What happened

Shares of Okta (OKTA -1.60%) were surging today after the cloud identity software company easily beat estimates in its third-quarter earnings report last night, and posted fourth-quarter guidance that was much better than expected.

As of 10:48 a.m. ET on Thursday, the stock was up 21.3% on the news.

So what

Okta, which helps businesses ensure that users can securely and seamlessy connect to the apps they need, limped into the third-quarter earnings report after the stock was slammed in the previous report when management acknowledged challenges integrating the sales force from Auth0, the customer-identity software company it acquired last May.

However, it now seems that those concerns were overblown. Revenue in the third quarter rose 37% to $481 million, easily beating the consensus at $465.3 million.

The company maintained its usual consistency, posting a net retention rate of 122%, meaning it grew sales from existing customers by 22% over the last four quarters, and it added 650 customers in the quarter, growing its customer base by 22% year over year to 17,050.

Customers with an annual contract value of more than $100,000 were up 32% to 3,740, showing it continues to gain traction with larger enterprises and successfully upsell its product.

On the bottom line, the company's efforts to control costs paid off as adjusted earnings per share (EPS) came in at breakeven, compared to a loss of $0.07 in the quarter a year ago, and was much better than estimates at a per-share loss of $0.24.

Acknowledging the challenges the company has faced recently, CEO Todd McKinnon said, "We remain focused on go-to-market execution, spend efficiency measures, and increasing profitability as we navigate an evolving macro environment."

Now what

Okta's guidance also showed that its profitability was ramping up much faster than expected as the company has slowed down its hiring and rationalized its real estate footprint. As a result, it expects adjusted EPS of $0.09 to $0.10 in the fourth quarter, which was well ahead of the consensus for a loss of $0.11 per share.

Revenue guidance was for $488 million to $490 million, or 27% to 28% growth. 

The improved bottom-line forecast shows Okta has more control of its cost structure than previously thought. While the company did not give fiscal 2024 guidance, investors should expect the adjusted profits to continue into next year.

After the software stock plunged through most of this year, it's not surprising to see it bouncing back on the significant improvement in profitability.