Okta (OKTA 9.81%) investors have some big questions heading into the company's earnings report next week. The identity-management software giant likely benefited from strong demand in the cybersecurity space as more business shifted online in early 2022. Yet concerns are mounting about how well Okta can capitalize on its expanding sales footprint.
Let's dive right into the report set to land on the afternoon of June 2.
Okta's last earnings announcement had plenty of good news on the growth front. Sales soared 63% to $383 million, and billings nearly doubled. The sales expansion was strong, even after removing the impact of the company's recent Auth0 acquisition. Revenue was up 39% on that basis.
Signs of solid engagement weren't hard to find, either. Okta gained market share and its average contract size jumped by 24%. One of management's core growth initiatives is to convince existing customers to sign up for more of its services over time, and that approach is working.
Investors are looking for continued solid sales gains in fiscal Q1 as revenue expands by about 55%. Palo Alto Networks reported robust demand for its cybersecurity services and hardware last week, adding to the optimistic short-term outlook for Okta.
The profit challenge
The main concern is around Okta's profitability. While Palo Alto Networks is enjoying rising margins, Okta's has been falling as the company works to integrate the Auth0 business. Losses last year expanded to $848 million compared to $266 million a year earlier.
Expanded red ink like that wasn't as much of a concern on Wall Street in earlier phases of the pandemic. However, with interest rates rising and a potential recession on the horizon, that attitude has changed.
Shareholders will want to see signs that Okta can begin moving the business back toward profitability. Yet non-GAAP losses are likely to land at around $50 million in Q1, management said back in early March.
A brighter outlook
Palo Alto Networks raised its sales outlook last week, and it's possible that Okta will follow with its own upgrade. Heading into the report, CEO Todd McKinnon and his team are looking for revenue to rise by about 38% in 2022 and operating losses to improve to $180 million.
The stock's tumble in recent months implies that investors have low expectations around that sales figure being boosted by much. They are even less certain that Okta can quickly cut its losses in the wake of its costly Auth0 acquisition.
That purchase unlocked a much larger addressable market for Okta, but the stock isn't likely to rebound sharply until management can show some positive earnings impacts from the company's quickly expanding cybersecurity service portfolio.