Shares of Okta (OKTA) have advanced 18% since the company in late February delivered solid fiscal Q4 (Jan.) numbers. Ahead of the release of FQ1 (April) results on May 29, the stock, recently trading at $102.96, is up 13.7% YTD versus a gain of 11.1% for the Nasdaq Composite.
It has been seven months since Okta, a provider of solutions to manage and protect identities, suffered a major security incident in which hackers gained access to its support case management system. The hack caused Okta shares in early November to trade down to a new 52-week low of $65.04.
Since the breach, Okta has taken a number of steps to enhance the security of its help center. It changed how and when access is fully provisioned to customer administrators as well as the system’s data retention policy. Okta hardened its corporate infrastructure and now requires multi-factor authentication (MFA) for protected actions in the admin console. Admin roles now need to be requested, approved and assigned only to authorized users for specific periods of time.
Heading into Okta’s FQ4 report earlier this year, investors were worried that the first full quarter after the breach would show at least some deterioration in the business. But Okta managed to surprise to the upside, with total revenue rising 19% to $605 million, coming in 3% above the consensus estimate of $587.5 million. The company even signed a record number of large contracts with $1 million+ in annual recurring revenue (ARR).
Okta’s total customer count rose 8% to 18,950, while the number of large customers with annual contract value (ACV) of more than $100,000 gained 14% to 4,485. This large customer cohort represents more than 80% of Okta’s total ACV. Total RPO of $3.385 billion rose 13%, with growth accelerating from 8% in the prior quarter because Okta is signing more large, long-term deals. Current RPO of $1.952 billion gained 16%, matching the growth rate from FQ3.
On the FQ4 earnings call, Okta CFO Brett Tighe said the latest numbers showed that the security incident had “minimal impact” on the company’s financial results. Okta experienced a strong cross-sell motion in the quarter and saw average contract duration hit a two-year high due to larger customers signing extended contracts. The new business pipeline entering FY’25 (Jan.) was actually stronger than the pipe going into FY’24, according to Okta CEO Todd McKinnon.
For FQ1, Okta offered total revenue guidance of $603 million to $605 million (growth of 16% to 17%), above the consensus at the time of $584.9 million. The company sees FQ1 total RPO of around $1.9175 billion (growth of 13%).
The only real sign of a fallout from the security breach was Okta’s FY’25 total revenue outlook of $2.495 billion to $2.505 billion, indicating modest growth of 10% to 11%. This suggests Okta may face some pressure on renewals.
At the Morgan Stanley tech conference in March, Tighe said it might take some time to see if the breach impacts customer renewals and/or pricing. If customers were upset with Okta about the breach, they most likely wouldn’t make any immediate changes. They would first need to find an alternative identity protection vendor. Plus, many Okta customers are on multi-year contracts. Tighe said this renewals risk was baked into FY’25 revenue guidance.
It could be that Okta never sees much backlash when it comes to renewals, which would mean the FY’25 top-line outlook is overly conservative. Traders have taken this optimistic view, as Okta shares surged 22.9% in one session following the FQ4 report and went on to reach a new 52-week high of $114.50 in early March.
Big institutional buyers of Okta in Q1—including Sands Capital, Voya Investment Management, Primecap Management, Soros Fund Management and Maplelane Capital—most likely are counting on the company’s recent security improvements to assuage customer fears about another breach. They also see some catalysts—such as sales force productivity improvements and large deal momentum—that could reignite Okta’s growth in the massive $80-billion market for identity and access management.
As the big breach fades into the past, Okta’s opportunity to gain share in a very large market can move back to the forefront. At recent prices, Okta’s enterprise value is 6.5 times the FY’25 consensus revenue estimate of $2.51 billion. The FY’26 consensus estimate of $2.83 billion indicates growth accelerating to 12.7% from 10.8% growth expected for this year.
