Okta, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended July 31, 2023; comparisons are with the quarter ended July 31, 2022 unless stated otherwise. Six-month results cover the six months ended July 31. Okta provides cloud-based workforce and customer identity services and reports as one operating segment.
Financial performance and position
| Metric | Q2 FY2024 | Q2 FY2023 | Change |
|---|---|---|---|
| Total revenue | $556 million | $452 million | +23% |
| Subscription revenue | $542 million | $435 million | +24% |
| Professional services and other revenue | $14 million | $17 million | -13% |
| Gross profit / gross margin | $407 million / 73% | $314 million / 70% | Margin +3 percentage points |
| Operating loss | $(162) million | $(208) million | Loss narrowed |
| Net loss | $(111) million | $(210) million | Loss narrowed |
| Basic and diluted loss per share | $(0.68) | $(1.34) | Improved |
For the six months ended July 31, revenue was $1.074 billion, up 24%; operating loss was $322 million versus $448 million, and net loss was $230 million versus $453 million. Subscription gross margin improved to 77% for the quarter and 76% for the six-month period, from 73% in each prior-year comparison. Professional services remained loss-making at gross margins of (49)% for the quarter and (43)% for the six months.
- Cash flow: Six-month operating cash flow was $182 million; the comparative-period cash-flow table shows a dash for 2022. Investing activities provided $554 million, primarily reflecting net investment maturities and sales; financing activities used $641 million, mainly for convertible-note repurchases. Cash, cash equivalents and restricted cash totaled $368 million at period-end.
- Liquidity: Cash and cash equivalents plus short-term investments were $2.106 billion at July 31, 2023, compared with $2.580 billion at January 31, 2023. Short-term investments were $1.750 billion.
- Debt: Convertible notes had a net carrying amount of $1.451 billion at July 31, 2023, down from $2.193 billion at January 31. During the six months Okta repurchased $750 million principal amount for $671 million cash and recorded a $73 million gain on extinguishment. The remaining principal was $552 million of 2025 notes and $908 million of 2026 notes.
- Other balance-sheet items: Deferred revenue was $1.242 billion; goodwill was $5.406 billion. Stock-based compensation was $185 million for the quarter and $351 million for the six months.
Material changes and operating metrics
- Subscription growth reflected new customers, increased users and additional products sold to existing customers. Customers increased approximately 12% year over year to more than 18,400; customers with ACV above $100,000 rose to 4,205 from 3,525.
- Dollar-based net retention declined to 115% from 122%, which management attributed primarily to the macroeconomic environment and slower expansion among existing customers.
- Remaining performance obligations were $3.027 billion, up from $2.790 billion; current RPO was $1.772 billion, up from $1.497 billion.
- Operating expenses totaled $569 million, including $17 million of restructuring and other charges. Research and development and general and administrative expenses increased, while sales and marketing expense was broadly flat. Operating expenses declined as a share of revenue.
Outlook, commentary and risks
- The filing provides no numerical revenue or earnings guidance. Management said it expects operating losses to continue for the foreseeable future, while believing available cash, investments and expected operating cash generation will meet projected needs for the foreseeable future.
- Management cited longer and less predictable sales cycles, which may delay deal closings and weigh on near-term cash flow and RPO growth, with possible later effects on revenue growth. Macroeconomic uncertainty, customer budget constraints and higher interest rates could adversely affect demand.
- Management expects subscription gross margin to improve over the long term through economies of scale, although it may fluctuate as the company invests. It expects research and development and general and administrative expenses to rise in absolute dollars as the business grows.
- Real-estate optimization resulted in $25 million of non-cash lease impairment charges in the first half, including $17 million in Q2. The workforce reduction of approximately 300 employees, announced in the prior fiscal year, was substantially complete in Q1 FY2024; related severance liability was paid by July 31. Additional real-estate charges may occur.
- Shareholder securities and derivative lawsuits concerning cybersecurity disclosures and Auth0 integration remain a contingency. Some claims were dismissed, but Auth0-related claims continue through discovery; the company said it cannot predict the outcome or estimate potential losses.
- Key risks include cybersecurity incidents and service interruptions, privacy and regulatory compliance, competition, slower customer expansion and renewals, economic conditions, continued losses, convertible-debt obligations, and reliance on key employees. Management reported disclosure controls were effective at a reasonable assurance level and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether subscription growth and RPO translate into recognized revenue, particularly as sales cycles lengthen.
- Whether the 115% dollar-based net retention rate stabilizes or declines further.
- How operating losses, stock-based compensation and cash generation evolve, and whether restructuring and real-estate charges recur.
- Remaining convertible-note principal, any future repurchases or conversions, and potential cash or dilution effects.
- Developments in the cybersecurity/Auth0-related litigation and any new material security or privacy events.