Okta's (OKTA -1.70%) impressive business momentum isn't letting up. The digital identity specialist this week announced another quarter of surprisingly strong sales growth as new enterprise customers flocked to its suite of security software services.
Those wins helped convince management to raise its fiscal year outlook, although it's still unclear when Okta will begin generating sustainable profits.
CEO Todd McKinnon and his executive team discussed their rising expenses and explained why they're more optimistic than ever about their growth strategy in a conference call with Wall Street analysts. Let's take a look at a few highlights from that presentation.
1. Riding the wave
The market tailwinds contributing to our momentum are the rapid growth of cloud and hybrid IT, digital transformation and security. These continue to strengthen and identity plays a critical role in each of them.
There were many metrics in this report that indicate Okta is gaining traction as a standard in identity management, including the addition of 450 new customers in Q1. But management is even more excited about the company's momentum among large enterprises. After saying back in March that Okta was approaching a "tipping point" with the world's biggest organizations, executives said they landed their single biggest contract to date this quarter.
In fact, high-value deals grew 53% to mark an acceleration over the prior quarter's rate. "Organizations are turning to Okta," McKinnon explained, "because we are uniquely able to address the broadest set of use cases across ... complex technology environments."
2. Investing in the business
Total operating expenses for Q1 grew 68%. The increase is primarily driven by sales and marketing investments as we look to capture more of our large addressable market, win more of the world's largest organizations and expand geographically. Importantly, we also moved the timing of Oktane from Q2 last year to Q1 this year.
-- CFO Bill Losch
Okta achieved notable financial gains such as a shift to positive free cash flow. However, the company is not moving toward bottom-line profitability. Instead, net loss worsened to $52 million from $26 million a year earlier.
The losses are being powered by increased spending on the sales infrastructure, which management sees as a critical priority today. To that end, they just announced new offices in Australia and Germany. Investors should expect Okta to continue pouring resources into attacking the market opportunity, especially given the success they're having at signing up new customers around the world.
3. The future is bright
We remain optimistic about the current demand environment, and based on our strong first quarter results, we are raising our full year outlook.
Okta's backlog, which represents subscription revenue that's expected to be booked over the next year, grew by a robust 49%. Executives noted that its retention rate dipped slightly but remained well over 100% (thanks to upselling). The decline was a natural consequence of Okta's shift toward higher-value contracts since the move pushes initial average deal size higher.
The company's broader outlook is getting brighter. Management now sees growth landing at between 36% to 37% compared to the prior forecast range of 33% to 35%.
Investors still don't have a good idea when that surging sales base will deliver sustainable profits since Okta expects to book a loss in fiscal 2020. Yet there's no denying that the software specialist is soaking up market share in an industry niche that's becoming more and more essential to organizations of all sizes.