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Okta's (NASDAQ:OKTA) Q2 Sales Top Estimates But Stock Drops


Full Report / September 01, 2021
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Identity management software maker Okta (OKTA) reported Q2 FY2022 results topping analyst expectations, with revenue up 57.3% year on year to $315.5 million. Okta made a GAAP loss of $276.6 million, down on its loss of $60.1 million, in the same quarter last year.

Okta (OKTA) Q2 FY2022 Highlights:

  • Revenue: $315.5 million vs analyst estimates of $293.1 million (7.61% beat)
  • EPS (non-GAAP): -$0.11 vs analyst estimates of -$0.33
  • Revenue guidance for Q3 2022 is $326 million at the midpoint, above analyst estimates of $319.2 million
  • The company lifted revenue guidance for the full year, from $1.22 billion to $1.24 billion at the midpoint, a 2.17% increase
  • Free cash flow was negative -$3.76 million, down from positive free cash flow of $52.8 million in previous quarter
  • Gross Margin (GAAP): 67.9%, down from 73.6% previous quarter

Founded during the aftermath of the financial crisis in 2009, 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system, manage who has access to what, set up automated rules to make sure that when employees leave access is withdrawn, and enforce policies around passwords and account security.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 $200.4 million, to $315.5 million.

Okta Total Revenue

This was another standout quarter with the revenue up a splendid 57.3% year on year. On top of that, revenue increased $64.4 million quarter on quarter, a very strong improvement on the $16.2 million increase in Q1 2022, and a sign of acceleration of growth, which is very nice to see indeed.

Analysts covering the company are expecting the revenues to grow 42.1% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Profitability

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, licences, technical support and other necessary running expenses was at 67.9% in Q2.

Okta Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.67 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has been going down over the last year, which is probably the opposite direction shareholders would like to see it go.

Key Takeaways from Okta's Q2 Results

With a market capitalization of $40.3 billion, more than $2.46 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, it was less good to see the pretty significant deterioration in gross margin. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company is down -6.19% on the results and currently trades at $248.4 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. There are a number of reasons why we think Okta is a great business. For a start, its revenue growth has been exceptional, and analysts believe that sort of growth is sustainable for now. On top of that, 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 27.9. And looking at the tech landscape today, Okta's qualities stand out, we think that the multiple is justified and we still like it at this price.

The Wall St analysts covering the company had a one year price target of $277.9 per share right before these results, implying that they saw upside in buying Okta even in the short term.

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