FREE: Okta Earnings Review. Long-Term Winner?

If you listen to the recording, the featured background audio is an original track of my 18-month-old daughter crying. I think you can still hear me just fine. I promise she was okay and was being supervised. No wonder why Elon wants everyone back in the office!

Shares of Okta traded up 5% today closing at $98.38. Year-to-date, shares are down 55% and the next twelve-month enterprise value to revenue (NTM EV/R) has dropped from 28 in July 2021 to 7.6 today.

That’s a 76% contraction in NTM EV/S multiple.

Since Okta’s IPO in April, 2017 the shares have increased from $23.51 to 98.38, a compound annual growth rate (CAGR) of 31% which would have turned a $10,000 investment into $40,000, beating the SPY CAGR of 13% over the same period.

Okta is currently trading at a trailing-twelve-month (TTM) EV/R of 10.8, roughly 20% higher than its all-time low of 9.0 in 2017.

Revenue per share (which takes into account share dilution due to acquisitions and stock-based compensation) has grown 30% per year since IPO and analysts are expecting revenue per share to grow roughly 32% per year from FY 23 to FY 25.

This could either be an incredible buying opportunity or a falling knife.. so lets dive in.

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Okta First Quarter Fiscal Year 2023 Financial Results

“We delivered solid first-quarter results highlighted by strength in new customer additions, dollar-based net retention rate, and the success we’re having with large customers as they continue their journey to the cloud,” - Todd McKinnon, Chief Executive Officer and co-founder of Okta.

First Quarter Fiscal 2023 Financial Highlights:

Revenue: Total revenue was $415 million, an increase of 65% year-over-year. This beat analyst expectations by $26 million or roughly 6.7%. Subscription revenue was $398 million, an increase of 66% year-over-year. Organic revenue grew 39%.

Remaining Performance Obligations (RPO): RPO, or subscription backlog, was $2.71 billion, an increase of 43% year-over-year. cRPO, which is contracted subscription revenue expected to be recognized over the next 12 months, was $1.41 billion, up 57% compared to the first quarter of fiscal 2022.

GAAP Net Loss: GAAP net loss was $243 million, compared to a GAAP net loss of $109 million in the first quarter of fiscal 2022. GAAP net loss per share was $1.56, compared to a GAAP net loss per share of $0.83 in the first quarter of fiscal 2022.

Non-GAAP Net Loss: Non-GAAP net loss was $43 million, compared to non-GAAP net loss of $13 million in the first quarter of fiscal 2022. Non-GAAP basic and diluted net loss per share was $0.27, compared to non-GAAP basic and diluted net loss per share of $0.10 in the first quarter of fiscal 2022. This beat analyst expectations by $0.07 or 20%.

Cash Flow: Net cash provided by operations was $19 million, or 5% of total revenue, compared to net cash provided by operations of $56 million, or 22% of total revenue, in the first quarter of fiscal 2022. Free cash flow was $11 million, or 3% of total revenue, compared to $53 million, or 21% of total revenue, in the first quarter of fiscal 2022.

Cash, cash equivalents, and short-term investments were $2.49 billion at April 30, 2022.

Financial Outlook:

For the second quarter of fiscal 2023, the Company expects:

Total revenue of $428 million to $430 million, representing a growth rate of 36% year-over-year. This beat analyst expectations of $423 million by $6 million or 1.4%.

Current RPO of $1.48 billion to $1.49 billion, representing a growth rate of 35% to 36% year-over-year;

Non-GAAP operating loss of $44 million to $43 million; and

Non-GAAP net loss per share of $0.32 to $0.31, assuming weighted-average shares outstanding of approximately 156 million. This beat analyst expectations by $0.02.

For the full-year fiscal 2023, the Company now expects:

Total revenue of $1.805 billion to $1.815 billion, representing a growth rate of 39% to 40% year-over-year. This beat analyst expectations by $30 million or 1.7%.

Non-GAAP operating loss of $167 million to $162 million; and

Non-GAAP net loss per share of $1.14 to $1.11, assuming weighted-average shares outstanding of approximately 157 million. This beat analyst expectations by $0.12 or 9.6%.

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Management Commentary: Todd McKinnon, Co-Founder, Chairman & CEO

On the Lapsus$ security hack in Q4

While we've done a lot of analysis, it's difficult to attribute any quantifiable impact on our solid Q1 results. When looking at key indicators, our competitive win rates and renewal rates have remained strong. In Q1, RPO grew 43% and current RPO grew 57%. Total revenue grew 65% and Okta standalone revenue grew 39%. New customer additions remain strong at 800, bringing our total customer base to 15,800, representing growth of 48%. We also continue to do well with large customers.

Notable customer win

A Fortune 500 insurance company was a great Okta SIEM and Workforce win. What's more, this customer was sourced through the AWS Marketplace, which has been doing well for Okta since we became available there in late 2020. The company sought best-of-breed tools to modernize the organization's aging IT infrastructure. Their legacy on-prem tools lack the capacity and stability to meet the needs of the business. Okta will provide a cloud-native identity solution to support their modernization efforts, while also addressing their on-prem infrastructure needs with Okta Access Gateway.

Management Commentary: Brett Tighe, CFO

On dollar-based net retention rate

Our dollar-based net retention rate for the trailing 12-month period remains strong at 123%. This was driven by the strong upsell motion we are seeing with our existing customers across both Okta and Auth0 as they expand on both products and users.

On FY 26 financial goals

Our long-term financial goals anchor on at least $4 billion of revenue in FY '26 with organic growth of at least 35% each year and 20% free cash flow margin in FY '26. To achieve these targets, we will continue to scale the company from a people and processes standpoint, including investing in talent across all areas of the company as well as in systems to prepare us for the next phase of growth.

Investor Q & A

On the future of identity and federal/department of defense interest

Just yesterday, we had the global CIO of one of the major branches of the DoD in our office with his entire executive team talking to us for the entire day about the future of identity and what it was going to look like. And I mean these are just the kinds of conversations, frankly, that regardless of what happened in Q1 with that security event or not, we were not having these conversations 6 or 12 months ago, and I think it portends very well for the future.

The federal government opportunity is a massive one for us.

Federal was the biggest deal of our quarter this year -- this quarter in terms of ARR. And that federal division was specifically focused on customer identity and access management. And you really see that the government is thinking about how they can adopt more of these modern solutions for a lot of their forward-thinking initiatives. You -- we've been working for a long time on bolstering up our federal capabilities. And we've got -- we've been FedRAMP Medium, Moderate for some time. We've got FedRAMP High and IL4 that are scheduled for this summer.

Austin’s takeaways

This was a strong quarter considering the macro fears and Okta’s security incident in Q1

Management seems confident and excited about both international and federal opportunities

Management reiterated FY26 goal of $4 billion in revenue with 35% organic growth and 20% free cash flow margin representing a score of 55 on the rule of 40

This is on my watchlist due to its low multiple, important market, and growth expectations but I’m hesitant to start a position because of questions around profitability at scale.

I have no position in Okta at the time of this writing.

Paying members are always first to find out what I’m buying (before I buy it)

Price Multiples, FY 18 - FY 22 Results, & FY 23 - FY 27 analyst expectations

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