Back in July, I wrote that the stock of Okta (NASDAQ:OKTA) was undervalued and to buy the dip. With the stock up over 22% since then, and up about 19% since my initial write-up let’s catch on the name.
As a quick reminder, OKTA is a cloud-based security firm that helps organizations authenticate and manage user identifications across devices. The company’s Workforce Identity Cloud helps customers secure their workforces and create secure solutions to collaborate with partner networks. The offering has a number of different modules at various price points.
OKTA’s Customer Identity Cloud, meanwhile, stems from its prior acquisition of Auth0 in 2021. The solution is used by organizations to provide secure experiences for their customers and end users. OKTA offers 3 Customer Identity Cloud plans: Enterprise, B2C, and B2B.
After selling off -17.1% the next session when it reported its Q1 results, shares of OKTA bounced back after it reported its Q2 results, jumping 16.2% the next session.
Customer growth concerns have been one of the biggest issues facing OKTA, as the company has seen a continued deceleration over the past year plus. For Q2 the company added 350 new customers, representing 12% growth, bringing its total up to 18,400 customers. That did continue the recent deceleration in customer growth, which came in at 14% (450 additions) last quarter and 26% (600 additions) a year ago.
Larger customer growth, or customers with $100,000 ACV, continued to outpace overall growth, increasing 19%. OKTA added 125 of these customers in the quarter. However, it had a record number of $5 million plus contracts, and its top 25 deals in the period had an aggregate value of over $100 million. At the end of Q1, it only had 300 customers with $1 million-plus AVC, so this demonstrates that it is doing a very nice job of moving upmarket.
Overall revenue rose 23% in the quarter to $556 million, while subscription revenue jumped 24% to $542 million. Analysts were looking for total revenue of $534.3 million.
Workforce ACV grew 22% and represented 61% of total ACV, while Customer Identity ACV grew 29%.
Its subscription backlog (RPO) increased 8% year over year to $3.03 billion, while subscription backlog expected to be recognized over the next 12 months (cRPO) climbed 18% to $1.77 billion.
Dollar-based net retention rate for the trailing 12-month period came in at 115%. That was down from 117% in Q1 and 122% a year ago.
Adjusted gross margins were 80% versus 77% a year ago, while GAAP gross margins were 73% versus 70% a year ago.
Adjusted EPS came in at 31 cents, topping the consensus by 10 cents. The company reported a loss of -10 cents per share a year ago.
The company generated operating cash flow of $53 million, while free cash flow was $49 million.
Looking ahead, OKTA forecasts Q3 revenue of between $558-560 million, representing 16% growth. It is projecting adjusted EPS of between 29-30 cents. It expects current RPO to rise 13% to $1.780-1.785 billion.
For the full year, the company guided revenue to grow by 19% to between $2.207-2.215 billion. It is projecting adjusted EPS of between $1.17-1.20. That’s up from prior guidance calling for revenue of between $2.175-2.185 billion and EPS of 88-93 cents.
OKTA management also hit the conference circuit this month.
When asked about metrics it saw that were giving it confidence that the macro was stabilizing at a Citi conference, CFO Brett Tighe said:
“So the big one for me is if you think about one of the vectors of growth for us for business over the years, it has been upsells related to seat count on the workforce side or expansions on the monthly active user side on the customer identity side. So for the prior couple of quarters, we had seen a headwind in those numbers. Specifically, people were just adding more because they expect to hire more people on the workforce side or they expect more economic activity in terms of more users on their applications. And so in Q2, we saw that, that trend stabilized. That was the biggest one for us because you saw the numbers in terms of headwind growing every quarter. But in Q2, it did stabilize. So that’s a big one for us. The other thing from a contract duration standpoint, we’ve seen that be lower and actually be a headwind to contract duration. We actually saw that tick up a little bit in the quarter. And so those are the 2 main metrics that we’ve really kind of focused on. I mean, there’s other new business versus upsell as well that stabilized. In other words, the mix of upsell is much higher than the mix has been historically. And so that stabilized in the quarter. So there’s a few things in the quarter we just saw that were good signs that things were not getting worse, let’s put it that way. It’s not like it’s getting a lot better, but it’s just not getting worse from a macro perspective. So we’re happy to see that.”
Overall, OKTA reported a solid quarter highlighted by nice growth in large customers, its cRPO growth exceeding expectations by a meaningful amount, and strong margins. The strength in large deals demonstrates OKTA’s transition as a one-stop shop in the identification security market, and that Microsoft (MSFT) isn’t a big competitive threat at the upper end of the market.
Now overall customer growth does remain challenged as SMB customers are being more impacted by the macro environment, but the customer growth deceleration does appear to be stabilizing. Net dollar retention and churn also appear to have stabilized as well.
OKTA was able to raise guidance for the second time. In my initial February write-up, I said that the company should be able to leap past low fiscal 2024 guidance, and thus far this has been the case. The company is also showing nice operating leverage in its business, which is seeing adjusted EPS guidance rise even more than revenue guidance.
SaaS companies are generally valued based on a sales multiple given their high gross margins and the companies wanting to pump money back into sales and marketing to grow.
On that front, OKTA is valued at a P/S ratio of about 6.5 x based on the FY 24 (ending January) consensus for revenue of $2.216 billion. Based on the FY25 sales consensus of $2.578 billion, it trades at a P/S multiple of 5.6x.
In the past, the company has often traded at over 25x LTM sales. However, growth is slowing from 40-50% a year to around 16-20% over the next few years.
OKTA showed signs of stabilization in Q2, while its execution with large enterprises has been impressive and speaks to the value of its solutions. The past issue with Auth0 salesforce rep attrition now appears to be behind the firm and its ability to cross-sell and offer a complete identification security solution for both workforces, vendors, and customers represents a compelling opportunity moving forward.
Cyber-security still remains one of the most important industries, and threats are only increasing. As such, at current levels, OKTA could also be an interesting takeout candidate by any larger players looking to get into identity management part of the market.
If OKTA’s stock could re-rate to a 6x multiple on its FY25 revenue, it would be a $110 stock, while an 8x multiple would equal a $125. My “Buy” rating remains unchanged as the company’s turnaround continues to unfold.