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Summary

Motley Fool Money: Episode Summary - "Stop! Please Sign In Again"

Release Date: December 4, 2024

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Introduction to Okta's Performance and Market Position

Mary Long opens the episode by introducing Okta, a leading cybersecurity company specializing in identity management and multifactor authentication. She highlights Okta's recent third-quarter results and poses a question about its direct competitors.

[00:23] Mary Long: "...the cybersecurity company Okta. They specialize in multifactor authentication...how do you make sure that you're the real you?"

David Meyer responds by outlining Okta's competitive landscape, mentioning major players like Palo Alto, Microsoft, Oracle, Ping Identity, and Cyberark. He emphasizes that while larger companies offer identity management as part of broader portfolios, Okta and its focused competitors dedicate their efforts solely to identity solutions.

[01:13] David Meyer: "...Okta, along with competitors like Ping Identity...they're specifically focused on everything associated with identity management..."

The Future of Multifactor Authentication

Mary shares a personal anecdote about the inconvenience of multifactor authentication, questioning whether it's the future of all digital access.

[02:05] Mary Long: "...I lose a little bit of my sanity each time I have to walk into the other room to get my phone..."

David empathizes, acknowledging the current inconvenience but pointing to advancements like adaptive multifactor authentication. This technology aims to streamline the verification process by analyzing user behavior and device traits, potentially reducing the need for constant phone-based authentication.

[02:33] David Meyer: "...adaptive multifactor authentication...collect data about the traits that you have associated with logging in..."

Okta Achieves GAAP Profitability

Mary delivers big news: Okta has achieved its first quarter of GAAP profitability, reporting a net income of approximately $16 million compared to a net loss of $81 million in the same quarter last year. She inquires about Okta's path to sustained profitability.

[03:52] Mary Long: "...Okta achieved its first quarter of GAAP profitability...What does Okta's path to consistent profitability look like from here on out?"

David explains that Okta has been actively managing its costs relative to revenue, addressing slowed growth post-pandemic by aligning expenses accordingly. With revenue and customer retention on the rise, especially with larger accounts surpassing $1 million, Okta is well-positioned for ongoing profitability and improved margins.

[04:14] David Meyer: "...Okta has taken an active stance in getting their costs more in line with their revenue over the past year..."

Customer Retention and Acquisition Strategies

Mary brings up Okta's challenges in customer addition, noting only about 200 net customers added in the quarter. She questions how Okta can persuade businesses to prioritize identity management despite conservative software spending.

[05:30] Mary Long: "...what does Okta have to do to make that argument to potential customers?"

David asserts that Okta must emphasize its superior ability to secure both external and internal access points, thereby preventing unauthorized access and protecting against vulnerabilities more effectively than broader platform solutions.

[06:08] David Meyer: "...Okta has to make the case that it can properly identify both the person and the device before you get into the network..."

Expanding Through Partner Ecosystem

When Mary mentions Salesforce transitioning into the next story, David shifts the focus to Okta's partner ecosystem. He explains that Okta leverages partnerships with consultants and resellers to expand its customer reach, acting as an extended sales force that also provides post-sale services.

[07:37] David Meyer: "...what the partner ecosystem does is it expands their access to customers...a third party sales force."

Transition to Salesforce and Agent Force

The conversation transitions to Salesforce as Mary introduces a story about Salesforce CEO Marc Benioff's injury during a scuba diving trip and its connection to Salesforce's AI initiative, Agent Force.

[08:21] David Meyer: "...Marc Benioff had a way to weave that injury and his recovery...to AI and what Salesforce is doing there."

Understanding Salesforce's Agent Force

David delves into Agent Force, Salesforce's latest AI offering. He defines it as a proactive, autonomous application designed to provide specialized, always-on support to employees or customers, enhancing productivity and decision-making.

[11:58] David Meyer: "...agent force is a way to create digital assistance for humans based on whatever tasks they're trying to perform..."

Salesforce's Financial Health and Expense Management

Mary shifts the discussion to Salesforce's financial results, noting an 8% year-over-year increase in revenue and a 25% rise in net income. She inquires about Salesforce's strategies for cutting expenses to achieve higher profitability.

[12:59] Mary Long: "...revenue was up 8% year over year. Net income up 25% year over year. Where is Salesforce cutting expenses?"

David attributes Salesforce's financial improvement to disciplined expense management, including workforce reductions and lowering selling, general, and administrative costs relative to sales. He also points out that new high-margin products contribute to better overall financial performance.

[13:17] David Meyer: "...good expense management...selling general and administrative costs as a percentage of sales are dramatically down..."

Commendation of Salesforce's CFO Amy Weaver

Before concluding, David praises Salesforce CFO Amy Weaver for her role in steering the company towards financial discipline without stifling growth. He highlights the effective partnership between Weaver and CEO Benioff, balancing visionary leadership with pragmatic financial execution.

[14:46] David Meyer: "...Amy Weaver...has done a great job of transforming Salesforce into the more mature growth company that it is today."

Conclusion

Mary thanks David Meyer for his insightful analysis of Okta and Salesforce, encapsulating key takeaways about their financial health, strategic initiatives, and market positioning.

[17:00] Mary Long: "...thanks so much for coming on to Motley Fool Money and sharing these wonderful insights..."

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This episode of Motley Fool Money offers a comprehensive analysis of two significant players in the cybersecurity and CRM spaces. Mary Long and David Meyer delve into Okta's journey to profitability amidst a competitive landscape and explore Salesforce's innovative AI endeavors alongside its robust financial strategies. Listeners gain valuable insights into how these companies navigate market challenges, optimize operations, and leverage technology to maintain and grow their market presence.

Transcript

[Mary Long]

The word of the day is Agent Force. You're listening to Motley Fool Money. I'm Mary Long, joined today by David Meyer. David, thanks for being here. How you doing on this Wednesday morning?

[David Meyer]

Hi, Mary. Thanks for, thanks for having me. I'm doing extremely well this morning.

[Mary Long]

I am so glad to hear that you're doing extremely well. Another company that's doing pretty well, not that you're a company that wasn't the kind of agreement that we want to kick the show off with, but there I am trying to make a smooth transition. But a company that's also doing extremely well might be the cybersecurity company Okta. They dropped their third quarter results yesterday evening. For anybody unfamiliar, this is an identification management company. It specializes in multifactor authentication and it helps companies protect employee access to applications or devices. So I come into contact with Okta nearly every day. When I log on to, say, Google Drive on my laptop, Okta sends me a notification on my phone to, say, hey, is it really you? We call this a cybersecurity company, but it strikes me as slightly different than what, say, CrowdStrike is doing. So who are Okta's direct competitors in this space?

[David Meyer]

So you write in that Okta is a little different than most because it's in a niche. But companies like Palo Alto, they actually are a competitor they have along with companies like Microsoft and Oracle and other larger companies who have a take a platform approach. They do offer their own identity management solutions, but identity management is just one piece right in their portfolio. Whereas Okta, along with competitors like Ping Identity, which was recently purchased by private equity firm Thoma Bravo, or a company like Cyberark, they're specifically focused on everything associated with identity management, both from coming into the network and once you're as well as once you're in the network.

[Mary Long]

I'm going to take us on a slight sidebar because I mentioned my own relationship with Okta. I love the security of this product, but I got to say, I lose a little bit of my sanity each time I have to walk into the other room to get my phone, which I intentionally placed away so as to not distract myself just to open up a Google Doc. Is this the future of everything? Should I just kind of get a grip and brace myself for multifactor authentication being everywhere that it's not already?

[David Meyer]

So sorry, I'm giggling because I've experienced the same thing. So I hear you. It definitely can be annoying, but right now it's pretty effective, right? I mean, the company wants to know that you Are in fact you. And this is one of the best ways they can do it, is using your phone. But there's something called adaptive multifactor authentication that Okta and others are working on. And what it does is it tries to collect data about the traits that you have associated with logging in what devices, what are your login patterns, where are you? And they try to take a lot of additional information in order to make the process easier to use, more efficient. But it still has to be safe, right? That is the most important thing. We don't want to let a bad actor in. So right now, it's hard to believe. It's hard to beat two factor authentication. You know, go to your phone, say, you know, type in the passcode and say it to you in order to give you the human that they want to know is you access. But I will just let you know companies are working on this to try to take that process and move it behind the scenes in order to verify that you. So you can leave your phone in the other room.

[Mary Long]

There we go. Love that. The future is bright. Big news for Okta this morning is that the company achieved its first quarter of GAAP profitability. So they brought in about $16 million of net income. That's compared to a net loss of $81 million in the same quarter of last year. What does Okta's path to consistent profitability look like from here on out?

[David Meyer]

So that's an awesome question, because that's what we look for in all of our companies, right? We want to see them get to scale and have that scale work for them in terms of more profits and cash flow. So Okta has taken an active stance in getting their costs more in line with their revenue over the past year or so. Like many software companies coming out of the pandemic, they actually saw slower growth. And one of the things that any company has to do is they have to balance their expenses with their level of revenue. So Okta has been doing that, and that work seems to be done, which is great, because in Okta's case, revenue is actually picking up again, as well as retention. So if management is right, and in their conference call, they mentioned that the opportunity to increase the number of greater than $1 million accounts is going up, that's a good sign that quarterly profits and cash flow should continue to stay positive and trend upward, because higher revenue like that tends to be, you know, across a better cost structure, tends to give you the margins you're looking for that are associated with scale.

[Mary Long]

This question of retention and large customers came up a bit on the call. Octos has seen some challenges on the customer addition front. They only added about 200 net customers during the quarter. Management attributed this largely to the macro climate, saying, hey, Bill, businesses are being more conservative about software spending. In my mind, part of the bull case for any cybersecurity company is, hey, this is not really something that you can afford to cut back on. What does Okta have to do to make that argument to potential customers? To say, hey, identity management is not something that you can afford to cut back on or not pay for at all.

[David Meyer]

Are you in the running for an Okta Salesforce representative? Because literally you just made the case in your question. In all seriousness, the people and devices that are outside the network are vulnerabilities. Those are where the attack vectors tend to head towards. So it really is a matter of Okta has to make the case that it can properly identify both the person and the device before you get into the network. And then once you're in the network, they also make sure that you can only access the things that you're allowed to access. So one thing that is very popular, right, is to get for a hacker is to find a vulnerability on the outside and then exploit that all the way through the system because there were no protections inside. So the case really is we prevent people from getting in, but should you get in, we prevent you from getting where you're not allowed to go. And right now, Okta is very good at that. That's the main focus of their business. And so it's a better sell to say, look, we do this better than someone can do it who just has this as a part of their platform. So come to Okta and we'll protect you, your people and your data.

[Mary Long]

CEO Todd McKinnon talked a lot about Okta's partner ecosystem on the call. What is that?

[David Meyer]

Yeah, great question. So lots of software companies partner with consultants and resellers that act as a complement to their internal sales teams. So essentially what the partner ecosystem does is it expands their access to customers. The profit structure is a little different, obviously, because you have to pay someone who's outside of your company to basically sell on your behalf. But it's great because it's, you know, essentially it's marketing. In addition, the partners do provide aftermarket service to those accounts that they bring to the company. So essentially it's a third party sales force.

[Mary Long]

What a beautiful setup, David, because our next story for the day.

[David Meyer]

I'm so glad you noticed how well I trans I've learned from you. I've learned from you.

[Mary Long]

I mean, really talk about smooth transitions, because the next story that we got on tap for today has to do with guess what? Salesforce, their CEO Marc Benioff mentioned on the call today that he is back from a birthday scuba diving trip to Fakarava, an atoll in French Polynesia. While there, he suffered an injury that we'll get into a bit more because unsurprisingly, Benioff had a way to weave that injury and his. His recovery from that injury to AI and what Salesforce is doing there. But first off, David, is Fakarava on your travel bucket list? I never heard of this space before.

[David Meyer]

So do they have any golf courses around the islands? Because if so, I'm in.

[Mary Long]

Scuba diving didn't quite do it for you.

[David Meyer]

You know, I'm. I'm absolutely willing to try, but it's not the number one thing that I do on vacation.

[Mary Long]

So while this appears that it might be the number one thing that Benioff does on vacation because while scuba diving there, he ruptured his Achilles. But fret not, he told investors that he experienced great care while back home and is now on the path to recovery, though it sounds like he's still in a boot. And again, he even found a clever way to kind of tie this whole story back to Salesforce and its latest AI offering, Agent Force. Basically, Benioff relays this preoperative call that he has with his care staff at a hospital where he's getting this treatment. And the call kind of gets him wondering about what it would have cost Salesforce to run. This call with Agentforce and this show, many approach of telling this personal story and weaving it back to what Salesforce is doing is very classic Benioff and it is entertaining. But how do you separate evangelism from actuality when you're listening to Benioff Sell or any other show? Manny, CEO Sell, the benefits of CRM and AI?

[David Meyer]

That is such a good question because it's something I actually think about quite a bit given that I tend to fish for investments in the technology ponds. And interestingly enough, we were talking about this very thing on the morning show this morning, which I encourage listeners to listen to as well. Actually, you don't separate them as investors. What you need to do is actually recognize the type of leader that you're dealing with in terms of the CEO. And Benioff is absolutely a visionary. Right. That he is always looking forward, he's always crafting narratives. He loves talking about this is where the future is going. And this is what we're going to do at Salesforce. So what I want to do as an investor is I want to embrace his style. But we'll go. We'll call it the classic trust but verify. Like, I trust that he, you know, he sees this every day. He loves it. It's his passion. But then you have to look at the track record of turning that vision right into performance. Because at the end of the day, it's performance that, you know, the narratives help, but it's performance that drives. Tends to drive stock performance. But for mo, for the most part, over the time that I've been following him, he's done just that. And that's the reason that we can say that is because we can cross reference his visions with results that are given by the CFO every quarter.

[Mary Long]

It's pretty clear that agent force is a central part of Benioff's future vision for Salesforce. It was mentioned, by my account 80 times in that earnings call the other day. Yet this product only launched in late October. So as a refresher, what is agentforce?

[David Meyer]

I think it's Marvel's upcoming Superhero blockbuster in 2025, if I'm not mistaken. No, seriously, let's go to the company and see how they define it and then we'll talk about it a little bit. So according to Salesforce, an agent force. Agent is a proactive, autonomous application that provides specialized, always on support to employees or customers. They're equipped with the necessary business knowledge to execute tasks according to their specific role. All right, so let's translate that from salesforce speak into something that's more digestible. So the idea is that agent force is a way to create digital assistance for humans based on whatever tasks they're trying to perform in order to help them become better workers, more productive, make better decisions, whatever it is they. They act as a way to quickly get a job done such that the person using the agent can get better at their job.

[Mary Long]

Kind of moving over to the financial results that came through in this most recent quarter. Revenue was up 8% year over year. Net income up 25% year over year. Where is salesforce cutting expenses? How is it able to improve net income at such a higher rate than it is its revenue?

[David Meyer]

CFO Amy Weaver hasn't really given much in terms of details about this other than they're employing good expense management. Okay. You know, good. You're making sure your costs are somehow aligned with your revenue. That's a good thing. But if we look Back. The company actually has reduced its workforce over the past year, and that was necessary. Just like Okta, when their revenue growth slowed, had to align the cost structure correctly. Salesforce has had to do the same thing. And the other place that I see where this is happening is according to the financial performance over the past few years, selling general and administrative costs as a percentage of sales are dramatically down. So perhaps there have been changes in compensation associated with the sales force. There may have been, you know, more careful expenditures around marketing to get, you know, get the word out about new products. But the other thing that I think is happening is that new products also seem to be carrying higher margins with them. So when you put all those things together, right, better, lower costs, higher margin, products coming out, you can lever that 8% revenue growth into 25% profit growth.

[Mary Long]

David, I think there's one other thing from this quarter that you want to talk about. Anything else that we haven't covered yet that you want to hit before we.

[David Meyer]

Before we close out there is I really would like to give a shout out to CFO Amy Weaver. She had been at Salesforce before, before she joined us CFO in 2021. And when that happened, there was a worry that as she tried to bring more quote, unquote, discipline to the company, she might clash with Marc Benio. And you could understand it, right? Benioff has been a swashbuckling pirate this whole time, selling the story of Salesforce and acquiring companies and integrating them in. He's just been nonstop. We're going to build Salesforce into the best software company that there is. But personally, I think this partnership has been working fantastically. And this conference call was another great example. Mark got to sell the vision of AI as the future. You mentioned it was agent force, which is the thing that Mark is most excited about, was all he could talk about, right? His little part in the beginning is just littered with the words AI and agent force, and that's what you want. He's good at that, right? He loves this company. Let him sell that. And Amy gets to talk about how well the company is executing that vision in a financially disciplined way. Look, there are still plenty of investments being made at Salesforce. They're making smaller acquisitions, but they are making acquisitions. They're invent. They're investing in their technology platform in order to bring all this great work that they're doing to customers along the way. There's now tons of cash flow being generated, including cash flow that's actually being returned to shareholders. Right. So if we think about it. It can be very difficult for a growth company to make the transition into a more mature growth company. But I think this executive team, and in particular Amy Weaver, has done a great job of transforming Salesforce into the more mature growth company that it is today. And I will just say this is not an easy thing to do. So kudos to Amy and the rest of the executive team.

[Mary Long]

David Meyer, thanks so much for coming on to Motley Fool Money and sharing these wonderful insights into some software companies with us today.

[David Meyer]

Thank you Mary. I really appreciate it.

[Mary Long]

One of the biggest questions in investing is whether you'll have enough money in retirement. Alison Southwick and Robert Brokamp discuss how you plan for one very important part of that equation.

[Alison Southwick]

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[Robert Brokamp]

When you picture your retirement, do you see yourself on the links, maybe traveling the world or otherwise just leaning back with an adult beverage and a deep sense of contentment? Yeah, that sounds really nice. But do you also have a lingering fear that your future resembles an Old Mother Hubbard type situation where your cupboard is bare but somehow you have money for a dog coffin and then, well.

[Mary Long]

Have you read Old Mother Hubbard lately?

[Robert Brokamp]

It gets weird. Anyway, the point is, even though we all aspire for that first scenario of a cushy retirement, being poor in old age is a common fear. According to a survey from Prudential released in June, the majority of Americans ages 55 and older worry about outliving their money. When it comes to estimating the odds that your portfolio will last as long as you do, perhaps you use a calculator or hire a financial planner. One of the most important Variables will be your life expectations, expectancy. The longer you expect to live, the more you'll need to have saved up before you can retire. I mean the math, just maths.

[Unnamed Speaker]

Absolutely. And the numbers will be different for each person. But someone who expects to live until age 95 will need anywhere between 35% to 40% more saved for retirement than someone who expects to live to just age 85. And for most people, we're talking about a difference of hundreds of thousands of dollars. So that's a lot of extra saving while working and maybe more years of working before you can actually retire. So to determine how much you need to save in order to retire when you want, you just need to know when you'll die. But of course, most people don't know when that'll happen, so the best you can do is make an educated guess.

[Robert Brokamp]

Now, fortunately, there are tools that provide evidence based estimates and then you can adjust the results to account for your own fears about running out of money. One such tool is the Actuaries Longevity Illustrator, a joint creation of the American Academy of Actuaries and the Society of Actuaries. I'm glad we have both, because they are two groups who know an awful lot about how long people live. You can find the [e-mail] and it incorporates four age, gender, smoking habits and health assessment to estimate the likelihood that you and your spouse, if you're married, will live to certain ages.

[Unnamed Speaker]

So let's use the tool to look at the potential longevity of a non smoking, 65 year old married heterosexual couple in average health. So according to the tool, the average life expectancy for the male is to age 86 and for the female it's 88. So at first glance you might think, well, just input those numbers into a retirement calculator. But you should keep a few important points in mind. First, half of people will die sooner than those ages, but half will live longer. And a couple of factors that are associated with above average longevity are higher levels of wealth and higher levels of education. And that probably applies to most of the people listening to this podcast. And another factor that leads to a longer life is marriage. According to the Longevity illustrator, there's a 50% chance that one member of our average health couple will make it to age 92. So if you're married, you should definitely assume a longer life expectancy. So you know, as you fiddle around with the tool, you'll see how other factors, such as being in poor health or being in excellent health, will change your odds of living to a certain age.

[Robert Brokamp]

All right, let's say you use the tool and see the results. And because there is no tool just yet that can reveal the exact timing of your demise, which number should you use to run your retirement numbers? Well, you're likely familiar with the concept of risk tolerance when it comes to your portfolio. You may have even taken quizzes that determine whether you're likely to be a conservative, moderate or aggressive investor. But you also have a risk tolerance for the possibility of outliving your money.

[Unnamed Speaker]

Some academics call this longevity risk aversion, which is basically how much you fear running out of money in your twilight years. If it's very high, that is, you want the possibility that you'll outlive your money to be very low, then you choose a life expectancy for which there's like a 10% or lower chance that you'll live to According to the Longevity illustrator, there's a 10% chance that one member of our average health couple will live to age 99. So you could choose that age or maybe even bump it up to 100 or higher if you're really worried about outliving your money. But the result will be when you use a calculator or see a financial planner, is that you're going to have to save a lot more before you can retire and or spend less in retirement. Now, on the other hand, perhaps you look at the results from the Longevity Illustrator and see that there's roughly a 1 in 4 chance that someone could die before age 80 or so. And if you're more worried about leaving experiences and money on the table than the possibility of outliving your money, then your longevity risk averse is low. So you may choose a lower life expectancy. But if you go that route, you just got to have a plan for how you'll change course if portfolio returns. Too much spending, maybe too long living all add up to higher risk that you actually will run out of money at some point.

[Robert Brokamp]

Okay, so people have to choose a life expectancy that feels right for them. But is there a starting point that experts recommend?

[Unnamed Speaker]

Well, fortunately, yes. In a study published in the Journal of Financial Planning, David Blanchett, the head of retirement research for PGMDC Solutions, said he was a guest on this show back in July of 2020 22. He determined that adding five years to the projected life expectancy of a single person or eight years to the longest life expectancy of either member of a married couple is a reasonable assumption. And he also found that just as a general starting point, the typical female male couple retiring at age 65 could use age 95 as their time horizon. And personally, this is the number that I use when I do my own retirement planning for my wife and me.

[Robert Brokamp]

All right, bro, time to bring us home. What are your final thoughts on choosing an estimate for how long you'll live?

[Unnamed Speaker]

Well, we're coming up on the end of the year and we're going to start seeing lists of famous people who passed away in 2024. And it'll include people like Shannon Doherty, Dikembe Mutombo, Tito Jackson, and Richard Simmons, God rest his energetic soul. And when you see these lists, you're going to see a lot of people who, like the folks I just mentioned, died in their 70s, 60s, even 50s. And when I see that, I think how tragic it would be to spend decades saving for retirement only to not live long enough to enjoy that much of it. So personally, even though I use age 95 when analyzing my wife's and my retirement, I also assume that we're going to front load the spending so that my wife and I have a grand old time in that first decade or so, and then we're going to spend less. In the last decade. I've also began to assume that we will save less for retirement once we reach our 60s and we'll instead begin to use some of that money to enjoy some of the things that we were saving for retirement, but do them a little bit before we actually retire. But this also means that my wife and I are sort of supercharging our savings until then to build in some protection against being poor in our older ages. We plan to delay taking Social Security until age 70 because even if our portfolio dwindles to nothing, we'll still get those inflation adjusted, partially tax free Social Security checks from Uncle Sam. And the longer we wait to claim the benefits, the bigger those checks will be. The bottom line here is that delaying Social Security can be some of the best so called longevity insurance that you can buy.

[Mary Long]

As always, people on the program may have interest in the stocks they talk about, and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you all personal finance content follows Motley fool editorial standards and are not approved by advertisers. The Motley fool only picks products that it would personally recommend to friends like you. I'm Mary Long. Thanks for listening. We'll see you tomorrow.