Okta (NASDAQ:OKTA) Exceeds Q2 Expectations Provides Conservative Guidance

Full Report / September 21, 2022
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Identity management software maker Okta (OKTA) reported results ahead of analyst expectations in the Q2 FY2023 quarter, with revenue up 43.2% year on year to $451.8 million. Guidance for the next quarter came in at $464 million at the midpoint, in line with analyst estimates. Okta made a GAAP loss of $210.4 million, improving on its loss of $276.6 million, in the same quarter last year.

Okta (OKTA) Q2 FY2023 Highlights:

  • Revenue: $451.8 million vs analyst estimates of $430.6 million (4.91% beat)
  • EPS (non-GAAP): -$0.10 vs analyst estimates of -$0.30
  • Revenue guidance for Q3 2023 is $464 million at the midpoint, roughly in line with what analysts were expecting
  • The company reconfirmed revenue guidance for the full year, at $1.81 billion at the midpoint
  • Free cash flow was negative $24.1 million, down from positive free cash flow of $11 million in previous quarter
  • Gross Margin (GAAP): 69.5%, up from 67.9% same quarter last year

Founded during the aftermath of the financial crisis in 2009, Okta (NASDAQ:OKTA) is a cloud-based software as a service platform that helps companies manage identity for their employees and customers.

The founders Todd McKinnon and Frederic Kerrest were working at Salesforce at that time and saw how cloud was changing the world of enterprise software but also how companies struggled to keep track of all the logins for the new services they just subscribed to.

Instead of having to manage separate login details for each of the many software tools that an employee uses, Okta provides them with a single account (Single Sign-On) which employees then use to login into any service. That makes it a lot easier for companies to then, through a centralized system, manage who has access to what, set up automated rules to make sure that when employees leave access is withdrawn, and enforce policies around passwords and account security. Okta also provides companies with software that, in similar fashion, handles authentication and account details storage of their customers.

As software penetrates corporate life, employees are using more apps every day, on more devices, in more locations. This drives the need for identity and access management software that help companies efficiently manage who has access to what, and ensure that access privileges are secure from cyber criminals.

Okta has built a robust integration network with most of the popular software apps. This makes is a competitive player in a market which includes Microsoft (NASDAQ:MSFT), Oracle (NYSE:ORCL), and Ping Identity.

Sales Growth

As you can see below, Okta's revenue growth has been exceptional over the last year, growing from quarterly revenue of $315.5 million, to $451.8 million.

Okta Total Revenue

And unsurprisingly, this was another great quarter for Okta with revenue up 43.2% year on year. On top of that, revenue increased $36.8 million quarter on quarter, a solid improvement on the $31.9 million increase in Q1 2023, and even a sign of slight acceleration of growth.

Guidance for the next quarter indicates Okta is expecting revenue to grow 32.3% year on year to $464 million, slowing down from the 61.3% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 30.9% over the next twelve months.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Okta's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 69.5% in Q2.

Okta Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.69 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Okta burned through $24.1 million in Q2, increasing the cash burn by 543% year on year.

Okta Free Cash Flow

Okta has generated $25.3 million in free cash flow over the last twelve months, 1.58% of revenues. This FCF margin is a result of Okta asset lite business model, and provides it with at least some cash to invest in the business without depending on capital markets.

Key Takeaways from Okta's Q2 Results

With a market capitalization of $14.3 billion, more than $2.47 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We were impressed by the exceptional revenue growth Okta delivered this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. On the other hand, Okta's revenue guidance for the full year was quite conservative and the cash burn has increased.  Overall, this quarter's results still seemed pretty positive and shareholders can feel optimistic. The company currently trades at $58.7 per share.

Is Now The Time?

When considering Okta, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although Okta is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been exceptional, though we don't expect it to maintain historical growth rates. Unfortunately, its gross margins aren't as good as other tech businesses we look at.

Okta's price to sales ratio based on the next twelve months is 6.9x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Okta doesn't trade at a completely unreasonable price point.

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