Okta, Inc. — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2024, the three months ended October 31, 2023; year-to-date figures cover the nine months ended that date. Fiscal 2024 ends January 31, 2024. Unless stated otherwise, amounts are in millions of dollars.
Financial performance and position
| Metric | Q3 FY2024 | Q3 FY2023 | Nine months FY2024 | Nine months FY2023 |
|---|---|---|---|---|
| Revenue | $584 | $481 | $1,658 | $1,348 |
| Gross profit / margin | $439 / 75% | $343 / 71% | $1,222 / 74% | $941 / 70% |
| Operating loss | $(111) | $(207) | $(433) | $(655) |
| Net loss | $(81) | $(209) | $(311) | $(662) |
| Net loss per share, diluted | $(0.49) | $(1.32) | $(1.91) | $(4.21) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $338 | $10 |
- Subscription revenue was $569 million for Q3, up 22%; it represented 97% of total revenue. Year-to-date subscription revenue rose 24% to $1,614 million. Professional services revenue was flat at $15 million for Q3 and declined 9% year to date.
- Q3 subscription gross margin increased to 78% from 75%; professional services gross margin remained negative at (25)%. Year-to-date subscription margin was 77%, while professional services margin was (37)%.
- Q3 operating expenses were $550 million, unchanged year over year. Sales and marketing declined, while research and development and general and administrative expenses increased. Stock-based compensation was $172 million for Q3 and $523 million year to date.
- Net loss improved year over year. Results included gains on early extinguishment of debt of $18 million in Q3 and $91 million year to date; higher investment interest income also contributed to the change in non-operating results.
- For the nine months, investing activities provided $574 million, primarily reflecting net maturities and sales of investments; financing activities used $774 million, mainly for note repurchases. Cash, cash equivalents and restricted cash increased $137 million to $408 million. Cash and short-term investments totaled $2,130 million at October 31.
- At October 31, total liabilities were $3,010 million and stockholders’ equity was $5,730 million. Convertible notes had $1,310 million aggregate principal outstanding ($552 million due 2025 and $758 million due 2026); their net carrying amount was $1,302 million.
Changes, operating metrics and outlook
- Revenue growth and gross margins improved compared with the prior-year periods, while operating and net losses narrowed. Management attributed subscription growth to new customers, more users and additional products sold to existing customers, and margin improvement primarily to spend efficiency.
- Customers increased to 18,800 from 17,050; customers with annual contract value above $100,000 rose to 4,365 from 3,740. Dollar-based net retention fell to 115% from 122%, which management attributed primarily to slower expansion among existing customers amid macroeconomic conditions.
- Remaining performance obligations were $3,073 million, up from $2,853 million; $1,826 million was current and expected to be recognized over the next 12 months.
- Management said longer and less predictable sales cycles may delay deal closings, near-term cash flow and RPO growth, and potentially affect later revenue growth. The filing provides no specific numerical revenue or earnings guidance in the supplied text.
- Management expects subscription gross margin to improve over the long term with scale, while noting near-term fluctuations as it invests. It expects research and development and general and administrative costs to rise in absolute dollars as the business grows; sales and marketing is expected to remain the largest operating expense category.
Risks, contingencies and unusual items
- Okta disclosed an October 2023 incident in which a threat actor accessed and stole information from its third-party customer support system. Management expects cybersecurity incidents to adversely affect future financial performance but said it cannot predict the extent. The filing describes reputational, customer, legal and financial risks related to this and prior incidents.
- Economic uncertainty, customer budget constraints, competition, and longer enterprise sales cycles could pressure demand, renewals, expansion and cash flows. The retention-rate decline is a notable indicator to monitor.
- During the nine months, Okta repurchased $508 million principal of 2025 notes for $462 million and $392 million principal of 2026 notes for $341 million. These transactions generated the $91 million gain on debt extinguishment. No warrants remained outstanding at October 31.
- Restructuring and other charges were $28 million year to date, including $25 million of non-cash real-estate lease impairment. The company said additional real-estate optimization charges may occur. A prior workforce plan targeted approximately 300 positions; an additional, described as insignificant, reduction generated $4 million of severance costs in the period.
- Shareholder securities and derivative lawsuits relating to cybersecurity disclosures and the Auth0 integration remain pending. The company said it cannot predict the outcome or estimate a potential loss or range of losses.
- Management stated that cash, investments and operating cash generation should be sufficient for projected needs for the foreseeable future, but also expects operating losses and potentially variable operating cash flow to continue. Disclosure controls were assessed as effective at a reasonable assurance level; no material change in internal control was reported.
Most important facts for investors to verify
- Whether the October 2023 support-system incident leads to measurable customer churn, slower new business, additional remediation costs, litigation or other liabilities.
- Whether the decline in dollar-based net retention continues, and how customer expansion, renewals and sales-cycle duration affect RPO and revenue growth.
- Whether operating cash flow remains positive and whether improved operating performance is sustainable apart from non-cash stock compensation and debt-extinguishment gains.
- How much additional real-estate impairment or restructuring expense is incurred, and whether spending efficiency translates into continued margin improvement.
- Debt maturities, potential conversion or cash-settlement requirements, and dilution from convertible notes and equity compensation.