Okta, Inc. — Form 10-Q Summary
Business context and reporting period
Okta provides cloud-based identity and access management services on a subscription basis. This filing covers the three and nine months ended October 31, 2021, the third quarter and first nine months of fiscal 2022. Okta reported more than 14,000 customers and over 7,000 integrations. Figures below are in U.S. dollars; financial statement amounts are GAAP unless identified otherwise.
Key financial metrics
| Metric | Three months ended October 31, 2021 | Nine months ended October 31, 2021 |
|---|---|---|
| Revenue | $350.7 million, up 61% year over year | $917.2 million, up 53% |
| Subscription revenue | $336.7 million, up 63% | $879.9 million, up 54% |
| Gross margin | 69%, versus 74% | 70%, versus 74% |
| Operating loss | $198.6 million, versus $52.0 million | $552.7 million, versus $149.6 million |
| Net loss | $221.3 million, versus $72.8 million; loss per share $1.44 | $607.2 million, versus $190.5 million; loss per share $4.17 |
| Operating cash flow | $37.1 million, versus $43.4 million | $90.6 million, versus $93.1 million |
| Free cash flow | $33.4 million, versus $41.6 million | $82.4 million, versus $78.2 million |
At October 31, 2021, cash and cash equivalents were $372.4 million and short-term investments were $2.110 billion. Management reported total cash, cash equivalents and short-term investments of $2.482 billion, available for working capital and general corporate purposes. Deferred revenue was $777.9 million; subscription remaining performance obligations were $2.350 billion, including $1.180 billion expected to be recognized over the next 12 months.
Convertible notes had aggregate principal of approximately $2.227 billion: $17.2 million due in 2023, $1.060 billion due in 2025 and $1.150 billion due in 2026. The 2023 notes were classified as current because their conversion conditions were met; the 2025 and 2026 notes were classified as noncurrent. Total liabilities were $3.012 billion.
Material changes versus the prior comparable period
- Growth reflected new customers, more users and product sales to existing customers, and the inclusion of Auth0 following its May 2021 acquisition. Auth0 contributed $46.0 million of Q3 revenue and $83.6 million from acquisition through October 31.
- Gross margin declined year over year, with management citing Auth0’s comparatively lower-margin revenue and acquired-technology amortization. Subscription gross margin was 73% in Q3 versus 78% a year earlier.
- Operating expenses rose substantially, reflecting higher headcount and stock-based compensation, acquisition and integration costs, marketing investment, and amortization of acquired intangibles. Total stock-based compensation was $155.8 million in Q3 and $407.6 million for the nine-month period.
- Q3 non-GAAP operating loss was $9.5 million, compared with non-GAAP operating income of $5.5 million a year earlier. For nine months, non-GAAP operating loss was $50.0 million, compared with $0.3 million.
- Nine-month calculated billings were $1.115 billion, up 69%. Okta said earlier customer invoicing under process changes favorably affected growth; excluding those changes, management estimated growth of 55% for the nine months and 53% for Q3.
Outlook, risks and unusual items
- Okta provided no specific numerical revenue or earnings guidance in the supplied filing text. Management expects operating losses to continue for the foreseeable future and operating expenses to increase. It expects sales and marketing costs to rise as it invests in customer acquisition, while subscription gross margin may fluctuate near term and is expected to improve over time with scale.
- Management said existing cash, investments and cash generated from sales should be sufficient for projected needs for the foreseeable future, while noting future capital requirements depend on growth, investment, acquisitions and other factors. COVID-19-related uncertainty, longer sales cycles and delayed deals could pressure cash flow, billings and RPO.
- The Auth0 acquisition had approximately $5.671 billion of consideration, primarily Okta shares, and generated $5.290 billion of goodwill. Purchase accounting remained preliminary. Okta also acquired atSpoke for approximately $79.3 million in cash.
- Acquisition-related stock awards, integration costs and acquired-intangible amortization materially affected reported expenses. Nine-month G&A included $42.8 million of acquisition and integration costs; the company also reported one-time stock compensation tied to Auth0 awards.
- Principal risks include integrating Auth0 and realizing expected benefits; competition and sustaining growth; cybersecurity, service availability and privacy compliance; COVID-19 and macroeconomic effects; and possible cash or dilution effects from convertible-note conversions. The 2023 notes were convertible at holders’ option for the quarter beginning November 1, 2021.
- There were no material legal proceedings disclosed as of October 31, 2021. Management reported effective disclosure controls and procedures at a reasonable assurance level.
Important facts for investors to verify
- How much reported growth and future performance derive from Okta’s underlying business versus Auth0, and whether integration plans deliver expected customer, product and cost benefits.
- Whether gross margins and operating losses improve as expected, considering acquisition amortization, headcount growth and stock-based compensation.
- How much calculated billings growth reflects customer demand versus the timing changes in invoicing, and how RPO and deferred revenue convert into revenue and cash.
- Potential conversion, settlement, repayment and dilution outcomes for the convertible notes, particularly the 2023 notes.
- Whether cash and investments remain sufficient as the company funds operations, acquisitions and integration, and whether key cybersecurity, privacy and service-continuity risks are effectively managed.