Okta Earnings: Fiscal 2024 Kicks Off in Murky Macroeconomic Environment

We maintain our $76 fair value estimate for no-moat Okta OKTA after the firm reported better-than-expected fiscal first-quarter results, offset by management’s commentary on the macroeconomy that continues to weigh on near-term financial results. These macroeconomic headwinds continued to affect Okta’s ability to land new customers and expand existing ones, as customers across the spectrum seek to recalibrate their IT spending in light of the uncertainty. While the near-term outlook is murky, we believe Okta stands to benefit from long-term tailwinds behind increased adoption of identity-based security solutions. With shares selling off sharply after hours, likely due to the elevated pressures mentioned above, we view Okta’s shares as fairly valued.

First-quarter revenue increased 25% year over year to $518 million, with subscription sales spearheading growth and expanding 26% year over year. The firm’s financial results were ahead of our expectations and management’s prior guidance. However, such growth is still a deceleration from prior quarters, and macroeconomically induced spending optimization led to Okta’s pre-existing customers spending less on its solutions. This dynamic led to Okta’s net retention declining 600 basis points year over year to 117%. Similarly, on the new user addition front, Okta saw a deceleration in both new user additions and new $100,000-user additions. While the near-term picture remains unclear, we believe both the land and expand portions of Okta’s sales motion are not limited by the firm’s opportunity but rather the macroeconomic circumstances.

Looking at profitability, Okta’s financial discipline continued to bear fruit, with the firm’s adjusted operating margins expanding considerably to 7% from negative 10% a year ago. We believe, as a nascent company, Okta’s margins stand to substantially expand as the firm scales up and can distribute costs over a larger customer base.