Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
Today, something a little different. Last week both Okta (2017 IPO) and Ping Identity (2019 IPO) reported earnings. Given that Okta and Ping are SaaS companies that sport competing product lines, the paired financial reports caught our attention. TechCrunch spoke with each after earnings. The picture that we got back from both companies was one of continued growth and increasing profitability.
This matters, as some cloud investors have thoughts about an eventual cloud slowdown. The most common argument that TechCrunch has heard is that as cloud and SaaS continue to eat at the current portion of enterprise software spend that they don’t already control, the pace at which they add market share will slow.
This doesn’t mean that SaaS and cloud products are going to go shrink; instead, the idea is that the pace of their expansion could slow, perhaps dramatically. End of the world? No. But a potentially notable change from the heady, recent days when SaaS and cloud were storming ahead.
Slower growth could limit the value of SaaS and cloud companies, which have long enjoyed rich valuations as investors coveted their recurring and regular revenues. This has in turn bolstered startup investors piling into enterprise-focused software companies. Changes to the market would impact not only the big shops, but perhaps smaller companies as well.
Let’s peek at Okta and Ping’s earnings briefly, and then read through notes from the companies about growth, customer acquisition costs, and more. Our goal is to get a handle on how two large, public SaaS players think about the world as they compete for growth and market share. What they tell us should help both you and I know what’s ahead for other SaaS players, large and small alike.
Growth
Let’s begin with scale and expansion (data via Okta and Ping Identity IR pages and quarterly reports):
- Okta revenue, quarter ending January 31 2020: $167.3 million, +45% year-over-year
- Ping Identity revenue, quarter ending December 31 2019: $68.2 million, +15% year-over-year
We can quickly see that Okta is larger and growing more quickly than Ping. But what we’re really curious about is its blended growth, given that we’re looking at cloud and SaaS growth more broadly than any single company’s performance. So, how did the two firms do as a pair, when we consider its expansion in the single-sign on and identity management spaces?
- Okta and Ping, year-ago quarterly revenue: $175.0 million
- Okta and Ping, most recent quarterly revenue: $235.6 million
- Percent change, year-over-year: 34.6%
That’s a healthy growth rate for two firms that compete. The economy grew by a point or two over the same time frame, while enterprise software spend itself expanded by a far-smaller 8.5%, according to Gartner. So our pair of SaaS shops crushed their sector’s growth while contesting for deals (with each other and other players that have similar products and services).
Are the two companies making more money as they grow? If the answer is yes, we’ll have a pretty healthy picture of the sector from the two, and some positive forward momentum, bearing in mind that private and public investors have recently begun to covet profitability over growth. This is a standard flight to quality, but it does matter.
From their most recent quarters:
- Okta adjusted net income: -$1.74 million (an improvement from its year-ago adjusted net loss of $4.3 million)
- Ping Identity adjusted net income: +$11.2 million (an improvement from its year-ago adjusted profit of $5.2 million)
Don’t sweat the direct comparison or how the firms are calculating those metrics. What matters is that both firms are seeing improving adjusted profits while growing comfortably. One more positive mark for SaaS and cloud today, using Okta and Ping as lens to view their space.
The future
What we’ve done is take a zoomed-out look at two competing companies recent financial performance, working to understand roughly where they stand as a pair. My take on their results? Generally bullish, though Ping’s growth rate and Okta’s GAAP losses leave plenty of room for improvement.
Now, the future. Can they keep up their growth and improving profitability? They sure struck bullish chords when speaking with us.
TechCrunch spoke with Okta’s Frederic Kerrest last week following his company’s earnings report. The executive vice chairman, chief operating officer, and co-founder were pretty buoyant. Okta had just recorded its first full-year of free cash-flow positivity, a key moment in a maturing SaaS company, and told this publication that not only was his firm beating the Rule of 40, it was cracking the tougher marker of the Rule of 50 (using free cash-flow as a percent of revenue as the profitability metric in the calculation, instead of something stricter).
What did he see ahead? Kerrest had lots to say, including that the trends that Okta is surfacing are large, and that it’s getting easier to sell its products over time; the cloud maturity is boosting in-market knowledge about cloud and SaaS products, making it less of a lift to shift Okta to new customers.
Regarding cloud growth, Kerrest told TechCrunch that given SaaS spend penetration into enterprise software and the broader IT market, there was lots of room ahead. He agreed that cloud was maturing, but didn’t see worried about a slowdown in dollar spend.
Turning to Ping, TechCrunch asked over email about the company’s expected ARR growth (around 17% to 19% in the current year), and how the firm is balancing growth and profitability. According to Ping’s CFO Raj Dani, after Ping drove “significant profit and cash flow margins while delivering growth in the past,” his company has “the confidence to invest in innovation and go-to-market activities in 2020 to help drive further growth.” He said that after a “number of investments in R&D” in the last few years, Ping is “now investing in Sales and Marketing to drive further growth.”
Growth is good, but some growth is inefficient. Is Ping falling into that trap? TechCrunch also asked about customer acquisition costs (CAC), something that can eat away at a company’s growth profitability. Dani said the following:
Historically, Ping has achieved best in class CAC. Given our immense market opportunity, we are taking this year to lean into Sales and Marketing, and already seeing strong proof points as evidenced by our enterprise new logo increase in 2019. This drives CAC slightly higher than usual for us in 2020, but we are monitoring it carefully and expect it to normalize as our sales and marketing investments drive returns and our newer products gain further foothold in the market.
This answer is notable in that someone in the world of business actually admitted that their CAC may rise. But there’s nothing in that answer that sounds worrying; slightly rising CAC is probably impossible to avoid with boosted S&M spend.
Summing, both companies are pretty enthused about future growth prospects, even if the broader cloud market’s growth might slow some over the next few years. Of course, we’re looking at two companies in a big industry at one point in time, but having both firms report results in quick succession gives us a useful macro lens.
If the two firms had reported different results, our take on today’s cloud marker would be sharply different. If one was struggling at the expense of the other, say, it might mean that there is less pie to divvy up, forcing cannibalization for example. Growing profitability at each and a healthy blended growth rate implies the opposite.
Finally, Ping’s Dani told TechCrunch this:
We believe the identity and access market to be in the early innings of a transformational market opportunity.
If that’s true, then probably lots of the cloud market still has room to grow, which is good news for SaaS companies large and small.