How Okta Is Integrating Newly Acquired Auth0

Okta (OKTA 1.21%) made a blockbuster acquisition earlier this year, snagging customer identity access management (CIAM) specialist Auth0 for $6.5 billion in an all-stock deal. Okta's second-quarter report was the first update for the newly combined cloud company.

In this segment from "Beat & Raise" on Motley Fool Live, recorded Sept. 1, Fool.com contributors Jeremy Bowman and Jason Hall discuss how the integration is proceeding and how it's strengthening Okta's leadership in identity.

Jeremy Bowman: I'm going to talk about Okta. I just had a quick interview with Freddy Kerrest, the COO over there.

Jason Hall: Chief Operation Officer, Yeah.

Bowman: Yeah, Chief Operating Officer, yeah. Thank you.

Hall: Just pop on Beat & Raise, talk a little bit about Chewy, pop off, [laughs] go talk to an executive of Okta, one of our favorite companies, just pop back on and tell us a little bit about the conversation. [laughs]

Bowman: Sure. I think there's always a bit of a caveat when you're getting information from the company. They're obviously going to push it and give you the brightest picture possible, but Okta has been a huge winner in the market and I think this is another one of the companies similar to like we are saying with Chewy, pretty great numbers out of their quarter. I just looked, it is down a few points because this is a stock that's priced for perfection. But just to hit some of the numbers, Okta closed early in their quarter in the acquisition of Auth0. You know, they do customer identity management, same thing Okta does.

Hall: It was a big bite, that was a pretty big deal. I know there were a lot of us that have questions about how does this fit with the business? How does it fit with your strategy? Keep going. But yeah, that was a big deal and they're still working through that.

Bowman: You're right. It was an all-stock transaction, so I think the company justified it to some extent that way, but it was valued around $7 billion, if I'm correct. But yes, Auth0 gave them more exposure in international markets where they were a bit weak and also helps accelerate them in customer identity, which Okta has historically been in workforce identity management. We use them at the Fool, every time we do a log-in to something Okta makes sure it's secure. They've become equal parts to work for or maybe not equal, but customer identity's become a big business for them as well.

But yeah, just hit some of the numbers, Q2 revenue was up 57% as far as Okta stand-alone revenue was up 39%, that's a slight acceleration from the previous quarter at 37%. I think in a lot of cloud companies we see a slowdown, Okta really isn't like that at all they're growing steadily by about 40%. The company actually gave long-term guidance that they expect to grow 35% annually through fiscal year 2026. They're planning to reach $4 billion there, they're also are targeting 20% free cash flow margin. They've got a pretty clear picture of where they're going and those are really great growth numbers and profitability numbers.

As far as GAAP, GAAP in the quarter was down pretty significantly, they reported a $0.48 loss per share or $277 million. Stock-based compensation kind of soared, which was partly a product of that acquisition I think. Free cash flow was about the same year over year, it went from a $7 million profit to a negative $4 million. The company expected the Auth0 acquisition to weigh on the bottom line a bit. That company is earlier in its profitability or life cycle as far as moving toward profit so that's to be expected. But according to what the COO told me, the integration's moving faster than expected and merging their sales teams. Auth0 has something like 13,000 individual subscribers and then a whole bunch of free customers so it gives them a rich potential subscriber pool to tap into.