Okta, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended July 31, 2020. This is Okta’s fiscal 2021 second quarter; fiscal year ends January 31. The filing was signed August 27, 2020. Okta provides a cloud-based identity management platform through a subscription-focused SaaS model.
Financial performance
| Metric | Three months ended July 31, 2020 | Year-over-year change | Six months ended July 31, 2020 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $200.4 million | +43% | $383.3 million | +44% |
| Subscription revenue | $190.7 million | +44% | $364.5 million | +46% |
| Gross profit / gross margin | $149.3 million / 74% | Margin: +2 percentage points | $283.7 million / 74% | Margin: +2 percentage points |
| Operating loss | $45.4 million | Prior-year loss: $43.6 million | $97.6 million | Prior-year loss: $95.4 million |
| Net loss | $60.1 million; $0.48 per share | Prior-year loss: $43.0 million; $0.37 per share | $117.8 million; $0.94 per share | Prior-year loss: $94.9 million; $0.83 per share |
| Operating cash flow | $10.9 million | Prior-year outflow: $1.1 million | $49.6 million | Prior-year inflow: $20.1 million |
| Free cash flow | $6.9 million | Prior-year outflow: $4.3 million | $36.6 million | Prior-year inflow: $8.9 million |
- Subscription gross margin was 79% in both the quarter and six-month period, unchanged year over year. Total gross margin increased from 72% to 74%, while professional services remained loss-making but improved: its gross margin was (19)% for the quarter and (22)% for the six months.
- Operating expenses rose 34% in the quarter to $194.7 million, including research and development of $53.9 million, sales and marketing of $98.3 million, and general and administrative expense of $42.5 million. Growth was primarily associated with employee compensation and headcount.
- Interest and other expense, net was $15.1 million for the quarter, versus $0.8 million a year earlier. Higher convertible-note discount and issuance-cost amortization, plus a $2.2 million debt-extinguishment loss, contributed to the larger GAAP net loss.
- Supplemental non-GAAP results showed quarterly operating income of $6.5 million and net income of $9.9 million; six-month non-GAAP operating loss was $5.9 million and net income was $2.5 million. These measures exclude, among other items, substantial stock-based compensation; quarterly stock-based compensation was $48.4 million.
Liquidity, cash flow, and debt
- Cash, cash equivalents, and short-term investments totaled approximately $2.515 billion at July 31, 2020, compared with $1.403 billion at January 31, 2020. Total current assets were $2.707 billion and current liabilities were $533.6 million.
- Six-month cash provided by operations was $49.6 million. Investing activities used $672.3 million, mainly reflecting net purchases of investments; financing activities provided $1.061 billion, largely from the 2026 convertible notes issuance.
- Convertible senior notes had $2.261 billion aggregate principal outstanding: $50.7 million due 2023, $1.060 billion due 2025, and $1.150 billion due 2026. Their balance-sheet net carrying amount totaled approximately $1.733 billion; this is below principal largely because of accounting discounts. The company also reported $208.7 million of operating lease liabilities.
- The 2023 notes became convertible at holders’ option for the quarter beginning August 1, 2020, following satisfaction of the stock-price conversion condition. Accordingly, $43.6 million net carrying value was classified as current. Okta reported only an immaterial amount of conversion requests as of the filing date.
- Deferred revenue was $396.8 million. Remaining performance obligations were $1.427 billion, of which $684.5 million was expected to be recognized over the next 12 months. These contracted amounts are not equivalent to recognized revenue or guaranteed collections.
Business trends, outlook, and risks
- Okta reported more than 8,950 customers and 6,500-plus integrations. Customers with annual contract value above $100,000 increased to 1,685 from 1,222 a year earlier. Dollar-based net retention was 121%, up from 118%.
- Calculated billings increased 27% in the quarter to $198.1 million and 35% for the six months to $407.6 million. Current remaining performance obligations increased to $684.5 million from $461.1 million a year earlier.
- Management said COVID-19 had not materially adversely affected the financial statements for the reported periods, but longer and less predictable sales cycles, delayed deal closings and customer payment delays could pressure billings, cash flow, RPO, and later revenue. Increased collection uncertainty and customer concession concerns raised the allowance for doubtful accounts and sales reserves.
- Management cited growing demand interest as remote work increased the importance of identity and Zero Trust security. It also reported cost savings from virtual events and sales activities, lower travel, and slower hiring. Okta believed existing liquidity and operating cash generation would meet working-capital and capital-expenditure needs for at least 12 months. No specific numeric revenue or earnings guidance is provided in the filing text.
- Key risks include COVID-19 and macroeconomic uncertainty; competition, particularly from Microsoft; sales-cycle lengthening and customer renewal or expansion trends; service availability and cybersecurity incidents; privacy and data-protection regulation, including uncertainty following invalidation of the EU-U.S. Privacy Shield; and dilution, cash-settlement needs, and refinancing or debt-service risks from convertible notes.
- The filing reported no material legal matters as of July 31, 2020, no material off-balance-sheet arrangements, and effective disclosure controls at period end. Management noted that actual COVID-19 impacts and estimates could change materially as conditions evolve.
Most important facts for investors to verify
- Whether revenue growth, billings, RPO, and 121% net retention remain resilient as COVID-related sales delays and customer budget pressures evolve.
- Whether cash generation can sustain investment and operating losses, and how much of reported liquidity is needed for working capital, debt settlement, and other commitments.
- The potential cash, share dilution, and balance-sheet effects if holders convert the 2023 notes, and the terms and implications of the 2025 and 2026 notes.
- How GAAP losses and margins compare with supplemental non-GAAP results, particularly given substantial stock-based compensation and convertible-debt accounting charges.
- Whether COVID-related collection allowances, customer concessions, or contract changes materially affect receivables, renewals, revenue, or cash flows in subsequent periods.