Okta, Inc. — Form 10-Q Summary
Business context and reporting period. Okta provides a cloud-based identity management platform for workforce and customer identity use cases. This unaudited filing covers the quarter and nine months ended October 31, 2020 (the third quarter of fiscal 2021); comparisons are with the corresponding 2019 periods. Subscription services accounted for 95% of revenue in both periods.
Financial performance
| Metric | Three months ended Oct. 31, 2020 | Year-over-year change | Nine months ended Oct. 31, 2020 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $217.4 million | +42% | $600.7 million | +43% |
| Subscription revenue | $206.7 million | +43% | $571.2 million | +45% |
| Gross profit / gross margin | $160.5 million / 74% | Margin +1 percentage point | $444.1 million / 74% | Margin +1 percentage point |
| Operating loss | $52.0 million | Loss widened from $45.7 million | $149.6 million | Loss widened from $141.1 million |
| Net loss | $72.8 million; $0.56 per share | Loss widened from $63.5 million | $190.5 million; $1.51 per share | Loss widened from $158.4 million |
| Operating cash flow | Quarterly figure not separately provided in the cash flow statement | — | $93.1 million | Up from $30.8 million |
| Free cash flow | $41.6 million | Up from $9.2 million | $78.2 million | Up from $18.1 million |
Margins and expenses. Subscription gross margin was 78% in the quarter versus 79% a year earlier, and 79% for the nine-month period, unchanged. Professional services remained loss-making at the gross-profit level, though its gross margin improved to negative 14% for the quarter and negative 19% for the nine months. Operating expenses rose 35% in the quarter to $212.4 million, led by sales and marketing; stock-based compensation was $53.7 million for the quarter and $139.8 million for the nine months. The company also reported non-GAAP operating income of $5.5 million for the quarter, but a non-GAAP operating loss of $0.3 million for the nine months; these adjusted measures exclude specified expenses.
Liquidity and debt. Cash and cash equivalents were $409.8 million and short-term investments were $2.085 billion at October 31, 2020, totaling approximately $2.495 billion. Current liabilities were $573.9 million, including $424.8 million of current deferred revenue and $35.1 million of current convertible notes. Convertible notes had aggregate principal of approximately $2.25 billion across 2023, 2025 and 2026 maturities; their balance-sheet carrying value was approximately $1.745 billion. Nine-month financing cash flow was $1.066 billion, principally reflecting the 2026 notes issuance and related hedge and warrant transactions. Investing cash outflow of $1.268 billion primarily reflected purchases of short-term investments.
Material changes and business metrics
- Revenue growth reflected new customers and expansion of user counts and product sales within existing customers. Calculated billings were $252.4 million in the quarter, up 44%, and $659.9 million for nine months, up 38%.
- Remaining performance obligations were $1.582 billion, up from $1.031 billion a year earlier; $753.2 million was expected to be recognized over the next 12 months. Dollar-based net retention was 123%, versus 117% a year earlier.
- Customers with annual contract value above $100,000 increased to 1,780 from 1,325. The company reported more than 9,400 customers and over 6,500 integrations.
- Interest expense rose substantially, to $22.4 million in the quarter and $50.1 million for nine months, primarily due to non-cash discount and issuance-cost amortization on the 2025 and 2026 convertible notes. The 2023 notes were classified as current because holders could convert them during the following quarter.
Outlook, commentary and risks
- The filing provides no numerical revenue or earnings guidance. Management expects operating losses to continue for the foreseeable future and operating expenses to increase in absolute dollars. It expects subscription gross margin to improve over the long term as scale economies develop, while noting near-term fluctuations are possible.
- Management said the subscription model makes revenue relatively predictable, but reported longer and less predictable sales cycles, with potential delays to deal closings, cash flow, billings and RPO growth. It also cited increased uncertainty around customer concessions and collection risk.
- Management believed available cash, investments and operating cash generation would be sufficient for working capital and capital expenditures for at least 12 months. It also warned that COVID-19-related delays in customer payments and deals could create near-term cash-flow headwinds.
- COVID-19 had not caused a material adverse impact on the reported interim financial statements, according to management, but its future effects remained uncertain. Work-from-home operations and virtual events reduced some employee-related and event costs; hiring continued to support growth.
- Key risks include macroeconomic and COVID-19 effects on customer spending, sales-cycle variability, competition (Microsoft identified as a principal competitor), customer retention and expansion, service availability and cybersecurity, privacy and regulatory compliance, and the potential cash, dilution and accounting effects of convertible notes. One channel partner represented approximately 13% of accounts receivable at quarter-end.
- No material legal matters were reported as of October 31, 2020. The company reported effective disclosure controls and no material change in internal control over financial reporting during the period.
Most important facts for investors to verify
- Whether revenue growth, billings, RPO and 123% net retention continue, particularly given management’s warning about longer sales cycles and COVID-19 uncertainty.
- Whether operating expenses and stock-based compensation growth translate into improved GAAP operating performance; compare adjusted results with GAAP losses.
- The liquidity and potential settlement implications of approximately $2.25 billion of convertible-note principal, including the 2023 notes’ conversion status and dilution exposure.
- Whether deferred revenue and accounts-receivable collection trends remain healthy, including the exposure to the channel partner that represented 13% of receivables.
- Future customer retention, subscription gross margins, cybersecurity and privacy developments, and any material changes in the pandemic’s effects on customers and operations.