Okta, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended July 31, 2019 (fiscal 2020); comparative quarter ended July 31, 2018. Okta provides a cloud-based identity management platform on a subscription SaaS model. Financial statements are unaudited.
Financial performance
| Metric | Three months ended July 31, 2019 | Year-over-year change | Six months ended July 31, 2019 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $140.5 million | +49% | $265.7 million | +49% |
| Subscription revenue | $132.5 million | +51% | $249.7 million | +52% |
| Gross profit / margin | $101.7 million / 72% | Margin: +2 percentage points | $191.8 million / 72% | Margin: +1 percentage point |
| Operating loss | $43.6 million | Loss widened from $38.4 million | $95.4 million | Loss widened from $63.4 million |
| Net loss | $43.0 million | Loss widened from $39.2 million | $94.9 million | Loss widened from $65.2 million |
| Diluted net loss per share | $0.37 | Unchanged | $0.83 | Compared with $0.62 |
| Operating cash flow | $(1.1) million | Compared with $(5.3) million | $20.1 million | Compared with $(1.4) million |
| Free cash flow (non-GAAP) | $(4.3) million | Compared with $(11.3) million | $8.9 million | Compared with $(12.9) million |
Quarterly subscription gross margin was 79%, up from 78%; professional services gross margin was negative 36%, versus negative 34%. Sales and marketing remained the largest operating expense at $78.4 million for the quarter. Stock-based compensation was $31.3 million in the quarter and $54.0 million for the six-month period.
Balance sheet, liquidity and debt
- At July 31, cash and cash equivalents were $206.8 million and short-term investments were $350.7 million, totaling $557.5 million in cash, cash equivalents and short-term investments. Total assets were $1.03 billion.
- Deferred revenue was $291.2 million, including $283.7 million current. Remaining subscription performance obligations were approximately $913.6 million; Okta expected to recognize about $461.1 million, or 51%, over the next 12 months.
- The 2023 convertible notes have $345.0 million principal, a 0.25% coupon and a February 2023 maturity. Their net carrying amount was $279.7 million; the reported estimated fair value was $958.9 million. After the share-price conversion condition was met, holders could convert during August 1–October 31, 2019, and the notes were classified as current at July 31. Okta stated its current intent was to settle principal in cash.
- Operating lease liabilities totaled $159.3 million. Adoption of ASC 842 brought lease right-of-use assets and liabilities onto the balance sheet; it did not affect reported operations or cash flows.
Changes, outlook and risks
- Revenue growth reflected new customers and higher user counts and product purchases from existing customers. Customers with annual contract value above $100,000 increased to 1,222 from 837. Dollar-based retention was 118%, down from 121%.
- Calculated billings rose 42% in the quarter and 48% for the six months. Management said it expects billings growth to trend down over time as billings increase in absolute terms.
- Operating costs rose with headcount and investment in research and development, sales and marketing, infrastructure and professional services. Management expects operating expenses to increase in absolute dollars and anticipates operating losses and negative operating cash flows for the foreseeable future. It expects subscription gross margin to improve over time with scale, though near-term margins may fluctuate.
- Management said existing cash, investments and expected cash from sales should meet working-capital and capital-expenditure needs for at least 12 months. No specific revenue or earnings guidance is provided in this filing.
- In March 2019 Okta acquired Azuqua for $44.2 million net of cash acquired, recording preliminary goodwill of $29.9 million and developed technology intangibles. It also purchased $8.5 million of developed technology in the quarter. Acquisition-related costs and acquired-asset amortization contributed to expenses.
- Key disclosed risks include intense competition, continued losses and execution of rapid growth, service availability and cybersecurity, privacy and regulatory compliance, and variability in sales cycles. Convertible-note conversion could require cash settlement or create dilution; the associated warrants may also dilute shares if in the money. No material legal proceedings were reported. Management judged disclosure controls effective at a reasonable assurance level.
Important facts for investors to verify
- Whether revenue growth, billings growth and customer expansion remain strong, and how the lower retention rate develops.
- Whether operating expenses and stock-based compensation growth translate into improving GAAP and cash-flow performance.
- The conversion status and settlement approach for the 2023 Notes, including potential cash needs, dilution and warrant effects.
- Cash, investment and deferred-revenue trends relative to acquisition spending, lease commitments and management’s liquidity outlook.
- Execution and integration of Azuqua and other technology investments, alongside cybersecurity, service uptime and privacy risks.