The 7investing Key Takeaways

Okta (Nasdaq: OKTA) is an identity management provider, whose cloud based service manages how customers or employees sign-in to more than 7,000 applications. The company recently reported its second quarter 2024 results on August 30th.

• 23% revenue growth and 9% free cash flow margin show signs the business is stabilizing with improvements in sales productivity.
• Management raised fiscal 2024 guidance and now expects a 15% free cash flow margin. At current valuation, the market is pricing in approximately 16% free cash flow growth — which seems achievable as Okta is executing its turnaround strategy.
• Macro uncertainty remains a risk, and sales productivity will need to continue in order to drive growth and leverage.
• Stock-based compensation remains high and could limit shareholder value creation.

The Numbers

• Total revenue was $556 million, an increase of 23% year-over-year.✅
• Remaining Performance Obligation (RPO), or subscription backlog, was $3.03 billion, up 8% year-over-year. Current RPO (CRPO), which is subscription backlog expected to be recognized over the next 12 months, was $1.77 billion, up 18%. CRPO being up nicely should give us confidence on Okta’s guidance. The divergence between CRPO and RPO growth rates shows the impact of shorter subscription terms. ✅
• Non-GAAP operating income was $59 million, or 11% of total revenue, compared to a non-GAAP operating loss of $15 million a year ago. We are starting to see operating expense discipline deliver leverage, as we should be expecting from SaaS businesses. ✅
• Free cash flow was $49 million, or 9% of total revenue, compared to negative $24 million, or (5)% of total revenue, in the second quarter of fiscal 2023. FCF should closely follow operating income trajectory. For FY24, company is expecting FCF margin of 15%. 🟰
• Cash & equivalents of $2.11 billion. “During the quarter, the company repurchased $142 million principal amount of the convertible senior notes due in 2025, and $242 million principal amount of the convertible senior notes due in 2026.” Over the past 2 quarters, Okta has repurchased $750 million of debt. ✅
• Workforce ACV grew 22% and represented 61% of total ACV. Customer Identity ACV grew 29% and represented 39% of total ACV.
• 350 new customers added bringing total to 18,400.
• 125 customers with $100,000+ ACV added, up 19% YoY to 4,200.
• Fastest growth seen from customers with ACV of $1 million or more.✅
• A record number of $5 million-plus total contract value deals. Nice to see the enterprise side of the business kicking butt. 💪🏽
• Gross retention rate in the mid-90% range. ✅
• Dollar-based net retention was 115%. DBNR is expected to drop because of slower expansion among the client base. 📉

Our Thoughts About the Numbers

• Co-founder Frederic Kerrest (who was on a sabbatical) will not return in an operational capacity but will continue serving as the vice chairman of the BoD.❗️
• Macro seems to be improving or at least not becoming worse: “While macro headwinds, including a minor FX headwind to revenue continue to impact our business, we believe the environment stabilized in Q2. Our view is based upon trends stabilizing or modest sequential improvements in contract duration, average deal size, the split between new business versus upsells and seat expansion within upsells and renewals.”✅
• Pipeline remains solid but skewed towards upsell. ✅
• Q2 saw a modest sequential increase in contract term lengths. Average term length was just over 2.5 years.✅

To see our deeper-dive into Okta’s results, our analysis of its current valuation, our overall thoughts about its competitive position, and our “Conviction Rating” on whether we think the stock is a buy, click below to read our complete Company Update.

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