Okta, Inc. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended April 30, 2017; comparisons are with the three months ended April 30, 2016. Fiscal year ends January 31. Okta provides a cloud-based identity platform on a subscription SaaS model. The quarter included the company’s April 2017 IPO.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Total revenue | $53.0 million | $31.8 million | Up 67% |
| Subscription revenue | $48.4 million | $27.6 million | Up 75% |
| Professional services and other revenue | $4.7 million | $4.2 million | Up 10% |
| Gross profit / gross margin | $35.5 million / 67% | $19.4 million / 61% | Margin up 6 points |
| Operating loss | $(28.6) million | $(22.7) million | Loss widened |
| Net loss | $(28.9) million | $(22.8) million | Loss widened |
| Net loss per share, basic and diluted | $(0.73) | $(1.22) | Improved |
| Net cash used in operating activities | $(9.7) million | $(15.0) million | Cash use narrowed |
| Free cash flow (non-GAAP) | $(13.3) million | $(17.2) million | Cash use narrowed |
Subscription gross margin rose to 77% from 73%; professional-services gross margin was negative 36%, versus negative 16%. Management attributed the latter comparison partly to the prior-year quarter’s $2.0 million of revenue from completed contracts whose costs had largely been incurred earlier. Stock-based compensation was $8.9 million, compared with $3.4 million.
Balance sheet, liquidity and financing
- At April 30, 2017, cash and cash equivalents were $221.7 million and short-term investments were $2.5 million, totaling $224.2 million. Total assets were $320.2 million.
- Current assets were $279.8 million and current liabilities were $143.1 million. Deferred revenue totaled $120.6 million, including $115.7 million current.
- Okta raised $200.0 million in IPO proceeds, net of underwriting discounts and commissions and before approximately $5.6 million of offering costs. The IPO and preferred-stock conversion substantially changed the capital structure; redeemable convertible preferred stock was converted into Class B common stock.
- No borrowings were outstanding on the $40 million revolving credit facility; $5.4 million of availability was reserved for lease-related letters of credit. Separate software financing obligations totaled approximately $0.6 million.
- Operating cash use was offset by $200.1 million of net cash from financing activities, primarily IPO proceeds. Ending cash, cash equivalents and restricted cash were $222.0 million.
Operating trends and material changes
- Management attributed subscription growth to new customers, larger customer contract values, increased user counts and additional products sold to existing customers. Dollar-based retention was 123%, up from 120%.
- Calculated billings, a company-defined non-GAAP measure, increased 75% to $59.9 million. Okta reported more than 3,350 customers and 493 customers with annual contract value above $100,000, versus 300 a year earlier. The platform had over 5,000 integrations.
- Operating expenses increased: research and development rose 75% to $15.4 million; sales and marketing rose 41% to $37.2 million; and general and administrative rose 68% to $11.6 million. Higher headcount and compensation were principal drivers.
- In February 2017, Okta acquired certain Stormpath employee-hiring rights and a non-exclusive IP license. The transaction added $3.7 million of goodwill. Related retention and restricted equity awards are expected to generate post-combination stock-based compensation expense.
Outlook, risks and other notable items
- The filing gives no specific numerical revenue or earnings guidance. Management expected operating losses and negative operating cash flows to continue for the foreseeable future, while stating that available liquidity, the credit facility and expected operating cash flows should cover working-capital and capital needs for at least 12 months.
- Management expected expenses to rise in absolute dollars as the company expands, particularly research and development, sales and marketing, and public-company functions. It expected sales and marketing to remain the largest expense category and subscription gross margin to improve over time, though near-term margins may fluctuate.
- Key disclosed risks include limited operating history and difficulty forecasting; competition; customer renewal and expansion dependence; service availability and reliance on AWS and other third parties; cybersecurity, privacy and regulatory exposure; and the possibility that growth and spending do not lead to profitability. Okta also cited its lack of currency hedging and risks from international operations.
- Okta reported no material legal proceedings or material claims as of April 30, 2017. Disclosure controls were assessed as effective at a reasonable assurance level; management cautioned that controls cannot provide absolute assurance.
- Class B shares carry 10 votes per share versus one vote for Class A. Directors, executive officers and affiliates held 60.9% of voting power as of April 30, 2017, concentrating control. The filing also notes potential share-sale pressure when IPO lockups expire.
Most important facts for investors to verify
- Whether subscription growth, 123% dollar-based retention and calculated billings growth persist, and how these measures translate into recognized revenue and cash generation.
- Whether subscription gross-margin gains continue while professional services remain loss-making.
- How operating expenses, stock-based compensation and Stormpath-related awards affect the path to profitability and share dilution.
- Whether cash burn remains consistent with management’s stated liquidity outlook, including the use and availability of the credit facility.
- Potential effects of customer churn, outages or security incidents, privacy regulation, competition, and the dual-class voting structure.