Okta, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended July 31, 2022. Okta sells cloud-based identity and access management services primarily through subscriptions. All amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. The interim financial statements are unaudited.
Key financial results
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $451.8 | $315.5 | $866.8 | $566.5 |
| GAAP gross margin | 70% | 68% | 69% | 70% |
| Operating loss | $(208.1) | $(263.4) | $(447.8) | $(354.1) |
| Net loss | $(210.5) | $(276.7) | $(453.2) | $(385.9) |
| GAAP diluted loss per share | $(1.34) | $(1.83) | $(2.89) | $(2.72) |
- Q2 revenue rose 43% year over year; subscription revenue increased 44% to $435.4 million and professional services and other revenue increased 33% to $16.4 million. Subscription revenue was 96% of total revenue.
- Q2 subscription gross margin was 73%, up from 72%; six-month subscription gross margin was 73%, down from 75%. The company attributed the six-month decline mainly to Auth0’s lower-margin revenue and higher amortization of acquired technology. Professional services remained loss-making at the gross-margin level, though its margin improved.
- Operating expenses were $522.2 million in Q2, up 9% year over year, including research and development up 27% and sales and marketing up 33%. General and administrative expense fell 35%, partly because the prior-year quarter included Auth0-related compensation and acquisition costs.
- Non-GAAP operating loss was $15.0 million in Q2 and $56.0 million for the six months; non-GAAP net loss was $16.0 million and $58.6 million, respectively. These measures exclude significant items, especially stock-based compensation.
Cash flow, liquidity and debt
- For the six months, operating cash flow was slightly negative at $(0.2) million, versus $53.5 million provided a year earlier. Free cash flow, as defined by Okta, was $(13.1) million versus $49.1 million. Q2 operating cash flow was $(19.0) million and Q2 free cash flow was $(24.1) million.
- At July 31, 2022, cash and cash equivalents were $216.0 million and short-term investments were $2.261 billion. Management reported total cash, cash equivalents and short-term investments of $2.477 billion. Available-for-sale securities had $30.5 million of gross unrealized losses; management reported no material investment impairments.
- Total convertible-note carrying value was approximately $2.195 billion, including $5.2 million current and $2.190 billion noncurrent. The 2023 notes were convertible at holders’ option for the quarter beginning August 1, 2022 and were classified as current. The 2025 and 2026 notes were classified as noncurrent.
- Deferred revenue was $1.011 billion. Subscription remaining performance obligations were $2.790 billion, of which $1.497 billion, or 54%, was expected to be recognized over the next 12 months.
- In July 2022, Okta entered a new cloud-services agreement with a total commitment of $450 million over four years.
Changes, outlook and risks
- Six-month revenue growth partly reflects the comparison with the prior-year period: the current period included six months of Auth0 revenue, while the prior-year period included about three months.
- Adoption of ASU 2020-06 reduced reported interest expense by approximately $21.0 million in Q2 and $41.8 million for the six months compared with the former accounting treatment. This accounting change makes reported losses less comparable year over year.
- Management said longer and less predictable sales cycles may delay deal closings and weigh on near-term cash flow, billings and RPO. Calculated billings grew 36% in Q2 and 21% for the six months; management expects billings growth rates to trend down over time.
- Management expects continued operating losses and cash flow that may fluctuate between positive and negative for the foreseeable future. It expects operating expenses to rise in absolute dollars, while anticipating subscription gross margin improvement over the long term as the business scales. The supplied filing text does not provide a clear numerical financial forecast for the next quarter or full year.
- Key risks include macroeconomic pressure and reduced customer spending, competition, customer retention and renewal trends, continued Auth0 integration and go-to-market execution, and cybersecurity and privacy exposure. Okta disclosed a putative shareholder class action filed in May 2022 concerning statements about cybersecurity controls and a January 2022 incident involving a third-party support provider; the company said it intends to defend the suit.
- Other notable items: dollar-based net retention was 122%, down from 124% a year earlier; customers with ACV above $100,000 increased to 3,525 from 2,610. Stock-based compensation was $340.7 million for the six months. Management reported effective disclosure controls and no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether revenue, billings, RPO and customer retention trends confirm continued demand despite longer sales cycles and macroeconomic uncertainty.
- Whether Okta can improve subscription and professional-services economics while growing headcount and sales and marketing investment.
- The cash-flow impact of the $450 million cloud-services commitment, operating losses and future integration costs.
- Potential cash settlement, conversion and dilution consequences of the 2023 notes, including the notes’ current classification and conversion window.
- Developments in the cybersecurity-related shareholder lawsuit and any further security incidents or resulting customer, regulatory or financial impacts.