Investors have been gaining confidence in recent months that Okta (OKTA 2.63%) will cash in on some major long-term business trends, including digital identity management and the shift toward cloud-based software services. On Thursday, the company added fuel to that optimistic outlook by trouncing sales growth expectations yet again. Revenue jumped 50% versus the 40% boost executives had predicted.
Looking deeper into the results reveals more good news about Okta's booming business, and below we'll cover a few of the highlights from the report.
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1. 53%: Growth in high-value contracts
Okta's high-value contracts, which it defines as those with over $100,000 in annual spending, grew 53% to again outpace overall sales gains. In fact, the increase accelerated from the prior quarter's 50% boost as the company signed up more members of the Fortune 100. "The world's largest organizations are increasingly realizing that identity is essential to their cloud, digital transformation, and security initiatives," CEO Todd McKinnon said in a press release.
Management has warned that sales trends will be volatile as the revenue base tilts more toward these huge contracts, and the company benefited from that lumpiness this quarter as sales improved to $125 million compared to the forecast range of between $116 million and $117 million.
2. 52%: Subscription revenue growth
The software specialist's other growth and engagement metrics all demonstrated healthy demand, led by a 52% spike in recurring subscription revenue. Customers are increasingly opting for cloud-based service contracts over straight-up license purchases. Billings improved at about the same rate, with deferred revenue spiking to $268 million from $174 million a year ago.
Okta must recognize these sales over the life of the contract rather than in an up-front sum, and that accounting approach reduces revenue growth in the short term but raises it in future quarters.
3. 67%: Boost in operating expenses
Selling expenses continue to far outpace revenue growth so that the earnings picture remains negative. Okta spent heavily in areas like research and development and sales and marketing, leading to a doubling of operating loss to $51 million. Investors are likely to see these expenses continue to climb in the coming quarters, too, as the company establishes a new global selling infrastructure in places like Australia and Germany.
4. 11%: Free cash flow margin
One of the key financial benefits of a subscription-based sales approach is that it supports steady, growing cash flow. Investors saw that setup start to deliver solid returns this quarter, as free cash flow improved to $13 million, or 11% of sales, from a loss of $2 million, or -2% of sales. That growth came despite an almost doubling of capital investment spending.
5. 37%: Sales growth outlook
Okta's first-quarter results, and its spiking subscription commitments, were strong enough to convince management to raise their 2019 outlook despite the fact that so much of the fiscal year lies ahead. McKinnon and his team now see sales increasing to between $543 million and $548 million compared to their prior forecast range of $530 million to $535 million.
The top of that new range implies 37% revenue growth compared to last year's 50% spike. While Okta will likely slow its sales pace in 2019 while seeing expanding losses, its market position is clearly strengthening. Investors have to hope that this success helps cash flow trends remain positive and supports improving earnings trends perhaps as early as 2020.
