Tough Stuff. First, we'll say that Okta, Inc (OKTA) had a tremendous quarter in terms of revenue growth. There. We said it. My mother used to say that if you have nothing nice to say, maybe you shouldn't say anything at all. We should stop here. That said, my mom doesn't read business articles, nor does she share my interest in economics. Good chance she never sees this. Let us proceed.
Okta reported the firm's fourth quarter for fiscal 2021 on Wednesday evening. Now, I understand the business need for fiscal years versus the public need for calendar years, but when one is a full four quarters off from the other? Anyone? Not really asking for an answer. For the reporting period, OKTA posted adjusted EPS of $0.06, which was a surprise profit and beat the street by seven cents.
Back out of the laundry list of adjustments, and the adjusted net income of just less than $8 million (leading that adjusted $0.06) becomes a net loss of $-75.8 million or GAAP EPS of $-0.58, which fell short of expectations. Just for funsies, the adjustments include $56.4 million worth of stock based compensation, $21.1 million worth of the amortization of debt discount and debt issuance costs, $4.6 million worth of non-cash charitable contributions, and almost $1.6 million in amortization of acquired intangibles. Yup, got to depreciate those darned acquired intangibles. Can you tell that as I go through the material, I am starting to develop an opinion? Again... not really looking for an answer.
Let's Dig In
The numbers within the numbers sans profitability are impressive. The 40.3% revenue growth is largely composed of $225.4 million in subscription revenue for growth of 42%. Calculated billings also grew in line at 40% to $316 million. Subscription backlog ramped 49% to $1.8 billion, while free cash flow increased 79% year over year to $32.494 million.
Turning to the balance sheet, I see nothing that rattles my cage. Cash is down year over year, but cash and short-term investments are up significantly. On the liability side, this is matched by a nine-fold increase in net senior convertible notes. There is no change at all made to the entry for goodwill, which we like to see.
Why The Stock Sold Off So Hard...
Reason 1:
Okta also announced last night that it had agreed to acquire Auth0 (pronounced auth-zero) in an all stock deal valued at $6.5 billion. I have seen Auth0 referred to as an Okta competitor. That's not exactly the case. Okta focuses on employee identity management. Okta's software works towards the management of human resources, payrolls, content and expenses. Auth0, also a software provider, seems to be more about controlling client/user access to web-based applications and software. Okta targets corporate IT departments, while Auth0 is aimed more at developers. On this acquisition, Okta CEO Todd McKinnon said, "Combining Auth0's developer-centric identity solution with the Okta Identity Cloud will drive tremendous value for both current and future customers." According to Barron's, Mckinnon says that Auth0 equity stakeholders will end up owning about 14% of the new firm after this deal closes. Okta expects to keep all 800 Auth0 employees.
Reason 2:
For the current quarter, Okta sees revenues running at $237 million to $239 million, producing adjusted earnings per share of $-0.20 to $-0.21. That revenue guidance is in-line with Wall Street, however Wall Street was looking for a far less awful looking negative EPS number ($-0.07). For the full year, Okta sees revenue of $1.08 billion to $1.09 billion, slightly above the street's view, and an adjusted EPS of $-0.49 to $-0.44 versus the EPS of $+0.04 that Wall Street had in mind.
In response I have seen seven five star analysts chimed this morning. Four of the seven either initiated at or reiterated "hold" ratings or their firm's equivalent of a hold. To be fair, there are three "buys" among the seven, but two of the three buys and three of the four holds reduced their target prices. Only Michael Walkley of Canaccord Genuity went the other way, upgrading from a hold to a buy and slapping a $300 price target on the shares. Excluding Walkley, by my own math, the average price target of those mentioned today by five star (rated at Tip Ranks) analysts is just about $249.
The Chart
Oversold? Technically, yes. The December high and February high form a double top at the top of the chart, which is a significantly bearish pattern. A lot of that air is already out of the balloon. Now, key to those interested, the key is the 200 day SMA, which has been pierced today (Thursday), but has not yet broken. Tonight's close could not be more important for this name. A failure to hold the $227 level could be at least short-term catastrophic. I would not even think of buying these shares not just ahead of this evening's closing bell, but maybe give OKTA the Jim Cramer "three day rule" treatment and then wee what it looks like.
For now, for me... this stock is a "no go" at this station.
