Okta, Inc.

Hi, everybody. Welcome to Okta's fourth quarter fiscal year 2023 earnings webcast. I'm Dave Gennarelli, 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 Tai, 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'll discuss non-GAAP financial measures. Though we may not state it explicitly during the meeting, all references to profitability are non-GAAP. 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 in 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 growth changes as we discuss our financial performance, and unless otherwise noted, each such reference represents a year-on-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 Q4 results and the significant improvement in our profitability and record cash flow. It was a strong close to FY23 with continued improvement in our go-to-market business performance, giving us confidence going into the new fiscal year. We've positioned Okta for continued success with our customers and improved profitability and increased cash flow as an organization to navigate the evolving macroeconomic environment. The three megatrends that have driven Okta's business over the past several years, the deployment of cloud and hybrid IT, digital transformation projects, and the adoption of zero-trust security, remain top priorities for organizations around the world. These trends are more relevant than ever, and the role of identity has only grown in importance in helping organizations do more with less. Organizations that can address at least one, if not all three of these trends, will fare better over the long term. All organizations need to enable a more efficient workforce and invest in security and innovation around revenue-generating initiatives, whether during a recession or emerging from one. And all of these initiatives are powered by identity. Remember that Okta was founded during a downturn. Over the past several months, how many companies have you heard talk about increasing efficiency? Okta has always enabled organizations to do more with less. And in this new environment where business leaders are striving for increased efficiency, Okta is well-positioned to advance our leadership position in a market that continues to move toward us. I'll dive into a deeper review of the quarter and finish with some comments to wrap up FY23. The two-cloud, one-platform approach that we introduced to the market mid-last year, the Workforce Identity Cloud and the Customer Identity Cloud, has really hit the mark and continues to be well-received by our customers and partners. Our go-to-market team has enthusiastically embraced the structure, and we continue to see an upward trend line in the number of sales reps that have closed customer identity cloud deals over the past four quarters. Just last week, we had our annual sales kickoff summit. The energy at the event was fantastic, and the team is highly motivated to keep the momentum going. Turning to our Q4 results, we added 550 new customers in the quarter, bringing our total customer base to 17,600, representing growth of 17%. New customer growth is an area where we believe the macroeconomic environment is affecting our business. Conversely, Brent will cover the continued strength we're experiencing with our upsell-cross-sell business with existing customers. 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 Sonos, Hewlett-Packard Enterprise, and MassMutual. In Q4, we added 190 customers with $100,000-plus ACVs. Our total base of $100,000-plus ACP customers now stands at 3,930 and grew 27%. Here are just a few notable examples of customer wins and upsells in Q4, which come from a wide range of industries. OpenAI, the company powering ChatGPT, was a great customer identity cloud win this quarter. With the increasing popularity of its cutting-edge AI technology, the company looked to Okta's Customer Identity Cloud to support authentication for the rapid influx of people interested in using the tool. Having utilized Customer Identity Cloud for authentication as a self-service customer, OpenAI's developers were able to bolster its customer identity needs thanks to Okta's ease of use, reliability, and security. A global 2000 agriculture and home improvement supply chain company was a great Workforce Identity Cloud win this quarter. The company selected Okta for its breadth of integrations, partnerships, and technology roadmap alignment. Okta will provide secure access for its 40,000 employees while providing the company with increased automation to reduce administrative overhead. A Fortune 100 insurance company was an exciting workforce identity cloud upsell this quarter. The company selected Okta's customer identity solution last year to reduce complexity associated with its homegrown identity solution and free up developers' time to focus on business differentiating projects. With this upsell, the company expanded its investment with Okta to replace its incumbent on-prem workforce technology and eliminate the friction in the end-user experience. We continue to see strong demand for Okta Identity Governance, or OIG, as our customers are tapping into the power of Okta's unified platform to improve their overall security posture and remove identity silos. This helps our customers gain better visibility across their identity stacks and implement a governance solution with faster time to value and cost reductions. It's still very early days with OIG, as it just became globally available in early December. We are seeing a lot of interest across various business segments and verticals, from organizations like Notion, the upstart productivity tool company, to NOV, a Fortune 1000 energy manufacturing company. NLV was a great OIG upsell this quarter. They had been leveraging Okta Workforce Identity Cloud products since 2020 and were looking for a product that would satisfy their regulatory reporting obligations. Since they had already implemented Okta workflows, OIG was a natural step for them. Reflecting back on FY23, we accomplished a tremendous amount. For example, revenue increased by 43%. RPO hit $3 billion. We added 2,600 customers. We added over 800 customers with an ACV of $100,000 or more. We expanded our portfolio of products, including Okta Identity Governance. And we made tremendous progress on the ESG front, including setting validated science-based targets for Scope 1, 2, and 3 emissions reductions. FY23 was a year of challenges, learnings, action, and change. Our vision, purpose, opportunity, and everything we do is grounded in what we make possible for customers. Identity isn't just part of an organization's infrastructure. It's a strategic component. And Okta isn't just the technology vendor. We're a strategic partner. We're a stronger company going into FY24 with deeper relationships with our customers and expanding product portfolio. As we go forward into FY24, organizational leaders around the world are looking for ways to become more efficient in today's environment. and we've never been so confident in our ability to help our customers create more efficiencies for both their workforce and their customer identity solutions. Okta, too, has taken several actions to create more efficiencies within our own organization as we position the company for our next phase of profitable growth. I also thought it would be helpful to share a few of Okta's top strategic priorities for FY24. These are shared across the entire organization to align our execution with our broader company strategy. Keep in mind, these are multi-year horizons. The first priority is winning the customer identity market. We've made tremendous progress in SIAM, but in many respects, we are still just getting started on what we believe is a $30 billion market opportunity. Second, take workforce identity to the next level. We've done well to establish our clear market leadership over the past 14 years with the broadest independent and neutral identity platform. Consistent with our core value of continuous innovation, we're pushing to advance our leadership position in the $50 billion workforce market. And third, scale Okta to support durable growth. This includes increasing automation throughout the organization and expanding our international presence in lower-cost geographies, both of which have margin benefits. Scaling for durable growth also includes hardening our own security infrastructure. Of course, underpinning our strategy continues to be our vision to free everyone to safely use any technology. To wrap things up, we're pleased with our finish to FY23 and believe we're positioned for profitable growth going into FY24 and beyond. I want to thank the entire Okta team for their tireless work and a special thank you to our customers and partners who place their trust in us every day. Before I turn it over to Brett, I want to give a special thank you to our outgoing general counsel, John Runyon. John has been a key advisor since Freddie and I founded the company, an executive team member over the past eight-plus years, and will continue to serve as an advisor through mid-September. I'm very excited that Larissa Schwartz, our deputy general counsel, who has been a member of the Okta legal team for the past seven-plus years, is being promoted to chief legal officer. Now here's Brett to walk you through more of the Q4 financial details and our outlook for meaningfully improved profitability this year.

Thanks, Todd, and thank you, everyone, for joining us today. We're pleased with the progress we've made over the past two quarters. We've taken action to significantly reduce our cost structure while maintaining key investments to fuel our future growth. And we're confident that we have set the path for many years of profitable growth. I'll review our fourth quarter results and our outlook for FY24. But first, I'll start with some commentary on the macro environment and the restructuring we announced last month. With regards to the macro environment, similar to last quarter, we have not experienced a meaningful change in sales cycles or close rates. However, customers are requesting shorter-term contract links as they become more conservative with their long-term commitments. Additionally, our overall business was more weighted towards upsells versus new business across both SMB and enterprise. New pipeline generation was also more weighted towards upsells. We continue to experience minor FX headwinds on our top-line metrics, which are incorporated into our reported numbers and outlook. With regards to the restructuring that we announced in early February, we've taken a gap charge of approximately $15 million in Q4. There were many functions in the organization that were affected, with the biggest reductions within the go-to-market and G&A teams. The vast majority were located in the United States. Turning to our Q4 results, total revenue growth for the fourth quarter was 33%, driven by a 34% increase in subscription revenue. Subscription revenue represented 97% of our total revenue. International revenue grew 32% and represented 21% of our total revenue. Looking at the ACV split between workforce identity and customer identity, workforce ACV grew 30% and represented 61% of total ACV. Customer identity ACV grew 35% and represented 39% of total ACV. Over the long term, we expect the mix to trend towards 50-50 with healthy growth in both businesses. RPO, or backlog, grew 12% and hit the $3 billion mark. Impacting total RPO growth is the general shortening of term lengths of recently signed contracts. Our average term length is just over 2.5 years. Current RPO, which represents subscription revenue we expect to recognize over the next 12 months, grew 25% to $1.68 billion. We view current RPO as the better metric to assess our quarterly performance relative to calculated billions, which, as we've noted, can be noisy due to fluctuations in invoice timing and duration. Calculated billings grew 18%, and current calculated billings grew 19%. As we've noted previously, this is the final time we'll be referencing billings performance in our formal commentary. Turning to retention. Our dollar-based net retention rate for the trailing 12-month period remains strong at 120%. The sequential downtick in the net retention rate was driven primarily by a decrease in the upsell rate with our SMB customers. 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 remain very healthy in the mid-90% range. Before turning to expense items and profitability, I'll point out that I'll be discussing non-GAAP results going forward. looking at operating expenses. Total operating expenses for the quarter were lower than expected. The better than expected profitability is primarily due to the combination of revenue over performance and better than expected outcomes from spend efficiency measures. Total headcount at the end of Q4 was just over 6,000, which is flat quarter over quarter. That number does not reflect the restructuring action, which will be incorporated in next quarter's headcount total. We will continue to hire in critical areas and backfill open positions. Moving to cash flow. Q4 free cash flow was seasonally strong, producing a record $72 million. We ended the year with a strong balance sheet anchored by nearly $2.58 billion in cash, cash equivalents, and short-term investments. Overall, we're pleased with our Q4 results. Now let's turn to our business outlook for Q1 and FY24. While we've been pleased with improved execution over the past two quarters, our projections continue to factor in the uncertainties of the macroeconomic environment. We're also factoring in the go-to-market leadership transition and the challenges we faced in the first half of last year. We're taking several actions to reduce our cost structure and increase our efficiency as an organization, including reducing headcount by 5%, rationalizing our facilities footprint, narrowing our R&D scope to focus on core product development, eliminating redundant software tools, increasing systems and process automation, and we're focusing on building operations in lower-cost regions in Europe and Asia Pacific that have fantastic talent bases. With that as a backdrop, for the first quarter of FY24, we expect total revenue of $509 million to $511 million, representing growth of 23%. Current RPO of $1.67 billion to $1.685 billion, representing growth of 19%. non-GAAP operating income of $18 million to $20 million, and non-GAAP diluted net income per share of 11 cents to 12 cents, assuming diluted weighted average shares outstanding of approximately $178 million. For FY24, we are raising our revenue outlook by approximately $25 million at the high end. We now expect revenue of $2.155 billion to $2.170 billion, representing growth of 16% to 17%. With our continued expense control, we plan to achieve non-GAAP profitability for the full year. We expect non-GAAP operating income of $136 million to $145 million, which yields a non-GAAP operating margin of approximately 6% to 7%. Non-GAAP net income per share of $0.74 to $0.79, assuming diluted weighted average shares outstanding of approximately $180 million. We expect free cash flow margin for FY24 to improve to approximately 10%. This includes a cash impact of approximately $15 million related to the organizational restructuring, which will be paid out in Q1. Lastly, I want to provide a few comments to help with modeling Okta. Keep in mind that when viewing our Q1 projections versus our Q4 results, Q1 has three fewer days, which impacts revenue and gross margins. We expect non-GAAP operating margin to build as we progress through the fiscal year. Similar to years past, Q2 is expected to be the seasonal low for cash flow. We are applying a static 26% non-GAAP effective tax rate now that we expect to be non-GAAP profitable for the foreseeable future. Partially offsetting the higher effective tax rate is a significant increase in interest income related to higher interest rates we expect on our cash and investments. We are also continuing to reduce our stock-based compensation. SBC as a percentage of revenue decreased by 7 percentage points in FY23, but remains elevated largely due to the Auth0 acquisition. We expect SBC to be in the low 30% range of revenue in FY24. The improvement is being driven by slower hiring, decreased grant sizes, and as the SBC impact from the off-zero acquisition begins to roll off. We remain committed to further reducing SBC and dilution over the long term. To wrap things up, I'll reiterate that we're pleased with the progress we've made over the past two quarters. Our business performance has improved, but we recognize there's still more work to do. We've significantly reduced our cost structure while maintaining key investments to fuel our future growth. And we're confident that we've positioned the company for many years of profitable growth. With that, I'll turn it back to Dave for Q&A. Dave?