Motley Fool Hidden Gems Investing - Stop! Please Sign In Again

Episode Date: December 4, 2024

Okta achieves profitability; another CEO gets a software lesson from a torn Achilles. (00:14) David Meier and Mary Long discuss: - Okta’s earnings and the future of logging in - Marc Benioff’s ability to turn vision into performance - Salesforce’s AI-driven future Then, (17:37), Robert Brokamp and Alison Southwick talk about how to avoid outliving your money in retirement. Visit our sponsor: Get 15% off the Amazfit T-Rex 3 at US.Amazfit.com/fool Companies discussed: OKTA, CRM Host: Mary Long Guests: David Meier, Robert “Bro” Brokamp, Alison Southwick Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

New from Nespresso. Blend wellness into your coffee routine with the Coffee Plus range. Infused with functional benefits. Choose the coffee you love with added B vitamins. Like Coffee Plus B12 to help support immune function. And Coffee Plus B6 to keep your day moving. Or go with the flow and choose Ginseng Delight. Our new double espresso with ginseng extract.

Whatever lies ahead, don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com. 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 are you doing on this Wednesday morning? Hi, Mary. Thanks for having me. I'm doing extremely well this morning. 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 multi-factor 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? So you're right 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 take a platform approach, they do offer their own identity management solutions. But identity management is just one piece in their portfolio, whereas Okta, along with competitors like Ping Identity, which was recently purchased by private equity firm Toma Bravo or a company like CyberArk. They're specifically focused on everything associated with identity management, both from coming into the network as well as once you're in the network.

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 multi-factor authentication being everywhere that it's not already? So, sorry, I'm giggling because, you know, I've experienced the same thing, so I hear you. It definitely can be annoying, but right now it's pretty effective, right? 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 multi-factor 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 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. There we go. Love that. The future is bright. Big news for Okta this morning is that the company achieved its first quarter of gap 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? 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 across a better cost structure tends to give you the margins you're looking for that are associated with scale. This question of retention and large customers came up a bit on the call. Okta 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, 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? 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 will also make sure that you can only access the things that you're allowed to access.

So, one thing that is very popular 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. CEO Todd McKinnon talked a lot about Okta's partner ecosystem on the call. What is that? 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 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. What a beautiful setup, David, because our next story for the day. I'm so glad you noticed how well I transitioned. I've learned from you. I've learned from you.

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, Mark Benioff, mentioned on the call the day 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 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. So do they have any golf courses around the islands? Because if so, I'm in. scuba diving didn't quite do it for you? I'm absolutely willing to try, but it's not the

number one thing that I do on vacation. 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 tie this whole story back to Salesforce and its latest AI offering, AgentForce. Basically, Benioff relays this pre-operative call that he has with his care staff at a hospital where he's getting this treatment. And the call 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 or any other showman-y CEO sell the benefits of CRM and AI? 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. Interestingly enough, we were talking about this very thing on the morning show this morning, which I encourage listeners to listen to as well. So 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. 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 call it the classic trust but verify. I trust that 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 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 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 the results that are given by the CFO every quarter. It's pretty clear that AgentForce 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? 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 act as a way to quickly get a job done

such that the person using the agent can get better at their job. 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? CFO Amy Weaver hasn't really given much in terms of details about this other than they're employing good expense management. Okay, 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 more careful expenditures around marketing to 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. 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 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 as 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 Mark Benioff. 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 non-stop, we're going to build Salesforce into the biggest,

best software company that there is. But personally, I think this partnership has been working fantastically. 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 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 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. 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. David Meyer, thanks so much for coming on to Motley Fool Money and sharing these wonderful

insights into some software companies with us today. Thank you, Mary. I really appreciate it. One of the biggest questions in investing is whether you'll have enough money in retirement. Allison Southwick and Robert Brokamp discuss how you plan for one very important part of that equation. New from Nespresso. Blend wellness into your coffee routine

with the Coffee Plus range, infused with functional benefits. Choose the coffee you love with added B vitamins, like Coffee Plus B12 to help support immune function and Coffee Plus B6 to keep your day moving. Or go with the flow and choose Ginseng Delight, our new double espresso with ginseng extract. Whatever lies ahead, don't change your morning. Let your morning change you.

Discover Coffee Plus on Nespresso.com. 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, have you read old mother Hubbard lately? 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 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. 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 save 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. 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 tool at longevityillustrator.org. It incorporates four factors, 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. 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. According to the tool, the average life expectancy for the male is to age 86, and for the female, it's 88. 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. 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 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. 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. 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 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 one in four chance that someone could die before age

80 or so. If you're more worried about leaving experiences and money on the table than the possibility about living your money, then your longevity risk aversion is low. 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 high risk that you actually will run out of money at some point. People have to choose a life expectancy that feels right for them. But is there a starting point that experts recommend? Well, fortunately, yes. In a study published in the Journal of Financial Planning, David Blanchett, the head of retirement research for PGMTC Solutions, and he was a guest on this show

back in July of 2022, 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. All right, bro, time to bring us home. What are your final thoughts on choosing an estimate for how long you'll live? 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.

four. It'll include people like Shannon Doherty, Dikembe Mutombo, Tito Jackson, and Richard Simmons, God rest his energetic soul. 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. 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. Personally, even though I use age 95 when analyzing my wives in 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.

as always people on the program may have interests 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 hear 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.