Okta, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended October 31, 2019. This is fiscal Q3 2020; comparatives are the corresponding 2018 periods. Okta provides a cloud-based identity management platform. The filing was signed December 5, 2019.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $153.0 | $105.6 | $418.7 | $283.8 |
| Subscription revenue | $144.5 | $97.7 | $394.2 | $262.4 |
| Gross profit / margin | $112.2 / 73% | $75.9 / 72% | $304.0 / 73% | $201.7 / 71% |
| Operating loss | $(45.7) | $(28.5) | $(141.1) | $(91.9) |
| Net loss | $(63.5) | $(29.5) | $(158.4) | $(94.7) |
| Net loss per share, diluted | $(0.53) | $(0.27) | $(1.37) | $(0.89) |
Revenue grew 45% in Q3 and 48% for the nine-month period, driven mainly by new customers and greater user and product adoption among existing customers. Subscription revenue grew 48% and 50%, respectively. Subscription gross margin was 79% in both Q3 periods and both nine-month periods; professional services had negative gross margins of 26% in Q3 2019 and 31% for the nine months. GAAP operating margin was (30)% in Q3 and (34)% for the nine months, versus (27)% and (32)% a year earlier.
- Cash flow: Nine-month operating cash flow was $30.8 million, compared with $5.1 million. Free cash flow, a non-GAAP measure defined by Okta, was $18.1 million versus negative $11.5 million. Q3 operating cash flow was $10.6 million and free cash flow was $9.2 million.
- Liquidity: At October 31, cash and cash equivalents were $1,039.6 million and short-term investments were $326.6 million, totaling $1,366.3 million. Current assets were $1,526.6 million and current liabilities were $478.4 million.
- Debt: Outstanding principal was $120.6 million on the 2023 convertible notes and $1,060.0 million on the 2025 notes. Balance-sheet carrying values were $99.2 million and $828.2 million, respectively. Both are unsecured, fixed-rate notes; stated coupons are 0.25% and 0.125%.
- Other indicators: Calculated billings were $175.6 million in Q3, up 42%, and $478.5 million for the nine months, up 45%. Remaining subscription performance obligations were approximately $1.03 billion, with about 50% expected to be recognized over the next 12 months. Customers with ACV above $100,000 rose to 1,325 from 937; trailing 12-month dollar-based net retention was 117%, down from 120%.
Material changes and notable items
- Operating expenses increased 51% in Q3 to $157.9 million; sales and marketing remained the largest category at $87.2 million. Management attributed spending growth largely to increased headcount and, for sales and marketing, expanded demand generation and events.
- Stock-based compensation was $35.7 million in Q3 and $89.7 million for the nine months. It is a significant expense and is excluded from Okta’s non-GAAP operating measures.
- In September, Okta issued $1.06 billion of 2025 notes and repurchased $224.4 million principal of its 2023 notes for total consideration of $604.8 million, comprising approximately $224.4 million cash and 3.0 million Class A shares. The transaction generated a $14.6 million GAAP loss on early debt extinguishment. Okta also purchased capped calls for $74.1 million.
- The 2023 notes became convertible at holders’ option for the quarter ending January 31, 2020 after the stock-price conversion condition was met, and were classified as current liabilities. The 2025 notes were not convertible under their conditions as of quarter-end.
- Okta acquired Azuqua in March for $44.2 million net of cash acquired, recording $29.9 million of goodwill. It also purchased developed technology assets for $8.5 million in May. The filing says these transactions did not have a material impact on the financial statements.
- Adoption of ASC 842 increased reported assets and liabilities for operating leases; the company reported $126.7 million of lease right-of-use assets and $154.0 million of noncurrent lease liabilities at October 31. Adoption did not affect operating results or cash flows.
Outlook, commentary and risks
Management said existing cash, investments and expected cash from product and service sales should be sufficient for working capital and capital expenditures for at least 12 months. It also expects operating losses and negative operating cash flows to continue for the foreseeable future. Management expects subscription gross margin to improve over time as the business gains scale, while noting near-term fluctuations may occur; it also expects calculated-billings growth to trend down over time. The filing provides no specific revenue or earnings guidance.
Principal risks highlighted include sustaining growth while expenses rise, intense competition, customer renewal and expansion, longer and less predictable enterprise sales cycles, service availability and cybersecurity, privacy and regulatory compliance, dependence on third-party infrastructure, and execution and integration of acquisitions. The company noted that an outage or security incident could harm customer trust, trigger contractual obligations, or result in liability. It reported no material legal proceedings as of October 31 and said disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether rapid subscription growth and billings growth persist, particularly as net retention declined from 120% to 117%.
- Whether expense growth, including headcount and stock-based compensation, can be managed while narrowing GAAP operating and net losses.
- The cash, share-dilution and accounting consequences of the convertible-note transactions, including the 2023 notes’ conversion status and settlement choices.
- Whether the $1.03 billion performance-obligation balance converts to revenue on the expected schedule and supports future growth.
- Execution and integration of Azuqua and other technology investments, and the potential impact of security, availability and privacy risks.