Okta Surges 20% Pre-Market as Q2 Results Beat Estimates, Raises Full-Year Guidance for Second Time This Year

The most notable highlight this quarter was the growth of the AI security business. The company opened its "Okta for AI Agents" tool to all customers, driving bookings for its "new product lineup" including the tool to account for 30% of total orders and boosting the average annual contract value (ACV) of related deals by about 40%.

Although management noted that the AI business currently makes a small absolute contribution to revenue, the company has signed dozens of AI-related security deals, including a multi-million-dollar contract in the healthcare sector.

CEO Todd McKinnon noted on the earnings call that while the AI agent security market remains in its early stages, recent high-profile security incidents are accelerating market demand.

He predicted that in five to 10 years, identity security will replace network-layer security as the largest segment in cybersecurity. Currently, driven by the urgency of AI transformation, sequential growth accelerated across both of Okta's core platforms—workforce identity and customer identity—with the core underlying business continuing to strengthen.

RPO data further confirmed this growth momentum. Remaining performance obligations (RPO) for the quarter grew 17% year-over-year to $4.858 billion, topping analysts' expectations of $4.7 billion. Of that total, current RPO (cRPO), expected to be recognized over the next 12 months, reached $2.585 billion, up 14% year-over-year and also beating analysts' estimates of $2.51 billion.

Strong RPO growth points to enhanced visibility into the company's future revenue. Amid intense competition in the identity security market, predictable revenue streams help mitigate operational uncertainty.

Behind Okta's impressive performance, two issues still merit attention.

First is the competitive pressure from Microsoft's (MSFT) product bundling. Microsoft can offer Entra ID to Microsoft 365 and Azure customers, which was previously viewed as Okta's primary competitive threat. However, Okta supports multi-cloud and multi-application environments, and this neutral positioning is its main advantage over Microsoft.

Second is the scale of its AI security business. Management acknowledged that AI-related revenue is expected to remain immaterial in fiscal 2027, and new products have yet to make a substantial contribution to current-period RPO. However, new products already account for 30% of new bookings, indicating that customer willingness to pay is taking shape.

Based on strong performance, Okta raised its full-year revenue guidance for fiscal year 2027 for the second time this year. Full-year revenue is expected to be between $3.216 billion and $3.226 billion, with adjusted earnings per share between $3.90 and $3.94. Third-quarter revenue is projected to be between $813 million and $817 million, with adjusted earnings per share expected to be $0.92 to $0.94.

In terms of operating efficiency, Okta's operating cash flow for the quarter reached $234 million, accounting for 29% of revenue, while free cash flow stood at $227 million, representing 28% of revenue, both showing significant improvements from the same period last year.

This content was translated using AI and reviewed for clarity. It is for informational purposes only.