Sorry, I was delayed in looking at Okta’s results, but as I said, I was traveling, and jet lagged, so here are my thoughts, finally:
Management was euphoric on the conference call. It even came across reading the transcript. I don’t remember them mentioning a single worry or problem. They just said everything was booming along (I guess that they felt that their “miniscule” 49% revenue growth rate was “booming” …my word, actually, not theirs).
They are obviously doing well in selling larger accounts, as their top 25 contracts were 100% larger than their top 25 contracts a year ago.
If you look at those quarterly growth rates, while it was 57% a year ago, and 49% this quarter, the last three quarters have had growth rates of 50%, 50%, and now 49%, so growth isn’t really falling off a cliff.
Revenue DOLLARS for the last four July quarters in millions of dollars (rounded off for clarity), were 37, 61, 95, and this quarter, 140.5. That means the year-over-year dollar increases were $24 million, $34 million, and this time $45.5 million, so while percent growth comes down as they leave the tiny numbers, their dollar-based growth is accelerating very nicely, thanks.
In fact RPO (Remaining Performance Obligations), or contracts signed but not yet recognized as revenue, was up 68%. In fact it’s now $914 million !!! Think of that compared to quarterly revenue of $140 million !!!
Subscription Revenue is 94.3% of total revenue, which sounds great.
Now let’s look at Free Cash Flow. For the last four quarters it has been (in millions of dollars), 1.4 improved from negative 11.2, then 4.8 improved from negative 0.2, then 13.2 up from negative 1.6, and this quarter negative 4.3 improved from negative 11.3. Add them all together and we have the last four quarters at positive $15.1 million, up from negative $24.3 million.
July quarter gross margins for the last four years (again, rounded off for clarity) have been 65%, 70%, 73%, and now 77%. Subscription gross margins for this year and last were 83% up from 80%.
Looking back at the last ten quarters their dollar-based net expansion rate has gone from 123% to 118% over TEN quarters, as they’ve been making much larger sales up front.
Total operating expense grew at 34% compared to that 49% revenue growth. They made it clear though that they are out to capture all the accounts that they can, because once they have them, they have them for life. They emphasized that their long contracts are at their large customers request, and not because of any price rebates, but because the customers see themselves “in a long term partnership with us.”
There are a couple of things to watch out for because of the timing of their Oktane Conference this year and last. Last year it was in the July quarter but this year it was in the Apr quarter. As the conference causes a lot of extra expenses and less net profit, Apr quarter EPS comparisons looked bad yoy (loss of 19 cents down from a loss of 9 cents the year before, and July comparisons looked great (loss of 5 cents up from a loss of 15 cents). If you consider the two quarters together you see that they lost 24 cents each year in the two quarters, with Oktane probably costing 10 cents each year. You have to consider net loss for the two quarters together as well, of course.
They see no macro slowing effect at all. “We’re not seeing any of those type of things. We’re seeing very strong macro demand for our product… we’re feeling that from a demand standpoint, demand is very strong for us.” Should I sell out of a company that says that? Really?
All in all, Okta seems to me like a company I want to hold for the foreseeable future, but that’s just me. You should make up your own minds.
In fact RPO (Remaining Performance Obligations), or contracts signed but not yet recognized as revenue, was up 68%. In fact it’s now $914 million !!! Think of that compared to quarterly revenue of $140 million !!!
I just thought of the best little factoid yet: This quarter compared to a year ago, Okta’s RPO went from $544 million to $914 million year-over-year. That means they added $370 million more in signed contracts with unrecognized revenue than a year ago. If you compare that to the $45 million growth in revenue that they were able to take credit for (from $95 million to $140 million) you can see how huge that RPO growth is, and why they feel that their business is booming.
And here is a very interesting way of looking at this. Their TTM revenues were $486 million. The year before at this time they were $325 million. That means recognized revenue was up $161 million in the 12 months. But they put away $370 million additional in unrecognized revenue in their RPO. If they could have recognized it, it would have more than tripled their revenue gain. No wonder they were euphoric !!!
And no wonder people are willing to pay higher EV/S ratios for our SaaS stocks.
One point about RPO - I need to go back and check but impression I left with is while RPO is growing, its a function of longer duration of contracts (as well, or largely!) and not clear if their annual revenue can be expected to grow any faster than 49% due to this RPO growth.
If I remember right, their current RPO (what can be recognized within next 12 months) grew by 52%… better than 49% revenue growth but not near 68% total RPO growth.
Not complaining on great results, just drawing attention to what can be realistically expected compared to 68% RPO growth there.
nilvest
PS: As I mentioned elsewhere on the board, I did exit OKTA, mostly on valuation… and to put money where I see better upside… but thats besides the point… we know Saul doesn’t trade based on valuation.
When looking at RPO, it is important to look at the contract terms. Along with bigger deals usually the longer terms come in to play. Say for ex: if OKTA signs $3M deal for 3 years, while RPO increases by $3M, their revenue can only grow by $1M per year. The last quarter say the average contract term increase
“A good indicator of our progress with winning the world’s largest organizations is the overall strength and 68% growth in total RPO. This is evidence that our deal sizes are getting larger and the contract term lengths are getting longer.”
Investors need to be careful to avoid double counting RPO as revenue. RPO is backlog, and will convert to revenue over time. You cannot count that as “revenue” today. For a company that is growing its revenue fast, the RPO growth should be slightly higher than revenue growth, especially as the large deals kick in with longer terms.
As growth rates stabilize, the RPO will stabilize. Hopefully it is many quarters away.
One point about RPO - I need to go back and check but impression I left with is while RPO is growing, its a function of longer duration of contracts (as well, or largely!) and not clear if their annual revenue can be expected to grow any faster than 49% due to this RPO growth.
If I remember right, their current RPO (what can be recognized within next 12 months) grew by 52%… better than 49% revenue growth but not near 68% total RPO growth.
A most excellent observation! I’ve been in business long enough to know that money that is NOT in the bank is “bird in the bush.” With all the complexities introduced by GAAP, stock based compensation, derivatives mark-to-market* pricing, etc. it’s cash in the bank, AKA Cash Flow, that is the best indicator of how a business is doing. One important caveat is that the SaaS business model has built in an early stage negative cash flow while the business is grabbing market share – see David Skok. What that means is that cash flow has to be seen in context, in the context of how far along the particular SaaS enterprise is.
To summarize, look at the numbers that GAAP and company cannot screw with!
Denny Schlesinger
mark-to-market pricing was greatly responsible for the 2008 meltdown by making bad situation worse and when it was repealed early in 2009 the stock market took off. But the bureaucrats didn’t know to leave a good thing be, they have reintroduced toxic mark-to-market which wildly distorts GAAP earnings with crazy swings that are best ignored.