Okta's (OKTA -1.66%) first-quarter earnings were overshadowed by its lowered guidance for the current quarter and the sudden departure of its CFO. Workday (WDAY -1.17%) shares fall a bit despite good first-quarter results and raised guidance. In this episode of MarketFoolery, Motley Fool analyst Maria Gallagher analyzes those stories as well as the latest great results from Williams-Sonoma (WSM -0.84%).
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This video was recorded on May 27, 2021.
Chris Hill: It's Thursday, May 27. Welcome to MarketFoolery. I'm Chris Hill. With me today, Maria Gallagher. Good to see you.
Maria Gallagher: Nice to see you, too.
Hill: We've got more specialty retail to talk about. We've got more earnings. But let's start with a reminder that next Monday is Memorial Day. That means the stock market is closed here in the United States for the holiday. That means we're off until Tuesday, so plan accordingly, people. Let's start with Okta, because shares of Okta are falling 10% this morning. This is the IT management software business. They said their loss for the current quarter is going to be bigger than they originally thought and also the CFO, Mike Kourey, is leaving, and unless I'm misreading this, this is a sudden departure because they have named an interim CFO while they look for a permanent successor.
Gallagher: Yeah. The quarter was pretty good, their revenue grew 37% to $251 million. Their subscription revenue grew 38%. The remaining performance obligations were up 52%. They added 650 new customers. Their enterprise customers surpassed 2,000. They closed on an acquisition. On a financial metric basis, it was a solid quarter, but I think the stepping down of a CFO after about a year isn't the best idea. People are not happy about it.
Hill: Yeah. I've said before, if the CEO leaves suddenly, that's one of those where-there's-smoke-there's-probably-fire situations, and right after that, if I'm rank-ordering, right after the CEO, it's the CFO. If the CFO leaves suddenly, it immediately invites the question, what's going on? Hopefully, nothing really is going on in terms of the business. Maybe it's a clash of personality, something like that. But the guidance plus the CFO suddenly walking out the door, I get why the stock is down.
Gallagher: Yeah. I'm not surprised. I think whenever you see that it's sudden and you see they're pointing at someone interim, I think that always raises a lot of red flags for people. Yellow flags at a minimum, I would flip your order. I get more nervous when the CFO leaves than when the CEO leaves because a lot of times, I think if a CFO leaves, they are the one who is like a deep dive looking at those finances [laughs]. I get more nervous when they depart sometimes. CEOs leave for various reasons. Yeah, I understand why the stock is down, I'm not surprised by it. Hopefully, they can find someone good. I'm actually more nervous about this acquisition because it was a really big acquisition that was valued at $6.5 billion a stock transaction. A lot of times with acquisitions when I look at them, I want to see that they're growing that total addressable market. From what I can tell, Auth0 does a lot of the same things as Okta. It has a different go-to-market strategy. It's attacking the same problem at a different angle, which is useful. But I just think a lot of terms of the acquisitions, I like to see them growing that total addressable market and going into new spaces. That's not really what I saw with this quite large acquisition. For me, that is something that raised more yellow flags than anything else in the past couple of months with Okta.
Hill: Yeah. Look, you and others have said time and time again that when it comes to Wall Street analysts, they're going to do their job, but in terms of expectations, a company's expectations, the ones that they set, those are more important. We, as investors, should hold businesses to the company's expectations, not necessarily that of Wall Street analysts. That said, you just touched on something that I think is important and shouldn't be overlooked, which is that you need to explain things like this, like it is the responsibility of any company management team that is making any acquisition to lay out for shareholders and the analyst community, this is why we made this. To your point, Okta, they haven't done a great job of that. They haven't fully explained why this is money well spent.
Gallagher: Yeah. Especially, when you see a big acquisition like that, the one that I still have a good amount of questions about, and then within a month the CFO who approved this acquisition leaving, that's not the best vision from a company. But I will say that it's still like I said, the quarter was still a solid quarter from a financial standpoint, and so I am still interested in the company, but I do think all of those combined makes me very not surprised that the stock is selling off.
Hill: The last question and then we'll move on. Are there enough good things that you saw in the quarter and with this business overall, because I mean, we use Okta at the Motley Fool in terms of IT management, they do a great job with that. From my experience, it's a very good platform. Do you look at the drop in the stock and it's decently off of its high for the year? Do you look at this as a buying opportunity or are there enough yellow flags between the CFO leaving and the acquisition they haven't done as good a job of explaining as they could have that you think I wouldn't necessarily jump in at this lower price?
Gallagher: I think I would get a little bit more interested in it. I do think it operates in a really interesting sector. I think it's a really sticky product. It has a good, solid history of up-selling and cross-selling within customers. I do think it's important to note, it's just super-richly valued. Even as it was selling off, it still was multiple over 40 times last 12-month sales. It's still a very expensive company even with this sell-off. I think I would be interested in it and would want to dig a little bit deeper. But yeah, still definitely a good amount of questions from me on this company.
Hill: Workday is in the business of HR software. First quarter revenue was higher than expected. They raised guidance, but shares of Workday down a little bit this morning. Is this also a valuation deal? This is a good quarter. It's the one-two punch. The revenue looked good. They raised guidance. But if the stock is too pricey, I get why it's selling off a little bit.
Gallagher: Yeah. It is another one that's pretty pricey. Once again, I think that this is a really interesting company. I think it's a sticky product and a necessary business. Their revenue was up about 15%. There was increased demand across all offerings. Specifically, their financial offerings saw a lot of momentum as companies prioritize digitization within this office of the CFO and they need more help in that. Some of their new customers are the Los Angeles Department of Water and Power and Saks Fifth Avenue, which I never thought I would say those two [laughs] right next to each other as customers. Like you said, they raised guidance. One thing that I think is really important to note as they had a customer satisfaction rating of 97%. I think that, to me, shows a really good momentum for the company and a good proven strategy of really helping customers and creating the sticky product. But I will say that they are planning to increase their global headcount by more than 2,500 hires in this next upcoming year, which is about an increase of 20%. They are going to continue to be spending a lot of money in the next couple of years. I think maybe that is one of the reasons that people were like, oh, you're still spending a lot of money and you're not growing at monumental rates. You're growing 15%-17%. I think that was maybe one of those reasons, but it was still a pretty good quarter in my opinion.
Hill: Who does Workday compete with?
Gallagher: Because Workday is usually with U.S. companies that are midsize, large, and global enterprises. Usually, with about 1,000-5,000 employees, over $100 million in revenue. Their competitors are bigger, more legacy. You'll think about Oracle, ADP, SAP, those types of payroll companies as opposed to if you think about Paylocity or Paycom, those are usually in those smaller sectors. This is because they are targeting those bigger companies, they are competing more with those legacy players.
Hill: Two quick notes before we move on. First, our guest on Motley Fool Money this week is Paul Lienert, a veteran journalist covering the automotive industry for decades. We're going to talk about Ford's new electric F-150. We're going to talk about the latest with Tesla's self-driving cars. So check out Motley Fool Money this week. As always, if you're looking for more stock ideas, you can check out Stock Advisor. It is the flagship investing service here at The Motley Fool. You get stock recommendations every month, you get Best Buys Now, you get a lot more than that. You can go to stockideas.fool.com and get a 50% discount. It's not a Memorial Day weekend sale. I know there are a lot of Memorial Day weekend sales going on. This is just the ongoing. You get a 50% discount at stockideas.fool.com because you're one of the dozens of listeners.
Here's what Williams-Sonoma did in its first quarter. Profits were 300% higher than a year ago. Same store sales were up 40%. They raised guidance and somehow, despite [laughs] all of that, shares of Williams-Sonoma dropped nearly 4% this morning. What? [laughs] This is not some hyper-valued software business.
Gallagher: I know. Of the three, this is the one I was most surprised by. So like you said, their revenue growth for comparable brands was up 40%, West Elm was at 51%, Pottery Barn, up 41%, Williams-Sonoma, up 35%, and then Pottery Barn Kids and Teen up almost 28%. Their new growth initiatives have really outperformed, two of those being their outdoor expansion. With West Elm, their outdoor furniture business grew 140%. Their Williams-Sonoma Home grew, their outdoor collection grew 200%, and then that business-to-business cross-brand growth was up 165%, and they raised their outlook. So it was a really stellar quarter, I think. To me, what makes the most sense is this is a home sales company and people are saying, as the world reopens, what is this going to look like? How much money are people going to spend on the home now that we can go outside again? But I think they're proving over the past year that people are moving to the suburbs. People are investing more in their homes as they're working from home, and they're splurging, spending up a little bit on creating that atmosphere. If you're having new gatherings, you're still probably having them at home, a good amount of new outdoor gatherings, or home-cooked meal parties. I think that might be some of the reasoning. You see a lot of these work from home stocks versus your vaccine plays. They all shift on different news. So I think it might be that, but it was a really great quarter, a really great year for Williams-Sonoma.
Hill: Yeah. I'm glad you mentioned all of the brands that they have under the Williams-Sonoma corporate parent because often is the case. We've seen this in years past with Williams-Sonoma where one of those brands just wouldn't be doing as well as the others and that to me as much as anything is what was amazing about this latest quarter for them. It's like, not only was there not a weak spot, there wasn't even really [laughs] like a part of their business that you looked at and thought, boy, they're really lagging. I mean, it was really great across the board.
Gallagher: Yeah. I think that's really interesting too. I mean, though the lowest growing is Pottery Barn Kids and Teens and they even called it out in their conference call, that their baby products within that segment are growing over 30%. So they think that's a good growth initiative for them. They called that a lot of growth initiatives within their conference call, which I think is always exciting, especially, when you look at these types of businesses. You're like, "Oh, well, what else can they do? How else can they grow?" They have a lot of really concrete examples. They talked about their 3D design tool utilization is up 50% and customers who use that tool generate about two times as many sales as the average customer. They really have leadership within the direct-to-consumer marketplace. Because they're able to pull back on promotions because they have all in-house designers with really high-scale kind of creations that are really unique, which is a game-changer for their margin. So I think that they're really innovating in a pretty exciting way in this space, in a way that I hadn't thought that they had been.
Hill: Yeah, it's not a business that on the surface screams innovation. It's like when you're selling furniture and you're selling homewares with the namesake, Williams-Sonoma brand. Yeah. It really is pretty incredible. They've got a couple of brands that I've never heard of before. One is called Mark and Graham, one is called Rejuvenation, but they all seem to fit. I don't look at any of the sub-brands that they have and think that in terms of what they are selling, they're an outlier to the business. It's all sort of mixed. In the same way that the brands under the Tapestry umbrella are all in the same category. So with that in mind, if you've got, let's just say, you've got a gift card, $100 gift card, and it can be at any one of these Williams-Sonoma, Pottery Barn, West Elm, Mark and Graham, which I don't know if you're familiar with it. Where are you shopping?
Gallagher: It's only a $100 gift card? Because I can get you anything on West Elm.
Hill: I was going to say, a $100 gift card at West Elm might get you a lamp [laughs] or part of a lamp. So let's put it this way, you get a 15% off, anything you buy, 15% off.
Gallagher: I think, right now, with my life, I would go Williams-Sonoma, I would take the $100 gift card to Williams-Sonoma. [laughs] I love to cook, I love to bake, I love a new gadget, I would be very excited. I really want to buy a stand mixer and I don't own one, so I think I would just take it and buy that. But ideally, if I got a larger gift card, I would go to West Elm.
Hill: Yeah. This is one of those things that doesn't show up on the balance sheet. But the longer these businesses go, these are all, I mean, I shouldn't say all, because I literally just learned about Rejuvenation and Mark and Graham this morning. But in terms of Pottery Barn, West Elm, Williams-Sonoma, the brand equity of those three, I mean, you know what you're getting when you go into any one of them, the quality is high. That's the sort of thing that only builds over time. I mean, unless they have some sort of horrific product-related scandal at one of them, it just grows over time.
Gallagher: Yeah. It's high quality, and it's high quality in areas people want to invest in. When people go to new homes and they want to invest in new furniture, a lot of times you're spending up on things like that. If you're getting into a new kitchen and you want to get a new high-quality pot and pans set, a good knife set, like you know these brands to go to and you will pay up for them because you know that they'll come with that quality, and I agree with you, I think that that continues to grow over time.
Hill: Maria Gallagher, always great talking to you. Have a great Memorial Day weekend.
Gallagher: Thanks. You, too. Thanks for having me.
Hill: 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 only on what you hear. That's going to do it with this edition of MarketFoolery. The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you on Tuesday.
