Okta's (OKTA +1.37%) second-quarter earnings report came out Wednesday night. This report gave investors the first update since the company's $6.5 billion acquisition of Auth0 closed on May 3, just a few days after the quarter began. While some investors seemed skeptical of the all-stock deal, especially given its hefty price tag, the second-quarter results show that the deal is priming Okta for long-term growth.
Overall revenue in the quarter was up 59% to $315.5 million, which was well ahead of estimates at $295.5 million. Standalone Okta revenue growth was up 39%, a slight acceleration from the previous quarter. On the bottom line, the Auth0 acquisition weighed on results as expected, with the company reporting an adjusted loss of $0.11 per share. That was down from a per-share profit of $0.07 in the quarter a year ago, but still better than the analyst consensus at a loss of $0.35.
Okta had a record quarter for customer additions with 750, bringing the grand total to 13,050. However, the biggest takeaways from the quarter revolve around the company's long-term growth potential. Let's take a closer look.
The Auth0 integration is moving faster than expected
There were a number of compelling strategic reasons for the Auth0 acquisition. First, Auth0's products are complementary to Okta's in a number of ways. Auth0 focuses only on Customer Identity Access Management (CIAM), while most of Okta's revenue comes from Workforce Identity. Auth0 also has a substantially different customer base -- the two companies only had 300 customers in common, or just 2% of Okta's total customer base. The companies offer a different set of CIAM products that cater to different needs. Auth0 focuses more on developers, allowing for more customizable solutions, while Okta's product is more of a universal low-code solution that can be applied according to an enterprise's security protocols.
Because the two companies have distinct strengths and different customer bases, Okta now has a great opportunity to cross-sell and upsell to the combined group of customers. This strategy includes selling Okta-branded workforce identity products to Auth0 customers and Auth0's CIAM solution to Okta's own workforce customers. The company shared one such example on the earnings call, noting that Warby Parker had been an Okta Workforce Identity customer and became an Auth0 customer during the quarter. Auth0 also has 13,000 self-service customers -- essentially developers building programs with its tools -- and another 40,000 free users, giving Okta another large potential market to tap into.
Additionally, Auth0, as a company that grew with a globally distributed workforce, derives a greater share of revenue internationally than Okta, which should help accelerate Okta's business outside the U.S. In Q2, 21% of revenue came from outside the U.S., with total international revenue doubling from the year-ago quarter.
Finally, the company said it was accelerating the timeline for integrating the sales force, targeting the beginning of the next fiscal year in February. That will help drive the kind of upselling and cross-selling that made the acquisition so appealing.
Image source: Okta.
Okta is the leader in identity
In the latest Forrester Wave report, Okta is rated as the top company in both strategy and current offerings. Forrester gave Okta the highest possible score in 14 out of 18 categories, including product vision, innovation roadmap, and user experience.
While the Forrester report is just one data point, it shows that Okta's product itself is an advantage over its competitors and that there's a strong product suite underpinning the company's growth. Okta considers Microsoft to be its main competitor, but the Forrester report ranked Microsoft #4, trailing Okta significantly in current product offerings. As a stand-alone, platform-neutral cloud identity company, Okta has some advantages over an enterprise software giant like Microsoft, whose tools come bundled with larger Microsoft packages and are therefore less customizable.
The five-year growth path is clear
Okta is targeting revenue of $4 billion in fiscal 2026, or annual growth of at least 35% each year, essentially growing as fast as the legacy business is currently. It also expects 20% free cash flow margins, meaning it plans to be both high-growth and highly profitable by then.
Okta should be able to hit those targets. It owns just a small piece of a massive addressable market that it values at $65 billion in 2021 and $80 billion next year, compared to $1.25 billion in expected 2021 revenue. The company is moving into the identity governance administration and privileged access management markets next year, adding $15 billion to complete the $80 billion addressable market in 2022. And Okta already has an impressive track record of steady growth, unlike many more volatile cloud stocks. Revenue growth has consistently come in around 40% in recent quarters, and its net retention rate has hovered around 120%, showing the company is both adding new customers and steadily growing its relationships with existing customers by expanding to new products and new employees.
Overall, with the digital transformation being accelerated by the pandemic and the Auth0 acquisition opening a number of new growth opportunities, this cloud stock looks well-positioned to make good on its ambitions.
