0722c012-6ea6-4805-ba0e-87e05efb29a2_Okta-Premium-Research.pdf
Okta Premium Research
IAM Overview
Identity and access management (IAM) helps to make sure the appropriate people access the appropriate networks and applications. Features include authentication, authorization, trust and security auditing for both onpremise and cloud-based systems.
Defining and managing roles is needed for both customers and employees. The goal is to have one digital identity per user, and to maintain, modify and monitor this digital identity to allow access to the appropriate assets and in the right context. This may include onboarding or offboarding the user. IAM systems allow for the administration of user access across an enterprise and ensures compliance.
IAM became more complicated once employee’s began to use their own devices and as companies transitioned to the cloud. This is because there was no longer a perimeter. Today there are on-site employees, off-site contractors, hybrid cloud environments, software-as-a-service applications, bring-your-own-device users, UNIX, Windows, Mac, iOS, Android – and soon there will be billions of machine to machine connections (internet of things) communicating through APIs.
IAM is important because these devices, user credentials and access points are where the majority of security breaches occur. According to IBM, 60% of data breaches are caused by an organization’s own employees.
According to Forrester, IAM is broken down into six technologies that have high business value.
• API Security: Allows for easy, single sign-on (SSO) access for B2B ecommerce and API integrations. This is especially useful for IoT, or the internet of things, device authorization as many devices must communicate seamlessly. This is important for machine-to-machine communication.
• Customer identity and access management (CIAM) enables organizations to capture and manage customer identity and profile data. Features include customer registration, self-service account management, access management, and directory services. Customer retention is much higher when there is less sign-on friction and fewer required steps. This is also important for omnichannel sign-in, such as switching from mobile to laptop.
• Identity Analytics (IA): Identity analytics evolved from the use of cloud and allows behavior analytics to identify usage and access patterns in data collected from the IAM. This creates risk profiles for the user behaviors and helps manage risk profiles based on application usage.
• Identity-as-a-Service (IDaaS): This provides single-sign on and identity management as a software service. The benefit is to remove servers, purchase/upgrade/install software, data backups and hosting fees from the provisioning process.
• Identity Management and Governance (IMG): IMG helps to minimize the risk of data breaches and improve end user productivity. Offers control and visibility into inappropriate access or policy violations. Helps to achieve compliance.
• Risk-based authentication (RBA): Allows for a variation of single-sign on and two-factor authentication.
Overview of Okta:
Okta is the preferred name brand in identity access management (IAM). When speaking to security professionals, the company is highly regarded. Okta’s Identity Cloud is an independent and neutral cloud-based identity platform that allows its customers to integrate with any application or scalable platform. One obvious benefit is that Okta does not lock customers into an ecosystem, like Microsoft or Salesforce, hence the word “independent” is frequently used in their marketing materials.
Workforce Identity simplifies the way an organization’s employees, contractors and partners connect to its applications and data from any device. This is the majority of the business.
Customer Identity Cloud enables organizations to transform their own customer’s experience making use of API- level access and seamless customer experiences. There is a large product range including Universal Directory, Single Sign-On, Adaptive Multi-Factor Authentication, Lifecycle Management and API Access Management.
The company recently launched new products, such as Access Gateway or advanced server access Dynamic Scale. This helps enterprises handle traffic bursts with up to 500,000 authentications per minute.
This month, the company announced end-to-end passwordless access with Okta FastPass. This will allow for a passwordless login experience across iOS, iPadOS, macOS, Android and Windows. The goal is to reduce friction while increasing security. The company believes that early access to FastPass will be available in Q4 2020.
There are a few reasons companies are more likely to go with a proven brand like Okta for identity access management. For one, IAM allows access to the company’s most critical systems and assets. Also, in order for IAM to work effectively, Chief Information Security Officers (CISOs) must put all of their eggs into one basket, as One Identity points out. Therefore, they will lean towards the independent solution that is also best in breed.
There are additional concerns and costs to integrating IAM with both on-premise and the cloud, and whether internal admins can properly work with IAM. Once IAM is implemented, CISOs and security teams want a solution that works effectively and does not duplicate workloads. In other words, this isn’t the place where a company cuts corners or goes with discounted solutions.
On the larger corporate-level, Microsoft is one of Okta’s main competitors. However, Microsoft’s goal of locking businesses into Azure, Skype and Office 365 is not ideal for all companies. Many prefer the freedom of multi-cloud and multiple vendors/cloud software solutions. Ping Identity is a competitor on the SMB level, yet does not have near the revenue growth or suite of products/solutions. Salesforce also has their hat in the ring but similar to Microsoft requires vendor lock-in with their software suite.
Addressable Market & Customer Use Cases
When Okta went public in 2017, the Workforce Identity addressable market was at $18 billion. According to Okta’s
Investor Day Presentation, Workforce Identity has now grown to $30 billion and Customer Identity has grown to $25 billion. Over the past three years, Okta’s revenue has grown at a CAGR of 54% from FY 2017 to FY 2020.
Okta derived 84% of its total annual revenue from the United States. The company believes that global demand will be a long-term opportunity.
Use cases for Okta:
• New Corp put 75% of its computer power into the public cloud and extended their workforce operations with applications like Google Apps and Dropbox. There are a total of 150 apps across all of News Corp’s digital sites and work flows. News Corp uses Okta’s single-sign on (SSO) access for easy access to applications, secure access with multi-factor authentication, and automates provisioning for new employees to onboard quickly.
• In the third quarter, the company won a workforce identity contract for Berry global, a Fortune 500 manufacturing and packaging company with tens of thousands of employees. The company wanted to protect itself from modern security threats. The company will improve the sign on experience for employees, reduce helpdesk request by enabling self-service password requests and enhanced security with multi-factor authentication.
• A Fortune 50 telecommunications company for its business customers to securely access key business services. Okta was selected over Microsoft to lower maintenance and infrastructure costs and provide faster time to value.
• Recently, Autodesk selected Okta Identity Cloud to centralize identity and access management for its customers. AutoDesk is the global leader in design and engineering software (Source: 4Q FY 2020 Earnings call transcript).
• Fortune 500 financial services company upgraded to Okta’s Access Gateway to UniFi access to both cloud and on-premise applications and enhanced security for its over 10,000 employees.
• For customer identity, a European film and television studio and distributor with over 8 million subscribers was recently onboarded.
• NTT data, a global top 10 global business and IT services provider, was a notable upsell in the quarter.
Coronavirus Effects
Although Okta has stated that billings will face headwinds this year, the company is not revising Q1 revenue guidance of $171 to $173 million. As of now, revenue guidance for fiscal 2021 ending January remains at $770 million to $780 million. The FY 2021 loss per share is slightly improved from $0.37-$0.42 to $0.31-$0.36.
The company expects slightly improved earnings per share of negative $0.16 to $0.17 compared to $0.23-$0.24 due to the reduced costs in Sales and Marketing from Okta’s employees working from home.
Despite the strength in Okta’s product during the work from home trend, a few analysts have placed a hold on the stock due to valuation concerns. Canaccord Genuity states they are on the sidelines due to valuation and Needham analyst Alex Henderson recently downgraded Okta due to little room for improvement in valuation.
Financials:
On March 5th, Okta reported Q4 and fiscal year 2020 results. Total revenue in the recent quarter grew 45% yearover-year to $167.3 million. In the previous quarter, revenue grew 45% YoY to $153 million.
Subscription revenue grew 46% to $158.5 million. Remaining Performance Obligations (or subscription revenue backlog) grew 66% YoY to $1.21 billion and calculated billings grew 42% YoY to $225 million.
Subscription revenue makes 94% of FY 2020 revenue while professional services and others make up 6%.
Okta is not profitable yet with non-GAAP loss per share of negative $0.01 EPS in the recent quarter compared to negative $0.04 EPS in the year-ago quarter.
Full year revenue grew 47% YoY to $586.1 million. Subscription revenue grew 49% YoY to $552 million and calculated billings grew 44% YoY to $703 million. Non-GAAP EPS was negative $0.31 EPS compared to negative $0.32 EPS in the previous year.
Revenue guidance for fiscal 2021 ending January remains at $770 million to $780 million. The FY 2021 loss per share is slightly improved from $0.37-$0.42 to $0.31-$0.36. This will represent a growth rate of 31% to 33%.
Consensus estimates for Okta is $771.65 million in FY 2021 and $1.0 billion in FY 2022.
In the earnings call, CEO and Co-Founder Todd McKinnon stated the company is investing in growing its base of large enterprise customers. The company added 142 customers with annual contract value greater than $100,000 bringing the total number figure to 1,467 – or an increase of 41% y-o-y. Total customer base is 7,950.
Operating cash improved 266% from $15.2 million to $55.6 million. Free cash flow also saw a big improvement from negative -$6.8 million to $36.3 million for fiscal year 2020. The company ended the year with $1.4 billion in cash, cash equivalents and short-term investments. Okta carries current liabilities of $546 million and long term debt of $837 million.
The company has been expanding internationally over the past two years, namely, Stockholm, Munich, Amsterdam, Paris, and Toronto.
Prior to the Coronavirus, the company’s operating expenses were expected to rise due to an increase in headcount. The company’s headcount rose 40% in the first half of FY 2020 and 44% in the second half of the year.
Valuation:
As stated, a few analysts pointed out that Okta is reaching maximum valuation. I believe most tech growth stocks will go through a valuation adjustment this year. Okta will not be an exception, although the company should fare better than most.
By my estimation, Okta will fare better than most because its core business of IAM for the cloud is a stable market (comparatively to others right now). We know Okta is not reducing guidance as of yet and I imagine this will be an anomaly come May/June when the majority of companies will have revised guidance or will decline to offer guidance.
When considering Okta’s valuation, it’s important to note that Okta spends more than 50% of its revenue on sales and marketing. I’ve been critical of this in the past and continue to question the runway of a few cybersecurity companies. Some companies spend heavily to stave off competition (this is my thesis for cybersecurity). Others move very quickly and spend heavily to gain market share while the opportunity is nascent. This is essentially what Amazon did and Netflix has been doing. I am initiating coverage on Okta because of the company’s name brand status in the B2B/enterprise world and because I believe it will be the de facto IAM company.
Okta has a current price to sales of 26 and a forward price to sales of 20.7. During the Q4 2018 selloff, Okta was at a current price to sales of 14-15 and its lowest forward price to sales has been 17. This would place Okta at a market cap of $12 to $13 billion with an addressable market around $50 billion (combining both workplace and customer identity markets).
Keep in mind, a $12-$13 billion market cap places Okta where the stock traded during the momentum rotation in Sep/Oct 2019; which was a 1-year low for many cloud stocks. Therefore, this is not a drastic discount given the current economic uncertainty.
However, you have to balance the fact that Okta’s customer base and market is more likely to stay intact this year compared to other tech companies. Assuming forward revenue will remain in the $770M range in the current fiscal year (as the company has stated it will) and $1 billion in the next fiscal year, then Okta will stand apart from companies that are lowering guidance.
Catalysts and Competitors:
Ping Identity carries a much cheaper valuation yet the low growth reveals a company that struggles to compete. Ping is forecasting full year revenue growth of 9%-11% from $242 million to $263 million. This growth is too low for me to personally consider, especially considering total addressable market in IAM has been growing rapidly.
It’s important to note that Gartner and Forrester place Okta above the competition. This matches the overall reputation of Okta in the tech industry. When I speak to companies about products, Okta is well received and spoken of very highly.
Regarding Salesforce, Microsoft, IBM and Oracle, many of these companies require vendor lock-in and are not able to innovate as quickly. Okta’s FastPass is a good example of how Okta is innovating.
On the topic of catalysts, Okta is a Coronavirus shopping list stock. Millions of employees will work from home this year and this will present operational challenges. Products like Okta will ensure only authorized users access their cloud applications. The CEO, Todd McKinnon, stated in a recent interview that the company is seeing an 80% increase in the amount of strong authentications.
We are covering Okta as a buy-and-hold due to hybrid cloud migrations, the popularity of multi-cloud (which prevents vendor lock-in) and the company’s future potential in blockchain. These are the more important catalysts, in my opinion, as valuing companies based on the Coronavirus is beyond my scope.
I feel fairly confident that blockchain will take off in the financial markets within a reasonable time span of 1-3 years and that Okta will be very well positioned when this occurs. Gartner and a few others place 2023 as the year when blockchain will be mainstream. The market will reach $3 trillion by 2030 (not all of this will be IAM, of course). Basically, I like Okta now for hybrid and multi-cloud and the $50 billion TAM …. but I really like Okta for the much bigger TAM that includes blockchain down the line.
Technical Analysis by Knox Ridley to follow this week.