Bear's Okta JanQ Review

Investment Analysis Clubs Saul’s Investing Discussions
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Okta reported an incredible quarter yesterday. Improvements everywhere.

Okta ended the fiscal year with 260M in annual revenue. They’re a 4.3B market cap, so anything but cheap. Still, this quarter was exactly what you’d want to see.

Revenue: up 59% YoY
Gross Profit: up 67% YoY
Gross Margin: improved to 71% from 68% last year (up from 61% in less than 2 years! Headed toward 80% based on cost of subscription revenue)
Operating Expenses: up 58% YoY (nice…rising much slower than gross profit)
Operating Loss: 25M (up YoY, but down as a percentage of revenue)
Cash Flow From Operations: 0.2M (up from -6.7M)
Dollar Based Net Revenue Retention Rate: 121%

Cutomers: 4,350
New Customers this Quarter: 400 (up 10% sequentially!)
Customers spending over $100k per year: 691 (up 56% YoY)

Def Revenue: 168.7M
New Def Rev this Quarter: 27M

March 2018 quarter outlook
Revenue: 78M - 79M
Adj. EPS: $(0.16) to $(0.15)

Full year outlook
Revenue: 343M - 348M
Adj. EPS: $(0.67) to $(0.62)

So much good stuff on the call. I’m not even sure what to highlight, but I’ll go with my #1 favorite part, where the COO explains how they can work with on-prem, give a great customer experience, and then increase the relationship with the customer by helping them move to the cloud:

And typically, we’ll go into a customer. They’ll have a specific problem that they’re trying to solve. They might have Oracle or IBM running on-premise. They have a specific problem or initiative they’re trying to solve. They’re trying to roll out office 365 or roll out Workday through a wide deployment. We integrate with Oracle and IBM, get them up and running quickly. We get that deployment rolled out to all their employees, and within a quarter or two quarters, we come back to the CIO and talk to him or her and we say, “How was that experience?” They say, “That was great.” And then we’ve earned the right to say, “Great. Now let’s talk about your existing Oracle or IBM on-premise infrastructure, and here’s the road map over the next 12 or 24 months for us to turn the lights off on that infrastructure.” So this is not a forklift upgrade program. This is not a big bang program. And frankly, I think that’s why you continue to see the very strong net dollar retention rates that we have and the continued expansion in the enterprise.

Fantastic quarter. Exciting company. Incredible growth, especially given the scale.

Bear

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Yes, I heard of Okta but never looked into it. I will tonight. I will actually have time enough on my hands tomorrow to maybe do something stock buy wise. Okta seemed rather mundane to me, being a sign on company, but you know, once you have a sign up company working for you, you don’t fire them and go to the next guy down the street.

the financials you specified Bear, mighty something fine to look at. I like the pedigree of those who are rather high on the stock. Indeed worth a detailed look immediately, and not in a deferred will get to it fashion.

Tinker

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https://www.okta.com/resources/access-manangement-leader-gar…

Not a bad place to start. Market leader! Don’t worry I won’t follow this up with a series of tiny posts. But thought this was a good place to start, looking at Gartner and Okta is #1, lik3 PSTG is #1 and Nutanix is #1.

Tinker

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OKTA is awesome.

The company I work for started using these guys a few months back and it has made my life soooooo much better. Before that I had to remember tons of passwords as we use a lot of different programs. I was constantly signing in and out of software. I have no idea how this translates to $$$ saved with the company. I am more productive and now I am not calling IT about getting something unlocked because I forgot the password. There are clearly some savings involved. OKTA has even come up in a few meetings where people are giving accolades to the move, so it has created quite the impression (we are not the IT guys either so there is no reason to bring up OKTA). From a minion’s perspective in a large corporation these guys get 2 thumbs up.

Have not bought the stock yet (because I am an idiot). But it has been near the top of my watch list for a while.

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Thanks Pigskin, as I’ve written before it’s always great to get a report from someone actually out in the field using it. Really appreciate you taking the time to post.

Have not bought the stock yet (because I am an idiot). But it has been near the top of my watch list for a while.

Sometimes people should consider dumping one of their junk stocks that’s going nowhere and buy the stock that sings to them.

Saul

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Sometimes people should consider dumping one of their junk stocks that’s going nowhere and buy the stock that sings to them.

Saul

That statement is worth its weight in gold. Particularly the “going nowhere” bit. I had a stock that I liked but doing nothing for 2 months so dumped it and added to Ntnx last week. Enough said. One can always get back in at a later stage if circumstances call for it.

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Great minds think alike, here is MF Pro’s Jeff Fischer tweet a couple of days back and I quote:

“One difficult stock market lesson to learn is to buy more of your best stocks – buy more of your winners. Naturally, keep allocations in mind, but averaging up in winners will trounce averaging down in losers, I can almost guarantee it (no guarantees in life, or else I would)”.

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buy more of your winners

Amen to that. I shifted from averaging down to “Adding to Winners” in Jan 17 and it has done wonders.

Started out with small lots in SQ, SHOP, OKTA, AYX, etc. and then kept adding in small stages to the winners. Since coming to this board, I have had the most success yet (up 23% YTD too).

As for OKTA specifically, by reading/studying Saul’s KB, I had another “Saul moment” and bought another small lost of OKTA two weeks ago. Worked out beautifully so far.

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I had a stock that I liked but doing nothing for 2 months so dumped it

Wow, we’ve turned into some pretty short term “investors” (traders :wink: here.

Not saying that strategy has not worked recently, as so many stocks discussed here have had GREAT runs in 2018, moving into any of the current crop of “Saul” stocks has been very profitable. I guess I understand it if this was a case of taking a trial position in a company and then after further review, saying, “nope, not for me”.

I would think if it was a stock you liked you might want to give it more than 2 months to prove itself, again, unless through further research you determined either you didn’t like it or you found a stock you liked more. But if it was just a case of the stock price doing nothing for 2 months, that is not giving an investment thesis time to play out, that is looking for the latest momentum stock to invest in (a valid investing strategy if you’re nimble enough to do that successfully).

Remember, when you sell a stock to buy another, you have to be right twice.

Good luck, all!

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Saul/Bear,

Very grateful for the teaching/sharing on this board.

Newbie here so bear w me.

OKTA 2018 FY rev growth is over 60%. They projected 2019 growth to be only 35% although they still forecast Q1 2019 to be in the 60% range. Is management sand bagging or is it they foresee difficulty in later months? I see similar thing with AYX.

I still could not get over negative net income, even on adjusted basis. 1) is it all right as long as the net loss is narrowing? or net loss % of rev is narrowing 2) How do you calculate PE when earnings are negative? Now if PE is not useful, what yardstick do we use to get a gauge when looking at growth rate? For example, if PE is 25 and growth rate is 45% then we know there is opportunity there. Now what to use if no PE?
3) Cash flow. I see you guys sometimes use cash flow from Op, sometimes Free Cash Flow. Since majority of the stocks you are in are hi tech/cloud/data type, I assume the capex is minimal so you use CFFO and FCF interchangeably? Does it concern you that companies still need to pump cash into investment/financing that they end up negative on net cash flow?

Much appreciated.

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Remember, when you sell a stock to buy another, you have to be right twice.

Maybe… Maybe you have to admit you were wrong the first time and try again. I’ve ridden some dogs way too long while I’ve figured out it’s OK to be wrong.

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I’ve ridden some dogs way too long while I’ve figured out it’s OK to be wrong.

Oh, I’ve ridden more than my share, too, although I’m changing…slowly.

That wasn’t my point, though, it was dumping a stock after 2 months of it not doing anything. Two months is not enough time to know whether you have a dog, or not.

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Welcome to the board, HermioneW! Very well articulated question!

Is management sand bagging or is it they foresee difficulty in later months? I see similar thing with AYX.

I think that’s exactly what they’re doing. Many companies do this. They usually come up with an excuse about “lack of visibility” more than a quarter or two out. But they know growth won’t slow that much. But perhaps it will come down from 59% to 50%. Instead of saying “growth slowed” they get to say “we beat our 35% guidance by a mile!”

I still could not get over negative net income, even on adjusted basis. 1) is it all right as long as the net loss is narrowing? or net loss % of rev is narrowing

I think those are questions only you can answer. But as you read through board posts from the last year or so, notice how many companies with recurring (SaaS) revenue managed to move from losses to profitability.

2) How do you calculate PE when earnings are negative? Now if PE is not useful, what yardstick do we use to get a gauge when looking at growth rate? For example, if PE is 25 and growth rate is 45% then we know there is opportunity there. Now what to use if no PE?

Personally I almost completely ignore PE for companies with losses. I look at the Gross Profit vs Operating Expenses. I want to see Gross Profit increasing faster than Operating Expenses. To me that means they’re not spending too much to grow.

3) Cash flow. I see you guys sometimes use cash flow from Op, sometimes Free Cash Flow. Since majority of the stocks you are in are hi tech/cloud/data type, I assume the capex is minimal so you use CFFO and FCF interchangeably? Does it concern you that companies still need to pump cash into investment/financing that they end up negative on net cash flow?

This may be a circuitous answer, but the best lesson here is to take all metrics in context. Example: Shopify’s CFFO was only 8M in 2017 (down from 14M in 2016!!!). Well, a big reason for this is that they’re starting to offer cash advances to their users, and this creates a receivable (38M in 2017) that puts a damper on cash flow…FOR NOW. So instead of 46M in CFFO, Shopify had 8M. They also had 20M in CapEx, so they were FCF negative. But really, without the receivable I mentioned above, FCF would have been 26M. And of course, the broader context is that even 26M is nothing compared to how much cash they will eventually be able to throw off. My point is simply this: CFFO or FCF, EPS, etc…none of them mean anything out of context. Judging Shopify by their cash flow, to use my example, will not work.

Hope this helps. Feel free to ask more of these very well-constructed questions.

Bear

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“One difficult stock market lesson to learn is to buy more of your best stocks – buy more of your winners. Naturally, keep allocations in mind, but averaging up in winners will trounce averaging down in losers, I can almost guarantee it (no guarantees in life, or else I would)”.

I love it!

Saul

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I had a stock that I liked but doing nothing for 2 months so dumped it

I bought into Nutanix about six months ago, give or take. It went nowhere for the first six weeks, but I had confidence in it and kept adding little bits. Then it’s taken off and it’s up 100% or so in the last four months. I’d be unlikely to dump a stock “I liked” unless I had a good reason, but then I wouldn’t “like it” any more.

In fact Shopify did nothing for three or four months after the short attack, but now is up to $150 or so.

And Alteryx did nothing for 10 weeks (I counted them on my graph just now), before it took off straight up. I was adding little bits the whole time because all the news was good.

Saul

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Okta may have had a great 1/4 but the market did not like it.

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I still could not get over negative net income, even on adjusted basis.
1) Is it all right as long as the net loss is narrowing? or net loss % of rev is narrowing
2) How do you calculate PE when earnings are negative? Now if PE is not useful, what yardstick do we use to get a gauge when looking at growth rate? For example, if PE is 25 and growth rate is 45% then we know there is opportunity there. Now what to use if no PE?
3) Cash flow. I see you guys sometimes use cash flow from Op, sometimes Free Cash Flow. Since majority of the stocks you are in are hi tech/cloud/data type, I assume the capex is minimal so you use CFFO and FCF interchangeably? Does it concern you that companies still need to pump cash into investment/financing that they end up negative on net cash flow?

Hi Hermione,

Here’s the deal with these little SaaS (Software as a Service) companies like Okta and Alteryx and the others:

When a company sells gadgets, whether it’s a computer, a washing machine, an automobile, or even a house, once they sell it they recognize all the money they get paid as revenue, and then they have to go out and build another one and sell it next year, and to grow they have to sell more of them next year.

When a company leases software over the internet, on the other hand, they may get paid for a three year lease up front, and they pay their sales commissions up front, but they only get to recognize the revenue one month at a time (even though they already have it in the bank). This gives them a lot of deferred revenue (revenue they have taken in but haven’t recognized yet), and lots of cash flow (as they are taking in more than they are spending, even if it doesn’t count as profit yet).

The big, BIG, difference is that next year they don’t have to go out and sell that software to the same customer again. In most cases the customer keeps renewing the software forever (for all practical purposes) if its good stuff, and if their customers find that the software they are leasing facilitates the running of their businesses. It’s called recurring revenue, as it comes in year after year. In fact it often actually grows, as next year the customers often sign up for additional bells and whistles, so the amount they get from each old customer goes up (the dollar net retention rate). This is an entirely different ball game than the company selling gadgets.

Since the management recognizes that every new customer is forever, they want to get them now, before someone else does, so they spend most of what they recognize in revenue on sales and marketing (among other things) to get more customers. (They’d be crazy if they didn’t). So they don’t show a profit in spite of their revenue growing at 60% per year.

That’s the story.

Saul

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Okta may have had a great 1/4 but the market did not like it.

Hi rizzz, nice try but Okta is up 37.5% in the past four weeks (39.71 divided by 28.87 = 1.375). Maybe it’s just catching its breath.
Saul

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“I had a stock that I liked but doing nothing for 2 months so dumped it”

Remember LGIH? I took 9-10 months until it virtually exploded up. Saul stood the course and recommended that we do too. It paid off in spades!

http://stockcharts.com/h-sc/ui?s=LGIH&p=W&b=5&g=…

Rob

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Since the management recognizes that every new customer is forever, they want to get them now, before someone else does, so they spend most of what they recognize in revenue on sales and marketing (among other things) to get more customers. (They’d be crazy if they didn’t)

There is also an incredible amount of “stickiness” to these customers because of the high cost and complexity to switch to another solution. Data stored in the SaaS system’s databases has to be extracted, converted and loaded into the new replacement system.

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