Okta, Inc. Q4 FY2022 earnings

Ongoing integration of Auth0 may disrupt business relationships, divert management, and fail to realize anticipated benefits. Auth0 contributed approximately $139.7 million in total revenue for the period from the acquisition date, but also brought significant integration costs, amortization, and potential unknown liabilities.

GAAP gross margin for FY2022 year to date was 69.5%, down 4.4 percentage points from 73.9% in FY2021 year to date, and subscription gross margin decreased to 74% from 79%. The decline was primarily due to Auth0 revenue carrying higher relative cost and lower gross margin plus increased amortization of acquired developed technology.

Operating loss for FY2022 year to date widened to $767.1 million from $204.2 million in FY2021 year to date, and net loss widened to $848.4 million from $266.3 million. Operating margin was down 34.6 percentage points to -59.0%, and Okta expects to continue incurring net losses for the foreseeable future.

Okta has experienced longer sales cycles, especially for larger enterprise deals, which may delay deal closings and create near-term headwinds for cash flow, RPO and billings growth. The company says sales cycles are lengthening in certain circumstances and becoming less predictable.

Adverse general economic and market conditions, including recession risk and reductions in workforce identity and customer identity spending, may reduce demand. MD&A notes COVID-19 uncertainty and potential longer sales cycles could delay deals and pressure future revenue growth.

Okta faces intense competition, especially from larger, well-established companies such as Microsoft, which may bundle identity functionality or sell at zero or negative margins. Competitive pressure could result in price reductions, fewer orders, reduced revenue and gross margins, and loss of market share.

The conditional conversion feature of the 2023 Notes was triggered as of January 31, 2022, making them convertible at holder option between February 1, 2022 and April 30, 2022, and they were classified as current liabilities. Cash settlement or conversion could adversely affect liquidity and dilute stockholders.

Operating cash flow for FY2022 year to date was down 18.6% to $104.1 million from $128.0 million in FY2021 year to date, and free cash flow margin was 7% versus 13%. Okta expects operating losses and cash flows that may fluctuate between positive and negative amounts.

Headcount grew from 2,806 employees as of January 31, 2021 to 5,030 as of January 31, 2022, placing demands on management and culture. Competition for engineers and sales personnel is intense, and Okta notes executive management changes including a CFO transition.

Total stock-based compensation expense increased to $565.5 million in FY2022 year to date from $196.2 million in FY2021 year to date, including amounts related to Auth0 revesting agreements. This expense may continue to pressure GAAP profitability and dilute stockholders.

Goodwill totaled $5,401.3 million as of January 31, 2022, up from $48.0 million as of January 31, 2021, largely from the Auth0 acquisition. Future impairment of goodwill or acquired intangible assets could harm results.

International revenue was 20% of total revenue in fiscal 2022, up from 16% in fiscal 2021, exposing Okta to geopolitical instability including Russia's invasion of Ukraine, foreign exchange fluctuations, and varied privacy and regulatory regimes.

Okta's Dollar-Based Net Retention Rate was 124% for the trailing 12 months ended January 31, 2022, up from 121% a year earlier, but any material decline would harm future results. Customer growth could fall below expectations as Okta focuses on larger organizations.

Calculated billings increased 76% in FY2022, but absent operational changes to bill customers earlier, billings would have grown 60% year over year. Billings and RPO can fluctuate due to seasonality, renewal timing, invoice duration, and foreign currency.