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Okta (NASDAQ:OKTA) Exceeds Q3 Expectations, Provides Optimistic Full-Year Guidance


Full Report / November 29, 2023

Identity management software maker Okta (OKTA) announced better-than-expected results in Q3 FY2024, with revenue up 21.4% year on year to $584 million. The company expects next quarter's revenue to be around $586 million, in line with analysts' estimates. It made a non-GAAP profit of $0.44 per share, improving from its loss of $0 per share in the same quarter last year.

Okta (OKTA) Q3 FY2024 Highlights:

  • Revenue: $584 million vs analyst estimates of $560.4 million (4.2% beat)
  • EPS (non-GAAP): $0.44 vs analyst estimates of $0.29 ($0.15 beat)
  • Revenue Guidance for Q4 2024 is $586 million at the midpoint, above analyst estimates of $580.3 million
  • Free Cash Flow of $150 million, up from $49 million in the previous quarter
  • Gross Margin (GAAP): 75.2%, up from 71.4% 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system, manage who has access to what, set up automated rules to make sure that when employees leave access is withdrawn, and enforce policies around passwords and account security.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.

Identity Management

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 very strong over the last two years, growing from $350.7 million in Q3 FY2022 to $584 million this quarter.

Okta Total Revenue

This quarter, Okta's quarterly revenue was once again up a very solid 21.4% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $28 million in Q3 compared to $38 million in Q2 2024. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.

Next quarter, Okta is guiding for a 12.9% year-on-year revenue decline to $586 million, a further deceleration from the 33.3% year-on-year decrease it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 13.1% over the next 12 months before the earnings results announcement.

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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 75.2% in Q3.

Okta Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.75 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, Okta's impressive gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.

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 $150 million in Q3, up 2,523% year on year.

Okta Free Cash Flow

Okta has generated $395 million in free cash flow over the last 12 months, an impressive 18.1% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.

Key Takeaways from Okta's Q3 Results

Sporting a market capitalization of $11.91 billion, more than $2.13 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.

It was great to see Okta improve its gross margin and beat Wall Street's sales estimates this quarter, both driven by better-than-expected subscription revenue. Its adjusted operating income, free cash flow, EPS, and next quarter's revenue and EPS guidance also topped analysts' forecasts. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. Investors were likely expecting more, however, and the stock is down 2.2% after reporting, trading at $70.99 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 strong over the last two years, though we don't expect it to maintain that historical pace.

Okta's price to sales ratio based on the next 12 months is 4.9x, 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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