OKTA • 10-K • FY 2023 • Positive

Okta's Identity Platform Scales Despite Integration Challenges and Economic Headwinds

March 03, 2023 • 1 min read

TL;DR

Okta demonstrated resilient growth with revenue up 43% YoY to $1.86B, despite macro challenges and Auth0 integration complexities. The company reached 17,600 customers (+14% YoY) while maintaining a robust 122% net retention rate. Notable enterprise wins and platform expansion drove large customer growth of 20% YoY. However, operating losses widened to $815M as integration costs and go-to-market investments weighed on margins. Looking ahead, management expects growth moderation but improving ope

Financial Performance Overview: Revenue growth remained strong at 43% YoY despite economic uncertainty, though decelerated from 56% in FY22. Subscription revenue comprised 96% of total revenue at $1.78B (+43% YoY). Operating margin deteriorated 580bps to -43.8% as Auth0 integration and sales force expansion drove higher costs. Current RPO grew 39% YoY to $1.61B, indicating healthy forward demand despite lengthening sales cycles. Customer acquisition costs increased 25% YoY, suggesting growing competitive pressure in the identity market.
Strategic Initiatives and Operational Changes: Management prioritized Auth0 integration and unified platform development, launching combined Identity and Access Management solutions. Sales reorganization aimed at cross-selling opportunities led to temporary disruption but positions for long-term growth. R&D investment increased 52% YoY to $400M (21.5% of revenue) focused on AI/ML capabilities and zero trust architecture. New partnerships with hyperscalers and system integrators expanded market reach, though full benefits expected in FY24.
Market Position and Competitive Dynamics: Okta maintained leadership in identity management with 17,600 customers, including 40% of Fortune 500. Enterprise customer count grew 20% YoY to 3,790 despite increased competition from Microsoft and Ping Identity. Geographic expansion continued with international revenue reaching 21% of total (+47% YoY). Customer concentration remained low with no single customer exceeding 3% of revenue, though sales cycles lengthened in enterprise segment.
Operational Efficiency and Profitability: Gross margin improved 50bps to 72.5% through platform optimization and economies of scale. However, operating expenses grew faster than revenue at 51% YoY due to Auth0 integration costs and sales force expansion. Stock-based compensation reached 30% of revenue, pressuring GAAP profitability. Management initiated cost optimization targeting $225M annual savings through reduced hiring and operational streamlining.
Growth Catalysts and Material Risks: Key growth drivers include zero trust adoption, cloud migration acceleration, and workforce identity expansion. Macro headwinds and IT budget scrutiny may impact deal velocity. Integration execution risks remain as Auth0 cross-sell opportunities materialize. Customer security incidents could impact brand reputation. Management expects 16-17% revenue growth in FY24 with improving operating leverage through cost controls.

Revenue

$1.86B ( YoY) with subscription revenue mix

↑ +43%

Rd Spend

$400M ( YoY) representing of revenue

↑ +52%

Net Income

-$815M ( operating margin, -580bps YoY)

↓ -43.8%

Gross Margin

(+50bps YoY) driven by platform optimization

↑ 72.5%

Free Cash Flow

-$66M improved from -$110M in FY22

Operating Margin

(-580bps YoY) due to integration costs

↓ -43.8%

Growth Indicators

17,600 total ( YoY), 3,790 enterprise ( YoY)

↑ +14%

Arr Or Bookings ↑$2.85B Total RPO (+40% YoY)

Retention Metrics ↑122% Dollar-based Net Retention Rate

Key Risks

Auth0 integration complexity impacting sales execution and margins
Increasing competition from Microsoft and Ping Identity in enterprise segment
Cybersecurity threats and potential customer security incidents
High stock-based compensation diluting shareholders

Key Opportunities

Zero trust architecture adoption expanding $80B TAM
Cross-sell potential across 17,600 combined customer base
International expansion with 21% revenue contribution
AI/ML capabilities enhancing platform differentiation

Bottom Line

Okta's FY23 performance demonstrates the company's resilient business model and strategic execution amid challenges. While growth remains strong, the focus shifts toward operational efficiency and profitable scaling. Integration execution and competitive dynamics require continued attention, but market leadership position and expanding TAM provide long-term growth runway. Key metrics to watch include net retention rate, operating margin improvement, and Auth0 cross-sell success.