Okta (OKTA +2.88%), the cloud-based identity management specialist, remains unflappable during the COVID-19 pandemic.
In its second-quarter earnings report, the company breezed past estimates with revenue growing 43% to $200.4 million, and adjusted earnings per share of $0.07, up from a loss of $0.05 a year ago. The company benefited from lower expenses for travel and entertainment and sales and marketing, partly due to the pandemic. Meanwhile, its backlog increased 56% to $1.43 billion, showing that demand remains robust for the company's tools, which help employees log on remotely, securely, and seamlessly.
Throughout Okta's history, the primary focus has been on workforce identity management, which includes applications like multi-factor authentication. But increasingly, its customer identity management, which helps businesses better interface with customers by doing things like retaining login information and creating a frictionless experience, has emerged as a key growth driver.
Image source: Okta.
All about the customer
On the earnings call, management noted that its customer identity access management (CIAM) business saw total contract value grow 72%, and it now makes up 24% of the total business. While the boom in e-commerce during the pandemic has highlighted the need to invest in customer interfaces that are as simple to use as possible, COO Frederic Kerrest said its rapid growth dates to pre-COVID times.
In fact, the company now sees a $25 billion total addressable market in customer identity, which compares to a current revenue run rate of about $200 million, or more than 100 times its current level. In workforce identity, the company estimates an addressable market of $30 billion, representing an opportunity 50 times larger than its current business. Based on those numbers, the customer identity segment represents the greater growth opportunity for the company, at least in percentage terms, and that opportunity should help drive top-line growth for the company as a whole.
At the time of its IPO in 2017, Okta was targeting a total addressable market of just $18 billion. The difference in just a few years shows both the expanding overall opportunity for the company, and the emergence of customer identity as a powerful business in its own right with similar potential to workforce identity, its core business and the one the company was founded on.
Kerrest, who is also the co-founder, said customer interest had driven the growth in the customer identity segment, and that it's an area that businesses had traditionally developed themselves. However, as digital customer interfaces have become more important, companies are choosing to outsource those needs, rather than develop in-house, which can be a costly use of resources and may not yield a better product. CEO Todd McKinnon explained on the call: "The CIAM market is predominantly composed of homegrown systems, and we've built a platform and a set of products that make it an easy decision for an organization to implement Okta as the identity solution for their customers."
The long-term opportunity
Okta also reiterated its long-term growth targets in the report, reminding investors that it still sees strong growth ahead despite any challenges from the pandemic. "Nothing's changed," said Kerrest, who added that the second half of the year was looking "very good." The company expects a compound annual growth rate of 30% to 35% through fiscal 2024, which ends in early 2024, and a free cash flow margin of 20% to 25%, showing that the company should be substantially profitable by then.
Based on that forecast and last year's results, the company is targeting $1.67 billion to $1.95 billion in revenue by FY 2024 and free cash flow of $334 million to $488 million.
While Okta's valuation may be steep, as the stock has nearly doubled this year, the shares are still more reasonably priced than many of its software-as-a-service peers. Considering the huge addressable markets in front of it, which should only expand as more companies embrace the cloud and improve their digital infrastructure, and the optionality and potential in customer identity, the company looks poised for several more years of strong growth.
