Why Okta's Q3 Earnings Report Was a Crowd-Pleaser

Okta (OKTA -0.89%) shares surged on the company's third-quarter earnings report as it showed continuing progress in the integration of Auth0 and its revenue growth rate accelerated modestly.

In this segment of Beat and Raise recorded on Dec. 1, Fool contributors Jeremy Bowman and Brian Withers discuss Okta's performance and its growth potential with Auth0 under its wing.

Brian Withers: Are you ready with Okta?

Jeremy Bowman: I'm back, yeah we got one hot off the press for you. [laughs] Okta just released third-quarter earnings report. Let's bring up the numbers here.

Brian Withers: They are only down eight percent.

Jeremy Bowman: [laughs] Classic cloud stock, SaaS stock. They do identity for the cloud, so we use them at the Fool for logging in securely. That's the bread and butter for both customer-facing and your workforce. But they've gotten beaten up in the last few weeks to over those broader high-growth valuation concerns we saw in the market. But yeah, down after-hours, but it was a pretty strong report. Third-quarter revenue up 61 percent to 351 million.

Brian Withers: Can you make it full screen for us Jeremy?

Jeremy Bowman: Sorry. Yes, thanks. Remember that Okta made an acquisition of Auth0, another customer facing identity software company earlier this year. That includes the growth from that. Standalone Okta revenue was up 40 percent, so still pretty solid. That easily beat estimates of $327 million. Earnings per share. They reported a non-GAAP loss of $0.07 a share well ahead of $0.24 per share loss estimates. The company had actually been profitable before the acquisition, but so the Auth0 acquisition is weighing on the bottom line a bit.

The outlook was definitely strong. They're calling for fourth-quarter revenue to be up 53 percent to $358 million or $360 million. I should mention also that guidance has been historically conservative. I think they'll probably beat these numbers, but then I see a bottom-line loss of $0.24 to $0.25. Full-year revenue up 53 percent. The stock was down six percent [laughs]. When I check, maybe eight percent now, down, and there was down at eight percent in regular session to full attracting with that sell-off in high-growth stocks. You can see in the chart that it's gotten banged up over the last few weeks.

Some highlights, they were the top rated company in Gartner Magic Quadrant for identity. Auth0 was also recognized as a leader for the first-time. Gartner is a leading tech research analysts. They rate companies. You might have seen the Magic Quadrant sheet. It helps to get these accolades. The Auth0 integration, which closed I want to say about six months ago seems, to be going very smoothly. Management called out the good cross-sell. Part of what was attractive about the acquisition is that Auth0 has a much different customer base and they also only do customer identity, whereas a majority of Okta's revenue comes from workforce identity. They've been able to cross-sell, bringing Auth0 customers over to their workforce program and vice versa. That's powered their growth.

Net retention rate was strong at 122 percent. That's a key figure with these SaaS companies because it shows that their existing customer base is increasing their spend, buying new products and adding new licenses as they grow their workforce. Then as I think I mentioned before, stand-alone Okta revenue is up 40 percent. My only concern, I think the company's performance has been outstanding since I think they IPO-ed in 2017, they are one of the most steadily growing cloud stocks I can think of. They nail it every quarter, but the valuation is still pretty high. Their recent pullback, I think they're at a price to sales of about 25 compared to a company like Box, with the price to sales of five. I think depending on what happens in the broader market, there's definitely room for the stock to fall more. But as far as the performance itself, I think there's really nothing to complain about here.

Brian Withers: This is one of my holdings and a favorite of mine as well. I was curious too with the Auth0 acquisition, how much of their revenue was organic growth. They called that out in their earnings a presentation at 40 percent, that's not shabby either.

Jeremy Bowman: They've been growing at about that clip for a year or two, I think. So you'd expect that their organic revenue to decelerate faster over time, but it's really held pretty steady. I think if they can maintain a 40 percent revenue growth, that certainly justifies a higher valuation.

Brian Withers: Yeah. Remaining performance obligations went up 49 percent.

Jeremy Bowman: 49 percent.

Brian Withers: A lot to like here. Maybe as everyone has thrown out tech stocks, if this one pulls back a little more, you might consider adding a bit.

Jeremy Bowman: Yeah, definitely. It's at a 52-week low right now, or been there.

Brian Withers: Trying to be patient.