Okta, Inc. Form 10-Q Summary
Business context and reporting period
Okta provides a cloud-based identity platform through a subscription software-as-a-service model. This filing covers the three and six months ended July 31, 2017, in fiscal 2018; comparisons are with the corresponding 2016 periods. Okta completed its IPO in April 2017, raising approximately $200.0 million net of underwriting discounts and commissions, before offering costs. It reported more than 3,650 customers and over 5,000 third-party application integrations at July 31.
Key financial metrics
| Metric | Three months ended July 31, 2017 | Three months ended July 31, 2016 | Six months ended July 31, 2017 | Six months ended July 31, 2016 |
|---|---|---|---|---|
| Total revenue | $61.0 million | $37.4 million | $114.0 million | $69.2 million |
| Subscription revenue | $56.1 million | $33.4 million | $104.4 million | $61.0 million |
| Gross profit / margin | $41.3 million / 68% | $23.7 million / 63% | $76.9 million / 67% | $43.1 million / 62% |
| Operating loss | $27.2 million | $20.6 million | $55.8 million | $43.3 million |
| Net loss | $27.0 million | $20.6 million | $55.9 million | $43.4 million |
| Net loss per share, basic and diluted | $0.29 | $1.10 | $0.83 | $2.32 |
| Operating cash flow | Not stated here by quarter | Not stated here by quarter | $(15.9) million | $(26.9) million |
| Free cash flow | $(10.5) million | $(15.0) million | $(23.8) million | $(32.2) million |
Q2 subscription revenue grew 68% year over year and total revenue grew 63%. Six-month subscription and total revenue increased 71% and 65%, respectively. Q2 subscription gross margin rose to 77% from 75%; professional services gross margin was negative 42%, compared with negative 33%. Operating expenses continued to exceed gross profit: Q2 sales and marketing was $39.6 million, research and development $16.9 million, and general and administrative $11.9 million.
At July 31, cash and cash equivalents were $126.5 million and short-term investments were $86.8 million, for combined liquidity of approximately $213.2 million. Current liabilities were $152.8 million, including $127.2 million of current deferred revenue; total deferred revenue was $131.3 million. Okta had no borrowings on its revolving credit facility, which had up to $40.0 million of capacity subject to revenue metrics and $5.4 million of letters of credit. Financing-arrangement obligations were approximately $0.5 million.
Material changes versus the prior comparable period
- Revenue growth was driven by new customers, higher customer contract values, increased user deployments, and additional products sold to existing customers. Dollar-Based Retention Rate increased to 123% from 120%.
- Customers with annual contract value above $100,000 increased to 539 from 354.
- Gross margin improved, primarily reflecting improved subscription margins and scale. Professional services remained loss-making, and its gross margin declined year over year.
- Operating losses widened in dollars as the company expanded headcount and spending. Stock-based compensation was $12.0 million in Q2 and $20.9 million for the six months, versus $3.7 million and $7.0 million, respectively, in 2016.
- Operating cash use improved year over year, aided in part by higher deferred revenue and noncash expenses. Investing cash outflow rose substantially, largely due to purchases of short-term investments; IPO proceeds drove financing cash inflow.
- Q2 loss per share was smaller than the prior-year loss per share, but the comparison reflects the much larger weighted-average share count following the IPO and conversion of preferred stock.
Outlook, management commentary, risks, and unusual items
- Management expects operating losses and negative operating cash flows to continue for the foreseeable future. It stated existing cash, investments, credit availability, and expected customer receipts should cover working capital and capital expenditure needs for at least the next 12 months. No specific revenue or earnings guidance was provided.
- Management expects research and development and general and administrative costs to rise in absolute dollars; sales and marketing is expected to remain the largest operating expense category. It expects subscription gross margin to improve over time, while noting near-term fluctuations may occur.
- Calculated billings were $71.7 million in Q2, up 54%, and $131.6 million for the six months, up 63%. Management expects the billings growth rate to trend down over time.
- In February 2017, Okta acquired certain employee hiring rights and a non-exclusive intellectual-property license from Stormpath. Consideration of $3.7 million was recorded as goodwill; additional restricted-stock awards and employee replacement awards generate post-combination compensation expense.
- Okta entered a three-year data-center hosting commitment in July 2017, with future annual commitments of $10.0 million. In August, it amended its San Jose lease, adding $6.3 million of commitments and up to $0.8 million in tenant improvements.
- Material risks include sustained losses, uncertain growth and sales cycles, competition, dependence on third-party cloud infrastructure, service outages, cybersecurity and privacy exposures, evolving regulation, and the company’s ability to manage rapid growth. Okta disclosed a past 2016 Dyn-related outage that led to service credits, which it said were not material. It reported no material legal matters as of July 31.
- Class B shares carry ten votes per share versus one vote for Class A, concentrating voting control; directors, executives, and affiliates held 63.5% of voting power at July 31. The filing also notes potential share-price pressure from lock-up expirations and stock sales.
Important facts for investors to verify
- Whether subscription growth, customer additions, and the 123% retention rate persist, and how billings growth develops.
- Whether subscription margin gains can continue while professional services remains loss-making and infrastructure investment expands.
- The path to profitability and cash-flow improvement, including the effects of rising operating costs and stock-based compensation.
- Cash and investment liquidity, deferred-revenue conversion, and compliance with the revenue-based credit facility terms.
- The cost and execution impact of the Stormpath-related awards, data-center commitment, and subsequent San Jose lease expansion.
- Whether cybersecurity, service availability, privacy compliance, or other disclosed risks result in customer losses, liabilities, or additional costs.