Okta, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended July 31, 2021; fiscal year ends January 31. Comparisons are with the corresponding 2020 periods. Okta provides cloud identity-management subscriptions and related services.
Financial performance and position
- Q2 revenue: $315.5 million, up 57% year over year. Subscription revenue was $303.1 million, up 59%, and represented 96% of revenue. Auth0 contributed $37.6 million from its May 3 acquisition through quarter-end.
- Six-month revenue: $566.5 million, up 48%. Subscription revenue rose 49% to $543.2 million.
- Profitability and margins: Q2 GAAP gross margin was 68%, versus 74% a year earlier; subscription gross margin was 72%, versus 79%. Q2 operating loss was $263.4 million (prior year: $45.4 million) and net loss was $276.7 million (prior year: $60.1 million). Six-month net loss was $385.9 million, versus $117.8 million. Non-GAAP operating loss was $24.5 million for Q2 and $40.4 million for six months.
- Cash flow: Six-month operating cash flow was $53.5 million, compared with $49.6 million; free cash flow was $49.1 million, compared with $36.6 million. Q2 operating cash flow was negative $2.6 million and free cash flow negative $3.8 million.
- Liquidity: Cash, cash equivalents and short-term investments totaled $2.469 billion at July 31. Deferred revenue was $737.3 million, including $721.8 million current. Management said available liquidity and expected cash generation should cover projected needs for the foreseeable future.
- Debt: Convertible-note principal outstanding totaled approximately $2.227 billion: $17.2 million due 2023, $1.060 billion due 2025 and $1.150 billion due 2026. The 2023 notes were classified as current because holders could convert them during the quarter ending October 31, 2021; the 2025 and 2026 notes were noncurrent.
- Operating indicators: Remaining performance obligations were $2.236 billion, of which $1.098 billion was expected to be recognized within 12 months. Dollar-based net retention was 124%, up from 121%; customers with ACV above $100,000 increased to 2,610 from 1,685.
Material changes and notable items
- Okta acquired Auth0 on May 3 for estimated consideration of $5.671 billion, principally Okta shares. The preliminary allocation included $5.290 billion of goodwill and $334.3 million of acquired intangible assets. Auth0 recorded $37.6 million revenue and a $150.3 million net loss during the included period.
- Q2 stock-based compensation rose to $187.7 million from $48.4 million; six-month expense was $251.8 million versus $86.1 million. G&A included $29.0 million of Auth0 acquisition costs for the six months and $33.8 million of one-time accelerated-vesting stock compensation for certain Auth0 employees.
- Calculated billings increased 83% in Q2 and 78% for six months. Okta said earlier invoicing from changes to its billing process boosted these rates; excluding that effect, growth would have been 74% and 57%, respectively.
- After quarter-end, Okta acquired atSpoke on August 2 for consideration of approximately $89 million, subject to adjustments.
Outlook, commentary and risks
- The filing does not provide clear numerical financial guidance. Management expects continued operating losses and cash-flow fluctuations for the foreseeable future, and anticipates higher operating expenses, including sales and marketing spending and costs associated with returning to in-person activities.
- Management expects subscription gross margin to fluctuate near term as it invests, with improvement over the longer term as scale increases. Auth0’s lower relative gross margin and acquired-intangible amortization weighed on reported margins.
- COVID-19 effects remain uncertain. Management noted longer or less predictable sales cycles and potential deal delays, customer payment delays and cash-flow or RPO headwinds; it also cited increased interest in identity solutions as remote and hybrid work expand.
- Key risks include integrating Auth0 and realizing expected benefits; sustained losses and execution of rapid growth; intense competition; service availability and cybersecurity incidents; evolving privacy regulation; and potential cash, dilution and classification effects from convertible-note conversions. The 2023 notes were convertible at quarter-end.
- No material legal proceedings were reported. Disclosure controls were assessed as effective at a reasonable assurance level. Okta also disclosed that its former CFO stepped down and an interim CFO was appointed effective June 1, 2021.
Important facts for investors to verify
- How much of reported growth and billings momentum reflects underlying demand versus Auth0 consolidation and earlier invoicing.
- Whether Okta can integrate Auth0, manage acquisition-related costs and support the substantial goodwill and intangible-asset valuations.
- Whether gross margins and operating losses improve as revenue scales, given sharply higher stock compensation and operating expenses.
- Cash-flow durability, customer renewals and retention, RPO conversion, and the cash or dilution effects of convertible-note conversions.
- Developments in COVID-related sales cycles, cybersecurity and privacy risks, and the atSpoke acquisition.