Judging by the initial stock price jump after the announcement, investors appeared to be happy with the latest earnings report from Okta (OKTA -1.60%) on Sept. 1. Sure, the giant in digital identity management saw a second straight quarter of losses. But its customer list is expanding, and these clients are increasingly boosting their contract commitments. Strong booking trends also imply robust profitability ahead as Okta integrates the new Auth0 business into the fold.

In a conference call with Wall Street analysts following the release, CEO Todd McKinnon and his team explained how these developments should support investor returns over the long term. Let's look at a few highlights from that presentation.

A man making a video teleconferencing call from home.

Image source: Getty Images.

1. Okta is gaining a bigger foothold

While Okta's 57% sales spike for the period beat expectations, executives said the growth picture was even clearer when you look at the changes to its customer base. The core identity-management platform attracted a record 750 new customers in the second quarter, and the new Auth0 segment brought in an extra 1,650 new clients.

Both divisions landed hundreds of new large-value contracts, too, and executives were thrilled to see how well the sales team was able to upsell and cross-sell across the widening portfolio of identity management and protection services. "We remain incredibly enthusiastic about the demand trends we're seeing in our business," McKinnon said.

2. Happier clients

Retention metrics paint a picture of an incredibly satisfied customer base that's getting plenty of value from Okta's portfolio. Contracts on average were renewed at 124% of their previous values, which reflects both strong renewal rates and high demand for additional services. "Gross retention rates remain very healthy," interim CFO Brett Tighe said, "and reflect the value of our products to our customers."

Executives warned that these rates might bounce around over the next few quarters, with extra volatility due to demand swings around the pandemic today and a year ago. Still, the general trend toward increasing contract sizes, combined with almost 100% renewal rates, is the best confirmation that investors have about the long growth runway ahead for Okta.

3. Looking ahead

Okta still sees the Auth0 business likely weighting down earnings and cash flow this year, mainly because that segment is earlier on in its expansion path and thus isn't as profitable. There could be unwelcome surprises, too, as integration progresses.

But Okta's wider outlook is improving in all the areas that matter. Growth is now expected to land at roughly 50% this fiscal year, with cash flow staying in modestly positive territory. Both metrics were upgrades over the prior forecast in late May.

Okta's longer-term vision still aims to reach annual sales of $4 billion by fiscal 2026, implying growth of at least 35% in each of the next five fiscal years. Free cash flow should reach about 20% of sales by that time, executives believe, compared to the 6% or so that is likely in fiscal 2022. "We are extremely excited about the $80 billion market opportunity in front of us," Tighe said.

Investor takeaway

Okta is spending cash aggressively right now, in areas like sales and marketing, and research and development, which is contributing to the losses that shareholders have seen over the last six months. It should be a few more quarters before it's clear whether this spending surge delivered appropriate returns without adding inefficiencies to this high-growth business.