Coming into its second-quarter report, Okta (OKTA 22.91%) shares had already rallied nearly 150% this year. Enthusiasm about the cloud-based identity specialist has exploded as it's established itself as a niche leader, attracting customers and driving rapid revenue growth.

Still, shares fell after its first-quarter earnings report in June, despite impressive numbers: a sign that high expectations were already baked into the stock. Investors may have been worried that the second-quarter earnings release would trigger another sell-off. However, this time, the stock surged by double-digits after hours as Okta crushed its own guidance and kept up its high-paced growth.

Let's take a closer look.

Metric Fiscal Q2 2019 Fiscal Q2 2018 Year-Over-Year Change
Sales $94.6 million $60.3 million 56.9%
Net income from continuing operations ($38.4 million) ($26.2 million) (46.6%)
Adjusted earnings per share ($0.15) ($0.15) Flat

Data source: Okta earnings report. 

What happened this quarter

Okta continued to grow by adding new customers and building relationships with its current ones as it implements a "land and expand" strategy, meaning it attracts new customers and grows relationships from there.

A group of Okta employees sitting around a table and talking.

Image source: Okta.

Once again, revenue growth blew past the company's guidance. Management had called for just 39% to 41% top-line growth in the fiscal second quarter, well below the 57% growth it delivered. During the quarter, the company added 450 customers, a 43% improvement from the same quarter a year ago. The number of customers generating $100,000 or more in annual recurring revenue rose by 90 during the quarter, bringing that total to 837, up 55% from a year ago. 

On the cost side, margins continued to improve, though Okta's bottom-line loss widened. Free cash flow margin increased by 540 basis points (100 basis points equals 1 percentage point) and operating margin improved from -43.5% to -40.6% as the company builds leverage in part due to its subscription-based product, which should naturally deliver operating leverage as the company grows.

During the quarter, Okta added new customers, including Cisco Meraki, Vox Media, and the Orlando Magic. It also acquired Scale FT, a Zero Trust security company. Zero Trust is a security protocol meaning that nothing inside or outside the organization's perimeters is to be trusted or granted access without verification. 

What management had to say

CEO Todd McKinnon summed up Okta's performance, saying, "We continued to see momentum across our business ..." and noting particular success in enterprise. He also said the growth in large accounts is "a testament to the increasing strategic need for an identity solution as organizations move to the cloud. This need is pervasive and imperative, and I believe we are in the early stages of capitalizing on this high growth opportunity."

COO Frederic Kerrest said Okta's dollar net retention rate was 121% in the quarter, a sign that it's doing an excellent job of keeping its customers satisfied. Kerrest also touted the company's expanding opportunity, saying it's "early for the business" and that Okta should benefit from a natural tailwind as more companies move to the cloud and see the advantage of the kind of identity and security products that Okta provides, which allow for customization and scaling in a way that was much harder before the cloud. Kerrest also said the company was targeting breakeven free cash flow by the end of the fiscal year. 

Looking ahead

Management lifted its guidance for the full year, calling for revenue growth of 45%-46% to $372 million-$375 million. On the bottom line, it sees an adjusted loss per share between $0.48 and $0.46. That compares to a prior forecast for revenue of $353 million to $357 million and adjusted loss per share between $0.58 and $0.54. 

For the current quarter, Okta expects revenue growth of 43%-45% to $96 million-$97 million and an adjusted loss per share of $0.12 to $0.11. With an expanding market opportunity, a target of breakeven free cash flow by the end of the year, and a pattern of breezing past its own guidance, Okta's future -- like those of many of its cloud-based peers -- continues to look bright.