Okta (NASDAQ:OKTA) Beats Q2 Sales Targets But Stock Drops
Identity management software maker Okta (OKTA) reported Q2 CY2024 results exceeding Wall Street analysts’ expectations, with revenue up 16.2% year on year to $646 million. Guidance for next quarter’s revenue was also better than expected at $649 million at the midpoint, 1.6% above analysts’ estimates. It made a non-GAAP profit of $0.72 per share, improving from its profit of $0.31 per share in the same quarter last year.
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Okta (OKTA) Q2 CY2024 Highlights:
- Revenue: $646 million vs analyst estimates of $632.6 million (2.1% beat)
- Adjusted Operating Income: $148 million vs analyst estimates of $124.8 million (18.5% beat)
- EPS (non-GAAP): $0.72 vs analyst estimates of $0.61 (17.6% beat)
- The company slightly lifted its revenue guidance for the full year to $2.56 billion at the midpoint from $2.54 billion
- EPS (non-GAAP) guidance for the full year is $2.61 at the midpoint, beating analyst estimates by 7.4%
- Gross Margin (GAAP): 76%, up from 73.2% in the same quarter last year
- Free Cash Flow Margin: 12.1%, down from 34.7% in the previous quarter
- Market Capitalization: $16.31 billion
“Okta is setting the standard for identity security by focusing on relentless innovation and expanding our product offerings within the Workforce Identity Cloud and Customer Identity Cloud,” said Todd McKinnon, Chief Executive Officer and Co-Founder of Okta.
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.
Identity Management
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.
Sales Growth
As you can see below, Okta’s 34% annualized revenue growth over the last three years has been excellent, and its sales came in at $646 million this quarter.
This quarter, Okta’s quarterly revenue was once again up 16.2% year on year. We can see that Okta’s revenue increased by $29 million quarter on quarter, which is a solid improvement from the $12 million increase in Q1 CY2024. This acceleration of growth was a great sign.
Next quarter’s guidance suggests that Okta is expecting revenue to grow 11.1% year on year to $649 million, slowing down from the 21.4% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 8.7% over the next 12 months before the earnings results announcement.
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Cash Is King
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 robust cash profitability, driven by its attractive business model that enables it to reinvest or return capital to investors while maintaining a cash cushion. The company’s free cash flow margin averaged 24.8% over the last year, quite impressive for a software business.
Okta’s free cash flow clocked in at $78 million in Q2, equivalent to a 12.1% margin. This quarter’s result was good as its margin was 3.3 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends carry greater meaning.
Over the next year, analysts predict Okta’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 24.8% for the last 12 months will decrease to 21.5%.
Key Takeaways from Okta’s Q2 Results
It was good to see Okta beat analysts' revenue, operating income, and EPS estimates this quarter. We were also glad its revenue and EPS guidance for the full year topped expectations. On the other hand, its current RPO (a leading indicator for future revenue) forecast for next quarter fell short of Wall Street's estimates, potentially signaling some softness. Overall, this quarter had some key positives. The market seemed to focus on the negatives, however, and the stock traded down 6.8% to $90 immediately after reporting.
So should you invest in Okta right now? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.
