OKTA • 10-Q • Q4 2021 • Positive

Okta's Auth0 Integration and Enterprise Push Drive Record Growth Despite Margin Pressure

December 02, 2021 • 1 min read

TL;DR

Okta shows strong momentum with revenue growth accelerating to $337.1M (+61% YoY) driven by Auth0 acquisition and enterprise customer expansion. Gross margins compressed 500bps to 71.3% as Auth0 integration costs and cloud infrastructure investments weigh on profitability. Customer count grew 49% YoY to over 14,000 with notable enterprise traction. Integration execution and competitive dynamics in the identity space remain key challenges heading into 2022.

Financial Performance Overview: Revenue accelerated to $337.1M (+61% YoY), with subscription revenue comprising 96% of total. Gross margins declined 500bps YoY to 71.3% due to Auth0 integration costs and infrastructure investments. Operating loss widened to $199.2M vs $52.7M prior year as R&D and S&M expenses grew significantly. Current RPO of $897.2M (+60% YoY) indicates strong forward momentum but integration costs will continue to pressure margins near-term.
Strategic Initiatives and Operational Changes: Auth0 integration progressing with unified product roadmap and initial cross-sell wins. Enterprise go-to-market strategy expanded with new sales leadership and increased focus on $100K+ deals. R&D investments grew 119% YoY to support platform consolidation and new identity governance capabilities. Management expects integration costs to peak in FY23 before realizing operational synergies.
Market Position and Competitive Dynamics: Enterprise customer count grew 54% YoY to 2,612 with Auth0 contributing significantly to mid-market expansion. Dollar-based net retention rate remained strong at 122% despite increased competitive pressure from Microsoft and Ping Identity. TAM expansion into customer identity and access management (CIAM) through Auth0 nearly doubles addressable market to $55B. Workforce identity leadership position strengthened but integration execution critical for maintaining momentum.
Operational Efficiency and Profitability: Operating margin declined to -59.1% from -25.3% as integration costs and growth investments outpaced revenue scaling. Sales efficiency metrics showed early signs of pressure with CAC payback extending to 21 months vs 18 months prior year. Cash flow from operations remained negative at -$3.7M though cash position strong at $2.5B. Management expects margins to begin recovering in late FY23 as integration completes.
Growth Catalysts and Material Risks: Key growth drivers include enterprise upsell motion, international expansion (29% of revenue), and Auth0 cross-sell opportunities. Primary risks center on integration execution, increased competition in CIAM, and potential customer disruption during platform consolidation. Macro IT spending environment remains supportive but elongated sales cycles emerging in some segments. Management maintaining high growth outlook but acknowledging near-term margin headwinds.

Revenue

$337.1M ( YoY, QoQ) with subscription revenue at of total

↑ +61%

Rd Spend

$84.7M ( YoY) at of revenue

↑ +119%

Net Income

-$199.2M ( operating margin) vs -$52.7M prior year

↓ -59.1%

Gross Margin

(-500bps YoY) due to Auth0 impact

↑ 71.3%

Free Cash Flow

-$3.7M with -1.1% FCF margin

Operating Margin

(-3380bps YoY) reflecting integration investments

↓ -59.1%

Growth Indicators

14,000 total customers ( YoY), 2,612 >$100K ( YoY)

↑ +49%

Arr Or Bookings ↑Current RPO $897.2M (+60% YoY)

Retention Metrics ↑122% dollar-based net retention rate

Key Risks

Auth0 integration execution with potential customer disruption and timeline slippage
Competitive pressure from Microsoft and Ping in enterprise accounts
Margin compression from integration costs and infrastructure investments
Elongating enterprise sales cycles impacting growth trajectory

Key Opportunities

Enterprise upsell with 54% growth in $100K+ customers and low penetration
Auth0 cross-sell into combined 14,000 customer base with <5% overlap
International expansion with most markets <20% penetrated
Identity governance TAM expansion targeting $15B market

Bottom Line

Okta's Q4 results demonstrate the company's ambitious balancing act between growth acceleration and strategic transformation through the Auth0 acquisition. While near-term profitability is sacrificed, the expanded TAM and strengthened competitive position in CIAM could prove worthwhile if integration execution succeeds. Enterprise momentum remains strong but watch for signs of sales cycle elongation. Key metrics to monitor include Auth0 cross-sell traction, platform consolidation milestones, and gross margin stabilization. The identity management market opportunity continues expanding, but successful navigation of the next 12-18 months will be critical for Okta's long-term leadership position.