Okta (OKTA)

Identity management software maker Okta (OKTA) announced better-than-expected revenue in Q1 CY2025, with sales up 11.5% year on year to $688 million. The company expects next quarter’s revenue to be around $711 million, close to analysts’ estimates. Its non-GAAP profit of $0.86 per share was 11.5% above analysts’ consensus estimates.

Company Overview

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.

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.

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Luckily, Okta’s sales grew at a decent 22.3% compounded annual growth rate over the last three years. Its growth was slightly above the average software company and shows its offerings resonate with customers.

This quarter, Okta reported year-on-year revenue growth of 11.5%, and its $688 million of revenue exceeded Wall Street’s estimates by 1.2%. Company management is currently guiding for a 10.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 9.3% over the next 12 months, a deceleration versus the last three years. This projection is underwhelming and suggests its products and services will face some demand challenges.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Okta’s billings came in at $552 million in Q1, and over the last four quarters, its growth slightly lagged the sector as it averaged 9.9% year-on-year increases. This alternate topline metric grew slower than total sales, meaning the company recognizes revenue faster than it collects cash - a headwind for its liquidity that could also signal a slowdown in future revenue growth.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

It’s relatively expensive for Okta to acquire new customers as its CAC payback period checked in at 72.9 months this quarter. The company’s slow recovery of its sales and marketing expenses indicates it operates in a highly competitive market and must invest to stand out, even if the return on that investment is low.

For software companies like Okta, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Okta’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an excellent 76.7% gross margin over the last year. Said differently, roughly $76.69 was left to spend on selling, marketing, and R&D for every $100 in revenue.

In Q1, Okta produced a 77.5% gross profit margin, marking a 1.5 percentage point increase from 76% in the same quarter last year. Okta’s full-year margin has also been trending up over the past 12 months, increasing by 1.5 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Okta was roughly breakeven when averaging the last year of quarterly operating profits, decent for a software business.

Analyzing the trend in its profitability, Okta’s operating margin rose by 17.5 percentage points over the last year, as its sales growth gave it immense operating leverage.

In Q1, Okta generated an operating profit margin of 5.7%, up 13.3 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

If you’ve followed StockStory for a while, you know 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 has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the software sector, averaging 28.1% over the last year.

Okta’s free cash flow clocked in at $238 million in Q1, equivalent to a 34.6% margin. This cash profitability was in line with the comparable period last year and above its one-year average.

Over the next year, analysts predict Okta’s cash conversion will slightly fall. Their consensus estimates imply its free cash flow margin of 28.1% for the last 12 months will decrease to 26.8%.

Companies with more cash than debt have lower bankruptcy risk.

Okta is a profitable, well-capitalized company with $2.73 billion of cash and $947 million of debt on its balance sheet. This $1.78 billion net cash position is 8.1% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

Revenue and adjusted EPS both beat, which is a good start. Despite the beat, Okta only reconfirmed full-year revenue guidance, which was in line with Wall Street's estimates. Typically, beats are flowed through to an increase in the full-year guidance. The company also stated that they are "now factoring in potential risks related to the uncertain economic environment for the remainder of" the year. Cybersecurity has been a strong performer as of late as the market sees the market as recession resistant and largely unaffected by tariffs. This print puts a dent in that. Shares traded down 11% to $111.77 immediately following the results.

Updated: June 19, 2025 at 10:01 PM EDT

Before deciding whether to buy Okta or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

When it comes to Okta’s business quality, there are some positives, but it ultimately falls short. To kick things off, its revenue growth was solid over the last three years. On top of that, Okta’s expanding operating margin shows it’s becoming more efficient at building and selling its software, and its bountiful generation of free cash flow empowers it to invest in growth initiatives.

Okta’s price-to-sales ratio based on the next 12 months is 6.2x. This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $123.32 on the company (compared to the current share price of $99.30).