Executive Summary / Key Takeaways

• Okta is solidifying its position as the leading independent identity partner, leveraging its comprehensive platform and strategic focus on security, product innovation, and go-to-market specialization to drive profitable growth despite a challenging macro environment.
• Recent financial results, including 12% subscription revenue growth in Q1 FY26, improving gross margins (80% subscription), and strong cash flow generation, demonstrate operational efficiency and execution.
• Growth is increasingly driven by large enterprise wins and the rapid adoption of new, high-value products like Identity Governance and Privileged Access, which are expanding the platform's capabilities and increasing average deal size.
• Okta's technological edge lies in its cloud-native, independent, and highly integrated platform, uniquely positioned to secure both human and non-human identities, including emerging AI agents, against an evolving threat landscape.
• While management maintains a prudent outlook for FY26 (9-10% total revenue growth guidance), factoring in macro uncertainty and go-to-market transitions, the underlying momentum in large deals, new products, and partner engagement suggests potential for continued execution.

The Identity Imperative: Setting the Scene for Okta

In the complex digital landscape of today, where cloud adoption accelerates, applications proliferate, and cyber threats grow ever more sophisticated, identity has emerged as the foundational layer of security. No longer merely about logging in, identity management is critical to enabling Zero Trust architectures, ensuring compliance, and facilitating seamless, secure access for both human users and the burgeoning population of machines and AI agents. This is the world Okta ($OKTA) inhabits and aims to lead.

Founded as a cloud-based identity and access management provider, Okta has evolved significantly since its 2017 IPO. A pivotal moment was the acquisition of Auth0, which extended Okta's reach from traditional workforce identity managed by IT and security teams to customer identity, empowering developers to embed secure access directly into their applications. This dual focus, coupled with a commitment to being an independent and neutral platform, forms the core of Okta's strategic positioning. The company has consistently demonstrated its ability to balance growth and profitability, achieving the Rule of 40 every year since going public.

Okta's journey has not been without challenges, notably cybersecurity incidents in 2022 and 2023 that impacted its reputation and led to increased scrutiny. However, these events catalyzed a redoubled focus on security, culminating in the "Okta Secure Identity Commitment," a strategic initiative aimed at hardening its own infrastructure and leading the industry in combating identity-based attacks. This commitment, alongside continuous product innovation and strategic go-to-market adjustments, defines Okta's path forward in a market demanding both robust security and operational efficiency.

The Okta Platform: A Differentiated Technological Fabric

At the heart of Okta's investment thesis lies its technology platform, a comprehensive suite designed to address the full spectrum of identity challenges. Unlike monolithic competitors who may offer identity as one component of a broader ecosystem, Okta positions itself as the leading independent identity partner, focused solely on providing a best-of-breed, cloud-native solution that integrates seamlessly with any technology stack.

The Okta Platform and Auth0 Platform together offer a broad array of capabilities, including Access Management (single sign-on, multi-factor authentication), Identity Governance (OIG, Lifecycle Management, Workflows), Privileged Access (OPA), Device Access, Fine Grained Authorization (FGA), Identity Security Posture Management (ISPM), and Identity Threat Protection with Okta AI (ITP). This breadth is a key differentiator, allowing customers to consolidate multiple point solutions onto a single, unified identity fabric.

Specific technological advancements highlight Okta's innovation engine:

• Identity Governance (OIG): A significant success story, OIG reached over 1,300 customers and contributed over $100 million in ACV within two years of launch. Combined with Lifecycle Management and Workflows, the total governance-related business exceeds $400 million in ACV. OIG offers rapid time to value and is increasingly ready for mainstream adoption with features like separation of duties and on-prem connectors.
• Identity Security Posture Management (ISPM): This product is qualitatively different, actively scanning customer environments to identify and prioritize identity security vulnerabilities, including those related to non-human identities (NHIs). Its ability to detect NHIs is particularly relevant as AI agents proliferate.
• Identity Threat Protection (ITP) with Okta AI: Moving beyond traditional multi-factor authentication, ITP continuously monitors risk signals throughout a user session, integrating with the broader security ecosystem (e.g., CrowdStrike (CRWD), Palo Alto Networks (PANW)) to detect issues and orchestrate remediation actions, such as terminating a session if a threat is detected post-login.
• Auth for GenAI: Addressing the emerging challenge of securing AI agents, this Auth0-based capability enables developers to integrate secure identity into GenAI applications, ensuring agents have built-in authentication, authorization, and secure API access. This is particularly exciting as AI projects move from proof-of-concept to production.
• Privileged Access (OPA): Ramping nicely, OPA extends Okta's reach into securing privileged accounts, often integrated with governance and access management in broader platform deals.

The "so what" for investors is clear: Okta's continuous innovation and expanding product portfolio create a powerful competitive moat. The ability to offer a comprehensive suite across workforce and customer identity, including emerging areas like governance, privileged access, and AI identity, allows Okta to capture larger deals, increase upsell and cross-sell opportunities within its growing base of nearly 20,000 customers, and drive higher customer retention rates. The focus on ease of use and rapid time to value, particularly for new products like OIG, differentiates Okta from legacy solutions that were often complex and failed to achieve full implementation.

Competitive Dynamics: Independence vs. Ecosystems

The identity market is intensely competitive, featuring a mix of large platform players, specialized vendors, and open-source alternatives. Okta's principal competitor is Microsoft (MSFT), whose Entra ID benefits from deep integration within the Microsoft ecosystem and significant financial resources. Other notable competitors include CyberArk (CYBR), particularly in the privileged access space, and various smaller, specialized vendors and homegrown solutions.

Microsoft's strategy often involves bundling identity solutions with its broader software and cloud offerings, presenting a cost challenge to independent vendors. However, Okta counters this by emphasizing the value of independence and neutrality. Its pitch to customers is that consolidating identity on an independent platform avoids vendor lock-in, provides greater flexibility to integrate with diverse technologies (Okta boasts over 7,000 integrations), and ultimately leads to better security outcomes by preventing a single point of failure or reliance on a potentially compromised ecosystem. While Microsoft may offer identity as a loss leader, Okta argues that its dedicated focus and comprehensive, best-of-breed platform provide superior security and operational benefits that outweigh the perceived cost savings of a bundled solution, particularly for large enterprises with heterogeneous IT environments.

In specialized areas like governance and privileged access, Okta competes with established players like SailPoint (SAIL) and CyberArk. Okta's strategy here is not necessarily to replace deeply embedded legacy on-premise systems but to win new use cases, particularly around cloud applications and modern infrastructure, and to offer these capabilities as part of a unified platform. Management believes the market for governance and privileged access in the cloud is significantly larger than the existing on-premise market and that Okta is uniquely positioned to capture this greenfield opportunity by integrating these functions seamlessly with core access management.

Okta's competitive advantages are rooted in its independent, cloud-native architecture, broad integration network, and expanding product suite. Its disadvantages include facing competitors with significantly larger financial resources and established customer bases (like Microsoft) and the inherent complexity of displacing deeply entrenched legacy systems or convincing customers of the value of a unified platform over specialized point solutions in certain niches. The company's strategic response involves doubling down on product innovation, leveraging its growing partner ecosystem (GSIs, marketplaces like AWS Marketplace, which has driven over $1 billion in TCV), and implementing go-to-market specialization to better address the distinct needs of IT/security buyers and developers.

Financial Performance: Balancing Growth and Efficiency

Okta's recent financial performance reflects a company executing on its strategic priorities, demonstrating improving efficiency and leveraging its platform to drive growth, particularly within its large customer base.

For the three months ended April 30, 2025 (Q1 FY26), Okta reported total revenue of $688.0 million, a 12% increase year-over-year. Subscription revenue, the core of the business, grew 12% to $673.0 million, representing 98% of total revenue. This growth was primarily driven by volume increases from new business and a 7% increase in customers with annual contract value (ACV) above $100,000. Professional services revenue was relatively flat at $15.0 million.

Gross profit for Q1 FY26 was $533.0 million, resulting in a gross margin of 77%. Subscription gross margin improved from 78% to 80% year-over-year, primarily due to improved spend efficiency. Operating expenses totaled $494.0 million, a decrease from $516.0 million in the prior year, reflecting improved spend efficiency across R&D (down 6%), Sales and Marketing (flat), and General and Administrative (down 11%). This operational discipline contributed to an operating income of $39.0 million in Q1 FY26, a significant improvement from an operating loss in the prior year period. The company achieved GAAP profitability for the first time in FY25 and reported net income of $62.0 million in Q1 FY26.

Key business metrics underscore the underlying trends. As of April 30, 2025, total remaining performance obligations (RPO) stood at $4,084 million, with current RPO (expected to be recognized as revenue over the next 12 months) at $2,227 million. The dollar-based net retention rate for the trailing 12 months was 106%, reflecting the impact of macroeconomic pressures on seat/MAU expansion, although gross retention remains healthy. The number of customers with ACV above $100,000 grew 7% to 4,870. The $1 million-plus ACV cohort continues to be the fastest-growing segment, representing over $1 billion in total ACV and growing 22% in Q4 FY25. New products contributed significantly to bookings, representing over 20% in Q4 FY25 and in the "zip code" of that in Q1 FY26.

Okta's liquidity position is strong, with cash, cash equivalents, and short-term investments totaling $2,725 million as of April 30, 2025. The company generated $241.0 million in net cash from operating activities in Q1 FY26, an increase from the prior year, driven by higher cash collections and improved spend efficiency. Okta intends to settle the principal amount of its $510 million convertible senior notes due September 1, 2025, in cash, a manageable obligation given its liquidity. The company believes its existing resources are sufficient to meet its short-term and long-term working capital and capital expenditure needs.

Outlook and Risks: Prudence Amidst Opportunity

Looking ahead, Okta's management has provided guidance that reflects a balance of optimism regarding strategic execution and caution regarding the external environment. For the second quarter of fiscal year 2026, Okta expects total revenue growth of 10%, current RPO growth of 10% to 11%, non-GAAP operating margin of 26%, and free cash flow margin of approximately 19%. For the full fiscal year 2026, the company anticipates total revenue growth of 9% to 10%, non-GAAP operating margin of 25%, and free cash flow margin of approximately 27%.

Management's guidance incorporates a prudent approach, factoring in potential risks related to the uncertain economic environment for the remainder of FY26. While they did not observe a quantifiable macro impact in Q1 FY26, customer conversations and a general market sentiment suggest potential headwinds going forward. This macro caution, along with the ongoing transition related to go-to-market specialization, informs the outlook. Notably, the additional conservatism related to the October 2023 security incident has been removed from the guidance, as management has not observed a quantifiable financial impact from the event in recent quarters.

Despite the prudent guidance, management is not slowing down investments in key growth areas: product innovation, the partner ecosystem, and go-to-market specialization. They believe these initiatives are critical to reigniting growth and capturing the massive long-term market opportunity, positioning Okta to execute effectively regardless of the macro backdrop.

However, several risks could impact Okta's ability to achieve its objectives. Macroeconomic uncertainty, including potential economic downturns, inflation, and rising interest rates, could continue to pressure customer budgets, leading to slower seat/MAU expansion and impacting net retention. Intense competition, particularly from large players like Microsoft leveraging bundling strategies, could constrain pricing power and market share gains. While the impact of past security incidents has not been quantifiable in recent financials, future incidents or perceived failures in security or privacy compliance could severely damage Okta's reputation, customer trust, and financial results. The complexity of global data privacy regulations and the evolving landscape of AI governance also present compliance challenges. The success of new products and go-to-market specialization depends on effective execution and market acceptance, which is not guaranteed. Furthermore, the upcoming maturity of convertible notes and potential need for future financing could introduce financial risks.

Conclusion

Okta stands at a critical juncture, having navigated past security challenges and operational inefficiencies to emerge as a more focused and profitable company. Its core investment thesis rests on the indispensable and growing need for robust, independent identity solutions in a fragmented and increasingly complex digital world. The company's comprehensive platform, spanning workforce and customer identity and expanding into high-value areas like governance, privileged access, and AI identity, provides a strong technological foundation and a significant runway for future growth, particularly within the large enterprise segment.

While macroeconomic headwinds and competitive pressures persist, Okta's strategic initiatives—deepening partner relationships, specializing its go-to-market efforts, and relentlessly innovating—are designed to capitalize on the long-term opportunity. The recent financial performance demonstrates solid execution and improving profitability, providing a stable base from which to invest for the future. Investors should weigh the potential for continued growth driven by platform expansion and market penetration against the risks posed by external economic conditions and intense competition. Okta's ability to maintain its technological leadership, execute its strategic plan effectively, and continue demonstrating operational efficiency will be key determinants of its success in weaving a path toward sustained profitable growth.