When Okta (OKTA -1.60%) announced plans early last year to acquire Auth0, it seemed like a match made in heaven. Auth0's authentication and authorization services seemed like a natural fit with Okta's identity and access management solutions. However, the companies soon learned firsthand about the types of pitfalls that often accompany major integrations.

Mergers and acquisitions can be challenging at the best of times, and reports of sales force attrition and confusion among the ranks at Okta left investors with a lack of confidence in the company. Traders drove the stock down by nearly 34% on Sept. 1, the day after the company delivered its fiscal second-quarter report.

Fast-forward three months, and the market's response to the fiscal third-quarter results it reported Nov. 30 suggests Okta's problems are all in the rear-view mirror, and all is forgiven.

A smiling person looking at a smartphone clenching their fist in celebration.

Image source: Getty Images.

A strong financial showing

For its fiscal 2023 third quarter, which ended Oct. 31, Okta's revenue rose 37% year over year to $481 million. Subscription revenue grew even more quickly, up 38%. This resulted in the bottom line breaking even on an adjusted earnings basis. While breaking even might not seem like a big deal, it was an improvement from the adjusted loss per share of $0.10 Okta reported just three months ago. 

To give the top- and bottom-line numbers context, analysts' consensus estimates were for revenue of $465.4 million and a loss per share of $0.24, so Okta beat expectations by a country mile. 

Other metrics were equally positive. Okta's calculated billings -- which includes revenue plus its quarterly change in deferred revenue -- grew 37% year over year, suggesting a remarkable degree of consistency in its upcoming revenue growth. Another factor that points to a bright future is the company's remaining performance obligations -- or unbilled subscription revenue -- which climbed to $2.85 billion, up 21%. Its current remaining performance obligation -- reflecting revenue that Okta expects to earn over the coming 12 months -- was $1.58 billion, up 34%.

Okta's customer count topped 17,000, up roughly 22% year over year, while the count of its most valuable customers -- those with annual contract values of $100,000 or more -- grew 32%. Additionally, its dollar-based net retention rate, which represents spending growth from existing customers, remained steady at 122%. 

Ironing out the wrinkles

It wasn't Okta's financial performance that spooked investors last quarter but rather the uncertainty and lack of confidence telegraphed by the cybersecurity company's management about the ongoing integration of the Auth0 and Okta sales organizations. 

On the conference call to discuss the second-quarter results, co-founder and CEO Todd McKinnon suggested Okta was struggling to bring those teams together. "While we are making progress, we've experienced heightened attrition within the go-to-market organization as well as some confusion in the field, both of which have impacted our business momentum," McKinnon said.

As a result of those difficulties, Okta suggested it might not meet its long-term financial guidance, which included $4 billion in annual revenue and a 20% free-cash-flow margin by 2026.

Management laid out a three-step plan to get things back on track, including slowing the attrition that was bogging down the sales organization, unifying its pricing structure, and simplifying the go-to-market approach with clear sales guidance for its two cloud-based products.

Now, just three months later, Okta is back in Wall Street's good graces. McKinnon revealed that attrition, which had spiked in the second quarter, had fallen to its lowest rate in several quarters. He also said in an interview with MarketWatch that the company has "done a much better job clarifying the products and the positioning and saying we have two clouds: We have Workforce Identity Cloud and Customer Identity Cloud, and it's very clear what to sell, when."

He went on to say that the problem stemmed from a lack of properly communicating its intentions to the sales staff, an issue that has since been rectified. 

Smooth sailing ahead?

For the fiscal 2023 fourth quarter now underway, Okta expects total revenue of $489 million, up roughly 28%, resulting in an adjusted loss per share of about $0.09. Even as management issued conservative guidance due to expectations of continued macroeconomic headwinds, its forecast was still better than analysts' consensus estimates, which called for revenue of $488 million and a loss per share of $0.12. Management put a cherry on top, increasing its full-year revenue guidance to growth of 41%, up from its previous forecast, which had called for growth in a range of 39% to 40%.

Perhaps even more importantly, Okta said it expects to report adjusted profits for full-year fiscal 2024, which begins Feb. 1, 2023. 

To be clear, Okta isn't cheap in terms of traditional valuation metrics, but the stock was recently trading at its cheapest valuation ever -- less than 4 times next year's expected sales. Experts typically view a price-to-sales ratio of between 1 and 2 as reasonable. That said, investors also tend to reward companies that deliver robust growth -- and Okta clearly checks that box.

Management has made solid improvements en route to its goals while also delivering a classic beat-and-raise quarter. Wall Street hadn't expected so much progress so soon, and that gave investors cause to celebrate.