OKTA slips to YTD lows as RPO outlook falls short

Okta (OKTA) delivered a solid Q2 performance, surpassing analyst expectations on both revenue and earnings per share (EPS). The company reported revenue of $646 million, up 16% year-over-year and ahead of the consensus estimate of $632 million. Adjusted EPS came in at $0.72, significantly beating the Street’s expectation of $0.61 and marking a substantial improvement from the $0.31 EPS reported in the same quarter last year. The results were driven by strong subscription revenue growth of 17% year-over-year, reaching $632 million, slightly above the estimated $619.8 million.

Despite the strong Q2 results, Okta’s guidance for Q3 was less encouraging, leading to a negative reaction in the stock market. The company forecasted Q3 revenue in the range of $648 million to $650 million, slightly above the consensus estimate of $639 million, and adjusted EPS between $0.57 and $0.58, compared to the expected $0.55. However, the current remaining performance obligation (cRPO) guidance for Q3 was projected to grow by only 9%, a slowdown that raised concerns among investors and contributed to a nearly 6% decline in Okta’s share price post-earnings.

One of the key concerns highlighted by analysts was the conservative nature of Okta’s outlook, particularly in light of ongoing macroeconomic headwinds and challenges within the SMB segment. The company’s cautious language around the impact of a past security breach also added to investor jitters. While management maintained that the hack has had negligible impact to date, the continued caution may have weighed on market sentiment. Despite this, Okta’s success in expanding its product portfolio and go-to-market (GTM) strategies was seen as a positive sign for the company’s long-term growth prospects.

Analysts were divided on the stock’s outlook following the earnings release. Needham, for instance, remained optimistic, reiterating a Buy rating with a price target of $130, arguing that Okta’s conservative guidance could set the stage for future beats and raises. On the other hand, Bank of America downgraded Okta from Buy to Underperform, citing concerns over the timing impact and cost optimization trends, and lowered its price target from $135 to $75. This divergence in analyst opinions reflects the uncertainty surrounding Okta’s near-term growth trajectory.

Okta’s financial performance in Q2 was bolstered by significant improvements in profitability metrics. The company reported an adjusted operating margin of 23%, up from 11% a year ago, and adjusted gross margin of 82%, exceeding the estimated 81.1%. Additionally, free cash flow surged 59% year-over-year to $78 million, well above the consensus estimate of $32 million. These strong margins and cash flow generation underscore Okta’s operational efficiency, even as it navigates a challenging macroeconomic environment.

In conclusion, while Okta delivered strong Q2 results that exceeded expectations, the company’s cautious guidance and ongoing macroeconomic challenges have created uncertainty around its near-term prospects. The stock’s sharp decline following the earnings report reflects these concerns, though the company’s strong fundamentals and continued innovation in identity security provide a solid foundation for future growth. Investors will be closely watching how Okta navigates the remainder of the fiscal year, particularly with regard to its ability to stabilize cRPO growth and capitalize on its expanding product offerings.