Okta Q121 recap

OKTA - Q121

If you aren’t up on Okta from my many posts, start with my deep dive a little over a year ago (post #54378), then catch up on numbers with SSI blog’s deep dive in May. https://softwarestackinvesting.com/okta-okta-stock-analysis/…

PR: https://investor.okta.com/news-releases/news-release-details…
Slides: https://investor.okta.com/static-files/225a4412-f3c0-4140-a7…
Fool take (Sparks): https://www.fool.com/investing/2020/05/29/oktas-rapid-revenu…
Fool take (Bowman): https://www.fool.com/investing/2020/05/31/unfazed-by-covid-1…
SSI recap: https://softwarestackinvesting.com/okta-okta-stock-q1-fy2021… [includes a huge competitive review]
CC transcript: https://www.fool.com/earnings/call-transcripts/2020/05/29/ok…
CC recap (sarksnz): https://discussion.fool.com/okta-q120-cc-notes-34523935.aspx
Gaucho is lightening: https://discussion.fool.com/okta-thoughts-34522337.aspx

Revenue 182.9M +46% ^^, +110bps seq

  • Sub Rev 173.8M +48% ^^, +200bps seq
    – Int’l Rev +47% (16% of ttl)
    RPO 1.24B +57%
  • Current RPO 619.1M +49%
    Billings 209.5M +42%
    Adj Gross Margin 77.5% +180bps
  • Adj Sub GM 81.8% flat
    Adj Op Loss -12.3M (vs -24.9M)
    … margin -6.7% (vs -19.9%) +1320bps !!
    Adj Loss -8.1M (vs -21.4M)
    Adj EPS -0.07 (vs -0.19)
    Opex 186.6M +31%
    CFFO 38.7M +82%
    FCF 29.8M +126% !!
    … margin 16.3% (vs 10.5%) +580bps
    $NER 121% +200bps
    Cash 1.45B
    Custs 8400 +28%
  • Custs >100K 1580 +38%

COVID-19 response:

  • made some core services free for new customers for up to 5 apps

  • supporting local orgs via Okta for Good fund, w/ $10M to non-profits

  • heavily impacted industries are ~12% of rev

  • expect to see more negative impact from pandemic in Q2-Q3

  • seeing mix of impact on new logos signing up; Workforce Identity projects were pulled forward, while some Customer Identity projects got delayed (except e-commerce facing, which is flourishing)

  • seeing longer sales cycles - near-term headwinds for RPO & Billings expected over rest of year

  • expect to remain FCF positive for rest of year as they are lowering facility costs (likely long term)

  • custs > 100K +38%, ACV +50%, and >50% of new growth is new logos

  • new cust FedEx rolled out for 85k workforce in 36 hours [impressive]

  • new cust Albertsons to integrate customer identity across all their brands (Safeway, Vons, Jewel-Osco)

  • new cust State of IL for both workforce and customer sides, plus Adv Server Access

  • new Global 2000 cust Parsons, replacing legacy systems for 16k empl, for both workforce and customer

  • upsell to T-Mobile (after their merger with Sprint, adding 30k empl), Moody’s (both workforce & customer), Workday, Zoom (Adv Server Access)

  • new CSO hired, ex-Symantec https://www.okta.com/press-room/press-releases/okta-appoints…

See my earlier thread on Oktane & the new products announced: https://discussion.fool.com/oktane20-happening-now-plus-new-prod…

  • Oktane20 Live happened virtually, with 20k registered attendees (3x more than expected in-person)
  • new deep partnerships with EPP providers CarbonBlack, Crowdstrike and Tanium
  • announced Okta Platform Services as new core of Okta Identity Cloud (building blocks for customers to integrate into), with Workflows, Hooks, and Devices modules
  • announced Okta Lifecycle Management Workflows, non-code interface to automate complex identity processes
  • announced Okta FastPass, an across device passwordless auth system via Okta Verify app
  • upgrading Partner Connect program

Since then:

CEO: “As we look forward to the rest of this year and beyond, when this crisis is over, we don’t expect organizations to revert to their prior ways of working. We have no doubt that a much higher percentage of workforces will be connecting remotely, and we see that as an inevitable long-term trend. Actions that organizations are taking today are accelerating that long-term arc toward using more technology for more flexible work, that’s a positive trend for the world and for Okta.”

CEO in Q&A: “I think that one thing that’s interesting about the environment is, at a high level, I believe that this pandemic has fast forwarded the adoption or at least the mindset around adoption of cloud in general by five years. I mean, I think that people are thinking about cloud and the inevitable migration to cloud. That has been fast forwarded in people’s minds significantly.”

My stance: Okta just keeps on chugging. Slight re-acceleration of top line and uptick in $NER, so the stay-at-home env has been a slight tailwind. They ARE seeing effects of the pandemic (lengthening sales cycles), and expect this to increase into Q2-Q3, but, at least for now, it is more than offset by the fact that they are in the midst of an ‘acceleration of the digital transformation’ trend that they and other companies have been mentioning. So everything is on track and they continue to execute. But they gave pretty muted guidance based on a possible slowdown in Q2-Q3.

I think Gaucho’s point in his post is a fair one - we reasonably expected a larger uptick in revenue, possibly back over 50%. Why did they not see more lift, if the current environment is fast-forwarding decisions by years (as MSFT and CRWD and OKTA itself are saying)? I think the fact that Okta is an all-or-none C-level decision to adopt is likely constraining the tailwind a bit, combined with the drag from the reduced-spend environment in many industries affecting their customer base more than expected. So like Gaucho, I admit to being slightly disappointed that they aren’t able to upsell more or increase customer growth.

That said, they continue to execute. RPO remains very strong as they sign up larger and larger enterprises onto long term contracts. Op and cash flow margins continue their slow march upwards. Oktane expenses normally drags down this Qs margins every year, so since it went virtual, margins benefited. Opex is under control and has some wiggle room to grow as opportunities arise. Lots of new products emerging as well as a great retooling of their platform into easy-to-integrate service blocks, akin to what Twilio did. And they continue to remain EXTREMELY sticky and getting stickier, as they allow users to automate workflows in their new no-code Lifecycle Mgmt interface (from the Azuqua acquisition a year ago).

A huge new bit of news that I haven’t seen on this board is the AWS SSO native integration just announced May 28. It allows linking Okta users to AWS SSO accounts, in order to use Okta SSO to gain access to management console and command line for AWS infrastructure. That ties together Okta’s Workforce Identity with AWS infrastructure, and goes hand-in-hand with Okta’s Advanced Server Access product for on-premise infrastructure. This positions Okta as a great access path for customers having infrastructure across hybrid environments. This is a great win, and alleviates worries that cloud providers are angling to box competing identity platforms out. See AWS’s blog post on it if you want get into the technical nitty-gritty. https://aws.amazon.com/blogs/aws/single-sign-on-between-okta… This isn’t the only positive sign from AWS - they also now integrate w/ Azure Active Directory as well. I think the cloud providers are starting to realize that customers don’t want to be forced into only their solutions for every aspect (what I’ve talked about before as the multi-cloud trend), esp for identity mgmt. Needless to say, it is quite interesting to see the cloud providers playing nice with each other. Okta, as the leader in this industry and as a neutral platform that integrates with all cloud providers & SaaS services, can only benefit.

Beyond the slightly subdued tailwinds from stay-at-home, I see A LOT of future potential here still. Their Zero-Trust bolt-on products like Access Gateway (akin to Zscaler ZPA, a VPN replacement) and Adv Server Access should start being meaningful contributors now. And there remains a significant upsell potential from their improved security methods in Adaptive MFA and now FastPass. Int’l continues to remains largely untapped. It has remained 16% of total for ~2yrs now; so it IS growing, but averages out to around the same pace as domestic, so never increases in the mix. (Not sure more int’l expansion is gonna happen during pandemic, so it remains more a long-term goal with a lot of future potential.) But dwarfing all those, their Customer Identity segment is really only just getting started - and it nearly doubles their TAM. I foresee Okta being a 40%s grower for a long while all of these future growth paths ramp up, and them achieving profitability soon after the pandemic lifts (if not before, if the slight tailwinds keep up and Q2-Q3 impact is milder than they are conservatively forecasting).

Like Gaucho, I may trim this at opportune times in order to fund faster hypergrowth stories. But I continue to remain utterly impressed with how sticky their service is, and it remains a top-3 position, as a top-dog company that is ramping up op leverage as its hypergrowth steadily tapers. And what if the tailwinds of these trends they ride manage to lift growth rates up further? Okta is such a strong company, and still has a lot of upside.

As in Datadog writeup yesterday, I highly recommend reading the competitive analysis in the SSI writeup above. Except in this case, Okta is BY FAR THE LEADER and is leaving all others in the dust. Ping Id (PING) is the only pure-play competitor in both workforce & customer identity, but they are growing at under 1/2 the rate. Microsoft continues to bolster their identity and SSO solutions, however, and is worth watching. Remember from above, Azure AD also integrates with AWS SSO now too.

And since I’m going on about SSI blog, he is a big fan of SaaS platforms that allow partner & developer tie-in, and had an extensive writeup on the subject in April. He walked through Okta, New Relic, and Zendesk as ideal examples, then postulates on how Zoom, Datadog and Coupa are moving their platforms towards that ideal. (He also touches on Crowdstrike a bit in comments.) https://softwarestackinvesting.com/considering-platform-play…

long OKTA


Muji, appreciate your very thoughtful and detailed write up here. I’m learning a lot from you and others.

You mentioned “* expect to see more negative impact from pandemic in Q2-Q3” seems like they’ve been adding many new customers…I wonder how much of that statement is to lower expectations and how much is reality?

I can’t help posting a public thank you. I know it’s wrong. But Muji you are the man. You are The Man. Your are The Man. Your contribution to this board is extraordinary.