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spk04: Being at Hoxton feels like an adrenaline rush. It's a short conference. It takes you away from work for just a few days, and you get a great benefit from it.
spk05: So I'm actually learning a lot of relevant information, especially about the future and what's coming down the pipelines.
spk06: Being able to use my fingerprint or biometric across any device for every single app that I have, I want to go implement this now. I just learned a lot of stuff that I wouldn't have known unless I was here. As I always say, live, log in, and prosper. If you haven't come to this conference before, you have to come.
spk01: You cannot put a price on this. The networking alone is worth it. It's just amazing. I absolutely love it.
spk03: Hi, everybody. Welcome to Okta's second quarter fiscal year 2024 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 our 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. 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. 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 more detailed information and 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.
spk02: Todd? Thanks, Dave, and thank you, everyone, for joining us this afternoon. Okta continues to build on its position as the leading independent identity partner. Our focus on improving execution and efficiency is has delivered solid top-line results along with significant improvements to operating profit and cash flow. Brett will walk you through more of the financial details and discuss why we believe the macroeconomic environment, while still challenging, has stabilized relative to the last few quarters. I'll now cover some of the highlights and achievements in the quarter that we believe position Okta for long-term success. I'll start with a few notable examples of customer wins and upsells in Q2, which come from a wide range of industries. An exciting new win this quarter was with one of the largest shipping and transportation lines in Europe. As the company sought to move more of its workloads to the cloud, it lacked a strong identity solution and struggled with manual and time-consuming processes. Okta Workforce Identity Cloud, including Okta Identity Governance, or OIG, will enable its thousands of employees and partners to seamlessly access company apps and systems while bolstering its security posture and improving compliance. A global 100 consumer packaged goods company was an exciting new Okta customer identity cloud win. The company sought a flexible, developer-friendly solution that would help improve the experience of their digital customers. The company will be deploying Okta across multiple customer-facing web, mobile, and IoT applications, as well as across different brands. This is a great beginning with a customer that will have massive expansion opportunities over time. Rider Truck Rentals was an exciting upsell. Rider has been leveraging Okta Workforce Identity Cloud, including Okta Customer Identity Solution, since 2019 to secure access for its employees and business partners. This quarter, Rider selected Okta Identity Governance to replace its legacy provider for identity governance, access request flows, and access certifications. OIG was deployed in just weeks, and with the power of workflows, Rider will significantly improve the onboarding experience for new employees while reducing costs. And here is an example of landing a new customer with OIG as the lead product. A leading global provider of customer experience solutions selected OIG for its extensibility and value. OIG will enable the company to streamline lifecycle management, ensure employees have the right level of access to their resources, and leverage the power of Okta's Workflows platform to customize complex identity governance requirements. In all, we added 350 new customers in the quarter, bringing our total customer base to over 18,400. representing growth of 12%. New customer growth is an area that we believe is being impacted by the macro environment, which results in a sales environment that is more conducive to expanding existing customer relationships. The net customer ads also reflects increasing strength with larger organizations and public sector agencies. We continue to see strong growth with large customers for both workforce and customer identity, and we are proud to work with some of the most important organizations in the world, such as ADT, MARS, and General Services Administration. In Q2, we added 125 customers with $100,000 plus annual contract value, or ACV. Our total base of $100,000 plus ACV customers now stands at over 4,200 and grew 19%. Similar to last quarter, our fastest growing cohort was customers with $1 million plus ACV. In fact, we had a record number of $5 million plus total contract value deals. And when you look at the total contract value of the top 25 deals in the quarter, the aggregate value was over $100 million. Large organizations have incredibly complex environments that require greater flexibility. Yesterday, we announced Okta for Global 2000, which is the industry's first identity architecture that gives companies the flexibility to choose which business units, processes, and technologies to run centrally and which to decentralize. Flexibility was built into Okta's core architecture from the beginning. Okta for Global 2000 makes it even more flexible with enhanced security controls and ease of use. It's a very powerful competitive differentiator against monolithic platforms that force companies to work only with their technology stack. This solution has already been a critical component of large new and upsell transactions. A great example of this is a longtime Okta customer, NTT Data. Their hub-and-spoke deployment includes one central engine as the hub that powers the various Okta organization's in NTT data's identity ecosystem. Okta for Global 2000 provides NTT data with the ability it needs to manage a distributed set of users with separate domains and IT environments. Product innovation has long been core to Okta's success, and this is a banner year for new products. We continue to be enthusiastic about the early customer reception and momentum of Okta Identity Governance. We've been pleasantly surprised at both the size of the organization's purchasing OIG, as well as the range of scenarios that OIG is brought on for, from replacing homegrown solutions and competitive displacements to being deployed alongside an existing identity governance vendor. It's particularly encouraging to see that nearly half of the OIG business booked in Q2 came from customers that hadn't previously purchased Okta lifecycle management or workflows, which were the building blocks of OIG. And we continue to see significant spend uplift with customers buying OIG as it's typically a third or more of their total workforce identity cloud spend. Another notable OIG customer win was with Grubhub, a longtime workforce identity customer. They added both identity governance and advanced server access to their product suite to reduce manual upkeep and bolster security of servers and on-premise applications. We also continue to look forward to the launch of Okta Privilege Access, or OPA, later this year, since our update on the Q1 earnings call, OPA, has moved from beta into early access. Okta Device Access is another product in early access that we're excited about. This extends Okta's seamless authentication experience to protect the first vulnerable user touchpoint, the device login. According to the 2022 Verizon Data Breach Investigation Report, Among security incidents associated with misplaced or stolen devices, 60% are desktop or laptop computers. These devices remain the last frontier where access to corporate resources are protected by just a password. This means that sensitive information such as locally stored documents and logged in applications are at risk. Okta device access enables identity powered MFA immediately when a device is powered up and when attempts are made to unlock the device. This has been one of the most highly requested capabilities by our customers in the last year. This is also timely as just last month, the White House held an MFA modernization event. Organizations desire this technology as an added layer of security, which, as an extra benefit, may help reduce their insurance risk premiums. I mentioned NTT earlier as part of Okta for Global 2000, and I'm excited that they're also an early adopter of Okta Device Access. as they continue to build upon their zero-trust security strategy. We'll talk more about our products and our roadmap at Octane, which we're hosting in San Francisco the first week of October. At the event, we'll go into more detail about what we're working on in the biggest area of technology interest in decades, AI. AI is a paradigm shift in technology that has transformative opportunities for identity, from stronger security and faster application development to better user experiences and more productive employees. Okta has been utilizing AI for years with machine learning models for spotting attack patterns and defending customers against threats. And we'll have more exciting AI news to share at Okta. Just like how every company has to be a technology company, I believe every company must have an AI strategy. More companies will be founded on AI. More applications will be developed with AI, and more identities will need to be protected with a modern identity solution like Okta. A great example of this is how Okta's Customer Identity Cloud is being utilized for the massive number of daily logins and authentications by OpenAI, which expanded its partnership with Okta again in Q2. And finally, I want to share some bittersweet news. My dear friend and co-founder, Frederick Karras, will continue to serve as vice chairman of Okta's board of directors, but will not be returning to Okta in an operational capacity. His contributions to Okta cannot be overstated. Of course, we'll remain highly connected, and I'll continue to work closely with Freddie as he provides guidance and helps formulate our strategy from his board seat, and remains committed to helping Okta achieve our long-term goals. We're all very happy for him and forever grateful for what he's done for Okta. I look forward to my continued partnership with Freddie in the years ahead. To wrap things up, we're pleased with our overall performance in Q2 and the advancements we made in execution and efficiency. It's always a good reminder that identity is a key building block for zero trust security, digital transformation, cloud adoption projects, and now AI. These trends will continue in any macroeconomic environment. as organizations look for ways to become more efficient while strengthening their security posture. We're still very early in what we believe is a massive addressable market, and we're positioned to expand on our success because of Okta's independence, neutrality, and ability to deliver a unified platform covering customer identity, access management, governance, and privilege access, all while committing to delivering profitable growth over the long term. Now here's Brett to walk you through more of the Q2 financial results and our outlook.
spk06: Thanks, Todd, and thank you everyone for joining us today. We're pleased with how quickly the actions we've taken to drive efficiency in our cost structure have taken root. As Todd noted, we're achieving these results while investing in our platform and business to fuel our future growth. I'll review our second quarter results and our outlook for Q3 and FY24, but first I'll start with some commentary on the macro environment. While macro headwinds, including a minor FX headwind to revenue, continue to impact our business, we believe the environment stabilized in Q2. Our view is based upon trends stabilizing or modest sequential improvements in contract duration, average deal size, the split between new business versus upsells, and seed expansion within upsells and renewals. Pipeline build was also healthy, but new pipeline continues to be skewed towards upsells. We also experienced further improvement in metrics related to our go-to-market team, including average tenure, ramp, and the number of sales reps closing workforce identity and customer identity deals. While these are all encouraging data points, we believe it's prudent to maintain a cautious near-term outlook. Turning to Q2 results, total revenue growth for the second quarter was 23%, driven by a 24% increase in subscription revenue. Subscription revenue represented 97% of our total revenue. International revenue grew 18% and represented 21% of our total revenue. Looking at the ACV split between workforce identity and customer identity, workforce ACV grew 22% and represented 61% of total ACV. Customer identity ACV grew 29% and represented 39% of total ACV. Over the long term, we expect the mix to trend towards 50-50 with healthy growth in both. RPO, or subscription backlog, grew 8%. The general shortening of contract term lengths signed over the past several quarters has impacted total RPO growth. However, in Q2, we were pleased to see a modest sequential increase in contract term lengths. Our overall average term length remains just over two and a half years. Current RPO, which represents subscription backlog we expect to recognize as revenue over the next 12 months, grew 18% to $1.77 billion. Turning to retention. Consisting with prior quarters, gross retention rates remained strong in the mid-90% range. Our dollar-based net retention rate for the trailing 12-month period remained strong at 115% and was driven by both upsell and cross-sell activity. Similar to last quarter, the sequential downtick in the net retention rate was a result of the macro environment where customers are not expanding seats at the rate they have in recent years. We believe this trend will persist in this environment. I'll reiterate that the net retention rate may fluctuate from quarter to quarter as the mix of new business, renewals, and upsells fluctuates. As I've noted previously, we've experienced a macro-related shift in our business mix to more upsell and cross-sell versus new business. Before turning to expense items and profitability, I'll point out that I'll be discussing non-GAAP results and less otherwise noted. looking at operating expenses. Total operating expenses for the quarter were lower than expected. The better than expected profitability is primarily due to revenue overperformance and our continued focus on spend efficiency measures. Total headcount at the end of Q2 increased slightly to approximately 5,800. Q2 free cash flow was $49 million, yielding a free cash flow margin of 9%. Free cash flow was significantly better than expected, driven by billings and strong collections. During the second quarter, we opportunistically repurchased $142 million of our 2025 convertible debt notes and $242 million of our 2026 convertible debt notes. This resulted in a $42 million gap-only gain. Over the past two quarters, we've repurchased $750 million of debt, resulting in a $73 million gap-only gain. We will continue to regularly evaluate our capital structure and capital allocation priorities. Our balance sheet remains strong, anchored by $2.11 billion in cash, cash equivalents, and short-term investments. Now let's turn to our business outlook for Q3 and FY24, which factors in the current state of the macroeconomic environment. As a reminder, we've taken several actions to reduce our cost structure and increase our efficiency as an organization, which will benefit margins this year and beyond. With that as a backdrop for the third quarter of fiscal year 24, we expect total revenue of $558 million to $560 million, representing growth of 16%. Current RPO of $1.780 billion to $1.785 billion, representing growth of 13%. Non-GAAP operating income of $53 million to $55 million, and non-GAAP diluted net income per share of $0.29 to $0.30, assuming diluted weighted average shares outstanding of $180 million. For FY24, we are raising our revenue outlook by $30 million at the high end of the range. We now expect $2.207 billion to $2.215 billion, representing growth of 19%. We are raising our outlook for non-GAAP operating income by $50 million to $215 million to $220 million, which yields a non-GAAP operating margin of 10%. Non-GAAP diluted net income per share is raised to $1.17 to $1.20, assuming diluted weighted average shares outstanding of $179 million. And we are raising our free cash flow margin outlook for FY24 to 15% from 12% previously. On a dollar basis, that's a raise of approximately $70 million. Lastly, I want to provide a few comments to help with modeling Okta. We are applying a static 26% non-GAAP effective tax rate for the fiscal year. We expect free cash flow margin in the low double digits in Q3 and to continue to grow into the mid-teens in Q4. To wrap things up, we're optimistic going into the second half of the fiscal year. While the pressures of the macro environment remain, we are confident that we've set the path of profitable growth for years to come. We continue to focus on initiatives to drive the top line while making significant progress to drive improvements to our operating and cash flow margins. And finally, we're excited to see everyone at Octane. In addition to all the great things we'll be talking about on the product side, we'll be hosting an executive panel session for analysts and investors with Todd, myself, and Eugenio Pace, our president of business operations. With that, I'll turn it back over to Dave for Q&A. Dave?
spk03: Thanks, Brett. I see that there's quite a few hands raised already and I'll take them in order. And in the interest of time, please limit yourself to one question so that we can get to everyone. And then you're welcome to queue back up with additional questions. So first up, we'll go to Rob Owens at Piper.
spk05: Great, Dave. Thank you and good afternoon, guys. I was hoping you could talk a little bit or unpack for us the guide and just the sequential change. When you're talking about the macro, you mentioned stability, but still having a level of conservatism. And so as we see this stability, A, can you help explain just the sequential in the guide? And B, maybe speak to some of the metrics relative to customer count, large customer metrics, you know, when those should turn the corner, net retention rates, CRPO as well. Thanks.
spk02: Hey, Rob, we're really happy with the results in the quarter, particularly a couple of the things you mentioned, the large customer momentum. We had the top 25 deals were over $100 million of TCV in the quarter, which is super, super strong. We also, you mentioned the customer counts, and it's definitely an area that we think is related to macro our customer ads and, and are really influenced by the small business part of our part of our, uh, the small SMB part of our business. Um, and we looked into that of course, and we, we manage that closely and we look at the logo churn in that number. It's very consistent with the last several quarters. And, um, I think what's happening is that smaller businesses aren't making new purchases. And I Alex Blanche- picks up from here, we think eventually it'll pick up we're not sure when, but as it picks it picks up, we believe that that part of the logo count will increase. Alex Blanche- On the high end customers, the million dollar plus ACV cohort was one of our strongest quarter ever for that for that cohort including some big new wins. We had one of the leading global companies in customer experience and support signed a completely new customer to Okta over $1 million ACV deal, and it was all around OIG. So we're seeing a lot of new business momentum in the largest companies in the world, which is pretty satisfying. So, yeah, a lot of good stuff to point you in the corner, but I think the macro environment is still – while stabilizing, it's still not as healthy as it could be for us. And our business is reflecting that to some degree, especially the forward outlook.
spk06: Yeah, I would just add to that, Rob. You know, we talked about the big deals. We actually had one of the biggest, one of the strongest big deal quarters ever in the company's history. So we talked about some stats, but it's just in general, it was a very strong big deal quarter. But not just... That wasn't the only highlight. There's a bunch of highlights. I mean, Todd talked about it, about customer identity participation. That's up into the right. So a lot of good things we're seeing in the business. A lot of great execution by the go-to-market team that we're really proud of in spite of this macro headwind. In terms of your question more specifically on the current RPO guidance itself, really, I mean, that is a reflection of what we were just talking about in terms of the macro headwind. Yes, it did stabilize in the quarter, but we're being prudent with our outlook at this point. given, you know, it is still a significant headwind for the field in terms of growing the business.
spk05: Thanks.
spk03: All right, next up, let's go to Itay Kidron at Oppenheimer.
spk04: Hey, guys, solid numbers. I guess, Todd, maybe you could give us a little bit more color on OIG and maybe kind of parse it by the customer base. First of all, just to clarify, this applies just to workforce customers, correct me if I'm wrong, but maybe you can dig a little bit into the install base What percentage of your base already had the first couple of modules of the platform before and how adding the latest component changed the dynamics from a demand standpoint? I'm just trying to get a sense of how much of this was greenfield versus there was already a pent-up demand for it, number one. And number two, with the incremental new module, what is the upside just of that incremental to the existing base? I know the whole platform can add a lot, but it sounds like you already have a lot of customers on this. So trying to get to the delta here of upside.
spk02: The first thing you ask about, you said it applies to workforce. I mean, OIG, we can sell OIG to any customer. So OIG is a great upsell for customer identity customers. It's not as directly integrated to that part of the business because usually that's managed by a separate team and kind of a separate process. But we sell OIG to customer identity customers. And that's a good expansion point in terms of increasing the value of the whole customer. But the real synergy is with the access management product. It just makes a lot of sense. If you think about the system that is controlling and doing access management for which applications you can access at work, it just makes sense that that tightly integrated governance system, which actually does the approvals and the routing to your manager to prove you can get a new application or new resource and then report to your auditors that you indeed have the right access. That just is a tight bundle and it's like technically integrated tightly with the access management. But when we look at our go to market and the ability to sell OIG, we have a bunch of customers that just have customer identity cloud. And in many cases, we have the potential to land the first workforce deal with OIG. So it's an upsell to that customer identity cloud customer, but it could be the first entry of the workforce suite. So in terms of like the penetration and so forth, the product is off to a very strong start. It's been generally available for a few quarters now. It's exceeding our expectations and not just in terms of numbers and revenue, but also It's exceeding our expectations in terms of the companies that are deploying it alongside of legacy governance products, but also the competitive displacements. I think the competitive displacements are something that we didn't think would happen this early to this degree, but we're seeing more of those than we expected. There was a good win, Ryder Truck Rentals, which is a Fortune 500 or Global 2000 company you've all heard of. It was a they had a legacy product and they looked at oig because we're it we're the we have other workforce products in that account we're helping them with those they looked at oig about a year ago and decided it wasn't feature rich enough or wasn't couldn't do what they needed to do, but. They were struggling with some of the enhancements on their legacy product, and they ended up bringing in OIG this past quarter to replace their legacy product. So that's a pleasant surprise as well. So we feel really good about this product. And we're also really excited about the next entry in the workforce suite, which is Privileged Access. So Okta Privileged Access, which is on schedule, it's progressed from beta to early access. It's got a couple dozen customers using the product, having success with us. It's built out and it's on schedule for the general availability in Q4 of this year. So lots of exciting stuff in the entire product suite. And then specifically on the workforce side, those two examples are pretty exciting.
spk06: And then one more thing, Utah, I just wanted to clarify. Hopefully you heard it earlier, but in terms of spend and upsell amounts that we're getting out of this, it's really about a third on average in the customers who have it. It's about a third of their total workforce spend right now. So it is a significant potential upsell in the entire 18,400 plus customer base. So we're excited about the opportunity as we move forward.
spk04: Can you tell us how penetrated are you into that 18,000? Like what percent already have this?
spk02: there's still a lot of opportunity to go. It's a new product. I mean, the component, it's, it's, as you, you're, there's the lifecycle management part of the product and there's the workflows part of the product. And then there's the really what rounds it out is the access certifications and the access requests part of it. The, the penetration rates in our installed base is the highest, as you know, for single sign-on and multi-factor authentication and, And then the next highest, but not nearly as close, nearly as penetrated as multi-factor or single sign-on is lifecycle management. Then the next highest is workflows. And then, you know, there's only a few, just the companies that have governance, the SKU governance actually have the certifications and the access requests. So there's a lot of room to run here and we're really excited about it.
spk01: Very good.
spk03: Thank you.
spk01: Let's go to Joe Gallo at Jefferies. Hey guys, thanks for the question. Nice quarter. You know, SIAM's held in really well with ACD growing 29% year over year on tough comps. How should we think about the durability of that business? You know, is the Salesforce more at ease selling it now? And then you noted broad macro stabilization. Does that have an outsized impact on SIAM? Thanks.
spk02: The data that we have for this quarter and the data we look at pretty closely in terms of your question about the Salesforce's comfort with it, with customer identity, is that there's more reps doing customer identity deals. So that is at a healthy level, just the participation, which conveys a lot of things. It conveys the reps' familiarity with it.
spk00: ability to prosecute to execute the opportunities etc etc so that we're comfortable with that overall i think
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