Okta stock plunges as CEO says ‘short-term challenges’ resulted in workers leaving at a higher rate

Okta Inc. shares plummeted in extended trading Wednesday after executives revealed the software company faced issues stemming from integration of the $6.5 billion acquisition of Auth0.

Okta OKTA,
+0.26%
executives hiked their annual earnings outlook again Wednesday, but kept their target for full-year revenue the same. Todd McKinnon, chief executive and co-founder of Okta, told MarketWatch in an interview following the release of results that “there are some short-term challenges.”

“There are a lot of things going really well, but the results were mixed,” he said.

One of the challenges has been a struggle in combining Okta’s sales force with sales reps acquired in the May 2021 acquisition of identity-platform Auth0 (pronounced “Auth Zero”), which is more focused on direct-to-user sales than Okta’s corporate focus .

It appears as if those challenges have sped up the revolving door at Okta, which makes software that helps authorized employees access applications on their corporate networks. McKinnon said on a conference call that attrition rates are currently higher than usual at roughly 20%, compared with a usual 15%, and that if he had to redo the integration, he would have been more moderate and less aggressive in growth.

On the call, McKinnon stressed to investors that the different sales organizations have only been integrating for about six months, and that these challenges have been factored into the outlook.

“To help contextualize this, over half of the outlook headwind relates to our sales integration challenges,” Brett Tighe, Okta’s chief financial officer, said on the call. “A secondary portion of the reduction relates to the heightened attrition, which resulted in a lower-than-expected capacity build as we move through the year.”

Tighe also admitted that the problems could affect longer-term forecasts.

“Given our near-term outlook coupled with the uncertainties of the evolving macro environment, we are re-evaluating our FY 2026 targets at this time,” Tighe said.

Okta shares declined nearly 12% in after-hours action following the release of the results Wednesday, after closing with a 0.3% gain at $91.40. The stock has declined 59.2% so far this year, as the S&P 500 index SPX,
-0.78%
has declined 16.4%.

Okta reported a second-quarter loss of $210.5 million, or $1.34 a share, compared with a loss of $276.7 million, or $1.83 a share, in the year-ago period. After adjusting for stock-based compensation expenses and other items, the loss came to 10 cents a share, compared with a loss of 11 cents a share in the year-ago period. Revenue rose to $451.8 million from $315.5 million in the year-ago quarter.

Analysts had forecast an adjusted loss of 31 cents a share on revenue of $430.7 million, based on the company’s forecast for a loss of 31 cents to 32 cents a share on revenue between $428 million and $430 million.

Okta executives kept their revenue forecast for the year at $1.81 billion to $1.82 billion, while reducing their forecast for adjusted losses to a range of 70 cents to 73 cents a share, compared with a previous forecast for an annual adjusted loss of $1.11 to $1.14 a share. Analysts surveyed by FactSet were expecting an adjusted loss of $1.11 a share on revenue of $1.82 billion.

For the third quarter, Okta executives guided for an adjusted net loss of 24 to 25 cents a share on sales of $463 million to $465 million. Analysts on average were expecting an adjusted loss of 28 cents a share on sales of $464 million, according to FactSet.

In the interview Wednesday, Okta leaders also discussed a continuing hack named “Oktapus” in which hackers used a breach of Twilio Inc. TWLO,
-2.30%
to intercept Okta one-time passwords used for multifactor authentication. That follows an unrelated Okta hack found in January that the company took until March to deem “not material.”

“The relevant thing is there’s no delay this time,” McKinnon told MarketWatch. “They used the Okta login page as a phishing target. We’re the leader in the industry so people are going to try to phish the leader.”

“The one that made this one look unique is that is was more effective than they usually are,” McKinnon said. “The short answer is, it worked.”

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