Identity management software maker Okta (OKTA) announced better-than-expected results in Q2 FY2024, with revenue up 23.1% year on year to $556 million. Guidance for next quarter's revenue was also better than expected at $559 million at the midpoint, 1.44% above analysts' estimates. Turning to EPS, Okta made a non-GAAP profit of $0.31 per share, improving from its loss of $0.10 per share in the same quarter last year.
Okta (OKTA) Q2 FY2024 Highlights:
- Revenue: $556 million vs analyst estimates of $534.3 million (4.06% beat)
- EPS (non-GAAP): $0.31 vs analyst estimates of $0.21 (44.5% beat)
- Revenue Guidance for Q3 2024 is $559 million at the midpoint, above analyst estimates of $551.1 million
- The company lifted its revenue guidance for the full year from $2.18 billion to $2.21 billion at the midpoint, a 1.42% increase
- Free Cash Flow of $49 million, down 60.5% from the previous quarter
- Gross Margin (GAAP): 73.2%, up from 69.5% in the 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system, manage who has access to what, set up automated rules to make sure that when employees leave access is withdrawn, and enforce policies around passwords and account security.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.
As you can see below, Okta's revenue growth has been impressive over the last two years, growing from $315.5 million in Q2 FY2022 to $556 million this quarter.
This quarter, Okta's quarterly revenue was once again up a very solid 23.1% year on year. On top of that, its revenue increased $38 million quarter on quarter, a very strong improvement from the $7.79 million increase in Q1 2024. This is a sign of acceleration of growth and great to see.
Next quarter's guidance suggests that Okta is expecting revenue to grow 16.2% year on year to $559 million, slowing down from the 37.2% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 14.1% over the next 12 months before the earnings results announcement.
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 73.2% in Q2.
That means that for every $1 in revenue the company had $0.73 left to spend on developing new products, sales and marketing, and general administrative overhead. Trending up over the last year, Okta's gross margin is around the average of a typical SaaS businesses. Gross margin has a major impact on a company’s ability to develop new products and invest in marketing, which may ultimately determine the winner in a competitive market. This makes it a critical metric to track for the long-term investor.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Okta's free cash flow came in at $49 million in Q2, turning positive over the last year.
Okta has generated $250.7 million in free cash flow over the last 12 months, a solid 12% of revenue. This strong FCF margin stems from its asset-lite business model, giving it optionality and plenty of cash to reinvest in its business.
Key Takeaways from Okta's Q2 Results
Sporting a market capitalization of $11.7 billion, more than $2.11 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that Okta is attractively positioned to invest in growth.
This was a clean "beat and raise" quarter. It was good to see Okta beat analysts' revenue, non-GAAP operating profit, and EPS expectations this quarter. We were also glad that next quarter's revenue and non-GAAP operating profit guidance came in higher than Wall Street's estimates. Full year guidance was also raised across the board. Overall, this quarter's results were strong, and shareholders should feel optimistic. The stock is up 11.1% after reporting and currently trades at $81.75 per share.
Is Now The Time?
When considering an investment in Okta, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. Although Okta isn't a bad business, it probably wouldn't be one of our picks. Its revenue growth has been impressive, though we don't expect it to maintain historical growth rates.
The market is certainly expecting long-term growth from Okta given its price to sales ratio based on the next 12 months is 5.1x. 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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