Okta in ‘Awkward Adolescent’ Stage of Growth, CEO Says

(Bloomberg) -- Okta Inc. Chief Executive Officer Todd McKinnon said a wave of executive departures at the software company is part of a difficult “awkward adolescent” stage as it builds on the customer and revenue gains made over the first five years as a public company.

The company's management software lets businesses authenticate the identity of employees and customers. Demand jumped during the early stages of the pandemic and Okta has continued that momentum, reporting earlier this week that fiscal-year sales jumped 56%. The growth, however, has come during a period of internal upheaval and a stock drop of about 40% from its high about a year ago.

McKinnon, a co-founder, said attrition was 19% and 20% in 2020 and 2021, respectively, compared with 11% in 2019. The pandemic and resulting reshuffling of the workforce had an impact, as it did on other organizations Okta's size. But at Okta, founded in 2009, the turnover also hit at something deeper: The company is trying to jump from $1 billion in annual revenue to a goal of $5 billion.

Okta's journey to a more mature vendor is a well-traveled one in enterprise software, often characterized by product expansions, acquisitions and leadership changes. At Okta, it has included all three.

A cadre of long-time executives have left, including former finance head Bill Losch and worldwide head of operations Charles Race. Okta has largely looked outside its workforce for replacements. Former Splunk Inc. president Susan St. Ledger was hired to take over for Race and fulfill the mission to get to reach the new sales target. And after 10 years at Okta, technology head Hector Aguilar left and former Alphabet Inc. executive Sagnik Nandy took his spot.

“We just didn't have the experience,” McKinnon said of the external hires. “You can either bet on someone that hasn't done it before or you can try to find someone amazing.”

Some of those transitions were rocky. Former Chief Marketing Officer Kendall Collins departed after less than a year, while former Chief Finance Officer Mike Kourey, who was previously on Okta's board of directors, lasted just a few months. Beyond the leadership, the company has experienced departures throughout the organization. In addition to changes at the top and the pandemic, McKinnon cited last year's acquisition of former rival AuthO for $6.5 billion as a driver.

“We've communicated a very compelling and interesting vision about why we are doing this and why it makes sense,” McKinnon said. “Ultimately the vast majority of people are excited about it. And the people who aren't are choosing to leave. But I expect that bucket to settle out now.”

The impact of the exits may be a short-term blimp: Okta is planning to hire more employees this year as it expands the sales force and amps up investments in marketing. Spending in that area rose 92% to $221 million in the period ended Jan. 31, Okta said Wednesday in its statement of quarterly results.

The company gave a revenue forecast of as much as $1.8 billion in the fiscal year, topping analyst estimates. The projected net loss of as much as $1.27 a share, however, was worse than analysts' expected.

Okta has spent years making sure its software can plug into the most commonly used applications across corporate America. In a testament to the strength of its offering, Salesforce.com Inc. halted use of its own authentication tool and deployed Okta, according to a company spokesperson.

But expanding that product proved tricky. Some companies will choose to use a standard set of products from Okta that can be deployed quickly without the need for a deep bench of engineering talent. However, a customer like Nike Inc., according to McKinnon, wants to add customizations to, for example, make a sign-on screen better resemble its existing brand marketing. That kind of request creates a challenge for Okta's home-grown product, which is much better suited to address a more uniform use. McKinnon said that's why the acquisition of AuthO was so critical, because it enables developers to more easily build unique applications on top of Okta's standard tools.

Alone, “Okta could really only cover about one-third of the market,” he said.

Amid the changes, analysts are still bullish about the company. “Okta's moves within identity and the broader security landscape is positioning them well for good things ahead,” JMP Securities analyst Trevor Walsh.