Investors had some big concerns heading into Okta‘s (NASDAQ:OKTA) fiscal 2022 first-quarter earnings report. In early May, the digital identity management specialist closed its biggest acquisition yet — the $6.5 billion purchase of Auth0 — which has the potential to threaten cash returns going forward. Shareholders also worried that Okta’s conservative initial outlook for fiscal 2022 suggested a demand slowdown following last year’s spike.
But those concerns were overblown. The first-quarter update set the pace for a strong year of growth and cash flows, despite some likely volatility due to the merger.
Better than expected
Sales landed at $251 million, which translated to a 37% increase year over year. That boost easily beat the 30% boost analysts were expecting and marked only a modest deceleration from the 43% spike Okta logged through 2020.
In the earnings call, CEO Todd McKinnon and his team talked up Okta’s success at growing the customer base in early 2021, including by signing up several large enterprises. The company is also finding room to broaden its contracts by upselling into other security services.
Better yet, there’s no indication that demand is slowing for its growing platform. “One thing is clear,” McKinnon told investors, “the importance of identity will continue to accelerate as global economies continue to recover.”
The mega merger
While it’s still too early to see any concrete data, Okta offered a few updated financial predictions that account for its Auth0 takeover. That purchase should allow the company to grow sales at over 30% annually over the next five years. This year’s growth will be between 45% and 47%, management said, compared to their pre-merger outlook calling for 30% gains. That target implies reaching $4 billion in annual sales by fiscal 2026.
As for its finances, Okta is also planning steady improvements in free cash flow with that figure reaching at least 20% of sales five years from now. The company produced a free-cash-flow margin of 13.3% in fiscal 2021 and 6.2% the year prior.
But operating losses are sticking around. Okta is forecasting an adjusted loss of between $172 million and $167 million this year, compared to last year’s $8 million operating profit.
The software-as-a-service (SaaS) giant has a clear path toward the $4 billion annual sales target, which is demonstrated by its swelling order backlog and rising subscription commitments. Yet shareholders should still brace for volatility over the next year or so, thanks to demand swings in the industry and challenges associated with integrating Auth0 into Okta’s operation.
That acquisition could introduce new costs and inefficiencies in the short term, even as it unlocks a big portion of the massive digital security market that Okta sees as its new playground. The fiscal first-quarter results confirm that Okta has solid momentum coming out of the pandemic. Now, it’s up to the management team to execute a challenging integration while working to stay ahead of demand shifts in the cloud services niche.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
View more information: https://www.fool.com/investing/2021/05/31/okta-earnings-momentum-holds-ahead-of-big-merger/