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Okta (OKTA) Research Report: Q1 CY2024 Update


Full Report / May 29, 2024

Identity management software maker Okta (OKTA) announced better-than-expected results in Q1 CY2024, with revenue up 19.1% year on year to $617 million. Guidance for next quarter's revenue was also optimistic at $632 million at the midpoint, 2.5% above analysts' estimates. It made a non-GAAP profit of $0.65 per share, improving from its profit of $0.22 per share in the same quarter last year.

Okta (OKTA) Q1 CY2024 Highlights:

  • Revenue: $617 million vs analyst estimates of $604.5 million (2.1% beat)
  • EPS (non-GAAP): $0.65 vs analyst estimates of $0.55 (19.1% beat)
  • Revenue Guidance for Q2 CY2024 is $632 million at the midpoint, above analyst estimates of $616.8 million
  • The company lifted its revenue guidance for the full year from $2.5 billion to $2.54 billion at the midpoint, a 1.4% increase
  • RPO: $3.36 billion, an increase of 14% year-over-year
  • Gross Margin (GAAP): 76%, up from 72.6% in the same quarter last year
  • Free Cash Flow of $214 million, up 28.9% from the previous quarter
  • Market Capitalization: $16.17 billion

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system, manage who has access to what, set up automated rules to make sure that when employees leave access is withdrawn, and enforce policies around passwords and account security.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 three years, growing from $251 million in Q1 2022 to $617 million this quarter.

Okta Total Revenue

This quarter, Okta's quarterly revenue was once again up 19.1% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $12 million in Q1 compared to $21 million in Q4 CY2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.

Next quarter's guidance suggests that Okta is expecting revenue to grow 13.7% year on year to $632 million, slowing down from the 23.1% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 8.6% 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 76% in Q1.

Okta Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.76 left to spend on developing new products, sales and marketing, and general administrative overhead. Trending up over the last year, 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 $214 million in Q1, up 72.6% year on year.

Okta Free Cash Flow

Okta has generated $579 million in free cash flow over the last 12 months, an impressive 24.5% 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 Q1 Results

It was good to see Okta beat analysts' revenue, RPO, and EPS estimates this quarter. We were also glad its full-year revenue, operating income, EPS, and free cash flow guidance topped analysts' expectations. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The stock is flat after reporting and currently trades at $97.20 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 we have other favorites, we understand the arguments that Okta isn't a bad business. We'd expect growth rates to moderate from here, but its revenue growth has been exceptional over the last three years. On top of that, its bountiful generation of free cash flow empowers it to invest in growth initiatives.

Given its price-to-sales ratio of 6.3x based on the next 12 months, the market is certainly expecting long-term growth from Okta. 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. If you like Okta, it seems to be trading at a reasonable price right now.

Wall Street analysts covering the company had a one-year price target of $113.36 right before these results (compared to the current share price of $97.20).

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