Business context and reporting period
Okta, Inc. provides cloud-based identity and access services to businesses. This Form 10-Q covers the quarter and six months ended July 31, 2018 (the second quarter of fiscal 2019). Comparisons are with the corresponding 2017 periods; prior-period figures are adjusted for the company’s retrospective adoption of ASC 606.
Financial results and position
| Metric | Quarter ended July 31, 2018 | Six months ended July 31, 2018 |
|---|---|---|
| Revenue | $94.6 million, up 57% | $178.2 million, up 58% |
| Subscription revenue | $87.9 million, up 59% | $164.7 million, up 59% |
| Gross margin | 70%, versus 67% | 71%, versus 67% |
| Operating loss | $38.4 million, versus $26.2 million | $63.4 million, versus $53.6 million |
| Net loss | $39.2 million, versus $26.0 million | $65.2 million, versus $53.7 million |
| Operating cash flow | Cash used: $5.3 million | Cash used: $1.4 million, versus $15.9 million |
| Free cash flow | Cash used: $11.3 million | Cash used: $12.9 million, versus $23.8 million |
Quarterly diluted loss per share was $0.37, compared with $0.28; six-month diluted loss per share was $0.62, compared with $0.80. Subscription gross margin was 78% in both 2018 periods, up from 77% in 2017. Professional services remained loss-making at the gross-profit level, although its margin improved to (34)% for the quarter and (24)% for the half-year.
At July 31, cash and cash equivalents were $192.9 million and short-term investments were $343.4 million, totaling $536.3 million. Current liabilities were $218.1 million, including $186.4 million of current deferred revenue. Total liabilities were $518.8 million. The company issued $345 million principal amount of 0.25% convertible notes due 2023; their balance-sheet carrying amount, net of discount and issuance costs, was $263.8 million. The $40 million revolving facility had $35.8 million available after letters of credit, no borrowings, and a November 2018 maturity.
Changes, business metrics, and unusual items
- Growth in subscription revenue was attributed to new customers, more users, and additional products sold to existing customers. More than 5,150 customers used the platform; customers with annual contract value above $100,000 rose to 837 from 539.
- Trailing 12-month dollar-based retention was 121%, versus 123%. Calculated billings rose 53% in the quarter and 56% in the six-month period.
- Remaining noncancelable subscription performance obligations were approximately $543.9 million; Okta expected to recognize about 56% over the following 12 months.
- Operating expenses increased with headcount and growth investments. Sales and marketing included higher demand-generation and event spending, including the annual customer conference’s move into this quarter. General and administrative expense included $1.1 million of ScaleFT acquisition costs for the quarter and $1.0 million of noncash charitable contributions.
- In July, Okta acquired ScaleFT for $15.6 million net cash consideration, recording $4.6 million of developed technology and $11.8 million of goodwill. The acquisition was not material to the financial statements overall.
- Adoption of ASC 606 had no material effect on revenue or cash flows; its main effect was longer deferral and amortization of contract acquisition commissions. The company generally amortizes new-contract commissions over five years.
Outlook, commentary, and risks
Management provided no specific numerical revenue or earnings guidance in the supplied filing text. It expected operating losses and negative operating cash flows to continue for the foreseeable future, while stating that available cash, investments, the credit facility, and cash generated from sales should meet working-capital and capital expenditure needs for at least 12 months. Management expected subscription gross margin to improve over time through scale, while noting near-term fluctuations as it invests in infrastructure and support.
Key disclosed risks include intense competition, the ability to sustain growth and customer retention, scaling operations and infrastructure, service outages or third-party cloud-provider disruption, cybersecurity and privacy incidents, regulatory compliance including GDPR, and execution of product development and acquisitions. The filing also highlights potential cash needs and dilution related to convertible notes and warrants. No material legal proceedings were reported as of July 31, 2018. Management concluded disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Whether high subscription growth and retention can be sustained as the company scales, and whether rising operating costs translate into improving operating leverage.
- How much of the $543.9 million remaining performance obligation converts to revenue on the stated schedule, and how billings growth develops.
- Cash generation excluding deferred-revenue timing and noncash charges; operating cash flow was near break-even for the half-year, but free cash flow remained negative.
- The economics, integration, and any subsequent performance effects of the ScaleFT acquisition.
- Convertible-note conversion, cash-settlement, hedge, and warrant terms, as well as the revolving credit facility’s November 2018 maturity and renewal or replacement.
- Potential dilution from equity compensation and the notes and warrants; stock-based compensation was $32.4 million for the six months.