Okta, Inc. — Form 10-Q Summary
Business context and reporting period. Okta provides cloud-based workforce and customer identity services on a subscription basis. This unaudited filing covers the quarter and nine months ended October 31, 2022 (fiscal 2023), compared with the corresponding 2021 periods. The nine-month comparison includes nine months of Auth0 revenue in 2022 versus approximately six months in 2021.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $481.0 | $350.7 | $1,347.8 | $917.2 |
| Subscription revenue | $465.9 | $336.7 | $1,299.2 | $879.9 |
| Gross profit / margin | $343.4 / 71% | $241.0 / 69% | $941.3 / 70% | $640.3 / 70% |
| Operating loss | $(206.6) | $(198.6) | $(654.4) | $(552.7) |
| Net loss | $(208.9) | $(221.3) | $(662.1) | $(607.2) |
| Net loss per share | $(1.32) | $(1.44) | $(4.21) | $(4.17) |
- Revenue rose 37% in Q3 and 47% over nine months. Subscription revenue was 97% of Q3 revenue and 96% of nine-month revenue. Management attributed growth chiefly to new customers, greater user counts and additional products sold to existing customers.
- Q3 subscription gross margin improved to 75% from 73%; nine-month subscription gross margin eased to 73% from 74%. Professional services remained loss-making at the gross-profit level. Total Q3 gross margin improved, while the nine-month rate was unchanged.
- Operating expenses increased 25% in Q3 and 34% over nine months, led by sales and marketing and research and development. Stock-based compensation was $171.0 million in Q3 and $511.7 million over nine months.
- Operating cash flow was $10.0 million and free cash flow was $5.7 million in Q3. For the nine months, operating cash flow was $9.8 million versus $90.6 million a year earlier, and free cash flow was negative $7.4 million versus positive $82.4 million.
Liquidity, debt and operating metrics
- At October 31, cash and cash equivalents were $249.6 million and short-term investments were $2,223.5 million, totaling approximately $2.473 billion in cash, cash equivalents and short-term investments. Management said these resources and expected cash from sales should meet projected needs for the foreseeable future.
- Total liabilities were $3.686 billion, including convertible notes. Note principal outstanding was approximately $2.215 billion: $5.2 million of 2023 Notes, $1.060 billion of 2025 Notes and $1.150 billion of 2026 Notes. The 2023 Notes were current and mature February 15, 2023; the later-dated notes were classified as noncurrent.
- Deferred revenue was $1.062 billion. Remaining performance obligations (RPO) were $2.853 billion, of which $1.579 billion, or 55%, was expected to be recognized over the next 12 months. Current RPO was up from $1.180 billion a year earlier.
- Calculated billings increased 37% in Q3 to $531.6 million and 27% over nine months to $1.412 billion. Dollar-based net retention was 122%, unchanged year over year; customers with ACV above $100,000 increased to 3,740 from 2,825.
Material changes, outlook and risks
- Q3 net loss narrowed year over year, but the nine-month net loss widened. Higher revenue and gross profit were more than offset at the operating level by increased operating expenses.
- Interest expense fell substantially versus 2021 following adoption of ASU 2020-06, which changed convertible-debt accounting and eliminated amortization of the embedded equity component. The comparison therefore reflects an accounting change, not simply a change in cash interest costs.
- Management reported longer and less predictable sales cycles, which could delay deals and weigh on near-term cash flow, RPO and billings growth. It expects operating losses to continue and cash flows to fluctuate; it also expects sales and marketing expense to rise in absolute dollars. Management expects subscription gross margin to improve over the long term, while noting near-term variability.
- Auth0 integration remains a risk: Okta cited short-term sales execution challenges following integration of the sales organizations and said it was refining the combined go-to-market strategy. The filing cautions that expected synergies and growth may not be achieved.
- A real estate optimization plan led to $14.2 million in non-cash lease impairment charges in Q3 as Okta planned to close duplicative sites and underused office space. A new cloud-services agreement entered in July 2022 carries a $450 million obligation over four years.
- Macroeconomic uncertainty, inflation, rising interest rates, competition, cybersecurity and privacy risks, and continued losses are significant risks. The filing also discusses the tax impact of required R&E cost capitalization and amortization beginning in fiscal 2023, which may increase cash taxes or tax expense.
- A shareholder securities class action filed in May 2022 alleges misleading statements concerning cybersecurity controls, breach vulnerability and Auth0 integration. A shareholder derivative action was filed November 28, 2022 on related allegations. Okta said it intends to defend the suits; claimed damages are unspecified. The filing reported no material legal matters in its commitments note as of October 31, 2022.
- The filing provides no clear numerical forward guidance for future revenue, earnings or cash flow.
Investor verification points
- Track billings, current RPO and retention for evidence that longer sales cycles or weaker customer spending are affecting demand.
- Assess whether expense growth, especially stock-based compensation and sales and marketing, is translating into sustainable operating leverage and cash generation.
- Monitor execution and customer outcomes from Auth0 integration, as well as any further integration or acquisition-related costs.
- Review the 2023 Notes maturity and potential settlement or dilution implications, alongside the company’s liquidity and cash-flow needs.
- Follow developments in the cybersecurity-related lawsuits and any resulting security, customer, regulatory or financial consequences.