10-Q: Okta Posts Strong Q3 Profit, Revenue Up 12%

Okta, Inc. reported a significant increase in net income and revenue for the third quarter and first nine months of fiscal 2026, driven by subscription growth and improved operating efficiency.

Summary

• Net income for the three months ended October 31, 2025, increased to $43 million, up from $16 million in the prior year period.
• Total revenue for the three months ended October 31, 2025, grew 12% to $742 million, with subscription revenue increasing 11% to $724 million.
• For the nine months ended October 31, 2025, net income surged to $172 million, compared to $5 million in the same period last year.
• Total revenue for the nine months ended October 31, 2025, rose 12% to $2,158 million, primarily from subscription revenue of $2,108 million.
• Operating income for the three months was $23 million, a significant improvement from an operating loss of $16 million in the prior year.
• Operating income for the nine months was $103 million, compared to an operating loss of $82 million in the prior year.
• Cash provided by operating activities increased by $162 million to $626 million for the nine months ended October 31, 2025.
• Acquired Axiom Security Ltd on September 4, 2025, for $54 million in cash to expand privileged access management capabilities.
• The "One Big Beautiful Bill Act" enacted on July 4, 2025, is expected to reduce federal and state cash tax payments and income tax expense for the remainder of fiscal year 2026 and future periods due to immediate expensing of domestic R&D.

Sentiment

Score: 8

Explanation: The company demonstrated strong financial performance with significant increases in net income and a shift to operating profitability. Revenue growth remains solid, and strategic acquisitions are expanding capabilities. However, a slight decline in net retention rate and ongoing cybersecurity/legal risks temper the overall positive outlook.

Positives

• Significant increase in net income for both the three and nine months ended October 31, 2025, demonstrating improved profitability.
• Strong revenue growth of 12% for both the three and nine months, primarily driven by subscription revenue.
• Improved gross margin for subscription revenue, reaching 80% for both periods, indicating better spend efficiency.
• Transition from operating loss to operating income for both the three months ($23 million) and nine months ($103 million).
• Substantial increase in cash provided by operating activities, up $162 million to $626 million for the nine months.
• Positive shift in investing activities, providing $223 million cash compared to using $137 million in the prior year, driven by higher proceeds from maturities of available-for-sale securities.
• Growth in customers with annual contract value above $100,000, increasing by 7% to 5,030.
• Acquisition of Axiom Security Ltd is expected to broaden privileged access management capabilities.
• The "One Big Beautiful Bill Act" is anticipated to reduce future tax payments and income tax expense.

Negatives

• Dollar-based net retention rate decreased to 106% as of October 31, 2025, from 108% in the prior year, primarily due to the macroeconomic environment.
• Increased cash used in financing activities, up $270 million to $622 million for the nine months, mainly due to convertible senior note payments and equity award tax settlements.
• Sales and marketing expenses remain the largest operating expense category and are expected to continue to be so.
• The company still maintains a full valuation allowance on its U.S. deferred tax assets.

Risks

• Adverse general economic, market, and industry conditions, including inflation, interest rates, and geopolitical events, could reduce demand for solutions.
• Failure to effectively manage future growth, including potential challenges in restructuring plans and maintaining customer satisfaction.
• Intense competition from larger, well-established companies like Microsoft, which could lead to price reductions and loss of market share.
• History of losses and uncertainty about consistent future profitability.
• Dependence on retaining existing customers and expanding their usage; non-renewal or less favorable terms could harm revenue.
• Inability to grow the customer base, particularly larger organizations, could harm revenue growth and profitability.
• Quarterly fluctuations in results of operations due to various factors, making future results difficult to predict.
• Interruptions or performance problems impacting technology, systems, or infrastructure could delay platform deployment and harm business.
• Past cybersecurity incidents (January 2022, October 2023) harmed reputation and financial results, with similar incidents possible in the future.
• Failure or perceived failure to comply with privacy or security provisions of contracts, policies, or legal requirements could result in proceedings, actions, or penalties.
• Inability to ensure solutions integrate or interoperate with various third-party operating systems, platforms, and devices could make platforms less competitive.
• Real or perceived errors, failures, vulnerabilities, or bugs in solutions, including deployment complexity, could harm business and results.
• Revenue recognition over the service period means sales decreases are not immediately reflected, limiting rapid revenue increases.
• Stock price volatility and potential decline due to numerous factors, including market performance and analyst expectations.
• Dual class common stock structure concentrates voting control with pre-IPO stockholders, limiting influence of other stockholders.
• Transactions related to convertible notes may affect the value of Class A common stock, including potential dilution from conversions.
• Dependence on executive officers and key employees; loss or inability to attract skilled employees could harm business.
• Susceptibility to risks associated with international operations, including political, economic, regulatory, and staffing challenges.
• Failure to adapt to rapid technological change, including in AI, could impair competitiveness.
• Increasing variability in sales cycles, especially for larger organizations, making revenue prediction difficult.
• Dependence on the success of strategic relationships with third parties, including channel partners and developers.
• Potential for delayed, inefficient, or unsuccessful implementation of solutions by customers.
• Challenges and risks associated with sales to public sector entities, including budget cycles, compliance, and termination rights.
• Failure to enhance brand cost-effectively could impair customer base expansion.
• Risk of not setting optimal prices for solutions in response to market changes or increased costs.
• Inability to consistently generate cash flows or raise additional capital could reduce competitiveness.
• Liability claims for contract breaches, with insurance potentially inadequate to cover losses.
• Evolving and complex scrutiny of sustainability matters may require additional costs or impact business.
• Interruptions or delays in services from third-party data centers or internet service providers could impair platform delivery.
• Reliance on software and services from other parties; defects or loss of access could increase costs.
• Issues in the development and use of artificial intelligence (AI), combined with an uncertain regulatory environment, may result in reputational harm or liability.
• Failure to adequately protect proprietary rights could impair competitive position and lead to costly litigation.
• Subject to intellectual property infringement claims from competitors.
• Use of open source software in platforms could negatively affect ability to offer solutions or lead to litigation.
• Indemnity provisions in agreements potentially expose the company to substantial liability.
• Exposure to foreign currency exchange rate fluctuations, with no current hedging arrangements.
• Subject to anti-corruption, anti-bribery, export controls, and economic sanctions laws.
• International operations may give rise to potentially adverse tax consequences due to complex tax laws and transfer pricing.
• Changes in tax laws or regulations could increase costs or harm business.
• Ability to use U.S. net operating loss carry-forwards and other tax attributes may be limited by ownership changes.
• Failure to maintain an effective system of disclosure controls and internal control over financial reporting could impair ability to produce timely and accurate financial statements.
• Changes in existing financial accounting standards or practices, or taxation rules, may harm results.
• If estimates or judgments relating to critical accounting policies prove incorrect, results could be adversely affected.
• Catastrophic events may disrupt business operations.

Future Outlook

The company expects the "One Big Beautiful Bill Act" to reduce federal and state cash tax payments and income tax expense for the remainder of fiscal year 2026 and future periods. It also anticipates continued investment in platform infrastructure, support organizations, and security posture, aiming to improve gross margin over time. Sales and marketing expenses are expected to remain the largest operating expense category but decrease as a percentage of total revenue as total revenue grows. The company believes existing cash, cash equivalents, investments, and cash from sales will be sufficient to meet short-term and long-term liquidity needs.

Management Comments

• We expect the impact of these security incidents to adversely affect our future financial performance, we cannot predict the extent of such impact with certainty.
• We expect our operating expenses to increase in future periods as we continue to expand our business.
• We expect our sales and marketing expenses will continue to be our largest operating expense category for the foreseeable future. We expect sales and marketing expenses as a percentage of total revenue to decrease as our total revenue grows.
• We expect general and administrative expenses as a percentage of total revenue to decrease as our total revenue grows.
• We revised our estimated annual effective tax rate upon enactment of the Act. As a result, income tax expense reported for the periods presented was computed to reflect the effects of the change in the tax law.
• We expect the immediate expensing of domestic R&D expenditures to be the most significant impact of the Act, resulting in a reduction in federal and state cash tax payments and income tax expense for the remainder of fiscal year 2026 and future periods.
• We are currently evaluating the impact of these provisions [related to international taxation from the Act] on our financial statements and tax positions.
• Given our current and anticipated future earnings, we may release a significant portion of our valuation allowance in the foreseeable future if there is sufficient positive evidence that outweighs the negative evidence.
• We believe our existing cash and cash equivalents, our investments and cash provided by sales of our solutions will be sufficient to meet our short-term and long-term projected working capital and capital expenditure needs for the foreseeable future.

Industry Context

The company operates in a rapidly growing cloud adoption and remote/hybrid workforce environment, where identity is becoming the most critical layer of an organization's security, shifting towards a Zero Trust security model. Okta positions itself as the leading independent identity partner, leveraging its Okta Platform and Auth0 Platform to address these trends. The industry is characterized by rapid technological change and intense competition, with Microsoft identified as a principal competitor. The company's acquisition of Axiom Security Ltd reflects a strategic move to broaden its privileged access management capabilities, aligning with the evolving security landscape.

Comparison to Industry Standards

• Our principal competitor is Microsoft, which has significantly greater financial, technical, sales and marketing, distribution, customer support, and other resources.
• Many competitors have larger intellectual property portfolios, longer operating histories, and more established relationships, potentially leveraging broader product offerings or incorporating functionality into existing solutions to gain business.
• The company has attained multiple privacy certifications (e.g., Data Privacy Network, Privacy Recognition for Processors, EU Cloud Code of Conduct Level 2) and maintains FedRAMP Authorities to Operate and HIPAA Security Rule alignment, indicating adherence to high security and compliance standards within the industry.
• The intellectual property ownership and license rights surrounding AI technologies are not fully addressed by courts or regulations, posing a general industry challenge for companies utilizing or developing AI.

Corporate Governance

Legal Proceedings

• Securities class action lawsuit (In re Okta, Inc. Securities Litigation) settled for $60 million, covered by D&O insurance and a $10 million company retention. Final approval granted on November 19, 2024, and the lawsuit was dismissed.
• Multiple derivative lawsuits (California Federal Derivative Actions, Delaware Federal Derivative Actions, Delaware Chancery Actions) were globally resolved with non-monetary terms and a $2.25 million fee award to plaintiffs' counsel, to be paid by D&O insurers. Final approval for California Federal Derivative Actions granted on October 22, 2025; Delaware Federal Derivative Actions dismissed on November 24, 2025; and a notice of voluntary dismissal filed for Delaware Chancery Actions on November 24, 2025.

Stakeholder Impact

• Shareholders: Positive financial results (increased net income, operating income, cash flow) could benefit shareholders. However, the decrease in dollar-based net retention rate and the dual-class stock structure concentrating voting power may be concerns. Convertible notes could dilute ownership.
• Employees: Restructuring plans involving workforce reductions have occurred in the past and could impact employee morale. Stock-based compensation is a significant component of employee compensation.
• Customers: Continued investment in platform infrastructure and security aims to improve service. Cybersecurity incidents have harmed reputation and customer relations in the past. Unsuccessful implementations or service disruptions could lead to customer dissatisfaction.
• Suppliers/Partners: Dependence on third-party service providers and channel partners is significant. Issues with these partners could affect service delivery.
• Creditors: The company's ability to service its debt (convertible senior notes) depends on future performance and cash flow. The 2026 Notes are now current liabilities.

Next Steps

• Adopt FASB guidance on disaggregated income tax disclosures in the Annual Report on Form 10-K for the year ended January 31, 2026.
• Evaluate the impact of FASB guidance on disaggregated income statement expense information (effective for annual periods beginning after December 15, 2026).
• Evaluate the impact of FASB guidance to modernize accounting for internal-use software costs (effective for annual periods beginning after December 15, 2027).
• Continue to monitor the impacts of macroeconomic conditions on business, results of operations, and financial position.
• Continue to invest additional resources in platform infrastructure, support organizations, and security posture.
• Continue to invest in technology innovation to expand platform capabilities and improve gross margin.
• Continue to expand sales and marketing capabilities, including further specializing the go-to-market organization.
• Assess capital structure and evaluate the merits of deploying available cash.
• May in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies.
• May use derivative instruments to hedge foreign currency exchange rate fluctuations in the future.
• Evaluate the impact of certain provisions of the "One Big Beautiful Bill Act" related to international taxation, effective beginning in the fiscal period ending January 31, 2027.
• Potentially release a significant portion of the valuation allowance on U.S. deferred tax assets in the foreseeable future if sufficient positive evidence outweighs negative evidence.
• Shibu Ninan's Rule 10b5-1 trading arrangement provides for the sale of up to 5,016 shares of Class A common stock from January 13, 2026, until April 15, 2026, or until all shares are sold.

Key Dates

Recommendation

The company has demonstrated a strong turnaround in profitability, moving from operating losses to significant operating and net income. Revenue growth remains robust, driven by subscription services, and cash flow from operations is healthy. While the dollar-based net retention rate saw a slight dip, the increase in high-value customers and strategic acquisition of Axiom Security Ltd indicate continued market penetration and product expansion. The positive impact of the 'One Big Beautiful Bill Act' on future tax expenses is also a favorable development. Despite ongoing competitive pressures and cybersecurity risks inherent in the industry, the fundamental financial improvements and strategic positioning suggest a positive trajectory for the stock.

Keywords

Identity Management, Cloud Security, SaaS, Cybersecurity, Zero Trust, Auth0, Privileged Access Management, Enterprise Software, Financial Results, SEC Filing, 10-Q, Subscription Revenue, Profitability, Operating Income, Cash Flow, Acquisition, Axiom Security, Convertible Notes, Data Privacy, AI, Risk Factors