Investors were bracing for some potentially bad news from digital identity management specialist Okta (OKTA -1.28%) in its fiscal second-quarter report. While growth trends have been looking strong as the pandemic pushed more business online, the company projected operating losses for the period. Its massive acquisition of the Auth0 business could result in further bottom-line pressure in the next few quarters too.
But on Sept. 1, Okta eased most of those concerns by posting accelerating sales gains and big efficiency wins from the Auth0 integration. Meanwhile, management's updated outlook implies a strong finish to fiscal 2022.
Let's take a closer look.
Demand is still strong
Okta had nothing but good news to report on the growth of the business. Subscription services jumped, and customers continued to renew contracts at a healthy clip. The company achieved robust sales in its core identity management business, plus extra gains from Auth0. Overall revenue rose 57% year over year to $316 million. That beat the guidance executives issued back in late May.
"In our first quarter as a combined company with Auth0, we're off to a fantastic start," CEO Todd McKinnon said in a press release. McKinnon went on to credit a favorable selling environment plus strong execution for Okta's impressive second-quarter performance. "[Organizations] continue to turn to Okta to deliver an unmatched array of modern identity solutions," he said.
Strong cash flow
Okta posted another net loss for the period, which wasn't a surprise given its current focus on growth. The Auth0 business is in an even earlier expansion phase, which means it should pressure companywide earnings in the short term.
The adjusted operating loss was $25 million, or 8% of sales, compared to 6% of sales last quarter. Cash flow, which management sees as a better barometer for the financial strength of the software-as-a-service operating model, was slightly negative in the second quarter. Yet Okta is still in positive territory for the year with free cash flow margin at 9% of revenue over the last six months.
A bright outlook
Executives were satisfied enough with the quarter's performance to lift both their sales and earnings outlook for the full year. Revenue should now reach $1.25 billion at the top of the range, good for 50% growth. The prior outlook called for full-year growth between 45% and 47%.
The non-GAAP operating loss will be much smaller, too. Rather than landing between $172 million and $167 million, the new guidance calls for a loss between $119 million and $114 million. While it's never exciting to see red ink, the revision implies Okta may quickly return to profitability even as it integrates the Auth0 business.
Its long-term outlook is just as bright now that Okta has a much bigger addressable market. Healthy billing trends imply the company will keep building up its client base, and its wider software portfolio means that it can service a bigger portion of these customers' digital security needs.
Investors may have been cautious heading into this earnings report, but they should now have a more bullish view of the company heading into the second half of fiscal 2022.