Okta (NASDAQ:OKTA) investors had low expectations ahead of the company’s fourth quarter earnings report. The digital identity service provider is seeing strong growth as more businesses move to the cloud, but its stock is still down sharply over the past year on fears it will slow gains to to come. And in recent months, Wall Street has punished growth stocks that have yet to demonstrate their ability to consistently generate profits – a category that includes Okta.
The company hasn’t had much good news to report on the profitability front this week – it expects losses to continue at least through the current fiscal year. But Okta’s core business is well positioned to target much of a roughly $80 billion annual market for identity and cybersecurity services.
The positive momentum in Okta’s sales trends shows no signs of slowing down. For its fourth fiscal quarter, which ended Jan. 31, revenue grew 63% year-over-year to $383 million, easily beating management’s forecast in early December. for an increase of about 53%.
A closer look at growth metrics reveals strong trends in demand and engagement. Okta’s organic revenue (excluding sales from its recent merger with Auth0, an authentication platform) grew about 40%, in line with gains in the prior quarter.
Most of its customers have also happily renewed contracts at higher values. This “land and expand” approach is evident in the fact that the average contract value increased by 24% compared to 21% a year ago.
The international business was another standout performance with sales more than doubling to 22% of total revenue from 16% at the end of fiscal 2021. Management sees a long run for this segment .
Worsening of losses
That said, Okta’s financial situation has worsened by certain measures. Its net operating loss increased to $214 million for the quarter, or 56% of revenue, and to $848 million for the full year, from $266 million a year earlier.
These losses, mainly due to the acquisition of Auth0 and Okta’s business investments, do not give a true picture of its earnings performance. Okta’s non-GAAP gross profit margin fell only slightly to 77% of sales for the year. Adjusted operating margin fell to minus 6% from 1% in fiscal 2021.
These setbacks can be attributed to the integration of the Auth0 business, which is in an earlier growth phase than Okta’s core segment. The weight of this will diminish over time, however. Okta’s profitability is also steadily improving as customers stay longer on its platform. These trends suggest that operating losses will soon give way to profits.
Current Year Forecast
Unfortunately, this exercise will not bring this return to overall profitability. Non-GAAP losses are expected to be about $185 million, management said, compared with $68 million in losses last year and a modest non-GAAP profit for fiscal 2021.
Still, growth prospects are bright, with sales likely to hit $1.8 billion this fiscal year, up from $1.3 billion last year. Okta has much bigger ambitions as it is targeting more than $4 billion in annual sales (and strong free cash flow) by fiscal year 2026.
The past year has positioned the company to achieve this goal, which equates to an annual increase in sales of approximately 35%. Investors shouldn’t let reported net losses convince them to sidestep this compelling growth story.
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Demitri Kalogeropoulos owns Okta. The Motley Fool owns and recommends Okta. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.