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2 Bright Spots in Okta's Earnings Report

There's a once-in-a-century pandemic happening in the world, but you wouldn't know it from looking at Okta's (NASDAQ: OKTA) latest earnings numbers.

The cloud-based identity and security specialist has been steady as a rock as the company continues to deliver strong revenue growth and increasing cash flow like clockwork.

In the third quarter, revenue rose 42% to $217.4 million, well ahead of estimates at $202.7 million. Its remaining performance obligations, essentially its backlog, jumped 53% to $1.58 billion, a sign that bookings are growing even faster than revenue and a bullish signal for long-term growth. On the bottom line, adjusted earnings per share improved from a loss of $0.03 to a profit of $0.04, topping expectations of a loss of a penny per share, and it recorded free cash flow of $41.6 million, up from $9.2 million a year ago.

What stood out about this quarter is that Okta's making significant headway with legacy institutions like banks that are traditionally late adopters of new technology. Such sectors, including governments, represent an opportunity for Okta, as they are large organizations with high needs for identity management.

Image source: Okta.

Bring on the banks

Among the new customers Okta landed in the third quarter were Canadian Western Bank, the seventh largest publicly traded bank in Canada -- First National of Nebraska -- and Nota, a digital banking service powered by M&T Bank. These aren't the company's first customers from the financial sector, but they represent a meaningful trend.

Banks and financial institutions are rapidly embracing Okta's suite of products. Canadian Western recently deployed Okta's Customer Identity Cloud after starting with the Workforce Identity product. The company called Okta a "critical component" of its technological transformation.

The financial sector is traditionally conservative and has been slower to adopt cloud-based technologies, so these additions represent promising new customers. The company also added the State of Iowa in the quarter, an organization with 20,000 employees, which (along with the addition of Illinois in the previous quarter) shows a groundswell in government.

COO Frederic Kerrest said in an interview: "You're seeing more and more of these large organizations that are saying, 'Hey, we know in the public sector we have to go cloud. We have to go to the Okta Identity Cloud." Kerrest also noted a huge opportunity in the federal government as agencies move toward the cloud, saying: "The opportunity in the federal government in particular in the coming years is going to be really big and we want to make sure [to be] well positioned for that."

Those were a few of the 450 customers the company added in the quarter. Kerrest also noted that Okta now has more than 300 customers generating annual revenue of at least $500,000, showing the company is strengthening relationships with large enterprises.

A win with AWS

In another sign of Okta's potential, Amazon (NASDAQ: AMZN) Web Services, the largest cloud infrastructure service, announced that Okta's Identity Cloud and its products will be available on AWS's marketplace. Prospective Okta customers can now easily purchase Okta's Workforce Identity and Customer Identity products from AWS, a big win for the company as it can draw from a pool of over 300,000 developers and buyers around the world that use AWS. Okta also offers an integration with AWS Control Tower, a product designed for AWS customers to better monitor security and operations across multiple accounts.

Okta is no stranger to AWS, as it's built its own service on Amazon's cloud infrastructure service and has thousands of joint customers with Amazon. But the AWS marketplace addition represents an important step in the relationship, and looks to be an important driver for long-term customer growth. AWS sales reps are also incentivized to sell Okta's products, providing a further tailwind.

Looking ahead, Okta's guidance for the fourth quarter was characteristically conservative, but the company remains on track as it tackles a $55 billion total addressable market. With strong tailwinds from remote work and digital transformation and annual revenue still under $1 billion, this cloud stock should have several years of robust growth ahead.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Amazon and Okta. The Motley Fool owns shares of and recommends Amazon and Okta and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.


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