Hi all, my notes from Okta CC.
Okta is cool. A bit like ZScaler, just how things should be.
Okta are continuing to grow well, but perhaps less than desired. They’re mostly US-based, International is 16% of revenue so lots of potential there (but may require more expenditure). They’re not seeing much impact from COVID apart from some delays. However, COVID impact is likely to be Q2/Q3 21 for them (and everyone else) which is why guidance could be considered muted.
RPO is up strongly, they have a ton of cash. It wasn’t a fantastic quarter I don’t think, but strong. Trends are in the right direction, and the next few quarters will allow positive COVID impacts to become apparent. If they don’t eventuate… something is wrong. Okta is a company that should be benefitting but it may take a few quarters to eventuate.
They also ‘spend’ a chunk in stock-based-compensation and share count is increasing 2% per quarter which always bugs me, but the market certainly doesn’t care about what bugs me!
I think their valuation has jumped ahead a bit but not too far ahead. I’ll be looking to add on any drops. Story is intact, big trends are intact, market is large…
One interesting anecdote for ZS owners was how a financial services company was using VPN for 20k/100k employees. COVID killed their VPN, OKTA got that back up and running. This is ZScalers bread and butter, and interesting that OKTA could essentially ‘scale’ the VPN boxes of the company.
cheers
Greg
ps. As always copy+paste into https://dillinger.io for a pretty version…
Q1 2021
Sauls Board discussions
OKTA FYQ1 2021 Results
A bit of a mixed bag of opinions, with some comparison to ZS. OKTA had a much bigger EV than ZS at the time. Okta subsequently jumped up in the last few days.
GauchoChris’ OKTA thoughts
He wanted to see more revenue growth, IMO this will take a few quarters to eventuate. If it doesn’t… they’re on his chopping block (rightly so!)
Checklist
Q: What is revenue doing yoy?
A: $125m, $140m, $153m, $167m, $183m = {+50%, +49%, +45%, +45%, +46%} ? {GD: consistent}
Q: What are customers doing q-1?
A: Customers growing about 6-7% per quarter. S&M spend is pretty high but once you’re in…?
Q: DBNER?
A: 121% ? Nice. They’re broadening products, and I really like their Server Access product.
Q: Revenue per customer up or down (either revenue/customers or ARR)?
A: Going up, but not by much.
Q: Expenses as percent of revenue going up or down (ie, any sign of leverage)?
A: Expenses as percent of revenue:
GAAP numbers
| | Q1 2019 | Q2 | Q3 | Q4 | FY 2019 | Q1 2020 | Q2 | Q3 | Q4 | FY 2020 | Q1 2021 |
| -------------------- | ------- | ------ | ------ | ------ | ------- | ------- | ------ | ------ | ------ | ------- | ------- |
| Revenue | 83621 | 94586 | 105576 | 115471 | 399254 | 125223 | 140480 | 153037 | 167327 | 586067 | 182859 |
| yoy | | | | | | 50% | 49% | 45% | 45% | 47% | 46% |
| Customers | 4700 | 5150 | 5600 | 6100 | | 6550 | 7000 | 7400 | 7950 | | 8400 |
| q-1 | | 10% | 9% | 9% | | 7% | 7% | 6% | 7% | | 6% |
| Revenue/Customer | 17792 | 18366 | 18853 | 18930 | | 19118 | 20069 | 20681 | 21047 | | 21769 |
| Customers ACV >$100k | 747 | 837 | 937 | 1038 | | 1142 | 1222 | 1325 | 1467 | | 1580 |
| q-1 | | 12% | 12% | 11% | | 10% | 7% | 8% | 11% | | 8% |
| R&D | 19,929 | 24,829 | 27,596 | 30,031 | | 34,032 | 40,045 | 41,832 | 43,360 | | 48,494 |
| % revenue | 24% | 26% | 26% | 26% | | 27% | 29% | 27% | 26% | | 27% |
| S&M | 49,493 | 59,004 | 56,911 | 62,552 | | 82,112 | 78,385 | 87,224 | 92,635 | | 104,043 |
| % revenue | 59% | 62% | 54% | 54% | | 66% | 56% | 57% | 55% | | 57% |
| G&A | 15,070 | 20,955 | 19,848 | 19,237 | | 25,766 | 26,887 | 28,887 | 31,352 | | 34,035 |
| % revenue | 18% | 22% | 19% | 17% | | 21% | 19% | 19% | 19% | | 19% |
Note these are GAAP numbers, SBC is a big part of their compensation, coming to a total of $37m in the latest quarter.
CC Review
Revenue: +46% ?
Subs revenue: +48% ?
RPO: +57% ?
Customers: 8400 ?
“Record free cash flow”
“Billings growth ‘solid’ despite some pressure (COVID)”
Diversified customer base. Large enterprise companies vast majority of business.
We’ve invested in attracting enterprise customers - paying off
Customers with ACV >$100k: +113 (>50% from new logos) → ~1600 total
- ACV of these customers increased +50%
Some delays… mostly within impacted industries.
SMBs business slow, but smaller proportion of business.
Some fast-track demand for IAM from new and existing customers.
Anecdotes
State of Illinois - Numerous legacy systems for auth. Win for both WorkForce and Customer Identity. Also Okta Advanced Server Access (to protect on-prem and cloud servers - {GD: whats this? Securing infrastructure “easier and more secure” access to Linux and Windows servers. Actually very cool. When you login to OKTA, you get a single-use certificate that lets you log-in to the server (dynamic too - who can access what server from what device and when)})
FedEx - Okta Identity Cloud - 85k remote employees. Deployed in 36 hours.
Parsons - New logo. G2K solutions provider for intelligence, defence and critical infrastructure markets. Replacing legacy systems for 16k employees. Universal Directory, SSO, Advanced Lifecycle Management, MFA, Okta Access Gateway. Also Authentication and Authorisation for its own SaaS product.
TMobile - upsell. Recently merged with Sprint, so needed to onboard another 30k employees.
Megatrends
“The megatrends of increased adoption of cloud and hybrid IT, digital transformation and Zero Trust Security have been driving our business for the past several years and will continue to drive our business well into the future. In fact, once we emerge from the crisis stage of this pandemic, we expect to see an acceleration of these trends. These trends resonate now more than ever and our leadership position going into this crisis will be further enhanced as we expand our presence and product offerings.”
“When crisis is over, don’t expect organisations to revert to prior ways of working”. Much higher proportion of remote workforces “inevitable long-term trend” → Positive trend for OKTA.
Oktane20
20k registrations, 3x more than expected in-person.
- Okta Platform Services
- Okta Workflows (makes Okta Identity Cloud programmable).
- Okta Lifecycle Management Workflows - no-code environment to automate complex lifecycle processes.
- Okta Devices (secure access across all devices).
- Okta FastPass “beginning of the end of passwords at work”
- Strategic Tech Partnerships with endpoint protection providers
- VMWare Carbon Black
- CrowdStrike
- Tanium {GD: whos that? tanium.com - private company}
“Allows combination of endpoint risk detection and user identity”
“Our mission is to enable anyone to use any technology”.
Social
Made some of core services free for new customers for up to 5 apps.
Supporting local orgs, OKTA for Good fund. $10m to non-profits at intersection of social good and tech.
Personnel
Charles Race - President of Worldwide Field Operations retiring (after 4 years)
Finances
Continuing to invest, but also conserving cash where appropriate.
| | Q1 21 | YOY |
| :---------------------------- | :---------- | :--------- |
| Revenue | $183m | +46% |
| -- Subs revenue | $174m | +48% | 95% of total revenue |
| -- International revenue | $29m | +47% | 16% of total revenue |
| Total Billings | $209.5m | +42% | Driven by new and existing customers,+ invoice timings. Some delays in purchase decisions |
| Current Billings | $209.6m | +41% |
| Current RPO (next 12 months) | $619m | +49% | **RPO preferred metric** |
| Total RPO | $1.24b | +57% |
| DBNRR | 121% | +200bps | Strong customer upsell. Slight increase in gross retention rate (enterprise). |
| Total GM (Non-GAAP) | 77.5% | +120bps |
| Subs GM (Non-GAAP) | 81.8% | flat |
| Operating margin (Non-GAAP) | -6.7% | +1320bps |
| Rule of 40 | 54% | -80bps |
| Customers | 8400 | +28% |
| Customers > $100k | 1580 | +38% |
| Non-GAAP Gross profit | $141.8m | +49.5% |
| OpExp | $154.1m | +29% | lower than expected, virtual Oktane |
| Headcount | 2379 | +34% | Customer facing and innovation. Pace of hiring moderated. |
| GAAP Operating loss | **-$52.2m** | vs -$51.8m | OpExp SBC = $32m |
| Non-GAAP Operating loss | -$12.3m | vs -$24.9m |
| GAAP Net loss/share | -$0.47 | vs -$0.46 |
| Non-GAAP Net loss/share | -$0.07 | vs -$0.19 |
| Op Cash flow | $38.7m | vs $21.3m |
| FCF | $29.8m | vs $13.2m |
| FCF Margin | 16.3% | +580bps |
| Cash and equivs | $1.45b | vs $547.5m |
- “We expect Q1’s beneficial invoice timing to become a modest headwind to second quarter billings growth.”
- Reduced spend on sales and marketing, travel and entertainment, lower employee costs. “Significant decrease in interest income”
- “Maintaining guidance”
- “Value of products more clear than ever”
| Guidance | | |
| :---------------------- | :---------------- | :--------------------------------------- |
| Total Revenue | $185m to $187m | +32% to +33% yoy |
| Non GAAP Operating Loss | -$5m to -$4m | |
| Net loss/share | -$0.02 to $0.01 | |
| Shares | 125m | |
| FY2021 | | |
| Total revenue | $770m to $780m | +31% to +33% |
| Non GAAP Operating Loss | -$37m to $30m | |
| Net loss/share | -$0.23m to -$0.18 | |
| Shares | 125m | |
| CapExp | $15m to $20m | down from $35m -reduced facilities needs |
Question-and-Answers
- Tactical versus strategic in Digital Transformation, fast-forward of adoption or at least mindset around cloud adoption by five years. In impacted industries, trying to survive. Other industries WFH are outside your perimeter. People figuring out identity is key part of pulling digital transformation projects forward.
- Annual guidance is a bit low, but given strength in this quarter, why isn’t that strength continuing through the rest of year? Mostly macro considerations, expecting weaker Q2/Q3 from COVID. Q4 expecting more normal. Pipeline is strong, but some delays in purchasing. Conservative view.
- Impacted industries exposure, churn in those industries? (consumer retail, hospitality and travel, food and beverage) → about 12% of business. Consistent net/gross retention. Do see some risk going forward, factored into guidance.
- Product set performance - usage overall “really accelerating”, particularly Multi-factor authentication. Workforce products pulled forward. Lead times of Customer Identity projects (eg: websites with Okta customer logins) are longer. But expect to see more of those projects going forward. Fedex example.
- AWS partnership - new native integration with AWS assets {GD: whats this?}. Customers know they have a cloud alternative in every part of stack. Microsoft? AWS? Google? Up development, to application layers. Lots of choice, we’re a neutral 3rd party that connects to everything. “Industry leading integrations (6500+)”. AWS contributed to integration, very deep integration.
- Gap between RPO and billings → Current RPO is better as a metric. Eliminates billings invoice timing variabilities.
- Oktane lead gen > 20k attendees. Very strong pipeline for rest-of-year. “Everyone movng to remote work environments”. Very strong upsells. Ecommerce in North America normally around 10%-12% of total commerce. “Think it jumped to 25/27% of total commerce”. “That trend is not going away” = big opportunity for us.
- Balancing aggressive growth with efficiency (detailed in Investor Day {GD: wheres this?})
- Identity is a fundamental thing but “lot of different tools have sort of identity functions”. Our vision is to build a platform that can support any use case". One unified, neutral and idependent identity platform is best for customers.
- Expansion rate really strong - some pull forward, but strong pipeline. Expansion rate can fluctuate.
- Competitive dynamics re: CyberArk acquisition of Adaptive. Swimlanes are starting to blur, but customers “really differentiating between legacy on-premise vendors … and modern cloud solutions”. Advanced server access “has done very, very well”. Upsell to Zoom. Customer is trying to solve the problem, rather than get hung-up on swimlanes and just do whats right for customers.
- Charles Race retiring - we’ll search for the best candidate in the world. Lots of time to find the right person.
- Any change in whats getting you into enterprise (products?). We’re getting opportunity to land in lots of different ways. We can land with MFA, or Customer Identity and Access Management, then crossover. eg: Financial services using VPN for 20k/100k employees. COVID killed VPN, we get that back up and running {GD: how does this mesh with what ZScaler are doing? If they can resurrect the VPN by offloading the authentication stuff, why do you need ZScaler?}. As we broaden the product, more opportunity to land.
- Multi-SSO - CloudFlare, ZScaler… Todd “I don’t know what multi-SSO means…sounds like Single Sign On”. (Thats what we do, bunch of other people trying, but we think we’re the best, most integrated. An example, Albertsons, 20+ banner companies under their umbrella, like Safeway, Vons, JewelOsco. They turn to us to create one way for customers to authenticate across all of them. So Albertsons has one view of a customer.
- MFA demand high. Pull forward deals → deal moves fast, MFA is pain point but more products than MFA get sold. To do MFA properly, you need core directory product, core SSO product. This acceleration hasn’t been going on very long, so a lot to go. Lots of runway in MFA.