Workday and Okta attractions extend beyond remote working

Buoyant Q1 results for the likes of Okta (NASDAQ: OKTA) and Workday (NASDAQ: WDAY) showed the benefits of the pandemic for companies exploiting cloud-computing, specifically those engaged in ‘human capital management’ – to use the preferred corporate jargon. But, as the return to normality kicks in, will those same benefits begin to evaporate?

The boom in remote working has been one of the more interesting side-effects of the pandemic. The numbers speak for themselves. In the space of a year, it is estimated that the number of Americans - as a percentage of the workforce - who worked from home regularly has risen from 4 per cent to 44 per cent. However, shifts in work patterns have been evolving over the past decade; the pandemic has served to accelerate any number of societal and commercial trends.

The point that this isn’t a particularly new phenomenon is made by a report from Global Workplace Analytics. It argues that the onset of faster broadband speeds across the world in 2005 spurred the original rise of homeworking; the total numbers of home workers had already increased in the US by 173 per cent prior to the pandemic. What is slightly trickier to forecast is how much more growth in homeworking is possible in the current climate. The fact that the same report estimates that about 62 per cent of US employees could feasibly work from home suggests there is a natural glass ceiling in growth rates for companies servicing this market. So, achieving both scale and a measure of market dominance will be vital over the next couple of years.

In addition, such a major change in the nature of work would not have been possible without the development of highly advanced cloud computing technology. The ability to store and access both applications and data flexibly, and on a huge scale, means companies can now operate easier-to-use and leaner IT systems than was the case 20 years ago. There are even substantial benefits in productivity from workers who aren’t stressed by commuting or dealing with the everyday annoyances of working in a vast building full of people – fewer arguments over who has used all the milk in the communal kitchen, for instance.

So, this week the market got a look at a stable of companies that have quietly been developing a presence in the services end of the cloud computing market where, unsurprisingly, business has been brisk.

All in the cloud

Okta describes itself, somewhat enigmatically, as a “leading customer identity provider”. On further investigation, this means it provides a platform of cloud-stored apps that employees can use across a range of devices to allow them to work completely remotely. Okta’s technology has a function that terminates access to the service the second an employee is no longer employed - so the “keeping-your-IT-licences-for-a-while-after-you-leave” days are long gone. And that’s just one of the applications.

The first quarter results reflected both the benefits accrued from pandemic lockdowns and the deeper costs for a company that is still establishing itself. First quarter revenues surged by 38 per cent to $240m (£169m), with subscriptions making up most of the increase in revenue. It is clear, though, that it is still subject to the paradox of rapid growth, where costs rise at a commensurate level. For instance, costs associated with marketing and research and development (R&D) increased substantially to $146m and $68m, respectively, versus comparators of $104m and $34m.

Additionally, interest expenses on its overall debt rose from $10.7m to $22.7m. Despite an overall net loss of $109m, the balance sheet looks fundamentally stable – when current assets and liabilities are divided, the current ratio comes out at a healthy 1.86, though admittedly this is only a snapshot.

In many ways, Okta’s business might be in less danger of the “Zoom fatigue” that many employees report with video conferencing services. As a platform provider with a base in established cloud computing, rather than a single use service, the company looks better placed if the trend rows back against remote conferencing this year.

Unsurprisingly, losses are still a feature of this growth and consensus forecasts for the fiscal year 2022 give an EPS of -0.97 cents.

Workday (NASDAQ) is a similar platform cloud computing subscription service to Okta, but with more specific applications. It provides a suite of apps that are focused on the finance, human resource and analytics side of businesses. In other words, the nuts and bolts necessary for basic business administration.   

The general impression was, as with Okta, that the pandemic has accelerated existing trends towards much more flexible working conditions. Still, management sounded bullish for the year ahead and predicted subscription sales growth of 17 per cent, overall, in the range $4.42bn to $4.44bn. Operating margins were forecast at a healthy 18-19 per cent.

The first quarter numbers also confirmed the trend in the sector that real scale has yet to be achieved. The company raised its headcount by 20 per cent, compared with this time last year, which was reflected in admin costs of $95m, up 17 per cent. Higher subscriptions also meant higher costs to service them – these rose from $145m to $182m in the first quarter.  

Consensus forecasts give Workday an adjusted EPS of 280 cents for the full financial year.

To stay at home or go into the office

The difference, and possible attraction, of cloud computing firms is that the technology is not particularly dependent on commuters continuing to stay at home. Although many major companies have made plans to downsize office space, particularly in expensive cities like London, there are just as many who are preparing their workforce for a return to the office: Goldman Sachs and Citigroup to name but two. Even in the US where the likes of Facebook and Amazon have allowed large-scale homeworking to continue, there are few who have guaranteed that this will continue past the end of June. While many workers have complained about some aspects of remote working, the basic advantage of using apps across a variety of devices in different locations, along with an IT infrastructure that someone else is responsible for, is uncontested.

While the share prices of both Okta and Workday have retreated in-line with the general sell-off in technology shares, the fundamental reason that they still attract interest from investors is that the capital costs of platform computing companies are miniscule - no more than a few servers in a secure location – when compared with older industries (a steel rolling mill is expensive by comparison.) Indeed, the main expense is R&D and the human resource cost of computer programmers and marketing – hence the generally large amount of intangible assets that such companies tend to generate.  

The downsides tend to focus on growing threats around cyber-security and the ability of hackers to cause mayhem. The recent shutdown of the Colonial Pipeline and subsequent ransom payment, though completely unrelated to the fact of cloud-computing, shows the risks that companies now need to manage with of a more dispersed, connected and potentially cyber-insecure workforce.