Okta, Inc.

Hi everybody. Welcome to Okta's fourth 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. At around the same time that the earnings press release hit the wire, we posted supplemental commentary to the IR website. This posted commentary contains a large portion of what would historically be the opening commentary, including customer commentary, product-related news, and a review of our financial results. This new format allows listeners to review that information before this call. It also allows us to spend more time discussing other news items and strategy while leaving more time for Q&A. 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 results. 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 in our supplemental financial materials, which include trended financial statements and key metrics posted on our investor relations website. 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 we're pleased with the strength of the business to close out our fy24 q4 was highlighted by record quarterly profitability and cash flow and strong top line results

Our Q4 financial performance was solid and suggests minimal impact on our financial results stemming from the security incident. The incident is now behind us, but we're using the learnings to reassess and strengthen the security aspects of our own infrastructure, as well as help ensure customers benefit from our experience by further strengthening our products and policies. This morning, we launched an initiative called the Okta Secure Identity Commitment, which is our long-term commitment to lead the industry in the fight against identity attacks. This new initiative encompasses Project Bedrock, which is aimed at hardening our ancillary and corporate systems and further strengthening our products and services. The Okta Secure Identity Commitment extends even further to champion customer best practices that enable our customers to be highly protected and elevate our industry to be more secure from identity attacks. We want our customers to benefit from our depth of experience, so we are further strengthening our customer policies to help ensure our products are deployed with Okta's best security practices. Identity has become a primary attack vector, and Okta is at the forefront of the fight against identity-based attacks. Okta Threat Insights has detected and prevented over 2 billion malicious requests in the last 30 days alone. We've reduced credential stuffing attempts and malicious bot traffic by more than 90% for some of our largest customers just over the past 90 days. And we're shaping industry best practices with 100% of Okta employees using Okta FastPass with phishing-resistant passwordless authentication. I encourage you to read more about the Okta secure identity commitment in the blog we posted today. Of course, all of this has to be backed up with great products. Okta has long been the leader in modern access management. We've started tapping into two more large market opportunities with the launch of Okta Identity Governance last year and Okta Privilege Access just a few months ago. Okta is changing the game with our unified platform approach, and we already have several customers that have turned to Okta for the combined benefits of our access management, governance, and privilege access. We're helping organizations make it easier for their employees and users to safely access their applications and help protect them from today's threat actors. From time to time, we augment our organic innovation through M&A. Earlier this month, we closed the acquisition of Sparrow Security, an identity security platform to provide our customers with richer insights and technology to elevate their identity security posture management. At the start of each new fiscal year, I'd like to share with you our top priorities as an organization. As you might expect, security is our top priority as a company for FY25. This covers everything from driving a company culture with a security-first mindset to our own security architecture as well as our products and services. The second priority is reigniting our growth. The obvious end result pertains to top-line metrics across regions and products, but to get there, we need to focus on our overall go-to-market operational excellence, further increase our competitiveness in our core markets, with enhancements to both our workforce and customer identity clouds, and strengthen our growth vectors in key industries, newly introduced products, and cross-cloud initiatives. Our third priority is scaling Okta from a technical perspective. Our goal is to set the company up for success in order to be a $5 billion and then a $10 billion plus company. This means investing in changes to reduce operational friction and drive global scale. This priority is intended to help fuel the first two priorities of security and growth. Before wrapping up my comments, I want to congratulate Eric Kelleher on his promotion to President of Customer Experience and Communications. In this elevated role, Eric will oversee marketing, customer first, and communications, and continue to go lead the go-to-market organization with John Addison, our Chief Revenue Officer. Eric has been with Okta for seven years, most recently as Chief Customer Officer. His primary focus will be driving growth, building brand loyalty, and enhancing the overall customer experience. I'm pleased with the strength and stability of our current leadership team going into the new fiscal year. As we head into FY25, I've never been more energized and excited about Okta's future. We're expanding on the world's most robust and modern identity platform, and we have a strong pipeline of products and functionality powered by Okta AI, all told, We're well positioned to capture the large market opportunity in front of us. And finally, I want to thank the entire Okta team for their tireless effort. And thank you to our loyal customers and partners who put their trust in us every day. Now here's Brett to cover the financial commentary and talk about how we're positioned for long-term profitable growth.

Thanks, Todd, and thank you everyone for joining us today. As Dave said at the top of the call, we've evolved our earnings call format. Most of my typical review of the quarterly financials was published on Okta's investor relations website at the same time as the press release. I'll cover a few of the financial highlights, but we'll focus my commentary on broader topics before getting into our business outlook. I'll start by sharing our view on the security incident and the macro environment. When analyzing our key metrics, we couldn't attribute a quantifiable impact from the security incident on our Q4 results. While not quantifiable, the event likely had some level of impact. We'll continue to monitor this as we move through FY25. All things considered, our solid Q4 financial performance suggests minimal impact on our financial results stemming from the security incident. The macro environment during Q4 was relatively consistent with what we experienced in Q2 and Q3 of FY24. In short, it's stable, but still challenging. Moving on to some financial highlights. We're pleased to achieve Rule of 40 again for FY24. For FY24, we generated a non-GAAP operating profit of 14% versus negative 1% last year, and free cash flow margin of 22% up from 3% last year. That's tremendous progress for a single year. Our Q4 financial performance was highlighted by record profitability and cash flow. We were encouraged by our strong top line metrics and pipeline growth. Weighted average term length for our contracts signed in Q4 hit a two-year high. We continued to see an increase in the number of sales reps selling both Workforce Identity Cloud and Customer Identity Cloud products and experienced particular strength with large customers. We signed a record number of million-dollar-plus ARR contracts in Q4, capping a year in which the number of million-dollar ARR contracts increased by over 30%. we added 150 customers in the quarter. The sequential decline in new customer ads reflects ongoing business trends of increased weighting of upsell versus new business resulting from the current macro environment and strength with large enterprise customers versus SMBs. Now I'm going to address one of the actions we're taking to drive new business and reignite new customer acquisition. Starting at the beginning of this quarter, we shifted our direct sales team that focuses on the SMB market in the Americas to what's commonly referred to as a hunter farmer model. That means we now have a team of account executives focused on driving new customer acquisition and a separate team of account executives focused on upsells within our installed base. We believe that we're still very under penetrated within our existing base of nearly 19,000 customers. This natural evolution will enable us to drive better results with both new and existing customers. Over the past several quarters, one of our strongest customer segments has been with large million-dollar-plus ACV customers. Our indirect partner ecosystem has played an important role in our success in this area. In fact, eight of our top 10 deals in Q4 were either resold or influenced by partners. From our traditional ISVs, system integrators, and solution providers, these partners help us scale and provide tangible value add to our customers. Recall that we introduced a new partnering framework called Elevate last year. The new program recognizes and rewards partners for the total value they deliver to Okta and our customers, from finding, developing, and influencing to delivering, managing, and transacting. Today, more than 40% of our business mix is invoiced through our indirect channel partners, up from about one-third just a couple years ago. and channel partners help influence an even greater percentage of our business. Helping drive that number is the strong contribution from the AWS marketplace. Okta continues to be a premier identity and access management partner for AWS globally. AWS now generates over $175 million in annual contract value for Okta, growing at over 130%. We look forward to even more success as we go forward. We're also starting new market routes to broaden Okta's availability further. We recently entered into an agreement with SoftBank Corporation as a managed service provider in the Japanese market. SoftBank is embedding a customized version of Okta Workforce Identity Cloud into its recently launched business concierge device management. This allows us to reach the approximately 16,000 Japanese companies and 2.4 million devices that utilize the managed service. It's the beginning of what we believe will be a new strategic path to market and the first step in an exciting new go-to-market motion for Okta. One last item I'd like to call out before turning to our outlook is share dilution. Actions we've taken over the past two years to reduce dilution have yielded great results. Building on that progress, starting in Q1, we will settle employees' tax obligations due at equity investing through the Net Share Settlement method. This will lower dilution because instead of issuing and settling shares into the market to cover the withholding tax, we will fund the estimated tax payment from corporate cash. In FY25, we expect this change will reduce dilution by approximately 1.7 million shares compared to our prior tax withholding method, ultimately making for a 1% benefit to our basic share count. This will have no impact on free cash flow. Now let's turn to our business outlook for Q1 and FY25. Over the course of the past several quarters, we've put significant effort into positioning the company for profitable growth for years to come. Over the past 18 months, the actions we've taken to drive efficiencies in our cost structure have yielded impressive results. The headcount reduction action we took earlier this month was part of our ongoing assessment to optimize our cost structure. The action also supports our strategy of increasing headcount in high-talent, lower-cost regions such as India and Poland. The majority of the approximately 400 positions that were eliminated were in supporting roles within the go-to-market team. As always, we take a prudent approach to forward guidance. We are factoring in a stable but still challenging macro environment consistent with what we've experienced over the past few quarters. And while our Q4 results were solid, we're incorporating some conservatism into our outlook as we continue to monitor potential impacts related to the October security incident. And lastly, while we were still finalizing our FY25 model when we provided our preliminary FY25 outlook last quarter, the expected cost savings from the headcount reduction was factored into those assumptions. Again, you can view the more granular guidance details in our press release or posted commentary. For the first quarter of FY25, we expect total revenue growth of 16% to 17%, current RPO growth of 13%, non-GAAP operating margin of 18%, and free cash flow margin of approximately 25%, which is inclusive of a cash impact of approximately $24 million related to the headcount reduction. We are raising our outlook across the board for the full year FY25. We now expect total revenue growth of 10 to 11%, non-GAAP operating margin of 18 to 19%, and a free cash flow margin of approximately 21%. To wrap things up, 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. With that, I'll turn it back over to Dave for Q&A. Dave?