OKTA • 10-Q • Q4 2022 • Neutral

Okta's Growth Decelerates Amid Integration Challenges and Rising Competition

December 01, 2022 • 1 min read

TL;DR

Okta faces significant headwinds as Q4 2022 shows decelerating growth and ongoing Auth0 integration challenges. Revenue grew 37% YoY to $481M, but margins remained pressured with operating losses widening to -$208M. Customer acquisition costs increased while retention metrics showed signs of stress. The company holds strong cash position of $2.47B but faces increasing competitive pressure in identity management space.

Financial Performance Overview: Revenue grew 37% YoY but showed sequential deceleration from 43% in prior quarter. Gross margins compressed 200bps YoY to 69% due to Auth0 integration costs and higher cloud infrastructure expenses. Operating losses widened to -$208M (-43% margin) from -$199M year ago. Current RPO grew 34% YoY to $1.58B, indicating slowing momentum in new bookings. Customer acquisition costs increased 15% YoY while net retention rate declined to 122% from 124% last quarter.
Strategic Initiatives and Operational Changes: Management is prioritizing Auth0 integration and platform consolidation, with expected completion by end of FY24. New unified identity platform launched to combine Okta and Auth0 capabilities. Sales reorganization implemented to address go-to-market inefficiencies, including creation of dedicated Auth0 sales team. R&D spend increased 42% YoY as company accelerates product development. Timeline for achieving profitability pushed out due to integration costs.
Market Position and Competitive Dynamics: Okta maintains leadership in identity access management but faces increasing competition from Microsoft and Ping Identity. Enterprise customer count grew 22% YoY to 3,700 but new customer additions slowed. Customer concentration improved with no single client over 5% of revenue. Geographic expansion continues with international revenue now 21% of total. Market share in workforce identity remains strong at 35% but customer identity segment shows increased competitive pressure.
Operational Efficiency and Profitability: Operating efficiency metrics deteriorated with sales efficiency ratio declining to 0.8 from 1.1 year ago. Employee productivity metrics show strain with revenue per employee dropping 8% YoY. Infrastructure costs increased 25% YoY despite efficiency programs. Path to profitability extended as integration and GTM investments continue. Management targets operating margin improvement of 300-400bps in FY24 through synergy realization.
Growth Catalysts and Material Risks: Near-term growth drivers include expansion in customer identity market and international operations. Macro headwinds impacting deal cycles and customer spending. Security breaches remain key risk after recent incidents. Integration execution and competitive displacement represent material risks. Management expects growth reacceleration in FY24 post integration completion.

Revenue

$481M ( YoY, QoQ) with subscription revenue at $466M ( YoY)

↑ +37%

Rd Spend

$112M ( YoY) representing of revenue

↑ +42%

Net Income

-$208M ( margin vs year ago)

↓ -43%

Gross Margin

(-200bps YoY) impacted by Auth0 integration

↑ 69%

Free Cash Flow

-$24M (vs -$6M year ago)

Operating Margin

(-200bps YoY) with increased investments

↓ -43%

Growth Indicators

(-200bps QoQ)

↑ 122%

Customer Count ↑17,050 total customers (+25% YoY)

Enterprise Customers ↑3,700 (+22% YoY)

Key Risks

Security incidents and breaches could damage reputation and customer trust
Auth0 integration execution risks with potential customer disruption
Increasing competition from Microsoft and Ping in core markets
Macro headwinds extending sales cycles and impacting growth

Key Opportunities

International expansion with current 21% revenue contribution
Customer identity TAM of $30B remains largely unpenetrated
Zero trust security trends driving workforce identity growth
Platform consolidation enabling significant cross-sell potential

Bottom Line

Okta faces critical execution period as it navigates Auth0 integration while maintaining competitive position. Growth deceleration and margin pressure likely to persist through FY23. Success depends on integration execution and sales reorganization effectiveness. Key metrics to watch include net retention rate, enterprise customer additions, and gross margin trends. Platform consolidation completion in FY24 could drive reacceleration if executed successfully.