capitalized software primarily driven by current period reversals. Additionally, allocated overhead costs increased by $0.7 million driven by higher headcount.
Sales and Marketing Expenses
 
Three Months Ended October 31,
 
 
 
2017
 
2016
 
$ Change
 
% Change  
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Sales and marketing
$
49,606

 
$
32,442

 
$
17,164

 
53
%
Percentage of revenue
73
%
 
77
%
 
 

 
 

Sales and marketing expenses increased $17.2 million, or 53%, for the three months ended October 31, 2017 compared to the three months ended October 31, 2016. The increase was primarily due to an increase of $9.4 million in employee compensation costs related to headcount growth, an increase of $5.0 million related to marketing and event costs primarily driven by increases in demand generation programs, advertising, customer sponsorships, a larger annual customer conference and brand awareness efforts aimed at acquiring new customers and an increase of $1.5 million in allocated overhead costs.
General and Administrative Expenses
 
Three Months Ended October 31,
 
 
 
2017
 
2016
 
$ Change
 
% Change  
 
 
 
 
 
 
 
 
 
(dollars in thousands)
General and administrative
$
13,546

 
$
7,922

 
$
5,624

 
71
%
Percentage of revenue
20
%
 
19
%
 
 

 
 

General and administrative expenses increased $5.6 million, or 71%, for the three months ended October 31, 2017 compared to the three months ended October 31, 2016. The increase was primarily due to an increase of $4.0

29



million in employee compensation costs primarily related to higher headcount to support our continued growth, an increase of $1.4 million in costs from professional services consisting primarily of IT, accounting, and consulting fees and an increase of $0.5 million in allocated overhead costs. Additionally, non-cash charitable contributions increased by $0.8 million.
Comparison of the Nine Months Ended October 31, 2017 and 2016
Revenue
 
Nine Months Ended October 31,
 
 
 
2017
 
2016
 
$ Change
 
% Change  
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Revenue:
 
 
 
 
 
 
 
Subscription
$
167,142

 
$
99,125

 
$
68,017

 
69
%
Professional services and other
15,098

 
12,381

 
2,717

 
22

Total revenue
$
182,240

 
$
111,506

 
$
70,734

 
63

 
 
 
 
 
 
 
 
Percentage of revenue:
 

 
 
 
 

 
 

Subscription
92
%
 
89
%
 
 

 
 

Professional services and other
8

 
11

 
 

 
 

Total
100
%
 
100
%