Okta (OKTA 75.07, -6.14, -7.56%), which provides cybersecurity relating to
identity management, is trading lower today after the company reported Q4 (Jan)
results last night. While the company’s JanQ results were quite good, the guidance left a little to be desired.
Let's dig into it.
Let's start with the good news. Okta reported a JanQ non-GAAP loss of $(0.04) per share, which was a good bit better than prior guidance for EPS of $(0.09)-(0.08). Revenue rose 49.9% year/year to $115.5 mln, which also was above prior guidance for revenues of $107-108 mln.
The guidance, meanwhile, was disappointing overall. While the company’s revenue guidance did show upside (Okta expects AprQ revs of $116-117 mln), Okta guided to a larger loss than expected at $(0.22)-(0.21). The story for the full year is similar: Okta expects revenues of $530-535 mln -- a better than expected forecast -- but its outlook also includes a much larger loss than had been expected at $(0.53)-(0.48).
What is going on with this guidance? The good revenue upside suggests that demand is not posing a major problem. The problem derives from the EPS line, which is being pressured by lower margins as Okta increases spending to drive growth. This includes dedicating more money to improving the product, and it means hiring more people -- headcount at quarter-end was up to 1,561, up 33% year/year.
Okta says that it is approaching a tipping point with the world's largest companies as they realize their need to sophisticate from legacy solutions systems and obtain a secure identity platform for the cloud. Okta believes that it is still in the early stages of this opportunity to support transitions and plans to invest to drive further growth. These investments, says the company, are consistent with the five-year model that was presented at its Investor Day. Basically, the company is saying that its investment intentions are not new information; perhaps analysts did not account for it properly in the models.
Importantly, even with the increased investments, Okta still feels like it's clearly on target to hit its operating margin targets of 16-19% by FY24. Okta says that it has made similar types of investments in the past and has felt the benefit of those.
Bottom line, there is no question that Okta is growing quickly and that it is in an attractive niche in cybersecurity. However, with the stock trading at a high valuation (around 15x sales), investors are going to be disappointed with breakeven looking like it's going to get pushed back. The higher spending may be a smart move, but investors are disappointed with the impact of that investment on margins.
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