Cloud computing stocks, especially those providing software as a service (SaaS), have proven to be fertile ground for investors. Several of these companies have quickly grown by capitalizing on the massive transition in business to cloud software, which offers several advantages over traditional applications, including scalability and integration. The subscription model these companies generally use also has the potential to deliver high profit margins once the businesses reach scale, as variable costs are relatively low.
Okta (OKTA -0.89%) is one such example of the power of this model and the opportunity in the cloud -- the stock has soared more than 300% since its 2017 IPO coming into its first-quarter earnings report. Investors were hoping to see Okta's strong growth continue as it brings in new customers and expands current relationships. And they were not disappointed as shares were up 5% in after-hours trading. Let's take a closer look at the results.
Image source: Okta.
Okta earnings: The raw numbers
| Metric | Q1 2019 | Q1 2018 | Year-Over-Year Growth |
|---|---|---|---|
| Revenue | $125.2 million | $83.6 million | 49.8% |
| Net income from continuing operations (loss) | ($51.8 million) | ($25 million) | N/A |
| Adjusted earnings per share | ($0.19) | ($0.09) | N/A |
Data source: Okta earnings.
What happened with Okta this quarter
Okta expanded in a number of ways in the quarter. It closed on its acquisition of Azuqua, which it calls "a leader in no-code, cloud-based business application integration and workflow automation." The move was announced in the fourth quarter.
It held its annual Oktane conference, which gives its customers an opportunity to learn about new applications in Okta's identity cloud and other products, and a chance to network with other information security professionals. Oktane shifted from the second quarter last year to the first quarter, which seems to have hurt margins in the first quarter.
During Oktane, the company introduced new products like Okta Identity Engine -- an update to the Okta Identity Cloud that gives customers the ability to address unlimited identity use cases with Okta -- and Okta Hooks, a product that allows developers to create custom integrations for Okta.
Those initiatives helped propel revenue growth well past guidance of 39% to 40%, and the company continued to grow high-value customers with a 53% increase in customers with a $100,000 annual contract value. Free cash flow margin continued to improve, jumping 12 percentage points, to 10.5%, or $13.2 million, as the company benefits from additional scale, and Okta is targeting positive free cash flow for the year.
Among the new customers it added in the quarter was Zoom Video, Takeda Pharmaceuticals, and one of the world's largest banks, which was unnamed.
What management had to say
CEO Todd McKinnon touted similar themes to past quarters, saying, "The world's largest organizations are increasingly realizing that identity is essential to their cloud, digital transformation, and security initiatives." He also highlighted the success of Oktane, adding: "Last month at Oktane19, we announced new products that further advance our leadership in both workforce and customer identity. These new innovations, coupled with our existing best-in-class offerings, position us well to continue executing on our significant and growing market opportunities."
In an interview, COO Frederic Kerrest said the company remained focused on the long-term opportunity, noting that the market for identity and security software is worth tens of billions of dollars. Kerrest also underscored the company's pace of innovation, saying it releases new software 40 times a year, so customers are always benefiting from new and improved products. Finally, he said the company continues to project an operating margin of 16% to 19% by 2024, showing that Okta's business model should eventually deliver significant profits.
Looking ahead
After the strong performance, Okta also raised its guidance for the year, calling for revenue of $543 million to $548 million, up 36% to 37% from the year before. That was up from a previous range of 33% to 34%. On the bottom line, it also slightly improved its outlook, going from calls for adjusted losses per share of between $0.48 to $0.53 to a new range of $0.45 to $0.49 per share in adjusted losses.
With its status as the leading independent provider of identity cloud software, Okta should continue to benefit as more businesses move to the cloud and embrace the need for workforce and customer identity management products.
