Overview of OKTA
Before delving further into its results and guidance, here is some background on the company: The company describes itself as the pioneer and leader of identity for the enterprise. It has developed a category-defining platform called "Okta Identity Cloud" which enables customers to securely connect people to technology from anywhere at anytime and from any device. OKTA designed the Identity Cloud to provide organizations an integrated approach to managing and securing all of their identities. The platform allows its customers to easily provision internal and external users, enabling any user to connect to any device, cloud or application, all with a simple, intuitive and consumer-like user experience.
The Identity Cloud is used as the central system for an organization's connectivity, access, authentication and identity lifecycle management needs spanning all of their users and applications. Moreover, the platform is used in two distinct ways: 1). to manage and secure internal users (employees); and 2). to connect and secure a customers external users (partners, suppliers, customers) via the APIs it has developed.
Like many other cloud software providers, OKTA uses a "land and expand" business model. In other words, it seeks to gain new subscribers by offering base products at a lower price. Then, as those customers implement and integrate the initial application into their business processes, it sells additional products to increase the value of those customers. It monetizes its platform through subscriptions that provide recurring revenue over the contract terms.
In regards to its customer base, it had more than 3,100 customers as of January 31, 2017 across virtually every industry and ranging from the largest enterprises to small and medium sized businesses. OKTA also partners with some of the most prominent tech companies in the world, such as Amazon Web Services, Box, Google Cloud, Microsoft, NetSuite, SAP, ServiceNow and Workday.
Q1 Results & Guidance
As noted above, this was OKTA's first quarterly report as a public company, and it did not disappoint. It reported a loss of ($0.50)/share, easily topping the ($0.61) Capital IQ Consensus with revenue jumping by 67% year/year to $53 million, also comfortably ahead of the $48.2 million consensus. In fact, OKTA achieved a record for quarterly revenue in billings. Calculated billings grew by 75% year/year to $60 million.
During its earnings conference call last night, management stated that demand for its core products continues to be very strong and that it is seeing more traction landing initial deals with external case uses at large companies. Furthermore, OKTA is benefiting from increasing expansion and up-sells from internal use cases to external case uses. Average deal size also continues to grow, which is reflected in its dollar based retention rate at 123% for the trailing 12 months.
But, not only is OKTA driving strong topline growth, but, it is also improving operating margins as it continues to see leverage in its business. Specifically, operating margin was (37%) compared to (61%) in the year ago period. Cash flow saw a similar improvement. For the quarter, free cash flow was ($13.3) million vs. ($17.2) million a year earlier. So, while OKTA is not yet profitable, it is clearly making good progress in that direction.
As for guidance, it sees Q2 EPS of ($0.26)-($0.25), inline with the ($0.26) Capital IQ Consensus, with revenue of $55-$56 million, edging the $54 million consensus. For FY18, it is projecting EPS of ($1.15)-($1.11), ahead of the ($1.18) Capital IQ Consensus, on revenue of $233-$236 million, also ahead of the $227 million consensus. Along with this solid guidance, management stated that it believes it is just scratching the surface in terms of its overall market opportunity and that is has the potential to broaden its reach with its existing customer base and into new customers and markets.