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After a brutal year for Okta (OKTA -3.48%), investors finally got some good news on Thursday, Dec. 1.
Shares of the cloud identity specialist soared 26% as it easily beat estimates in its third-quarter earnings report. Revenue rose 37% year over year to $481 million, compared to estimates at $465.3 million, and the company posted a breakeven adjusted loss, compared to estimates of a per-share loss of $0.24.
Its guidance for the fourth quarter was also much better than expected as the company called for adjusted per-share profit of $0.09 to $0.10, compared with expectations of a loss of $0.11 per share.
The results and strong guidance showed the company taking control of its cost structure at a time when much of the software sector is struggling with macroeconomic headwinds.
Okta Co-Founders Frederic Kerrest, left, and Todd McKinnon at the IPO launch in 2017. Image source: Okta.
Okta didn’t deny that macroeconomic headwinds are affecting the business; the company has said before that it started to see sales cycles lengthen. CFO Brett Tighe said on the earnings call that there was some softening in demand from small and medium-sized businesses in North America and that its pipeline was more weighted to upsells, showing that new customers were more reluctant to sign on.
However, the company has been proactive about controlling costs as it said it would in its second-quarter earnings report. In the third quarter, management slowed its pace of hiring, and rationalized its real estate footprint, helping to drive the better-than-expected bottom-line results.
In the third quarter, headcount grew by 261 people to 6,037, its slowest pace in six quarters, and on a year-over-year basis, the number of employees was up 32%. The company indicated that the growth rate would continue to slow.
In its preliminary guidance for fiscal 2024, which begins in February, management stressed that it expected the macro environment to get worse before it gets better. Consequently, it is forecasting revenue growth of just 16% to 17% to between $2.13 billion and $2.145 billion. That was significantly worse than the analyst consensus at $2.31 billion, or 26.7% revenue growth, though Okta has historically been conservative with its guidance.
The company’s bottom-line forecast for fiscal 2024 was much better than expected: Management said it sees an adjusted operating margin of 1% to 3%, which means adjusted operating income of roughly $20 million to $60 million. Analysts expected a per-share loss of $0.31.
Okta is the leading independent cloud identity provider. The company provides tools for businesses that allow employees and customers to securely connect and stay logged into the apps they need.
The company is targeting an $80 billion addressable market, which is made up of $35 billion from workforce identity, $30 billion from customer identity, and $15 billion from newer products, identity governance (IGA), and privileged access management (PAM).
Okta launched IGA last year, and the response has been positive so far. CEO Todd McKinnon said it’s “exceeded all expectations” and, according to comments from Guggenheim analyst John DiFucci, some customers are waiting for the release of PAM to buy the whole Okta suite. Okta expects to release PAM in next year, and the privileged access product could be a significant driver when it comes out.
Okta’s revenue run rate is only just hitting $2 billion, and its addressable market of $80 billion implies that the company has a huge growth opportunity in front of it, which it looks well positioned to capitalize on as the independent cloud identity provider.
While 2023 may present challenges, the company is delivering ahead of expectations on the bottom line, and it should get a boost from the launch of privileged access management.
Okta stock was clearly oversold coming into the third-quarter earnings report, and at a price-to-sales ratio of just 6, the stock still has a lot of upside potential, especially once the recessionary headwinds fade.
Jeremy Bowman has positions in Okta. The Motley Fool has positions in and recommends Okta. The Motley Fool has a disclosure policy.
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