Okta Earnings: Strong Results for Okta as Sales and Profitability Top Our Estimates

We are raising our fair value estimate for no-moat Okta OKTA to $85 from $76 after the firm closed out a strong quarter with financial results ahead of our prior estimates. Further, management’s commentary on the macroenvironment paints a better picture than in prior quarters, with the firm experiencing customer demand stabilization. However, while macro conditions improved from prior quarters, they continue to affect the firm’s sales motion, particularly in the small-to-medium-size customer segment. With shares rallying after the earnings report, we view Okta as fairly valued relative to our updated valuation.

Second-quarter sales clocked in at $556 million, up 23% year over year and well ahead of our above-consensus $536 million estimate. Encouragingly, the pipeline for future sales also looks solid with current remaining performance obligations, representing the backlog the firm expects to recognize as subscription revenue over the next year, growing 18% year over year to $1.77 billion. Okta’s billings, another forward-looking metric, also expanded 25% year over year, further underscoring an improving pipeline for future sales.

At the same time, however, macro-induced spend optimization continues to weigh on Okta’s upselling motion with the firm’s net retention for the second quarter coming in at 115%, down 700 basis points year over year and 200 basis points sequentially. We believe that as demand conditions normalize, Okta’s net retention metric could rebound to 120%-plus territory.

Looking at profitability, Okta’s emphasis on operational discipline continued to bear fruit with the firm’s adjusted operating margins expanding considerably to 11% from negative 3% a year ago, ahead of our 7% prior estimate. We reiterate our view that as Okta scales its business, the firm stands to expand its margins substantially over the 10-year forecast.