Okta, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended January 31, 2019 (FY2019). The filing also reports the quarter ended January 31, 2019 (Q4 FY2019). Unless noted otherwise, figures are in U.S. dollars.
Business context
Okta sells cloud-based identity management subscriptions for workforce and customer identity use cases, with related implementation services. It reported more than 6,100 customers and more than 6,000 integrations at year-end. Revenue is primarily subscription-based, generally invoiced annually in advance under noncancelable contracts; the weighted-average contract duration was 2.4 years.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $399.3 million | $256.5 million |
| Subscription revenue | $370.9 million | $236.4 million |
| Gross profit / gross margin | $285.8 million / 72% | $175.8 million / 69% |
| Operating loss | $(119.6) million | $(111.9) million |
| Net loss | $(125.5) million | $(109.8) million |
| Net loss per share, diluted | $(1.17) | $(1.32) |
| Cash provided by (used in) operating activities | $15.2 million | $(25.2) million |
| Free cash flow (non-GAAP) | $(6.8) million | $(37.2) million |
| Calculated billings (non-GAAP) | $488.2 million | $314.9 million |
| Cash, cash equivalents and short-term investments at year-end | $563.8 million | $229.7 million |
| Working capital at year-end | $145.1 million | $129.6 million |
FY2019 subscription gross margin was 79%, versus 78% in FY2018; professional services gross margin remained negative at (27%), improving from (40%). Sales and marketing was the largest operating expense at $228.0 million. Stock-based compensation totaled $76.3 million, up from $49.9 million.
Q4 comparison: Revenue was $115.5 million, versus $77.1 million in Q4 FY2018, an increase of approximately 50%. Gross margin was 73% versus 71%. Operating loss was $(27.7) million versus $(23.7) million, and net loss was $(30.8) million versus $(23.0) million.
Material changes versus prior period
- FY2019 revenue grew 56%, following 60% growth in FY2018; subscription revenue increased 57% year over year, primarily from new customers and expansion in existing accounts.
- Year-end customers with annual contract value above $100,000 rose to 1,038 from 691. Dollar-based retention was 120%, down from 121%.
- Operating cash flow improved to positive $15.2 million from negative $25.2 million, with deferred revenue increasing $89.3 million. Free cash flow remained negative.
- Okta issued $345.0 million of 0.25% convertible senior notes due 2023. Reported interest expense was $15.1 million, including substantial noncash discount and issuance-cost amortization.
- ScaleFT was acquired in July 2018 for $15.6 million net cash consideration. Azuqua was announced as a subsequent acquisition in March 2019 for approximately $52.5 million cash, subject to closing conditions.
Outlook, risks and unusual items
- Management expected operating expenses to rise in absolute dollars and stated that it expected net losses and negative operating cash flows to continue for the foreseeable future. The filing provides no specific numerical revenue or earnings guidance.
- Management anticipated subscription gross margin improvement over time from scale, while noting near-term fluctuation could result from investment in infrastructure and support. Sales and marketing was expected to remain the largest expense category.
- The company reported $563.8 million of cash, cash equivalents and short-term investments and said existing liquidity and expected customer cash receipts should cover working capital and capital expenditure needs for at least 12 months.
- The notes were classified as a current liability at year-end because a conversion condition had been met. Holders could convert during February 1–April 30, 2019; none had requested conversion as of the filing date. Okta stated its current intent was to settle principal in cash. The notes’ estimated fair value was $620.6 million at January 31, 2019, above principal of $345.0 million.
- Major disclosed risks include security incidents or service outages, reliance on AWS and other third parties, privacy and regulatory compliance (including GDPR and the forthcoming California Consumer Privacy Act), competition, customer renewals and expansion, and the ability to manage rapid growth.
- Operating lease obligations totaled $244.7 million; total contractual obligations, including notes and other commitments, were $653.4 million. The San Francisco headquarters lease extends to October 2028.
- No material legal proceedings were reported. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. ASC 606 was adopted retrospectively; its primary reported effect was deferral and longer amortization of sales commissions.
Important facts for investors to verify
- Whether revenue growth, customer expansion and retention remain durable as growth rates moderate.
- How much operating cash flow reflects recurring economics versus advance billings and deferred-revenue growth; track free cash flow and deferred commissions.
- The potential cash, dilution and balance-sheet effects of note conversion, including the hedge and warrant arrangements.
- The scale and trajectory of stock-based compensation and its effect on GAAP losses and share dilution.
- Progress toward profitability, subscription-margin expansion and the cost of infrastructure, sales expansion, leases and acquisitions.
- Any subsequent updates on Azuqua’s closing and integration, and on security, availability or privacy-related incidents.