Okta, Inc.

Hi, everybody. Welcome to Okta's third quarter of fiscal year 2023 earnings webcast. I'm Dave Giannarelli, Senior Vice President of Investor Relations at Okta. With me in today's meeting, we have Todd McKinnon, our Chief Executive Officer and Co-Founder, and Brett Tye, our Chief Financial Officer. 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 our 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 in 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. A 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 in our earnings release. You can also find detailed information on 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 numerical 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. We're pleased with our Q3 results, but before reviewing them, I thought I'd provide an update on some of the progress with respect to the execution challenges we faced this year. Our confidence in our ability to further advance our leadership position in a very large market opportunity has not wavered. In fact, with all the great new products and functionality we announced at Octane 22 earlier this month, we are more optimistic about our long-term prospects than ever. The action plan we initiated to stem attrition has delivered meaningful improvement over the last quarter. And while we're making progress with the execution challenges we outlined, we recognize that it will take several quarters to regain top-line momentum in the business. Adding to the challenge is a global macro environment that we anticipate becoming worse before it improves. Brett will talk more specifically about what we're seeing in our business in terms of the macro environment, and the more cautious approach we're taking to our business outlook. We view these issues as short-term in nature. We continue to focus on the long-term while making the necessary adjustments to the business in the near-term, including our commitment to meaningfully higher profitability and cash flow. One constant is that identity will remain a critically important element to organizations. At Octane 22 earlier this month, we officially unveiled our simplified two-cloud approach to the market. the workforce identity cloud and the customer identity cloud. Two clouds, one Okta. This alignment has alleviated prior confusion in the field and sets us up to build on these two powerful pillars. More importantly, This strategy has been enthusiastically received by our go-to-market team, customers, and partners. A great proof point is the upward trend line of the number of sales reps that have closed Customer Identity Cloud deals over the past three quarters. The feedback that I personally received in my conversations with dozens of partners and customers at Octane was overwhelmingly positive, and we firmly believe that it will only get better with time. Identity matters to every part of an organization, which is why it's such a strategic decision. CIOs care about high-performing IT. CMOs care about conversion and customer acquisition. CTOs care about innovation. CFOs care about costs and efficiency. And CEOs and their boards care about all of these things. identity can help address all of these and having one account exec to speak to all these decision makers will help drive a more cohesive identity strategy across the entire organization turning to our q3 results we added 650 new customers in the quarter bringing our total customer base to over 17 000 representing growth of 22 percent we continue to see growth with large customers for both workforce and customer identity and we are proud to work with some of the most important brands in the world, such as S&P Global, McKesson, and Zoom. In Q3, we added 215 customers with $100,000 plus ACV. Our total base of $100,000 plus ACV customers now stands at over 3,700 and grew 32%. Here are just a few notable examples of customer wins in Q3, which come from a wide range of industries. KeyBank, a Fortune 500 financial services company, was a significant Okta workforce new business win. They sought a cloud-based identity solution to help modernize their legacy systems, eliminate redundancies across tool sets, and support their cloud-first initiatives. Okta's Workforce Identity Cloud will provide a unified identity system while also enhancing security through adaptive multi-factor authentication for KeyBank's 25,000 globally distributed employees. A Fortune 100 global entertainment conglomerate was a big upsell this quarter. As a result of many acquisitions, the company has disparate identity providers that resulted in its employees having multiple different logins to access corporate apps resulting in friction, unpleasant user experiences, and slowed business outcomes. Having leveraged Okta Workforce for several business units, this customer is now deploying Okta Workforce Identity Cloud to cover its more than 200,000 employees. Today, they are one of our largest customers, and we believe there is significantly more opportunity to unlock as we partner with them going forward. We also closed our biggest customer identity cloud deal ever with a multinational technology company. This company began using Okta back in 2019 to better connect with its business partners. The company then sought to consolidate onto a single identity provider while accelerating revenue, moving to the cloud, and enhancing its security posture. The Okta Customer Identity Cloud will help increase security and harden authentication for this customer amid increased security concerns while maintaining the ease of their end-user experience. We also had another strong quarter with our public sector vertical. Year-to-date, our business with PubSec organizations has increased over 65%, with great wins across both workforce and customer identity clouds. A great workforce upset on Q3 was with a huge federal agency that will cover tens of thousands of their employees. The agency is modernizing its legacy on-prem identity technology. We see significantly more opportunity to expand our relationship with this agency and the even larger agency that it rolls up to. We also continue to have success with state and local agencies as they replace legacy identity solutions for both their employees and their citizens. In Q3 alone, cities like Birmingham, Charlotte, and Tampa all turned to Okta. We got to meet with some of these customers just a couple of weeks ago at Octane 22 in San Francisco. This was our 10th Octane, and we had nearly 10,000 registrants for the in-person and online event, a sold-out partner pavilion, and 9 million views of the live opening keynote stream. During the event, we announced numerous new products, features, and functionality that we believe will elevate Okta's market leadership position. In our strategy to build the primary cloud for identity, we now cover the most use cases of any company and help solve the most challenging identity issues that are being driven by the increasing deployment of cloud technology, the adoption of zero-trust security, and digital transformation projects. As Okta invests in both of our clouds and develops purpose-built functionality for app building, IT, and security teams, we're also investing in connecting our clouds. This interoperability and connection has the ability to create greater value for customers in flexibility and security, and it can also become the catalyst for rapid innovation that drives business outcomes. The foundation of this interoperability is the Okta Identity Platform, where shared platform services and the Okta Integration Network reside. As the Okta Identity Platform evolves, additional services will be available for customers, emphasizing capabilities that unlock even more use cases. Core to Okta's success is our independence and neutrality. The Okta Integration Network is the foundational technology that supports customer choice. It was innovative when we launched it 13 years ago, and it still offers the broadest selection and deepest integrations available. The success we're having with customers around the world is directly related to the Okta Integration Network. Monolithic platforms try to imitate the Okta Integration Network, but they can never replicate it. In fact, We're now taking the power of the Okta integration network to the next level with the power of our two clouds. By having both clouds together, we further enable this open ecosystem of choice. Workforce customers get the functionality they're craving, like seamless zero-trust security, continuous authentication, and fine-grain authorization, all working out of the box. And for the SaaS builders, they know what enterprise readiness looks like because we define it in the customer identity cloud and can plug into the workforce customers around the world. All of this pushes the identity industry forward, resulting in more standardization that benefits everyone. And finally, I want to thank Susan St. Ledger for her dedication to Okta the past two years. We wish her well in her retirement at the end of this fiscal year. We're initiating a search, but if a successor isn't in place at that time, I will step in to lead the go-to-market organization in the interim. Susan will stay on as an advisor to provide for a successful transition. We're looking forward to bringing on the next leader who will help Okta further penetrate the massive market opportunity. To wrap things up, we're pleased with our Q3 financial results. We've made some early progress to improve our execution challenges, but we recognize we still have a lot more work to do to regain our business momentum. I want to thank the entire Okta team for their tireless work. I also want to thank everyone who came out to support us at Octane 22. Now here's Brett to walk you through more of the Q3 financial details and our outlook for meaningfully increased profitability in Q4 and next year.

Thanks, Todd, and thank you, everyone, for joining us today. I'll start with some commentary on the macro environment and then get into our third quarter results followed by our outlook. With regards to the macro environment, while we didn't experience a meaningful change in sales cycles, we are seeing signs that the environment has further weakened since we spoke last quarter. For example, in Q3, new pipeline is more weighted towards upsells and we're experiencing some softening demand in the SMB market in North America. Turning to our Q3 results. Total revenue growth for the third quarter was 37%, driven by a 38% increase in subscription revenue. Subscription revenue represented 97% of our total revenue. International revenue grew 39% and represents 22% of our total revenue. we experienced minor FX headwinds, which are incorporated into our reported numbers. RPO or backlog grew 21% to $2.85 billion. Impacting total RPO growth is the general shortening of term lengths of recently signed contracts and an increase in public sector contracts, which generally have a one-year term length. Our average term length is just over two and a half years. Current RPO, which represents subscription revenue we expect to recognize over the next 12 months, grew 34% to $1.58 billion. We view current RPO as the better metric to assess our quarterly performance relative to calculated billings, which, as we've noted, can be noisy due to fluctuations in invoice timing and contract duration. Calculated billings and current calculated billings grew 37%. Turning to retention, our dollar-based net retention rate for the trailing 12-month period remains strong at 122%. This was driven by the strong upsell motion we are seeing with our existing customers as they expand on both products and users. As always, the net retention rate may fluctuate from quarter to quarter as the mix of new business, renewals, and upsells fluctuates. Consistent with prior quarters, gross retention rates remained very healthy in the mid-90% range, despite experiencing some sequential weakness in the S&B market. Before turning to expense items and profitability, I'll point out that I will be discussing non-GAAP results going forward. Looking at operating expenses. Total operating expenses for the quarter were lower than expected and allowed us to return to non-GAAP profitability with slightly positive operating income. The better than expected profitability is primarily due to the combination of of the past four quarters. Moving to cash flow. Free cash flow was $6 million. We ended the third quarter with a strong balance sheet anchored by nearly $2.5 billion in cash, cash equivalents, and short-term investments. Overall, we're pleased with our Q3 results. Now, let's turn to our business outlook for Q4 and FY24. This outlook incorporates the execution challenges we experienced this year, which resulted in lower than expected capacity build as we move through the year. We're also taking a more cautious stance on the macro environment, which we believe will get worse before getting better. We expect to continue to benefit from the spend reduction measures we started implementing in Q3, including significantly reducing our hiring plans, rationalizing our facilities footprint, and applying greater overall financial discipline. The reductions will help us further improve our operating margins and profitability in Q4 and beyond. For the fourth quarter of FY23, we expect total revenue of $488 million to $490 million, representing growth of 27% to 28%. Current RPO of $1.63 billion to $1.64 billion, representing growth of 21%. non-GAAP operating income of $15 million to $17 million, and non-GAAP diluted net income per share of $0.09 to $0.10, assuming diluted weighted average shares outstanding of approximately $175 million. For FY23, we are raising our revenue outlook by approximately $18 million at the high end. We now expect revenue of $1.836 billion to $1.838 billion, representing growth of 41%. We are raising our profitability outlook by approximately $66 million at the high end. We now expect non-GAAP operating loss of $41 million to $39 million and non-GAAP net loss per share of $0.27 to $0.26, assuming weighted average shares outstanding of approximately $158 million. Lastly, I want to provide a few comments to help with modeling Okta. We're providing a non-GAAP fully diluted share account for Q4 because we expect to flip to positive non-GAAP net income for the quarter. We will continue to provide a basic share account for FY23 because of the net loss position for the full year. We expect Q4 to be our seasonally strongest quarter for free cash flow and expect free cash flow margin to be in the low double digits. We also expect free cash flow margin for FY23 to be in the low single digits. We are increasing our calculated billings outlook for FY23 by approximately $25 million to $2.065 billion to $2.075 billion, representing growth of 28% to 29% when viewed on a like-for-like basis or 20% to 21% on an as-reported basis. As we've noted throughout this year, this will be the final time we provide a billings outlook. While we are in the early phases of financial planning, we would also like to provide a preliminary view of FY24. With our continued focus on expense control, we are focused on achieving non-GAAP profitability for FY24 and an operating margin in the low single digits. We are also targeting a meaningful increase to free cash flow and free cash flow margin over FY23 and will provide more specific cash flow comments on our Q4 call. From a revenue perspective, we are factoring in the execution challenges we face this year, the go-to-market leadership transition, and the growing uncertainties of the macroeconomic environment. We estimate total revenue to be in the range of $2.130 billion to $2.145 billion, or growth of 16% to 17%. While we had initially planned on providing an update on our long-term targets, we believe it's prudent to wait and revisit this once we have increased visibility and confidence in the macroenvironment. new global field operations leadership in place, and have made more progress on the integration. To wrap things up, we're confident we have the right action plan in place to build on our progress and expand on our market leadership position. I'll turn it back to David for Q&A.