Okta, Inc. — Form 10-Q Summary
Business context and reporting period
Okta provides a cloud-based identity platform. This unaudited filing covers the three months ended April 30, 2018 (fiscal 2019 first quarter); comparisons are with the three months ended April 30, 2017, as adjusted for ASC 606.
Financial and operating performance
- Revenue: $83.6 million, up 60% year over year. Subscription revenue was $76.8 million (+59%); professional services and other revenue was $6.8 million (+68%). Management attributed subscription growth primarily to new customers and greater user and product adoption among existing customers.
- Profitability: Gross profit was $59.5 million and GAAP gross margin was 71%, versus 67% a year earlier. Subscription gross margin rose to 79% from 77%; professional services margin improved to negative 15% from negative 56%. Operating loss narrowed to $25.0 million from $27.4 million; net loss narrowed to $26.0 million from $27.7 million. Basic and diluted loss per share was $0.25 versus $0.70.
- Expenses: Operating expenses increased 36% to $84.5 million. Sales and marketing remained the largest category at $49.5 million. Stock-based compensation totaled $14.1 million, up from $8.9 million.
- Cash flow: Operating activities provided $4.0 million, compared with $9.7 million used in the prior-year quarter. Free cash flow, as defined by Okta, was negative $1.6 million versus negative $13.3 million.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $547.0 million at April 30; current assets were $636.2 million and current liabilities $202.9 million. The company reported $35.8 million available under its $40 million revolving facility, with no borrowings outstanding. It issued $345 million of 0.25% convertible senior notes due 2023; the balance-sheet carrying amount was $259.9 million, reflecting debt discount and issuance costs. Note hedges cost $80.0 million and warrant issuance generated $52.4 million.
- Business indicators: Calculated billings were $95.9 million, up 60%. Customers with annual contract value above $100,000 numbered 747, versus 493; dollar-based retention was 121%, down from 123%. Remaining subscription performance obligations were approximately $499.1 million, with about 56% expected to be recognized in the next 12 months.
Material changes and accounting
Okta adopted ASC 606 effective February 1, 2018, using the full retrospective method. The company said the effect on revenue was not material; the main change was deferring a broader set of incremental contract acquisition commissions and generally amortizing them over a five-year benefit period. Investing cash outflow increased substantially, primarily because of $252.9 million in purchases of investments; financing cash flow included the convertible-note issuance and related hedge and warrant transactions.
Outlook, commentary, and risks
- Okta provided no specific numerical revenue or earnings guidance in the supplied filing text. It expected operating losses and negative operating cash flows to continue for the foreseeable future, while stating existing liquidity, credit availability and expected customer cash receipts should meet working-capital and capital-expenditure needs for at least 12 months.
- Management expected investment in research and development, sales and marketing, infrastructure and headcount to continue. It anticipated subscription gross margin could fluctuate near term but expected it to improve over time with scale; sales and marketing was expected to remain the largest operating expense in the foreseeable future.
- Key risks include intense competition, execution and scaling challenges, customer retention and expansion, service availability and cybersecurity, privacy and regulatory compliance (including GDPR, effective May 25, 2018), and the possibility that growth or sales cycles vary. The company also highlighted potential cash and dilution impacts from conversion or repurchase obligations under the notes and possible dilution from warrants.
- No material legal proceedings were reported as of April 30, 2018. Management said disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth, billings, large-customer additions and 121% dollar-based retention persist in subsequent quarters.
- How ongoing operating losses, stock-based compensation and investment in sales, product and infrastructure affect profitability and free cash flow.
- The terms and potential cash, dilution and accounting consequences of the 2023 notes, note hedges and warrants, including the revolving facility’s November 2018 maturity.
- Whether the $499.1 million of remaining subscription obligations converts to recognized revenue on the expected schedule, and how much is renewed or expanded.
- The effect of ASC 606’s commission accounting and the new GDPR requirements on reported results, operating costs and customer demand.