A Post-Earnings Chat With Okta On SaaS And Enterprise Adoption

Okta reported its third quarter fiscal 2019 earnings last week. The stock market liked what it saw, pushing Okta’s shares higher after the identity management company beat on both top and bottom lines.

Against an expected $97 million in revenue, Okta put up $105.6 million. Stacked next to an expected adjusted loss of $0.11 per share, Okta lost just $0.04 (adjusted). That’s pretty good.

But what I want to know is what’s underneath the financial noodling, so I got on the phone with Okta’s COO and co-founder Frederic Kerrest to learn more about the state of recurring software revenue, a critical substance for today’s startups.

SaaS Fatigue, Enterprise, And Adoption

My chat with Kerrest echoed a recent conversation I had with Zuora’s CEO Tien Tzuo and CFO Tyler Sloat the other week. Zuora is bullish on subscriptions, and especially software-as-a-service as a subset of the category. Okta is SaaS and is quite bullish on the model as well, along with its own business.

As always with these post-earnings calls with public corporations, my goal with Okta’s COO was to learn about the state of its market so that I could better understand what’s going on down below, in the private markets.

Two things stuck out. First, in Kerrest’s view, we’re still in surprisingly early innings for subscription revenue in the tech market. (This despite tech being earlier than other categories in converting to recurring revenue). Second, that it seems that enterprise adoption of SaaS products is picking up.

Early

Every executive thinks that their company has room to run and is going to get much bigger in time. But in the case of Kerrest and SaaS, he detailed his take a bit. And as it applies to startups, let’s chat about it.

According to the Okta executive, SaaS is around 10 percent of the enterprise software market today. But, not everything will make it to the cloud (his example was the Goldman trading algorithm), so SaaS is perhaps 20 to 30 percent into its journey, in Kerrest’s estimation. That means, by my own mental math, that SaaS as a cohort of companies has another decade or two of good growth ahead of it.

But I was curious about short-term burnout. Are companies getting tired of having to buy most new software as a stream of payments? Is there anything approaching SaaS fatigue in the market? “No way,” according to Kerrest.

So SaaS is in comfortable straits, at least in Kerrest’s view. Which makes some sense given our second point: enterprise adoption.

Enterprise

Okta picked up 100 accounts in its third quarter (fiscal 2019) that were $100,000 or greater in annual recurring revenue (ARR) terms. That’s $10 million in new ARR for the company in the three month period or more than one new $100,000 ARR account per day throughout the quarter.

Why care about one company’s ability to land larger clients? Because when I asked the COO about why Okta listed that metric in its earnings, instead of merely noting revenue growth, he said that metrics of the sort are a “proxy” for enterprise adoption. It’s a useful point to understand, as it seems to me (anecdotally) that more SaaS company quarterly reports I read are sharing a new-large-accounts-landed figure.

More broadly, the metric’s popularity implies broader enterprise SaaS adoption in the market. This can lower companies’ positive dollar churn (net retention), as they may capture more of a deal’s value at the start of a contract instead of later, via upsells. (Check Box’s numbers here for more on that.) But as SaaS has SMB roots, the shift to enterprise-level pick up is probably good for both startups targeting big companies (Slack et al) and big companies looking to land similar deals (Microsoft et al).

Summing, Okta’s business looks healthy, and the company thinks that its category is as well. SaaS and infrastructure as a service (IaaS) are “just getting started” Kerrest said, so if you are out there at a startup, there’s no good excuse to not grow like mad.

Illustration Credit: Li-Anne Dias