Okta, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended October 31, 2018. Okta provides cloud-based identity and access management services through a subscription-based SaaS model. Unless noted otherwise, financial figures are in U.S. dollars.
Key financial results
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $105.6 million | $66.9 million | $283.8 million | $179.5 million |
| GAAP gross margin | 72% | 68% | 71% | 68% |
| Operating loss | $28.5 million | $34.5 million | $91.9 million | $88.1 million |
| Net loss | $29.5 million | $33.1 million | $94.7 million | $86.8 million |
| Net loss per share, diluted | $0.27 | $0.35 | $0.89 | $1.13 |
| Operating cash flow | $6.4 million | $(9.5) million | $5.1 million | $(25.4) million |
- Growth and margins: Q3 revenue increased 58% year over year, led by subscription revenue, up 58%; professional services and other revenue rose 56%. Subscription gross margin was 79% versus 78%; professional services gross margin remained negative, improving to (20)% from (50)%. Nine-month subscription and total revenue grew 59% and 58%, respectively.
- Expenses and profitability: Q3 operating expenses rose 30% to $104.4 million, slower than revenue growth. The operating loss narrowed year over year in Q3 but widened for the nine-month period. The company remained GAAP loss-making; nine-month net loss increased versus the prior year.
- Cash flow: Nine-month free cash flow, a non-GAAP measure, was negative $11.5 million versus negative $35.0 million. Operating cash flow improved, supported in part by deferred revenue growth and non-cash expenses.
- Liquidity: Cash, cash equivalents and short-term investments totaled $546.0 million at October 31, 2018. Current assets were $658.1 million and current liabilities $244.8 million. Deferred revenue was $211.1 million, mostly current.
- Debt: Okta issued $345.0 million principal amount of 0.25% convertible senior notes due 2023. Their balance-sheet carrying amount was $267.7 million; the company reported a $471.3 million estimated fair value. It also bought note hedges for $80.0 million and sold related warrants for $52.4 million. No revolver borrowings were outstanding at October 31; $35.8 million was then available, but the facility expired by its terms in November 2018.
Changes, outlook and material items
- Revenue growth was driven by new customers and greater user counts and product purchases among existing customers. Customers with annual contract value above $100,000 increased to 937 from 603. Dollar-based retention was 120%, down from 123%.
- Calculated billings, a company-defined metric, increased 58% in Q3 and 57% for the nine-month period. Remaining noncancelable subscription performance obligations were approximately $614.4 million; about 55% was expected to be recognized over the next 12 months.
- Management said it expects operating expenses to increase in absolute dollars, while sales and marketing expenses may decline as a percentage of revenue as revenue grows. It expects subscription gross margin to improve over time, while noting near-term fluctuations as it invests. The filing gives no specific numerical revenue or earnings guidance; management expects operating losses and negative operating cash flows for the foreseeable future, but believes available liquidity and cash from operations will meet needs for at least 12 months.
- ScaleFT was acquired in July 2018 for $15.6 million net of cash acquired. The acquisition added $11.8 million of goodwill and $4.6 million of developed technology; acquisition-related costs were $1.1 million.
- Adoption of ASC 606 was retrospective. Revenue impacts were described as not material; the main change was deferring and amortizing a broader set of contract acquisition commissions, generally over a five-year benefit period. Comparatives shown in the filing were adjusted.
- New commitments included a four-year data-center agreement totaling $60.0 million. Total contractual obligations were $657.4 million, including $245.8 million of operating lease obligations and $345.0 million principal on the notes.
- No material legal proceedings were reported. Key risks include intense competition, sustaining customer retention and growth, service availability and cybersecurity, privacy and regulatory compliance, execution of rapid expansion, and the potential cash, dilution and accounting effects of convertible notes. The filing also identifies the decline in retention rate and the company’s continuing losses as considerations.
Important facts for investors to verify
- Whether revenue growth, calculated billings and enterprise customer additions continue, and whether dollar-based retention stabilizes or declines further.
- Whether improving gross margins and cash generation persist as infrastructure, hiring and sales-and-marketing costs rise; assess stock-based compensation, which was $53.9 million for the nine months.
- Liquidity and financing after the revolving credit facility expired, alongside the company’s loss outlook and substantial contractual commitments.
- Convertible-note conversion, cash-settlement and potential dilution exposure, including the effects of the note hedges and warrants.
- Execution and integration of ScaleFT, the data-center commitment, and the expected impact of lease accounting adoption.