Okta’s (NASDAQ: OKTA) stock price has had a difficult few years. Since August of 2021, shares are down around 63%. However, over the past 52 weeks, the stock is recovering, up 34%. The Technology Select Sector SPDR Fund (NYSEARCA: XLK) is up 32% over the same period.
The technology company known for making it easier to sign into cloud computer applications at work has been posting earnings surprises and growing closer to being profitable on a non-adjusted basis.
So, what exactly does Okta do, and how well is it executing its strategy? We'll answer these questions by looking at the company’s annual report and recent financial statements. We'll examine the company’s earnings report released on Aug. 28 and provide some insight into how the company could grow faster.
Okta’s “Single-Sign On” Function Increases Efficiency at Work
Okta operates as one reportable segment but has two distinct product groups: Workforce Identity Cloud and Customer Identity Cloud. The Workforce Identity Cloud has probably Okta’s most well-known feature, “Single Sign-On."
Single Sign-On allows an organization's employees to access all the cloud applications available to them by entering their username and password just once. This is much more efficient than having to re-enter these credentials every time they want to use a new application. It also reduces the headache of having to remember different usernames and passwords.
Workforce Identity Cloud offers various other products that add layers of cybersecurity to a company’s cloud and on-site systems, ensuring that the right people have access to what they need, and the wrong people don’t.
The Customer Identity Cloud is a set of tools that software developers can use to make it easier for their customers to sign into its applications.
The company gets around 97% of its revenue from subscriptions to all these solutions. One of Okta’s most powerful selling points is its over 7,000 and growing integrations with software providers. This means that if a company uses specific software, it can probably sign into it with Okta.
Shares Fall Despite Beating Estimates: Is the Sales Department to Blame?
Okta beat expectations on both adjusted earnings per share (EPS) and revenue in its Q2 2024 calendar year results. Adjusted EPS came in at $0.71, for a surprise of 15%. This was an increase of 132% from the previous year's quarter. Meanwhile, revenue of $646 million was 2% higher than expected and an increase of 16%.
Full-year revenue guidance of $2.56 billion was barely higher than expected. Full-year adjusted EPS guidance of $2.60 was 18 cents higher than expected. The company also grew marginally closer to achieving non-adjusted profitability. However, shares were down close to 5% as of 5 PM EDT in after-hours trading.
Possible culprits for this are a slowdown in the growth of its customers with over $100,000 in contract value and the continued drop in its Dollar-Based Net Retention Rate. These metrics show that the company was less successful in acquiring large clients and cross-selling to existing clients.
These are not great signs considering the emphasis the company is putting on its “land and expand” sales model. This is where it starts with a small initial agreement with a customer and then works to expand the contract value of the relationship over time.
It does this by having certain salespeople who acquire customers, and others who manage and expand the relationship after acquisition. This is a significant shift in sales strategy that it implemented in February.
Okta’s Partner Ecosystem is a Proven Way to Reignite Growth
Before the release, revenue was growing at around 20%, half of what it was in 2022. With revenue growth continuing to fall, investors should question whether growth can reaccelerate.
The best way to reignite growth may be to expand its “partner ecosystem." Okta has a partnership with Amazon Web Services (AWS), where their products are seamlessly integrated. So, when AWS gets a new customer, Okta is a highly attractive option as that customer’s access management solution.
The company has gotten around $175 million in annual contract value from this partnership, and that number is growing 130% a year. However, these relationships must have lower margins to compensate AWS for the business, so Okta still needs to improve its internal sales. Still, investors should watch for future announcements of similar partnerships with big tech firms.
