Okta, Inc.

Everybody, welcome to Octa's third quarter of fiscal year 2022 earnings webcast. I'm Dave Gennarelli, Vice President of Investor Relations at Octa. With me in today's meeting, we have Todd McKinnon, our Chief Executive Officer and Co-Founder, Brett Tai, our Interim Chief Financial Officer, and Frederick Karest, our Executive Vice Chairman, Chief Operating Officer and Co-Founder. Today's meeting will include forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements regarding our financial outlook and market positioning. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance, or achievements to be materially different from those expressed or implied by the forward-looking statements. Forward-looking statements represent management's beliefs and assumptions only as of the date made. Information on factors that could affect the company's financial results is included in our filings with the SEC from time to time, including the section titled Risk Factors and our previously filed Form 10-Q. In addition, during today's meeting, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. The reconciliation between GAAP and non-GAAP financial measures and a discussion of the limitations of using non-GAAP measures versus their closest GAAP equivalents is available on our earnings release. You can also find more detailed information in our supplemental financial materials, which include trended financial statements and key metrics posted on our investor relations website. In today's meeting, we will quote a number of numeric or growth changes as we discuss our financial performance. And unless otherwise noted, each such reference represents a year over year comparison. And now I'd like to turn the meeting over to Todd McKinnon. Todd.

Thanks, Dave, and thank you, everyone, for joining us this afternoon. Our strong third quarter results were driven by continued performance across Okta's standalone business as well as from Auth0. The importance of identity continues to accelerate as global economies endeavor to recover. Okta and Auth0 are playing a pivotal role in helping organizations secure access to technology from anywhere. The three megatrends that have driven Okta's business over the past few years continue to drive our growth. the deployment of cloud and hybrid IT, digital transformation projects, and the adoption of zero-trust security environments. I'll start with a quick recap of our combined Q3 financial results and then get into some of our other notable highlights from the quarter. In Q3, RPO grew 49%, current RPO grew 57%, total revenue grew 61%, subscription revenue grew 63%, and we generated $33 million in free cash flow for a 10% free cash flow margin. We added 950 customers in Q3 with over 700 additions to the Okta platform and over 200 new Auth0 customers. Our overall customer base now stands at 14,000. We added over 200 customers with $100,000 plus annual contract value, or ACV, and about half of them were new customers. Our total base of $100,000 plus ACV customers now stands at over 2,800. We also continue to have strong momentum with even larger contracts. The growth rate for a customer cohort with an ACV of $250,000 or greater all grew 50% or higher. Here are just a few notable examples of large enterprise wins in Q3, which come from a wide range of industries. A global investment management firm with hundreds of billions of dollars under management was an exciting new workforce and customer identity win this quarter. The Okta identity engine was key to the firm selecting Okta to improve its security posture by modernizing its IT ecosystem and reducing its dependency on legacy on-prem infrastructure. Okta will enable the firm to provide a better user experience to its employees and institutional clients while meeting the finance industry's high standard for security. Under Armour, one of the world's largest athletic performance brands, was a great new Okta customer identity win. As the pandemic created a significant shift in purchase behavior towards digital, they needed to quickly identify a solution capable of unifying legacy direct-to-consumer applications to modernize the way it was connecting with its consumers. Okta's low-code, easy to integrate, and scalable solution is helping Under Armour create a seamless, more consistent experience across millions of monthly consumer interactions. A Fortune 100 financial services company was a great new Auth0 win in Q3. They are deploying Auth0 as the identity layer for their B2B applications, allowing the company to focus their development resources on their core products. It's a great first step, and we see a lot of opportunity to further partner with this global company in the future. Combining forces with Auth0 accelerates our penetration into the massive CIAM market. One area that we are particularly excited about is the opportunity to cross-sell into each other's customer base. While we've only been a combined company for two quarters, we're already seeing some great cross-sell activity. Auth0 customers that became new Okta workforce customers include NASCAR, SigTech, Johanna, and Topin Printing, a global 1,000 company. We also had a large financial services customer of Okta sign on as a new Auth0 customer. This company has millions of customers and billions of dollars in funded loans. They've been a great Okta customer since 2017, using Okta workforce products to secure their infrastructure, scale rapidly, and improve its security posture. As the company grew, it was looking for a trusted partner to replace a legacy home-built system and free up its engineering resources. Okta and Auth0 collaborated to identify which solution would be the best fit and aligned on Auth0 due to its ease of use, extensibility, and scalability. With millions of logins per month, the company looks to improve the member experience as well as enhance its security posture. We also continue to build on our public sector customer base and momentum, including a federal government win in the quarter with the Department of Transportation, Office of the Inspector General. Additionally, Okta was recently included in the first-ever StateRamp Authorized Vendor List. This inclusion demonstrates Okta's commitment to helping state and local governments drive transformation across their platforms. StateRamp authorization gives government and procurement officials confidence in a service provider's data security capabilities and provides a central location for sourcing and state ramp verified SaaS solutions. We've already seen great success with state agencies, including Kansas, Illinois, Iowa, and Montana. We're also experiencing success with local government agencies, including the cities of Los Angeles and Las Vegas and Larimer County. It's still early innings for Okta within the public sector, and we're excited to build on this opportunity. Over the past 13 plus years, Okta has established itself as the leader in identity and access management. We're a trusted partner with our customers, and we've built that trust with great products and great service. At our virtual showcase event in October, we highlighted new features and innovations from Okta's customer identity, such as device authorization grant, branding, and customer admin roles. We also announced the availability of the Auth0 platform on Azure. The addition of Azure as an Auth0 private cloud platform option unlocks a secure cloud deployment option for organizations seeking strategic fit with their technology stack. Other exciting news from Showcase was that we've decoupled workflows from advanced lifecycle management to better capture the value that customers are getting with new tiered pricing for paid users. Okta Workflows automates complex identity-centric business processes for many of the world's leading brands, including Sonos, Slack, Intercom, and Moody's. Now, any customer can leverage the power of Okta workflows to solve any identity use case from provisioning and security to customer privacy and more. Workflows will be a key offering within our IGA portfolio. On that front, we continue to make great progress on the development side for both our IGA and PAM initiatives. In fact, We had an overwhelming response to invitations to our IGA beta, including marquee logos. It's clear to us that customers are hungry for cloud-first alternatives to their IGA and PAM initiatives, and Okta has become a trusted partner for their identity solutions. Our growing customer base and strong retention rate is great validation of our business. It's also nice to receive third-party recognition of our leadership as well. Gartner recently published their 2021 Access Management Magic Quadrant evaluation, and I'm proud to say that Okta was named a leader for the fifth consecutive year and was positioned highest on the ability to execute access of any vendor in the evaluation. Auth0 was also named a leader for the first time. I also want to take a minute to recognize the progress we've made on the ESG front. Earlier this year, we made a commitment to achieving 100% renewable electricity for our global real estate footprint by 2022. We advanced the program rapidly and recently announced we reached that goal for our global offices and employees work from home consumption. We've recently published an ESG fact sheet on our website, which contains more detailed information on this, as well as all the other great work we're doing on this front. I want to highlight that this past quarter we celebrated the fifth anniversary of the founding of Okta for Good, our social impact arm. Our goal is to strengthen the connections between people, technology, and community. and we'll continue to commit our most valuable resources, our people, products, and dollars to this work. Before we get to the financial review, I wanted to give a quick update on the CFO search. We're being very thoughtful with the process, and it's always difficult to project timelines. In the meantime, Brett and team have been doing a fantastic job, and they've earned trust and confidence both internally and externally. I'll close by saying that we remain excited about the trends we're seeing in our business. Q4 is always our biggest quarter of the year, and it's off to a good start. It's clear that the market continues to move toward a modern cloud-first approach to identity. With our unmatched array of cloud-native identity solutions that solve a wide range of use cases, it's also clear that Okta is best positioned to capture and execute against the $80 billion total addressable market opportunity. I'll now turn it over to Brett to walk you through more of our Q3 financial details and how we're raising our outlook for the fiscal year.

Thanks, Todd, and thank you everyone for joining us. As we noted last quarter, Okta and Auth0 are integrating quickly and will only be breaking out Auth0's gap revenue and net loss for Q3 and Q4 of this fiscal year. With that, I will now highlight some of the results for the third quarter as well as provide our business outlook. Total revenue for the third quarter increased 61%, driven by a 63% increase in subscription revenue. Subscription revenue represented 96% of our total revenue. On an Okta standalone basis, total revenue grew 40%. Auth0 revenue net of $4 million in recognized purchase accounting adjustments was $46 million. RPO or backlog which for us is contracted subscription revenue, both build and unbuild that has not yet been recognized grew 49% to $2.35 billion. Current RPO, which represents subscription revenue, we expect to recognize over the next 12 months also experienced strong growth of 57% to $1.18 billion. Demand for our products remains robust, driven by the macro trends that Todd mentioned earlier, Calculated billings growth in the third quarter was driven by strength across new and existing customers for both Okta and Auth0. Both total and current calculated billings grew 54%. Calculated billings includes the effect of billings process improvements that were enacted at the end of the first quarter of FY22. Excluding the billings changes, calculated billings grew 53%. Turning to retention, our dollar-based net retention rate for the trailing 12-month period was 122%, reflecting the strong upsell motion we are seeing with our existing customers across both Okta and Auth0 as they expand on both products and users. Consistent with prior quarters, gross retention rates remain very healthy and reflect the value of our products to our customers. The net revenue retention rate may fluctuate from quarter to quarter as the mix of new business, renewals, and upsells fluctuate. Before turning to expense items and profitability, I'll point out that I will be discussing non-GAAP results going forward. Now looking at expenses, operating expenses grew 70% and is primarily attributable to the inclusion of Auth0. Total headcount now stands at nearly 4,600 employees, up 76%. Moving to cash flow. Free cash flow was $33 million, which yielded a 10% free cash flow margin. The strong free cash flow generation was primarily driven by beneficial working capital. We ended the third quarter with a strong balance sheet anchored by $2.48 billion in cash, cash equivalents, and short-term investments. Now, let's get into our financial outlook for Q4 and FY22. We had strong Q3 results and maintained conviction in the secular market tailwinds and our leadership position in the identity market. We're making great progress integrating Auth0 and continue to be prudent and thoughtful about the rate and pace of near-term integration and synergies. This is reflected in our guidance. With that as a backdrop, for the fourth quarter of FY22, we expect total revenue of $358 million to $360 million, representing a growth rate of 53% year over year, non-GAAP operating loss of $35 million to $34 million, and non-GAAP net loss per share of 25 cents to 24 cents assuming weighted average shares outstanding of approximately 154 million. For the full year FY22, given our strong Q3 results and expectations for a strong Q4, we are raising our revenue outlook. We now expect total revenue of $1.275 billion to $1.277 billion, representing growth of 53% year-over-year. We also now expect non-GAAP operating loss of $85 million to $84 million and non-GAAP net loss per share of 53 cents to 52 cents, assuming weighted average shares outstanding of approximately 147 million. We continue to believe that current RPO is a better metric than calculated billings to measure quarterly performance as it provides a more predictable and consistent view of the business. Here are a few comments to help with modeling the full year FY22. First, we continue to expect current RPO growth to remain strong with growth similar to subscription revenue growth. Note that our subscription revenue growth expectations have been raised following our strong Q3 results. Second, we continue to expect calculated billings growth to outpace subscription revenue growth by low double digits for the year. This projects an acceleration in the billings growth rate from Q3 to Q4. And finally, we continue to expect free cash flow margin to be in the positive mid single digit range. While we are in the early phases of financial planning, we would also like to provide a preliminary view of our revenue outlook for FY23. Identity continues to be a primary area of focus for all companies, and our market-leading position sets us up well for the next year and beyond. We currently estimate total revenue to be in the range of $1.745 billion to $1.755 billion, representing growth of 37%. To wrap things up, we had a great quarter and are extremely excited about the $80 billion market opportunity in front of us. Okta is very well positioned to build on its strong foundation and market leadership position, which gives us continued confidence in our long-term outlook of $4 billion in revenue in FY26, growing at least 35% in each year through FY26, and 20% free cash flow margin in FY26. With that, I'll turn it back to Dave for Q&A. Dave?