March 14, 2017
Yesterday, Okta filed its S-1 with the SEC, officially marking its intent to go public. This planned IPO had been rumored in early 2016, but less than optimal capital market conditions in 2016 likely contributed to the delay. The S-1 followed last week’s news that Okta acquired Stormpath, an identity API provider based in Silicon Valley, for an undisclosed amount.
The filing is not surprising but opens a window into the financial dynamics of the identity-as-a-service (IDaaS) market. After reviewing the S-1, three main themes stand out for me:
- IDaaS demand is very strong. Okta’s fiscal year ends on January 31, so full-year figures are not yet available for the period ending January 31, 2017. But comparing Okta’s revenue numbers for its 2015 fiscal year with its 2016 fiscal year shows an impressive 100% year-on-year growth. A big boost in service revenue also suggests that Okta is being deployed in larger, more complex environments that require more customization and services. Over the past 18 months, Forrester has had a steadily increasing number of IDaaS-related inquiries from enterprise clients looking to deliver identity and access management (IAM) capabilities to their employees via a SaaS subscription model. Okta’s revenue growth aligns with the strong growth in demand we see from our clients.
- Customer acquisition costs are high, even in growth markets. While Okta is demonstrating strong revenue growth, its sales and marketing expenses in 2015 and 2016 were nearly 100% of revenue. While the rate of increase in Okta’s expenses is slowing, demonstrating operational efficiencies, these high costs reflect the reality that customer acquisition costs can be high even in a dynamic market that’s experiencing strong end user demand. While investors have traditionally been very patient with SaaS subscription businesses as long as revenue is growing, the IDaaS customer acquisition economics will be a key metric to track in coming years.
- IPOs are returning as a viable liquidity exit for tech companies. According to Dealogic, there were just 26 US listed technology IPOs in 2016, considerably lower than the 10-year rolling average for IPOs. Okta’s filing, following the recent Snap IPO and other recent filings from companies like MuleSoft and ForeScout, suggests that improving capital market conditions are motivating companies that opted out of IPOs in 2016 to revisit those plans. If market conditions remain strong, expect more IPOs from all technology sectors in 2017.