Enterprise identity management company Okta (NASDAQ:OKTA) just crushed expectations for its second quarter. Revenue soared 57% year over year and subscriptions, which sport a higher gross margin than the corporate average gross margin, saw outsize year-over-year revenue growth of 59%.
The need for the company's identity management solutions is "pervasive and imperative," Mckinnon noted in the second-quarter earnings release, "and I believe we are in the early stages of capitalizing on this high growth opportunity."
Looking beyond the second-quarter earnings release, management provided further context on its business during its quarterly conference call. Here are two takeaways.
1. Evidence of scale
Since Okta has yet to achieve profitability, investors are looking for signs of the company's scalability. As long as Okta is showing its economics can improve as its customer base grows, investors can count on the company becoming profitable over the long haul.
Fortunately, Okta showed year-over-year improvement across its gross margin, operating margin, operating cash flow margin, and its free cash flow margin. Operating cash flow and free cash flow margins, for instance, improved 480 and 540 basis points year over year, respectively.
But some investors may have noticed some pressure on Okta's operating margin on a sequential basis. Should they be concerned?
CFO Bill Losch explained Okta's sequential margin trend:
As expected, we saw a sequential dip in our operating margin in the quarter, largely due to the costs associated with Oktane [-- the company's annual customer conference]. Through the remainder of this year, we are planning to further ramp our hiring as we continue to invest in our go to market initiatives and innovation. However, we also expect an operating margin will continue to improve on a fiscal year basis.
In other words, the sequential pullback in Okta's operating margin was only due to an event that only occurs once a year. Even more, given how Oktane is a centerpiece to Okta's marketing strategy, big spending on the event will likely pay off in terms of customer acquisition.
2. Okta's "biggest opportunity"
One important narrative in Okta's second quarter was an acceleration in the year-over-year growth rate of customers with over $100,000 in annual recurring revenue. In second quarter, these customers increased 55% year over year. This compared to 52% year-over-year growth in Q1. The acceleration was "a testament to the increasing strategic need for an identity solution as organizations move to the cloud," said CEO Todd McKinnon in the second-quarter earnings release.
When asked for more detail on the drivers behind this inflection during the company's earnings call, McKinnon credited the growth to three tailwinds: an overall transition to the cloud, the widespread attention that digital security is seeing, and companies' efforts to be more digital.
Together, these are creating big opportunity for the company, McKinnon explained:
I think the biggest opportunity for us has been getting that message out there that identity is really important to facilitate all of those transitions and to take advantage of all those transitions. I think what's happening is that message is getting out there. So, everyone knows they have to go to the cloud. Everyone knows they have to be secure and transform their businesses to digital. They're starting to realize more and more that identity is a key to that.
Overall, Okta's second-quarter conference call reinforced why the company can continue growing at impressive rates for the foreseeable future.