Investors have been growing more optimistic about the earnings prospects for identity and security solutions provider Okta (NASDAQ:OKTA). It sits in the middle of three huge business shifts, after all: security, the digital transformation, and cloud services. Together, these trends could power healthy sales gains for Okta, which just recently celebrated its 10th year of existence, with just the last two occurring as a public company.
CEO Todd McKinnon and his executive team discussed a few highlights from the recently ended fiscal fourth quarter that support that bullish view of the business. Below are three highlights from their presentation.
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Below the surface, we are approaching a tipping point with the largest organizations in the world, recognizing the need for secure and scalable identity solutions that connect to both their cloud applications and on-premise infrastructure.– CFO Bill Losch
Okta ended the year on a positive note by blowing past its short-term forecast to notch 50% sales gains in the quarter and reach a 56% spike for the full year. Management said they were especially pleased with the growth they’re seeing in big contracts. The base of customers spending over $100,000 annually rose by 50% to just over 1,000, outpacing the expansion rate of the broader client base.
Okta’s success in bringing in new Fortune 100 clients suggests its identity management suite is well-positioned for the shifting demand trends, executives believe. Citing the signing of a Fortune 10 business this quarter, McKinnon said that “these organizations are acknowledging the critical role that that could will play in their environments.” To better meet their needs in the year ahead, Okta’s development priorities center around targeting large enterprises, strengthening the integration of its services, and bulking up its security features.
Our top-line outperformance, margin improvement, and strong cash collections drove our solid cash flow performance.– Losch
All the key financial metrics improved in the quarter, which inched Okta closer to — but still far from — bottom-line profitability. Gross profit margin rose to 76.4% of sales from 73.9%, and selling and marketing expenses expanded at a slower pace than revenue. As a result, operating loss improved to $28 million, or 24% of sales, from $24 million, or 31% of sales, a year ago. On a non-GAAP basis, operating loss was 4.3%, compared to 11.9% in late 2017.
Investors shouldn’t count on Okta achieving GAAP profitability soon, given the fact that management is seeing such strong returns from its marketing and development investments right now. Executives also warned that there will be volatility in its cash flow results as the business tilts further toward large client contracts.
At our analyst day last October, we shared our five-year targets for strong, sustainable top-line growth and profitability. Since that time, our conviction has only strengthened in Okta’s growth opportunity.– Losch
Management says they believe they’re still in the early stages of their growth opportunity. Their fiscal 2020 outlook reflects that positioning, with aggressive marketing and development spending projected to put non-GAAP operating losses at around $26 million compared to $42 million last year and $61 million in fiscal 2018.
Sales growth is expected to slow from 56% this past year to between 33% and 34%. That prospect combined with the projection for a third straight year of losses pressured shares immediately following the earnings release. Investors can’t fault the company for aggressively attacking its biggest opportunities, though, since Okta’s growth initiatives are clearly delivering a bigger client base and improving profit margin.