How to evaluate the Okta IPO
The company, the product, and the filing — an S-1 Breakdown
Okta, an identity platform for the enterprise, filed for a $100M IPO. There has been quite a few enterprise software/SaaS IPOs filing in 2017, with AppDynamics, MuleSoft, Alteryx and now Okta. Goldman is leading the offering and Okta plans to trade under the creative symbol, “OKTA”.
The company was founded in 2009 and their mission is to enable their customers to securely connect people to any technology, from any device. Okta first started in the SSO (single sign-on) market and has since significantly widened their product offerings. As SaaS applications like Salesforce, Zendesk, Workday exploded in usage there was no easy way to enable employees to securely access those applications, or for IT to safely manage these connections. Okta helped solve this problem by becoming the pipeline.
Today, they have 6 products and over 2 million people logging into applications through their products each day.
The company has been growing very fast, and did $111.5M in revenue in the first 9 months of FY’17, up 90% YoY.
They did $85.9M in FY’16, up from $41.0M in FY’15, a 109% increase.
They ended last quarter at $152M of implied ARR (annual recurring revenue).
As with most high-growth SaaS companies, they are losing money, and in the first 9 months of FY’17 had a $(65.2)M operating loss at a (58)% margin.
Okta has 2,906 customers and over 5,000 integrations with cloud/web and mobile apps. The company has 843 FTEs and is headquartered in San Francisco, California.
Okta’s Identity & Products
Identity access is a core tenant to an organization’s security and access posture, especially in the cloud world.
Okta becomes the platform that connects users to any technology on any device, and is the central system for access and authentication. Okta is removing the complex and sprawling legacy identity infrastructure environments (that were primarily built for an on premise world) and replacing it with a single cloud solution that connects through any type of integration, as well as through APIs.
Okta has 6 different products — Universal Directory, Single Sign-on, Adaptive Multi-factor Authentication, Lifecycle Management, Mobility Management and API Access Management.
Another interesting stat they reveal; they mention their customers usually use more than 50 IT supported cloud applications. Okta is interoperable with any application, so as the transition to the cloud continues they stand to benefit. I imagine this increase in cloud application usage drives a portion of their high net revenue retention number.
Okta’s 2,900+ customers are across 185 countries and represent every vertical — some customers include Adobe, Clorox, MGM Resorts, American Express, Magellan Health, and many others. Their revenue is ~90% subscription and almost 90% of revenue is generated in the U.S. The company sells through the field, inside sales, as well as through channel partners.
Their average ACV last quarter was $52.5K, which is up ~30% YoY. Okta charges customers by the number of products and end users and the average weighted contract length is 2.4 years. As of January 2017, they had 443 customers paying them >$100K in ACV. Their net revenue retention was 124% last quarter.
Okta believes their market opportunity to be $18B+. The IAM (identity access management) is a $5.4B market and EMM (enterprise mobility management), is a $2.1B market. They also calculate their TAM by applying their pricing against Census data for businesses over 250 FTEs, which comes out to $9B. Okta also disclosed the entire cloud software market of $78B, some of which they think can address.
Okta says they compete with CA, IBM, Microsoft, Oracle and Symantec, and RSA on the authentication side. Additionally, they compete with Citrix and VMware on the mobility management side.
They don’t mention it in the S-1, but another fast-growing company in the authentication market is Duo Security, which started in two-factor and has broadened their offering significantly over the past few years. Duo is growing very fast too as reported here.
Another competitor not mentioned, called Auth0, which provides an API for identity integration (primarily used by developers) competes as well. Okta recently acquired Stormpath which is a competitor to Auth0, and it will be interesting to see how Okta goes after developers more aggressively. You can see other competitors in Gartner’s magic quadrant.
The company has reportedly raised $229M from investors including Sequoia, Greylock, Andreessen, Altimeter, Floodgate, Glynn Capital Management, Janus Group, Khosla, and SV Angel. 5%+ pre-offering VC shareholders include Sequoia (21.2%), Andreessen (19.6%), Greylock (16.9%), and Khosla (8.1%). Their last reported valuation was $1.2B in a $75M round led by inside investors in Sep-2015.
Financials and Metrics
Okta is growing fast, although still losing significant dollars. They recorded $111.5M in revenue in the first 9 months of FY’17, and grew 90% YoY. If they continued on that rate for Q4'17 (which they have yet to disclose), they would hit ~$163M in annual revenue, which is extremely impressive.
Over the past 7 quarters, they grew implied ARR by an average of 17% QoQ and ended last quarter at $152.5M of ARR. In the same time period, their ACVs have increased 41% to $52.5K, up from $37.2K. They are moving further up-market and probably landing larger initial deal sizes too. Net new customer adds QoQ have been relatively flat.
I do like how they release customers and billings (TCV I believe) metrics on a quarterly basis. In terms of their cohort disclosure, Okta’s analysis shows the contribution margin over time of their FY 2015 cohort of customers; which represented $24.1M in ACV and $46.4M to acquire those customers, a (92)% margin. By FY 2017, that same cohort represented $34.7M in ACV and $12.6M in costs, a 64% margin.
Their sales efficiency is solid for a company of their scale — I calculate an average of 15 months over the past 7 quarters (non-GAAP). For reference, I calculated an average of 26 months for Alteryx, 20 months MuleSoft and 16 months for AppDynamics. Other public company averages are here. Outputs of Okta’s metrics are below.
Annual GAAP P&L (except for billings; 000's)
Quarterly Subscription Revenue ($M)
Implied Ending ARR Over Past 8 Quarters ($M)
Okta is growing their implied ARR quickly, although their net new ARR is not growing sequentially quarter-over-quarter as you can see in the chart below. Over the past year, they have added $71M+ of net new implied ARR. At a $(65.2)M net income loss, that ratio is roughly 1:1, which is pretty good.
Ending Customers by Quarter
Implied ACV (annual contract value) by Quarter
Dollar-Based Net Revenue Retention Rate
Cohort Output from S-1
Cash Flows (000's)
Quarterly P&L and Metrics (000's)
As with any IPO, it’s hard to know exactly where they will price/trade, but high-growth SaaS companies typically get priced on an EV/revenue multiple (enterprise value over revenue). In this case, an NTM (next-twelve-months) revenue multiple makes sense, and I’ve used FY’2018 as a proxy.
Companies do not release projections publicly during a roadshow, but I’ve put a range below using simple math (essentially a guess). This includes a range of growth rates from my estimated FY’17 revenue (which I’ve approximated using last year’s growth rate) extrapolated into FY’18.
Okta is an amazing business — they have a huge opportunity being the choke-point for the ever-growing ecosystem of software applications used in enterprises. They are also serving the acute need those same enterprises have in managing and protecting against cyber credentials theft, which happens in most wide-scale breaches. Okta is sitting in a very strategic place. Congrats to the team on building a great company. I imagine they have a very successful IPO.
Lastly, a fun fact. In the company’s management letter they disclose what their name, Okta, means; “The word Okta is the unit of measure for cloud cover in meteorology. We thought that was a great name for a company focused on enabling its customers to adopt cloud computing.”
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