# Okta, Inc. (OKTA) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Okta, Inc.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1660134/000166013424000025/okta-20240131.htm
Accession: 0001660134-24-000025
Filing date: 2024-03-01
Report date: 2024-01-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/OKTA/
All MD&A years: /company/OKTA/mda/
Previous year: /company/OKTA/mda/fy2023/ (FY 2023)
Next year: /company/OKTA/mda/fy2025/ (FY 2025)

Item 7. 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 consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Amounts reported in millions are rounded based on the amounts in thousands. As a result, the sum of the components reported in millions may not equal the total amount reported in millions due to rounding. In addition, percentages presented may not add to their respective totals or recalculate due to rounding. In addition to historical financial information, the following discussion contains forward-looking statements that are based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section titled “Risk Factors” under Part I, Item 1A of this Annual Report on Form 10-K. Our fiscal year ends January 31. References to fiscal 2024, for example, refer to the fiscal year ended January 31, 2024.

Overview

Okta is the leading independent identity partner. Our Workforce Identity Cloud and Customer Identity Cloud, powered by Auth0, enable our customers to securely connect the right people to the right technologies and services at the right time. Every day, thousands of organizations and millions of people use Okta to securely access a wide range of cloud, mobile, web and Software-as-a-Service ("SaaS") applications, on-premises servers, application programming interfaces, IT infrastructure providers and services from a multitude of devices. Employees and contractors sign into the Workforce Identity Cloud to seamlessly and securely access the applications they need to do their most important work. Organizations use our platform to collaborate with their partners and to provide their customers with more modern and secure experiences in the cloud and via mobile devices. Developers leverage our Customer Identity Cloud and Workforce Identity Cloud to securely and efficiently embed identity into the software they build, allowing them to innovate and focus on their core missions.

Given the growth trends in the number of applications and cloud adoption and the movement to remote and hybrid workforces, identity is becoming the most critical layer of an organization’s security. As organizations shift from network-based security models to a Zero Trust security model focusing on adaptive and context-aware controls, identity has become the most reliable way to manage user access and protect digital assets. Our approach to identity allows our customers to simplify and efficiently scale their security infrastructures across internal IT systems and external customer facing applications.

As of January 31, 2024, more than 18,950 customers across nearly every industry used Okta to secure and manage identities around the world. Our customers consist of leading global organizations ranging from the largest enterprises, to small and medium-sized businesses, universities, non-profits and government agencies. We also partner with leading application, IT infrastructure and security vendors through our Okta Integration Network. As of January 31, 2024, we had over 7,000 integrations with these cloud, mobile and web applications and IT infrastructure and security vendors.

We employ a SaaS business model and generate revenue primarily by selling multi-year subscriptions to our cloud-based offerings. We focus on acquiring and retaining our customers and increasing the value we provide to our customers over time, and thus their spending with us through expanding the number of users who access our Workforce Identity Cloud and Customer Identity Cloud and up-selling additional product offerings. We sell our product offerings directly through our field and inside sales teams, as well as indirectly through our network of channel partners, including resellers, system integrators and other distribution partners. Our subscription fees include the use of our service and our technical support and management of our platform. We base subscription fees primarily on the products used and the number of users on our platform. We typically invoice customers in advance in annual installments for subscriptions to our platform.

Our revenue is relatively predictable as a result of our subscription-based business model, which constituted approximately 97% of total revenue for fiscal 2024. Future growth may be impacted by longer sales cycles, which we have experienced, which in turn, could result in delays in deals closing, creating near-term headwinds for cash flow, remaining performance obligations (“RPO”) and billings growth as well as potential future impacts on revenue growth and other key metrics on a trailing basis.

55

OKTA, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Impact of Cybersecurity Incidents

In the past we have experienced cybersecurity incidents, such as the January 2022 incident involving one of our third-party service providers and the October 2023 incident where a threat actor gained unauthorized access to and stole information from our third-party customer support system, that harmed our reputation and customer relations, adversely impacted our financial results and may create additional liabilities. While we expect the impact of these security incidents to adversely affect our future financial performance, we cannot predict the extent of such impact with certainty. Due to the nature of our business, the announcement of any security incidents, even if not significant, could have these impacts.

Impact of Current Economic Conditions

Worldwide economic uncertainties and negative trends, including financial and credit market fluctuations, uncertainty in the banking sector, rising interest rates, inflation and other impacts from the macroeconomic environment have, and could continue to, adversely affect our business operations or financial results. As we continue to monitor the direct and indirect impacts of these circumstances, the broader implications of these macroeconomic events on our business, results of operations and overall financial position remain uncertain. See the section titled “Risk Factors'' included under Part I, Item 1A above for further discussion of the possible impact of these factors and other risks on our business.

Financial Information and Segments

We operate our business as one reportable segment. For fiscal 2024, 2023 and 2022, our revenue was $2,263 million, $1,858 million and $1,300 million, respectively, representing a growth rate of 22% and 43% in fiscal 2024 and 2023, respectively. For fiscal 2024, 2023 and 2022, we generated net losses of $355 million, $815 million and $848 million, respectively. Our accumulated deficit as of January 31, 2024 was $2,830 million.

Key Business Metrics 

We review a number of operating and financial metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Total Customers and Number of Customers with Annual Contract Value Above $100,000

As of January 31, 2024, we had over 18,950 customers on our platform. We believe that our ability to increase the number of customers on our platform is an indicator of our market penetration, the growth of our business, and our potential future business opportunities. Increasing awareness of our platform and capabilities, coupled with the mainstream adoption of cloud technology, has expanded the diversity of our customer base to include organizations of all sizes across all industries. The number of customers who have greater than $100,000 in ACV with us was 4,485, 3,930 and 3,100 as of January 31, 2024, 2023 and 2022, respectively. We expect this trend to continue as larger enterprises recognize the value of our platform and replace their legacy identity access management infrastructure. We define a customer as a separate and distinct buying entity, such as a company, an educational or government institution, or a distinct business unit of a large company that has an active contract with us or one of our partners to access our platform. For purposes of determining our customer count, we do not include customers that use our platform under self-service arrangements only.

56

OKTA, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Dollar-Based Net Retention Rate

Part of our ability to generate revenue is dependent upon our ability to maintain our relationships with our customers and to increase their utilization of our platform. We believe we can achieve these goals by focusing on delivering value and functionality that enables us to both retain our existing customers and expand the number of users and products used within an existing customer. We assess our performance in this area by measuring our Dollar-Based Net Retention Rate. Our Dollar-Based Net Retention Rate measures our ability to increase revenue across our existing customer base through expansion of users and products associated with a customer as offset by churn and contraction in the number of users and/or products associated with a customer.

Our Dollar-Based Net Retention Rate is based upon our ACV which is calculated based on the terms of that customer’s contract and represents the total contracted annual subscription amount as of that period end. We calculate our Dollar-Based Net Retention Rate as of a period end by starting with the ACV from all customers as of twelve months prior to such period end ("Prior Period ACV"). We then calculate the ACV from these same customers as of the current period end ("Current Period ACV"). Current Period ACV includes any upsells and is net of contraction or churn over the trailing twelve months but excludes ACV from new customers in the current period. We then divide the Current Period ACV by the Prior Period ACV to arrive at our Dollar-Based Net Retention Rate. Our Dollar-Based Net Retention Rate is inclusive of ACV from self-service customers.

Our strong Dollar-Based Net Retention Rate is primarily attributable to gross retention, an expansion of users and upselling additional products within our existing customers. Larger enterprises often implement a limited initial deployment of our platform before increasing their deployment on a broader scale. The decrease in our Dollar-Based Net Retention Rate as of January 31, 2024, compared to January 31, 2023, was primarily a result of the macroeconomic environment, with ACV from existing customers increasing at a slower rate in the current period.

Remaining Performance Obligations ("RPO")

RPO represent all future, non-cancelable, contracted revenue under our subscription contracts with customers that has not yet been recognized, inclusive of deferred revenue that has been invoiced and non-cancelable amounts that will be invoiced and recognized as revenue in future periods. Current RPO represents the portion of RPO expected to be recognized during the next 12 months. RPO fluctuates due to a number of factors, including the timing, duration and dollar amount of customer contracts and fluctuations in foreign currency exchange rates.

Components of Results of Operations

Revenue

Subscription Revenue. Subscription revenue primarily consists of fees for access to and usage of our cloud-based platform and related support. Subscription revenue is driven primarily by the number of customers, the number of users per customer and the products used. We typically invoice customers in advance in annual installments for subscriptions to our platform.

Professional Services and Other. Professional services revenue includes fees from assisting customers in implementing and optimizing the use of our products. These services include application configuration, system integration and training services.

We generally invoice customers as the work is performed for time-and-materials arrangements, and up front for fixed fee arrangements. Professional services revenue is recognized as the services are performed.

Overhead Allocation and Employee Compensation Costs

We allocate shared costs, such as facilities costs (including rent, utilities and depreciation on assets shared by all departments), certain information technology costs and recruiting costs to all departments based on headcount. As such, allocated shared costs are reflected in each of the cost of revenue and operating expense categories. Employee compensation costs reflected in each of the cost of revenue and operating expense categories include salaries, bonuses, compensation related taxes, benefits and stock-based compensation. Additionally included in the sales and marketing expense category are sales commissions and related taxes.

57

OKTA, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Cost of Revenue and Gross Margin

Cost of Subscription. Cost of subscription primarily consists of expenses related to hosting our services and providing support. These expenses include employee-related costs associated with our cloud-based infrastructure and our customer support organization, third-party hosting fees, software and maintenance costs, outside services associated with the delivery of our subscription services, amortization expense associated with capitalized internal-use software and acquired developed technology and allocated overhead.

We intend to continue to invest additional resources in our platform infrastructure, our platform support organizations and security posture. We will continue to invest in technology innovation and we anticipate that costs qualifying for capitalization of internal-use software costs and related amortization may fluctuate over time. We expect our investment in technology to expand the capability of our platform, enabling us to improve our gross margin over time. The level and timing of investment in these areas could affect our cost of subscription revenue in the future.

Cost of Professional Services and Other. Cost of professional services consists primarily of employee-related costs for our professional services delivery team, travel-related costs, allocated overhead and costs of outside services associated with supplementing our professional services delivery team. The cost of providing professional services has historically been higher than the associated revenue we generate.

Gross Margin. Gross margin is gross profit expressed as a percentage of total revenue. Our gross margin may fluctuate from period to period as a result of the timing and amount of investments to expand our hosting capacity and our continued efforts to build platform support and professional services teams.

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.

Sales and Marketing. Sales and marketing expenses consist primarily of employee compensation costs, costs of general marketing and promotional activities, travel-related expenses, amortization expense associated with acquired customer relationships (including unbilled and unrecognized contracts yet to be fulfilled) and trade names 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.

General and Administrative. General and administrative expenses consist primarily of employee compensation costs for finance, accounting, legal, information technology and human resources personnel. In addition, general and administrative expenses include acquisition and integration-related costs, non-personnel costs, such as legal, accounting and other professional fees, charitable contributions, and all other supporting corporate expenses, such as information technology, not allocated to other departments.

Restructuring and Other Charges. Restructuring and other charges consist primarily of personnel costs, such as notice period, employee severance payments and termination benefits. In addition, restructuring and other charges include certain lease impairment charges.

Interest and Other, Net

Interest and other, net consists of interest expense, which primarily includes amortization of debt issuance costs and contractual interest expense for our convertible senior notes, interest income from our investment holdings, gains on early extinguishment of debt and gains and losses from our strategic investments.

Provision for (Benefit from) Income Taxes

Our provision for (benefit from) income taxes consists of federal and state income taxes in the United States and income taxes in certain foreign jurisdictions where we operate. The difference between our effective tax rate and the federal statutory rate is primarily due to a valuation allowance against U.S. deferred tax assets, the tax effect of foreign operations and state taxes.

58

OKTA, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations

The following table sets forth our results of operations for the periods presented:

[[GREPCENT_TABLE]]
[["","Year Ended January 31,"],["","2024","","2023","","2022"],["","(dollars in millions)"],["Revenue"],["Subscription","$","2,205","","","$","1,794","","","$","1,249"],["Professional services and other","58","","","64","","","51"],["Total revenue","2,263","","","1,858","","","1,300"],["Cost of revenue"],["Subscription(1)","502","","","464","","","329"],["Professional services and other(1)","79","","","82","","","67"],["Total cost of revenue","581","","","546","","","396"],["Gross profit","1,682","","","1,312","","","904"],["Operating expenses"],["Research and development(1)","656","","","620","","","469"],["Sales and marketing(1)","1,036","","","1,066","","","771"],["General and administrative(1)","450","","","409","","","432"],["Restructuring and other charges","56","","","29","","","\u2014"],["Total operating expenses","2,198","","","2,124","","","1,672"],["Operating loss","(516)","","","(812)","","","(768)"],["Interest expense","(8)","","","(11)","","","(91)"],["Interest income and other, net","81","","","22","","","9"],["Gain on early extinguishment of debt","106","","","\u2014","","","\u2014"],["Interest and other, net","179","","","11","","","(82)"],["Loss before provision for (benefit from) income taxes","(337)","","","(801)","","","(850)"],["Provision for (benefit from) income taxes","18","","","14","","","(2)"],["Net loss","$","(355)","","","$","(815)","","","$","(848)"]]
[[/GREPCENT_TABLE]]

(1) Includes stock-based compensation expense as follows:

[[GREPCENT_TABLE]]
[["","Year Ended January 31,"],["","2024","","2023","","2022"],["","(dollars in millions)"],["Cost of subscription revenue","$","75","","","$","69","","","$","49"],["Cost of professional services and other revenue","15","","","14","","","12"],["Research and development","277","","","275","","","193"],["Sales and marketing","156","","","159","","","136"],["General and administrative","161","","","160","","","176"],["Total stock-based compensation expense","$","684","","","$","677","","","$","566"]]
[[/GREPCENT_TABLE]]

59

OKTA, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The following table sets forth our results of operations for the periods presented as a percentage of our total revenue:

[[GREPCENT_TABLE]]
[["","Year Ended January 31,"],["","2024","","2023","","2022"],["Revenue"],["Subscription","97","%","","97","%","","96","%"],["Professional services and other","3","","","3","","","4"],["Total revenue","100","","","100","","","100"],["Cost of revenue"],["Subscription","22","","","25","","","25"],["Professional services and other","4","","","4","","","5"],["Total cost of revenue","26","","","29","","","30"],["Gross profit","74","","","71","","","70"],["Operating expenses"],["Research and development","29","","","33","","","36"],["Sales and marketing","46","","","58","","","59"],["General and administrative","20","","","22","","","34"],["Restructuring and other charges","2","","","2","","","\u2014"],["Total operating expenses","97","","","115","","","129"],["Operating loss","(23)","","","(44)","","","(59)"],["Interest expense","\u2014","","","(1)","","","(7)"],["Interest income and other, net","4","","","2","","","1"],["Gain on early extinguishment of debt","4","","","\u2014","","","\u2014"],["Interest and other, net","8","","","1","","","(6)"],["Loss before provision for (benefit from) income taxes","(15)","","","(43)","","","(65)"],["Provision for (benefit from) income taxes","1","","","1","","","\u2014"],["Net loss","(16)","%","","(44)","%","","(65)","%"]]
[[/GREPCENT_TABLE]]

60

OKTA, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

A discussion regarding our financial condition and results of operations for fiscal 2024 compared to fiscal 2023 is presented below. A discussion regarding our financial condition and results of operations for fiscal 2023 compared to fiscal 2022 can be found under Item 7 in our Annual Report on Form 10-K for fiscal 2023, filed with the SEC on March 3, 2023, which is available free of charge on the SEC’s website at www.sec.gov and our Investor Relations website at investor.okta.com.

Comparison of the Years Ended January 31, 2024 and 2023

Revenue

[[GREPCENT_TABLE]]
[["","Year Ended January 31,"],["","2024","","2023","","$ Change","","% Change"],["","(dollars in millions)"],["Revenue:"],["Subscription","$","2,205","","","$","1,794","","","$","411","","","23","%"],["Professional services and other","58","","","64","","","(6)","","","(10)"],["Total revenue","$","2,263","","","$","1,858","","","$","405","","","22","%"],["Percentage of revenue:"],["Subscription","97","%","","97","%"],["Professional services and other","3","","","3"],["Total","100","%","","100","%"]]
[[/GREPCENT_TABLE]]

For fiscal 2024, the increase in subscription revenue was primarily due to the addition of new customers, an increase in users and sales of additional products to existing customers. The increase in revenue was attributable to a 8% increase in total customers, from over 17,600 as of January 31, 2023, to over 18,950 as of January 31, 2024, and revenue from existing customers as reflected in our Dollar-Based Net Retention Rate of 111% as of January 31, 2024.

For fiscal 2024, the decrease in professional services and other revenue was due to lower bookings associated with professional services.

Cost of Revenue, Gross Profit and Gross Margin

[[GREPCENT_TABLE]]
[["","Year Ended January 31,"],["","2024","","2023","","$ Change","","% Change"],["","(dollars in millions)"],["Cost of revenue:"],["Subscription","$","502","","","$","464","","","$","38","","","8","%"],["Professional services and other","79","","","82","","","(3)","","","(4)"],["Total cost of revenue","$","581","","","$","546","","","$","35","","","6","%"],["Gross profit","$","1,682","","","$","1,312","","","$","370","","","28","%"],["Gross margin:"],["Subscription","77","%","","74","%"],["Professional services and other","(36)","","","(27)"],["Total gross margin","74","%","","71","%"]]
[[/GREPCENT_TABLE]]

For fiscal 2024, cost of subscription revenue increased primarily due to an increase of $22 million in employee compensation costs, an increase of $7 million in software costs and an increase of $5 million in third-party hosting costs as we expanded capacity to support our growth.

Our gross margin for subscription revenue improved from 74% to 77% during fiscal 2024. The increase was primarily driven by improved spend efficiency resulting in lower relative cost of subscription revenue.

For fiscal 2024, cost of professional services and other revenue decreased slightly.

61

OKTA, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Our gross margin for professional services and other revenue decreased to (36)% during fiscal 2024 from (27)% during fiscal 2023 primarily due to a decrease in professional services and other revenue.

Operating Expenses

Research and Development Expenses

[[GREPCENT_TABLE]]
[["","Year Ended January 31,"],["","2024","","2023","","$ Change","","% Change"],["","(dollars in millions)"],["Research and development","$","656","","","$","620","","","$","36","","","6","%"],["Percentage of revenue","29","%","","33","%"]]
[[/GREPCENT_TABLE]]

For fiscal 2024, research and development expenses increased primarily due to an increase of $39 million in employee compensation costs. We expect our research and development expenses will increase in absolute dollars as our business grows.

Sales and Marketing Expenses

[[GREPCENT_TABLE]]
[["","Year Ended January 31,"],["","2024","","2023","","$ Change","","% Change"],["","(dollars in millions)"],["Sales and marketing","$","1,036","","","$","1,066","","","$","(30)","","","(3)","%"],["Percentage of revenue","46","%","","58","%"]]
[[/GREPCENT_TABLE]]

For fiscal 2024, sales and marketing expenses decreased primarily due to a decrease in marketing costs of $15 million and a decrease in amortization expense of $9 million for acquired customer relationships and trade names. The decrease in sales and marketing expenses as a percentage of total revenue was primarily driven by improved spend efficiency. We expect our sales and marketing expenses will continue to be our largest operating expense category for the foreseeable future. We expect sales and marketing expenses as a percentage of total revenue to decrease as our total revenue grows.

General and Administrative Expenses

[[GREPCENT_TABLE]]
[["","Year Ended January 31,"],["","2024","","2023","","$ Change","","% Change"],["","(dollars in millions)"],["General and administrative","$","450","","","$","409","","","$","41","","","10","%"],["Percentage of revenue","20","%","","22","%"]]
[[/GREPCENT_TABLE]]

For fiscal 2024, general and administrative expenses increased primarily due to an increase of $26 million in employee compensation costs. We expect general and administrative expenses as a percentage of total revenue to decrease as our total revenue grows.

62

OKTA, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Restructuring and Other Charges

[[GREPCENT_TABLE]]
[["","Year Ended January 31,"],["","2024","","2023","","$ Change","","% Change"],["","(dollars in millions)"],["Restructuring and other charges","$","56","","","$","29","","","$","27","","","92","%"],["Percentage of revenue","2","%","","2","%"]]
[[/GREPCENT_TABLE]]

For fiscal 2024, restructuring and other charges increased primarily due to an increase of $14 million in lease impairment charges and an increase of $13 million in severance and termination benefit costs.

Interest and Other, Net

[[GREPCENT_TABLE]]
[["","Year Ended January 31,"],["","2024","","2023","","$ Change","","% Change"],["","(dollars in millions)"],["Interest expense","$","(8)","","","$","(11)","","","$","3","","","(25)","%"],["Interest income and other, net","81","","","22","","","59","","","265"],["Gain on early extinguishment of debt","106","","","\u2014","","","106","","","\u2014"],["Interest and other, net","$","179","","","$","11","","","$","168","","","1,571","%"]]
[[/GREPCENT_TABLE]]

For fiscal 2024, the change in interest and other, net was primarily due to the gain on early extinguishment of debt related to repurchases of convertible senior notes and an increase in interest income from our short-term investments.

Provision for Income Taxes

[[GREPCENT_TABLE]]
[["","Year Ended January 31,"],["","2024","","2023","","$ Change","","% Change"],["","(dollars in millions)"],["Provision for income taxes","$","18","","","$","14","","","$","4","","","31","%"]]
[[/GREPCENT_TABLE]]

For fiscal 2024, income tax expense resulted primarily from income in profitable foreign jurisdictions, federal and state taxes resulting from tax attribution utilization limitations, and the tax impact of shortfalls from stock-based compensation in the United Kingdom.

For fiscal 2023, income tax expense resulted primarily from income from profitable foreign jurisdictions, the tax impact of shortfalls from stock-based compensation in the United Kingdom, and state taxes.

The Organization for Economic Cooperation and Development ("OECD") and many countries have proposed to reallocate some portion of profits of large multinational companies with global revenues exceeding EUR 20 billion to markets where sales arise ("Pillar One"), as well as enacted a global minimum tax rate of at least 15% for multinationals with global revenues exceeding EUR 750 million ("Pillar Two"), with additional countries considering or intending to adopt these proposals. In December 2022, the Council of the European Union ("EU") formally adopted the EU Minimum Tax Directive, which would require member states to adopt Pillar Two into their domestic law. The directive requires the rules to initially become effective for fiscal years starting on or after December 31, 2023. Certain jurisdictions in which we operate have enacted Pillar Two legislation, with other countries considering changes to their tax laws to adopt the OECD's proposals. The enactment of Pillar Two legislation is not expected to have a material adverse effect in fiscal 2025, on our effective tax rate, financial position, results of operations and cash flows. We will continue to monitor and reflect the impact of such legislative changes in future financial statements as appropriate.

63

OKTA, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Liquidity and Capital Resources

As of January 31, 2024, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $2,202 million, which were held for working capital and general corporate purposes, including potential future acquisition activity. Our cash equivalents and investments consisted primarily of U.S. treasury securities, money market funds, corporate debt securities and certificates of deposit. Historically, we have generated significant operating losses and both positive and negative cash flows from operations as reflected in our accumulated deficit and consolidated statements of cash flows.

Recent macroeconomic events, including rising interest rates, global inflation and bank failures, have led to further economic uncertainty in the global economy. To mitigate risk, our cash and cash equivalents are distributed across large financial institutions. In addition, we have policy restrictions in place on the types of securities that can be purchased as part of our available-for-sale securities portfolio. These restrictions take credit quality, liquidity and diversification into consideration among other criteria. We continue to monitor the impacts of this situation; however, there can be no assurances that conditions in the banking sector and in global financial markets will not worsen and/or adversely affect us.

Effective the first quarter of fiscal 2025, we intend to satisfy employee payroll tax withholding due upon the vesting of share-based compensation awards with our own funds under the "net share settlement" approach. Previously, payroll tax withholding was satisfied via the sale of shares of our common stock in the open market. The net share settlement approach reduces our equity dilution rate by covering such withholding tax obligations from existing cash reserves and impacts future liquidity. The cash outflow to cover these tax obligations is classified as a financing activity in the statement of cash flows.

In September 2019, we completed our private offering of the 2025 convertible senior notes ("2025 Notes") due on September 1, 2025 and received aggregate gross proceeds of $1,060 million. The interest rate on the 2025 Notes is fixed at 0.125% per year and is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2020. In connection with the 2025 Notes, we used a portion of the proceeds to enter into capped call transactions ("2025 Capped Calls") with respect to our Class A common stock.

In June 2020, we completed our private offering of the 2026 convertible senior notes ("2026 Notes") due on June 15, 2026 and received aggregate gross proceeds of $1,150 million. The interest rate on the 2026 Notes is fixed at 0.375% per year and is payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2020. In connection with the 2026 Notes, we used a portion of the proceeds to enter into capped call transactions ("2026 Capped Calls") with respect to our Class A common stock.

In the ordinary course of our business, we may, at any time and from time to time, seek to extinguish our outstanding Notes through cash purchases and/or exchanges for equity, in open-market purchases, privately negotiated transactions or otherwise. Such extinguishments, if any, will be conducted on such terms and at such prices as we may determine, and will depend on our evaluation of the prevailing market conditions, trading price of the 2025 Notes and 2026 Notes (collectively, "the Notes"), our liquidity requirements, legal and contractual restrictions and other factors. During fiscal 2024, we repurchased $508 million principal amount of the 2025 Notes for $462 million in cash and $542 million principal amount of the 2026 Notes for $475 million in cash, which resulted in an aggregate gain on early extinguishment of debt of $106 million. The 2025 Capped Calls and 2026 Capped Calls remained outstanding notwithstanding such repurchase. We may, however, elect to terminate the 2025 Capped Calls or 2026 Capped Calls, in full or in part. In connection with any such termination, the option counterparties or their respective affiliates are expected to modify their hedge positions, which activity could affect the market price of our Class A common stock or the trading price of the Notes that remain outstanding. See Note 8 to our consolidated financial statements “Convertible Senior Notes, Net” and the section titled “Transactions relating to our Notes may affect the value of our Class A common stock” in “Risk Factors” included under Part I, Item 1A of this Annual Report on Form 10-K for additional information.

On August 2, 2021, we completed the acquisition of Townsend Street Labs, Inc. ("atSpoke"), providing total cash consideration, net of cash acquired of $79 million. Of this amount, $13 million of consideration was held back as partial security for any adjustments and indemnification obligations and was paid during fiscal 2024.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

On February 1, 2024, we completed the acquisition of Spera Cybersecurity, Inc. and its subsidiary ("Spera"). Total net consideration, subject to final adjustments, consists of approximately $80 million of cash and our Class A common stock. See Note 16 to our consolidated financial statements "Subsequent Events" for additional information.

We believe our existing cash and cash equivalents, our investments and cash provided by sales of our products and services will be sufficient to meet our short-term and long-term projected working capital and capital expenditure needs for the foreseeable future. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, billing frequency, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the expansion of our international operations, the introduction of new and enhanced product offerings, and the continuing market adoption of our platform. We continue to assess our capital structure and evaluate the merits of deploying available cash. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies this could reduce our ability to compete successfully and harm our results of operations.

A significant majority of our customers pay in advance for annual subscriptions. Therefore, a substantial source of our cash is from our deferred revenue, which is included on our consolidated balance sheet as a liability. Deferred revenue consists of the unearned portion of billed fees for our subscriptions, which is recognized as revenue in accordance with our revenue recognition policy. As of January 31, 2024, we had deferred revenue of $1,511 million, of which $1,488 million was recorded as a current liability and is expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria have been met.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

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[["","Year Ended January 31,"],["","2024","","2023","","2022"],["","(dollars in millions)"],["Net cash provided by operating activities","$","512","","","$","86","","","$","104"],["Net cash provided by (used in) investing activities","441","","","(130)","","","(367)"],["Net cash provided by (used in) financing activities","(883)","","","48","","","89"],["Effects of changes in foreign currency exchange rates on cash, cash equivalents and restricted cash","1","","","(6)","","","(2)"],["Net increase (decrease) in cash, cash equivalents and restricted cash","$","71","","","$","(2)","","","$","(176)"]]
[[/GREPCENT_TABLE]]

Operating Activities

Our largest source of operating cash is cash collections from our customers for subscription and professional services. Our primary uses of cash from operating activities are for employee-related expenditures, marketing expenses and third-party hosting costs.

During fiscal 2024, cash provided by operating activities was $512 million, an increase of $426 million compared to fiscal 2023. The increase was primarily attributable to an increase in cash received from customers and improved spend efficiency, partially offset by an increase in cash paid to vendors.

Investing Activities

During fiscal 2024, cash provided by investing activities was $441 million, compared to cash used in investing activities of $130 million during fiscal 2023. The change was primarily attributable to an increase in cash provided from investment maturities and sales, net of purchases, partially offset by cash paid for business acquisitions, net of cash acquired.

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OKTA, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Financing Activities

During fiscal 2024, cash used in financing activities was $883 million, compared to cash provided by financing activities of $48 million during fiscal 2023. The change was primarily attributable to payments made for repurchases of the Notes.

Material Cash Requirements

Contractual Obligations

The following table represents the Company’s known short-term (i.e., the next twelve months) and long-term (i.e., beyond the next twelve months) obligations as of January 31, 2024:

[[GREPCENT_TABLE]]
[["","","Short-term","","Long-term","","Total"],["","","(dollars in millions)"],["Convertible Senior Notes:(1)"],["Principal payments","","$","\u2014","","","$","1,160","","","$","1,160"],["Interest payments","","3","","","4","","","7"],["Operating leases(2)","","37","","","124","","","161"],["Purchase obligations(3)","","262","","","240","","","502"],["Total contractual obligations","","$","302","","","$","1,528","","","$","1,830"]]
[[/GREPCENT_TABLE]]

(1) See Note 8 to our consolidated financial statements "Convertible Senior Notes, Net" for additional information.

(2) See Note 9 to our consolidated financial statements "Leases" for additional information.

(3) Purchase obligations primarily relate to data center hosting facilities, and other sales and marketing obligations.

Indemnification Agreements

In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify customers, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No material demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations and comprehensive loss, or consolidated statements of cash flows.

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. In the preparation of these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting estimates, which we discuss below.

Income Taxes

Income taxes are accounted for in accordance with the liability method. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled.

Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character, within the carry-back or carry-forward periods available under the applicable tax law. In assessing the need for a valuation allowance, we consider available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. Our judgment regarding future estimates may change due to many factors, including future market conditions and the ability to successfully execute our business plans and tax planning strategies. Should there be a change in the ability to recover deferred tax assets, our provision for income taxes would increase or decrease in the period in which the assessment is changed.

Our tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. We recognize the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. Significant judgment is required in determining the technical merits of an uncertain tax position, such as taking into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent the final tax outcome of these matters is different than the amounts recorded, such differences may impact the provision for income taxes in the period in which such determination is made.

Business Combinations

When we acquire a business, the purchase price is allocated to the acquired assets, including separately identifiable intangible assets, and assumed liabilities at their respective estimated fair values. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates can include, but are not limited to:

•future expected cash flows from subscription contracts, professional services contracts, other customer contracts and acquired developed technologies;

•person hours required in recreating certain acquired technologies;

•historical and expected customer attrition rates and anticipated growth in revenue from acquired customers;

•royalty rates applied to acquired developed technology platforms and other intangible assets;

•obsolescence curves and other useful life assumptions, such as the period of time and intended use of acquired intangible assets in our product offerings;

•discount rates;

•uncertain tax positions and tax-related valuation allowances; and

•fair value of assumed equity awards.

These estimates are inherently uncertain and unpredictable, and unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

If the initial accounting for a business combination is not complete following the acquisition date, we report provisional amounts for the known assets, liabilities, equity interests, or items of consideration for which the accounting is incomplete at the end of the financial reporting period. Provisional accounting is inherently subjective and judgmental. The objective of the measurement period is to provide a reasonable period of time to obtain the information necessary to complete all aspects of business combination accounting with a high level of confidence. During the measurement period, which may be up to one year from the acquisition date, adjustments to the reported

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

provisional amounts may be recorded for which the accounting was incomplete, with the corresponding offset to goodwill. Should the accounting for a business combination be incomplete by the end of a reporting period that falls within the measurement period, we report provisional amounts in our financial statements, disclosing them as provisional, and any material measurement period adjustments are identified as such. Additional assets acquired or liabilities assumed in an acquisition that were not recognized at the acquisition date might be identified during the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, no further adjustments are made.

Loss Contingencies

We evaluate contingent liabilities, including threatened or pending litigation, and make provisions for such liabilities when it is both probable that a loss has been incurred and its amount can be reasonably estimated. Because of uncertainties inherent in litigation, we base our estimate and accrue the liabilities, if any, on the information available at the time of our assessment. Significant judgment is required to determine both the probability and the estimated amount of loss given such legal proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Developments in these matters could affect the amount of any liability we may accrue. As additional information becomes available, we may revise our estimates. Any revisions in the estimates of potential liabilities could have a material impact on our operating results and financial position. Further, until the final resolution of any such matter, there may be a loss exposure in excess of the liability recognized and such amount could be significant.

Revenue Recognition

We derive our revenues primarily from subscription fees and professional services fees. A description of our revenue recognition policies is included in Note 2 to our consolidated financial statements "Summary of Significant Accounting Policies."

Our contracts with customers often contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price of the contract is allocated to the separate performance obligations on a relative standalone selling price basis. Evaluating customer contracts with multiple performance obligations and complex terms may require significant judgment in identifying the distinct performance obligations.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements “Summary of Significant Accounting Policies — Recent Accounting Pronouncements Not Yet Adopted" for more information.

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