Okta's Second Act: Profits, Backlog, and the AI Agent Bet

Okta’s fiscal second quarter paired an unexpected profit surge with accelerating bookings and a deliberate push into AI agent security, sending shares to a one day high after earnings.

Key Takeaways

• Current remaining performance obligations accelerated to 14 percent growth, the clearest sign that enterprise demand is strengthening rather than merely holding steady this cycle.
• GAAP operating margin nearly tripled to 13 percent as falling stock based compensation and share buybacks let profitability finally catch up with a decade of steady revenue growth.
• Management’s candid admission that AI agent security remains immaterial to near term results is a useful check on a stock now priced for a much larger opportunity ahead.

The Quarter That Reset Expectations

Okta released its fiscal second quarter results after the New York close on August 26, and the market did not wait for the earnings call to render a verdict. Shares that had already finished the regular session nearly 3 percent higher, at $134.42, jumped as much as 19 percent in after hours trading, briefly touching $160.45, a level above the 52 week high the stock had set in mid July. For a company that spent much of the past two years trading like a mature, single digit grower, the reaction said something more specific than simple relief at a beat: the market was, for the first time in this cycle, willing to price Okta on the strength of a story rather than the safety of its numbers alone.

That story rests on results that were strong regardless of the narrative wrapped around them. Total revenue for the quarter ended July 31 reached $805 million, up 11 percent year over year and comfortably ahead of the roughly $792 million to $795 million range analysts had modeled. Subscription revenue, the recurring core of the business, rose 12 percent to $793 million. Professional services revenue slipped to $12 million from $17 million a year earlier, a decline that on its face looks like softness but is in fact the visible edge of a deliberate margin decision explored later in this piece. Okta beat on nearly every headline metric investors track, and it did so while also closing an acquisition and pushing a flagship AI product to general availability, a rare pairing of expansion and execution inside a single quarter.

Profitability Finally Catches Up

The more consequential story sat beneath the top line. GAAP operating income nearly tripled to $107 million, lifting the GAAP operating margin to 13 percent of revenue from 6 percent a year earlier, while gross margin improved to 80 percent from 77 percent. Non GAAP operating income reached $226 million, a 28 percent margin essentially unchanged from a year ago, meaning the GAAP margin expanded without Okta leaning further on the adjustments that skeptics of software accounting tend to distrust. Net income rose to $116 million from $67 million, and diluted earnings per share on a non GAAP basis came in at $1.05, eight cents above consensus.

Much of that improvement traces to a single, unglamorous line item. Stock based compensation fell to $114 million from $144 million, a rare case of a still growing software company actually shrinking its heaviest non cash expense rather than merely diluting shareholders around it. Combined with $372 million in first half share repurchases, the effect shows up twice: once in the margin line, and again in a lower diluted share count that flatters earnings per share independent of operating performance. Investors have grown wary of software companies that print growth while quietly expanding the share count through equity compensation; Okta’s quarter offered a rebuttal to that pattern, and an intentional one.

What the Backlog Is Really Saying

If the income statement explains the market’s enthusiasm, the backlog explains why that enthusiasm has legs. Remaining performance obligations rose 17 percent year over year to $4.858 billion, and current RPO, the portion expected to convert to revenue over the next twelve months, climbed 14 percent to $2.585 billion. That figure matters more than its size suggests, because it represents an acceleration from the 12 percent growth Okta reported in each of the two prior quarters. In a subscription business, backlog acceleration is a cleaner signal than revenue growth itself, since it reflects contracts already signed rather than sales still being pursued, and it is far harder to manufacture than a single quarter’s revenue line.

That acceleration is not evenly distributed across Okta’s customer base; it is concentrated where the company has spent years building relationships. The cohort of customers paying more than $100,000 annually grew 6 percent to 5,255, while the cohort above $1 million in annual contract value surpassed 600 accounts, growing more than 20 percent. Net retention held at 107 percent, up a point from a year earlier. New products, chiefly Okta Identity Governance alongside Privileged Access and the newer AI agent offerings, accounted for roughly 30 percent of bookings, up from about a quarter in the prior period, and deals that included a new product carried, on average, 40 percent higher contract value than those that did not. This is the quiet arithmetic behind Okta’s margin story: selling more to existing customers costs less than acquiring new ones, and the benefit surfaces first in backlog before it ever reaches the income statement.

The Agent Economy, in Its Early Innings

The theme investors most wanted to hear about, artificial intelligence, remains smaller in the actual numbers than in the language surrounding them. During the quarter Okta made Okta for AI Agents generally available to all customers and closed dozens of AI related deals, including a multi million dollar contract with a healthcare organization. The company also completed its roughly $200 million acquisition of Permiso Security, a threat detection startup whose behavioral analytics are being folded into Okta’s platform to extend coverage to machine and agentic identities, the non human accounts multiplying inside large enterprises as they adopt autonomous software.

What distinguished the quarter was less the acquisition itself than management’s restraint in describing it. Chief Executive Todd McKinnon told analysts the AI security opportunity would not materially affect fiscal 2027 results, and he identified market confusion among competing vendors, rather than any single rival, as the more pressing near term obstacle. That is an unusually candid framing for a company whose stock is now being valued, in part, on the assumption that AI agent identity becomes a meaningful business well before the numbers currently justify it. Whether that candor should reassure investors or give them pause depends on how patient the market remains once the novelty of the theme wears off.

Guidance, Capital Discipline and What Comes Next

Capital allocation reinforced the sense of a company managing for durability rather than for headlines. Okta retired the remaining $350 million of its 2026 convertible notes in cash during the quarter, ending the period with $2.3 billion in cash and short term investments. Operating cash flow reached $234 million, a 29 percent margin, and free cash flow was $227 million, up from $162 million a year earlier. None of these figures move a stock 19 percent in an evening, but together they describe a balance sheet built to absorb both an acquisition strategy and whatever turbulence the broader software sector eventually encounters.

Guidance moved higher across the board. For the full year, Okta raised its revenue outlook to $3.216 billion to $3.226 billion, up from the roughly $3.19 billion to $3.21 billion range set three months earlier, and lifted its non GAAP earnings guidance to $3.90 to $3.94 per share, above the $3.84 the Street had been expecting. Embedded in that guidance is a deliberate one point drag from shifting professional services work to systems integrator partners, a trade the company is making openly in favor of margin over top line optics. Wall Street had already priced in a strong quarter, with several analysts lifting price targets into the $165 to $180 range beforehand, and the public sector, one of Okta’s stated growth priorities, still accounts for under 10 percent of revenue. The company delivered a genuinely strong quarter on conventional terms: accelerating backlog, expanding accounts, and profitability catching up with more than a decade of growth. Whether it also deserves to be priced as an AI security business rather than an identity incumbent having a good quarter is the question the coming year will settle.