Okta, Inc. — Q1 FY2020 Form 10-Q
Business context and reporting period. Okta provides a cloud-based identity management platform. This unaudited quarter ended April 30, 2019; the comparable period ended April 30, 2018. Fiscal 2020 ends January 31, 2020.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $125.2 million | $83.6 million | +50% |
| Subscription revenue | $117.2 million | $76.8 million | +52% |
| Professional services and other revenue | $8.1 million | $6.8 million | +19% |
| Gross profit / gross margin | $90.1 million / 72% | $59.5 million / 71% | Margin +1 percentage point |
| Subscription gross margin | 79% | 79% | Unchanged |
| Operating loss / margin | $(51.8) million / (41)% | $(25.0) million / (30)% | Loss widened |
| Net loss | $(52.0) million | $(26.0) million | Loss widened |
| Net loss per share, diluted | $(0.46) | $(0.25) | Loss per share increased |
| Operating cash flow | $21.3 million | $4.0 million | Improved |
| Free cash flow (non-GAAP) | $13.2 million | $(1.6) million | Improved |
| Calculated billings (non-GAAP) | $147.2 million | $95.9 million | +53% |
Operating expenses rose 68% to $141.9 million, led by sales and marketing ($82.1 million, +66%), research and development ($34.0 million, +71%), and general and administrative ($25.8 million, +71%). Stock-based compensation was $22.7 million versus $14.1 million. Non-GAAP operating loss was $24.9 million, compared with $10.8 million.
Balance sheet, liquidity and debt
- Cash, cash equivalents and short-term investments totaled $547.5 million at April 30, 2019; reported cash and cash equivalents were $208.1 million and short-term investments were $339.4 million.
- Cash, cash equivalents and restricted cash totaled $219.9 million at quarter-end, down $91.4 million during the quarter.
- Total liabilities were $759.1 million; stockholders’ equity was $239.4 million. Deferred revenue totaled $275.7 million, including $268.0 million current.
- The $345.0 million principal amount of 0.25% convertible notes due February 2023 had a net carrying value of $275.7 million. Following satisfaction of a conversion price condition, holders could convert during May 1–July 31, 2019; the notes were therefore classified as current. No holders had requested conversion as of the filing date. Their estimated fair value was $763.0 million.
- Operating lease liabilities totaled $159.5 million. The company also disclosed $35.6 million of undiscounted payments for a lease not yet commenced.
Operating cash flow benefited from a $20.7 million increase in deferred revenue and other working-capital movements. Investing cash outflow was $125.6 million, including $44.2 million paid net of acquired cash for Azuqua and net investment purchases. Financing cash inflow was $13.3 million, primarily from stock option exercises.
Changes, outlook and notable items
- Revenue growth reflected new customers, more users, and additional products sold to existing customers. Customers with ACV above $100,000 increased to 1,142 from 747 year over year; trailing-12-month dollar-based retention was 119%, down from 121%.
- Remaining subscription performance obligations were approximately $792 million; Okta expected to recognize about $416 million, or 53%, over the next 12 months.
- Okta acquired Azuqua on March 18, 2019 for $44.2 million net of acquired cash. It recorded $15.7 million of developed technology and preliminarily recorded $29.9 million of goodwill; acquisition-related costs were $3.0 million.
- Adoption of ASC 842 added operating lease right-of-use assets and liabilities to the balance sheet and did not affect operating results or cash flows.
- Management said it expected operating losses and negative operating cash flows to continue for the foreseeable future, but believed available liquidity and cash from sales would cover working capital and capital expenditure needs for at least 12 months. It expects subscription gross margin to improve over time; no specific quarterly or annual revenue or earnings guidance was provided in the supplied filing text.
- Professional services gross margin deteriorated to (31)% from (15)%, attributed to investment in that organization. Management noted subscription margins may fluctuate as it invests in infrastructure and support.
- Key risks include intense competition, execution and growth-management challenges, reliance on third-party cloud infrastructure, service availability and cybersecurity, privacy and data-protection compliance, and continued losses. The company reported no material legal matters as of April 30, 2019 and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether subscription growth, large-customer additions and retention remain strong, particularly as retention eased to 119%.
- Whether expense growth moderates and gross-margin gains translate into a narrower GAAP operating loss; Q1 operating loss widened despite revenue growth.
- Whether positive operating cash flow and free cash flow persist, given reliance on advance billings and deferred revenue.
- Whether noteholders convert during the disclosed window, and the potential cash, dilution and liquidity effects of conversion or repurchase obligations.
- How Azuqua integration and purchase accounting, including preliminary goodwill, develop after the acquisition.