Okta (OKTA -0.69%) investors had low expectations ahead of the company's fourth-quarter earnings report. The digital identity services provider is enjoying strong growth as more businesses move to the cloud, but its stock is still down sharply over the past year on worries about slowing gains ahead. And in recent months, Wall Street has been punishing growth stocks that haven't yet demonstrated the ability to consistently generate profits -- a category that includes Okta.
The company didn't have much good news to report on the profitability front this week -- it's projecting that losses will continue at least through the current fiscal year. But Okta's core business is well-positioned to target a big piece of a roughly $80 billion annual market for identity and cybersecurity services.
Good growth
The positive momentum in Okta's sales trends shows no signs of slowing. For its fiscal Q4, which ended Jan. 31, revenue was up 63% year over year to $383 million, which easily topped management's early December forecast for a roughly 53% increase.
Looking deeper into the growth metrics reveals solid demand and engagement trends. Okta's organic revenue (excluding sales from its recent merger with Auth0, an authentication platform) was up about 40%, consistent with the prior quarter's gains.
Most of its customers happily renewed contracts at higher values, too. That "land and expand" approach is clear from the fact that average contract values were up 24% compared to 21% a year ago.
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The international business was another standout performer with sales more than doubling to reach 22% of total revenue compared to 16% in late fiscal 2021. Management sees a long runway ahead for that segment.
Worsening losses
All that said, Okta's financial picture worsened by some measures. Its net operating loss expanded to $214 million for the quarter, or 56% of revenue, and was $848 million for the full fiscal year, up from $266 million in the prior year.
Those losses, mainly driven by the Auth0 acquisition and Okta's business investments, don't paint a true picture of its earnings performance. Okta's non-GAAP gross profit margin ticked down only slightly to 77% of sales for the year. Adjusted operating margin fell to negative 6%, meanwhile, compared to positive 1% in fiscal 2021.
Those steps backward can be blamed on the integration of the Auth0 business, which is in an earlier growth phase than the core Okta segment. The weight of that will lessen over time, though. Okta's profitability is also improving steadily as customers stay on its platform longer. These trends suggest that operating losses will give way to profits again soon.
Current fiscal year forecast
Unfortunately, this fiscal year won't bring that return to overall profitability. Non-GAAP losses are expected to be roughly $185 million, management said, compared to $68 million of losses last year and a modest non-GAAP profit in fiscal 2021.
Yet the growth outlook is bright, with sales likely to reach $1.8 billion in this fiscal year, up from $1.3 billion last year. Okta has much bigger ambitions as it targets over $4 billion of annual sales (and robust free cash flow) by fiscal 2026.
This past year helped position the company to move toward that target, which equates to a roughly 35% yearly sales increase. Investors shouldn't let reported net losses convince them to watch this compelling growth story from the sidelines.
