At the start of 2021, I had picked OKTA to do well over the next three years. Let’s talk about what Okta does. Okta provides identity and access management (IAM) for all sizes of companies allowing them to securely integrate internal and third-party cloud applications. You can read more about how they do that at their website
Okta reported their Q1 2022 results last week and the stock fell 10% the next day. Oftentimes, when someone starts investing in individual stocks for the first time and the stock takes a huge fall after an earnings result, their first reaction is that earnings report must be bad and their instinct is to sell the stock. However, as I explain in this article that over the short term, stock price is just noise not a signal. So, you might be wondering what happened and why did the stock price fell 10% after the earnings result? Were the results that bad? Let’s take a look.
Here is how OKTA revenues have trended over the past two years.
|Year||Q1 (Growth Rate)||Q2 (Growth Rate)||Q3 (Growth Rate)||Q4 (Growth Rate)||Total (Growth Rate)|
|FY 2020||$125m (50%)||$141m (49%)||$153m (45%)||$167m (45%)||$586m (47%)|
|FY 2021||$183m (46%)||$200m (43%)||$217m (42%)||$235m (40%)||$835m (43%)|
|FY 2022||$251m (37%)|
The current quarter is in bold and you can see that their Q1 revenues grew by 37% compared to the Q1 2021. Not only that, it is higher than the revenues of Q4 2021 by 7%. This is called sequential growth. As you can see that the revenues are growing every quarter which is nice to see. With companies like Okta, I like to track not just the quarterly revenues but also how much visibility do they have for future quarters. Okta management shares a metric that it calls Remaining Performance Obligations (RPO). Basically you can think of RPO as revenues that Okta expects to realize in the coming years. They call it contracted subscription revenue or backlog. According to Okta management, year over year growth in RPO is a more meaningful metric when viewing along with the revenue growth. Here is how their RPO has trended over the same time.
|Year||Q1 (Growth Rate)||Q2 (Growth Rate)||Q3 (Growth Rate)||Q4 (Growth Rate)|
|FY 2020||$792m (59%)||$914m (68%)||$1.03B (68%)||$1.21B (66%)|
|FY 2021||$1.24B (57%)||$1.43B (56%)||$1.58B (53%)||$1.80B (49%)|
|FY 2022||$1.89B (52%)|
The current quarter is in bold and as you can see that this number has also been trending up over the last nine quarters. If you think about it, the management has so much visibility over the coming quarters that they will be recognizing about $1.89 billion of revenues in future. They also share that in the next 12 months, they will recognize about $899 million out of the $1.89 billion.
One more tidbit, their total revenue in FY 2021 was $835 million and they have already booked more than twice of that from their existing customers ($1.89B) in their backlog.
More recently, they made their biggest acquisition in May of this year when they acquired Auth0 for $6.5 Billion. Auth0 will help Okta increase their total addressable market. Usually acquisitions make me nervous for the future because it is quite complex for two different cultures to work together and create synergies. However, in this case, the management of Auth0 has agreed to stay on and work together with Okta management. That is an indication that Auth0 management wants to stay invested in the future of the combined enterprise.
Finally, on their most recent earnings call, Okta’s management provided their future outlook and confirmed that they can grow their revenue base to $4B in the next 4 years. That is a compounded annual growth rate (CAGR) of 35%. For perspective, I am happy with a company that is consistently growing its revenues by at least 20%. I will take 35% growth any day. According to my experience, when a company provides a future expectation like this for the next four years, they are usually being conservative. This means that they are expecting a minimum of $4B revenue run rate in the next four years. The actual revenues should be more than that. You can easily project this number using the RPO numbers above.
Now, you must be thinking this is all good. Their revenues grew by 37%. Their RPO grew by 52% which was an acceleration from 49% in the previous quarter. They acquired another company which will increase their total addressable market then why did the stock price fell more than 10% after the results. I think it was due to this news.
Okta also announced today that Mike Kourey is stepping down from his position as Chief Financial Officer, effective June 1, 2021. Kourey will sign the quarterly report on Form 10-Q, which will be filed later today, and he will remain at Okta in an advisory role to help ensure a smooth transition.
Mike Kourey stepped down from the CFO position only after one quarter. He was appointed as the CFO after the previous quarter’s results were announced. Before Mike Kourey, Bill Losch worked as the CFO for the past seven years. Why did Mike Kourey step down from the CFO position only after one quarter? Management did not give a clear answer in the earnings call however, I watched an interview of Okta’s CEO Todd McKinnon on CNBC and the hidden message was that “it wasn’t a good fit”.
I am not a big fan of turnover in the C-suite and when the CFO resigns only after one quarter that raises a yellow flag in my eyes. However, combining this news with the actual results that Okta reported plus the growth in their RPO numbers and their commitment to a $4B revenue run rate in the next four years have me cautiously optimistic for the future. I will be closely watching who they appoint as their next CFO and if the new hire can last longer.
As of now, I remain long Okta. What do you think? Should I have sold my position and moved my money to a different stock?