Okta, Inc. — Q3 FY2018 Form 10-Q
Reporting period: Three and nine months ended October 31, 2017. Okta provides a cloud-based identity platform on a subscription SaaS model. The company completed its IPO in April 2017.
Financial performance
| Metric | Three months ended Oct. 31, 2017 | Year-over-year change | Nine months ended Oct. 31, 2017 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $68.2 million | +61% | $182.2 million | +63% |
| Subscription revenue | $62.7 million | +64% | $167.1 million | +69% |
| Gross profit / gross margin | $47.1 million / 69% | Margin: +2 percentage points | $124.0 million / 68% | Margin: +4 percentage points |
| Operating loss | $35.2 million | Prior-year loss: $21.9 million | $91.0 million | Prior-year loss: $65.2 million |
| Net loss | $33.8 million | Prior-year loss: $21.9 million | $89.7 million | Prior-year loss: $65.3 million |
| GAAP net loss per share | $0.35 | Prior-year loss per share: $1.14 | $1.17 | Prior-year loss per share: $3.46 |
Subscription gross margin was 78% in both the quarter and nine-month period, versus 77% and 75%, respectively, a year earlier. Professional services remained loss-making at gross margins of negative 37% for the quarter and negative 38% for the nine months. Operating expenses rose substantially, particularly research and development and sales and marketing. Stock-based compensation was $14.4 million for the quarter and $35.3 million for the nine months.
Cash, liquidity and obligations
- Cash, cash equivalents and short-term investments totaled $223.6 million at October 31, 2017. Current assets were $294.7 million and current liabilities were $171.0 million.
- Operating cash flow was negative $25.4 million for the nine months, compared with negative $35.4 million a year earlier. Free cash flow, as defined by Okta, was negative $35.0 million versus negative $44.0 million.
- Investing cash flow was negative $81.5 million, mainly reflecting $95.3 million of securities purchases. Financing cash flow was positive $221.4 million, primarily from the IPO and stock-option exercises.
- Deferred revenue was $141.6 million, of which $138.5 million was current. Okta says most customers pay subscription fees in advance.
- No borrowings were outstanding under the $40 million Silicon Valley Bank revolving facility; $35.6 million was available after letters of credit. Other financing-arrangement obligations totaled approximately $0.4 million.
Changes, outlook and significant items
- Revenue growth was primarily attributed to new customers, more users and additional product sales to existing customers. Customers with annual contract value above $100,000 increased to 603 from 401; trailing 12-month dollar-based retention was 123%, versus 124%.
- Calculated billings increased 54% in the quarter and 59% for the nine months. Management expects the calculated-billings growth rate to trend down over time as billings grow in absolute terms.
- Management expects continued operating losses and negative operating cash flows for the foreseeable future, but believes available liquidity, the credit facility and operating cash generation will be sufficient for at least 12 months. It expects sales and marketing expenses to remain the largest operating-expense category, while declining as a percentage of revenue; it expects subscription gross margin to rise over time, though near-term fluctuations are possible.
- Okta identified the forthcoming revenue-recognition standard (ASC 606) as potentially materially affecting deferred commission accounting and sales-commission amortization, as well as certain revenue timing and disclosures. The company was evaluating implementation and transition method.
- The Stormpath transaction added goodwill and product/engineering capabilities; related post-combination compensation contributed to expense growth. Okta also reversed $0.5 million of previously capitalized software costs in the quarter.
- Subsequent to quarter-end, Okta signed a San Francisco headquarters lease with approximately $170.6 million of payments for the first two phases and a conditional additional phase with approximately $35.6 million of payments. The initial lease term is 10 years; the filing describes rent abatements and landlord improvement allowances.
Risks and contingencies
Key disclosed risks include sustained losses and cash burn; intense competition and uncertain ability to sustain growth; longer and less predictable enterprise sales cycles; customer retention and expansion; service outages and dependence on AWS and other third parties; cybersecurity, privacy and regulatory exposure, including upcoming European data-protection requirements; and execution risks from rapid growth and public-company compliance. The company reported no material legal proceedings at October 31, 2017, no material change in internal control over financial reporting, and effective disclosure controls at a reasonable-assurance level.
Important facts for investors to verify
- Whether fast subscription growth and customer expansion can continue while operating losses and expenses rise.
- Whether subscription-margin gains can offset persistently negative professional-services margins and infrastructure investment.
- How cash burn, deferred-revenue conversion and sales commissions evolve; free cash flow remains negative.
- The financial and operational impact of the new headquarters lease and other hosting, lease and purchase commitments.
- The ultimate ASC 606 transition method and effect on revenue timing and deferred commissions.
- How Okta manages security, uptime, privacy compliance and its dependence on third-party infrastructure.
- The significance of dual-class voting control: Class B shares carry 10 votes each, and directors, officers and affiliates held 76.2% of voting power as of October 31, 2017.