- The structural benefits of the remote work trend are already visible before the pandemic
- Expect heavy R&D commitments with both companies firmly in expansionary mode
Positive results in the first quarter for the likes of Okta (NASDAQ: OKTA) and Working day (NASDAQ: WDAY) has shown the benefits of the pandemic for companies leveraging cloud computing, especially those engaged in “human capital management” – to use preferred corporate jargon. But, as the return to normalcy kicks in, will those same benefits start to evaporate?
The boom in remote working has been one of the most interesting side effects of the pandemic. The numbers speak for themselves. Within a year, it is estimated that the number of Americans – as a percentage of the labor force – who regularly worked from home increased from 4% to 44%. However, it is clear that changes in working models have evolved over the past decade – the pandemic has served to accelerate a number of societal and business trends.
The fact that this is not a particularly new phenomenon is highlighted by a report from Global Workplace Analytics. He argues that the emergence of faster broadband speeds across the world in 2005 spurred the initial boom in working from home; the total number of homeworkers had already increased in the United States by 173 percent before the pandemic. What is a little trickier to predict is how far it is possible to increase homework in the current climate. The fact that the same report estimates that about 62 percent of U.S. employees could work from home suggests that there is a natural glass ceiling in the growth rates of companies serving this market. Thus, achieving both scale and a measure of market dominance will be critical over the next two years.
Furthermore, such a dramatic 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 at scale means that businesses can now operate computer systems that are easier to use and lighter than 20 years ago. There are even substantial productivity benefits from workers who aren’t stressed out by commuting or the daily hassles of working in a large, crowded building – less hassle over who’s been using it all. milk in the common kitchen, for example.
So this week the market took a look at a stable of companies that have quietly developed a presence in the service sector of the cloud computing market where, unsurprisingly, business has been buoyant.
Everything in the cloud
Okta describes himself, somewhat cryptically, as a “primary customer identity provider”. Upon further investigation, this means that it provides a platform of cloud-stored applications that employees can use on a range of devices to allow them to work completely remotely. Okta’s technology has a feature that terminates access to service the second an employee is no longer employed – hence the days of “keeping-your-computer-licenses-for-a-time-after-time.” your-leave ”are long gone. And that’s just one of the apps.
The first quarter results reflect both the benefits of pandemic lockdowns and the greater costs for a business that is still in the process of establishing itself. First-quarter revenue jumped 38% to $ 240million (£ 169million), with subscriptions accounting for the bulk of the revenue increase. It is clear, however, that it is still subject to the paradox of rapid growth, where costs increase at a proportional level. For example, costs associated with marketing and research and development (R&D) increased significantly to $ 146 million and $ 68 million, respectively, against comparators of $ 104 million and $ 34 million.
In addition, the interest expense on its aggregate debt fell from $ 10.7 million to $ 22.7 million. Despite an overall net loss of $ 109 million, the balance sheet looks fundamentally stable – when current assets and liabilities are divided, the current ratio stands at 1.86, although admittedly this is only a snapshot. .
In many ways, Okta’s business may be less prone to the “zoom fatigue” that many employees report with video conferencing services. As an established cloud-based platform provider, rather than a one-time service, the company looks better positioned if the trend returns to remote conferencing this year.
Unsurprisingly, losses are still a feature of this growth and the consensus forecast for fiscal 2022 gives EPS of -0.97 cents.
Working day (NASDAQ) is a platform-based cloud computing subscription service similar to Okta, but with more specific applications. It provides a suite of applications focused on the financial, human resources and analytical aspects of businesses. In other words, the nuts and bolts needed 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 seemed optimistic for the coming year and forecasted 17% growth in subscription sales, overall, in the range of $ 4.42 billion to $ 4.44 billion. The operating margins are forecast to be between 18 and 19%.
The first quarter numbers also confirmed the trend in the industry that true scale has yet to be reached. The company increased its workforce by 20% compared to the same period last year, which translated into administrative costs of $ 95 million, up 17%. Higher subscriptions also meant higher costs to maintain them – those fell from $ 145 million to $ 182 million in the first quarter.
Consensus forecast gives Workday Adjusted EPS of 280 cents for the full year.
To stay at home or go to the office
The difference and possible appeal of cloud computing companies is that the technology is not particularly dependent on commuters continuing to stay at home. While many large companies have plans to downsize offices, especially 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 for n ‘to name just two. Even in the United States, where Facebook and Amazon have allowed large-scale home working to continue, few have guaranteed it will continue beyond the end of June. While many workers have complained about some aspect of working remotely, the fundamental benefit of using apps on a variety of devices in different locations, as well as an IT infrastructure for which someone else is responsible , is undisputed.
While Okta and Workday’s stock prices have retreated alongside the general sell-off of tech stocks, the fundamental reason they continue to garner investor interest is that the capital costs of platform IT companies are rising. tiny – no more than a few servers in a secure location – compared to older industries (a steel rolling mill is expensive in 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 these companies tend to generate.
The downsides tend to focus on the growing cybersecurity threats and the ability of hackers to cause chaos. The recent shutdown of the Colonial pipeline and the resulting ransom payment, while completely independent from cloud computing, demonstrates the risks companies now face with a more dispersed, connected and potentially cybernetic.