Okta (NASDAQ:OKTA) Reports Upbeat Q3 But Stock Drops

Full Report / December 01, 2021
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Identity management software maker Okta (OKTA) reported Q3 FY2022 results topping analyst expectations, with revenue up 61.3% year on year to $350.6 million. Guidance for next quarter's revenue was $359 million at the midpoint, which is 1.1% above the analyst consensus. Okta made a GAAP loss of $221.3 million, down on its loss of $72.7 million, in the same quarter last year.

Okta (OKTA) Q3 FY2022 Highlights:

  • Revenue: $350.6 million vs analyst estimates of $327.4 million (7% beat)
  • EPS (non-GAAP): -$0.07 vs analyst estimates of -$0.23
  • Revenue guidance for Q4 2022 is $359 million at the midpoint, above analyst estimates of $355 million
  • Free cash flow of $33.3 million, up from negative free cash flow of $3.75 million in previous quarter
  • Gross Margin (GAAP): 68.7%, down from 73.8% 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system, manage who has access to what, set up automated rules to make sure that when employees leave access is withdrawn, and enforce policies around passwords and account security.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 in effect drives the need for identity and access management platforms 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 impressive over the last year, growing from quarterly revenue of $217.3 million, to $350.6 million.

Okta Total Revenue

This was another standout quarter with the revenue up a splendid 61.3% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $35.1 million in Q3, compared to $64.4 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting revenues to grow 39.8% over the next twelve months, although estimates are likely to change post earnings.


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 68.7% in Q3.

Okta Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.68 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.

Key Takeaways from Okta's Q3 Results

Sporting a market capitalization of $33.2 billion, more than $2.48 billion in cash and with positive free cash flow over the last twelve months, we're confident that Okta has the resources it needs to pursue a high growth business strategy.

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. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. But investors might have been expecting more and the company is down 8.25% on the results and currently trades at $181.62 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. We think Okta is a good business. Its revenue growth has been exceptional. And while its gross margins aren't as good as other tech businesses we look at, the good news is its strong free cash flow generation gives it re-investment options, and its efficient customer acquisition is better than many similar companies.

The market is certainly expecting long term growth from Okta given its price to sales ratio based on the next twelve months is 19.1x. There is definitely a lot of things to like about Okta and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $299 per share right before these results, implying that they saw upside in buying Okta even in the short term.

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