Identity management software maker Okta (OKTA) reported Q1 FY2023 results topping analyst expectations, with revenue up 65.3% year on year to $414.9 million. Guidance for next quarter's revenue was $429 million at the midpoint, which is 1.45% above the analyst consensus. Okta made a GAAP loss of $242.7 million, down on its loss of $109.2 million, in the same quarter last year.
Okta (OKTA) Q1 FY2023 Highlights:
- Revenue: $414.9 million vs analyst estimates of $388.7 million (6.72% beat)
- EPS (non-GAAP): -$0.27 vs analyst estimates of -$0.34
- Revenue guidance for Q2 2023 is $429 million at the midpoint, above analyst estimates of $422.8 million
- The company lifted revenue guidance for the full year, from $1.78 billion to $1.81 billion at the midpoint, a 1.4% increase
- Free cash flow of $11 million, up 118% from previous quarter
- Gross Margin (GAAP): 68.3%, down from 73.6% 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system, manage who has access to what, set up automated rules to make sure that when employees leave access is withdrawn, and enforce policies around passwords and account security.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 incredible over the last year, growing from quarterly revenue of $251 million, to $414.9 million.
This was another standout quarter with the revenue up a splendid 65.3% year on year. Quarter on quarter the revenue increased by $31.9 million in Q1, which was roughly in line with the Q4 2022 increase. This steady quarter-on-quarter growth shows the company is able to maintain a strong growth trajectory.
Guidance for the next quarter indicates Okta is expecting revenue to grow 35.9% year on year to $429 million, slowing down from the 57.3% 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 31.1% 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 68.3% in Q1.
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. 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.
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's free cash flow came in at $11 million in Q1, down 79.1% year on year.
Okta has generated $45.6 million in free cash flow over the last twelve months, 3.12% 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 Q1 Results
Sporting a market capitalization of $13.3 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. The company is flat on the results and currently trades at $93.66 per share.
Is Now The Time?
Okta may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although we have other favorites, we understand the arguments that Okta is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. Unfortunately, its gross margins show its business model is much less lucrative than the best software businesses.
Okta's price to sales ratio based on the next twelve months is 7.6x, suggesting that the market is expecting more moderate growth, relative to the hottest 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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