Okta, Inc.

Hi, everyone. Welcome to Okta's first quarter fiscal year 2025 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 our 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. 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. Board-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-K. 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 in our supplemental financial materials, which include trended financial statements and key metrics posted on our investor relations website. In today's meeting, we'll 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. Q1 was a solid start to FY25, highlighted by continued strength of large customers and the public sector, and record profitability and cash flow. The operating efficiency actions that we started almost two years ago have delivered outstanding leverage to our model. While it's difficult to quantify the impact on our business from the October security incident, our analysis continues to suggest minimal impact on our financial results. Today, I'll cover the progress we've made with the Okta Secure Identity Commitment and then review some of the highlights from our showcase event earlier this month. As a reminder, we launched the Okta Secure Identity Commitment earlier this year. This is our long-term plan to lead the industry in the fight against identity attacks. It's aimed at hardening our ancillary and corporate systems and further strengthening our products and services, as well as championing customer best practices that help enable our customers to be highly protected. We want our customers to benefit from our depth of experience, so we are further enhancing our customer policies to help ensure our products are deployed with Okta's best security practices. In only a few short months, we've made meaningful progress. Identity plays a critical role in the technology stack, so it's not surprising that identity-based attacks have become a top method for threat actors. Over 80% of data breaches in the industry involve some kind of compromised identity. Identity is security. As part of our vision to free everyone to safely use any technology, Okta is modernizing identity and effectively modernizing security. We are protecting our customers by blocking over 2 billion security attacks a month. And it's likely that number will only grow. During the week of the RSA conference, we hosted hundreds of customers at our hybrid showcase event. In addition to the keynotes, we hosted a large group of CISOs from various industries to discuss today's threat environment and how Okta helps protect them. It was an energetic forum and we walked away with even more confidence that we're on the right track of delivering industry-leading identity security solutions. Our products are the foundation of Okta. We already have the broadest array of identity products in the world. Building on that, our current rate and pace of innovation is really impressive. We've historically put a lot of focus on delivering secure products to our customers, and we are now on the journey to make Okta one of the most secure companies in the world from every aspect, from our internal technologies to people to processes. At Showcase, we featured the latest product innovations, starting with a new product, Identity Security Posture Management, stemming from our recent acquisition of Sparrow, This technology is a fantastic addition to our portfolio as it proactively identifies vulnerabilities and security gaps before they can be exploited. It works for both Okta and other identity providers like AWS and Azure AD, bringing a multi-layered defense strategy on top of the already strong security capabilities in the Workforce Identity Cloud. Earlier this month, we began rolling out identity security posture management to select customers in North America. We're also excited about the launch of identity threat protection with Okta AI, which includes powerful features like universal logout, which makes it possible to automatically log users out of all of their critical apps when there is a security issue. Think of this as identity threat detection and response for Okta. We expect identity threat protection to become generally available this summer. There are so many more new products, features, and enhancements that we spoke about at Showcase, so I encourage you to check out the summary in our posted commentary. We're really excited about all the great innovation that is taking place at Okta, which will help drive future growth. I also want to remind you of our three top priorities for FY25 because they are fundamental to our success. It shouldn't be surprising to anyone that security is our top priority, from our company culture to our security architecture to our products and services. The second is reigniting our growth, and this is where all the great product innovation will contribute. And the third top priority is scaling Okta in order to set us up for success to become a $5 billion and then $10 billion plus company. To wrap things up, we are pleased with the start to FY25. We're expanding on our robust and modern identity platform, and we have a strong pipeline of products and functionality powered by Okta.ai. Identity is security, and Okta is playing a critical role in helping companies protect themselves from identity-based attacks. As always, I want to thank the entire Okta team for their tireless efforts and our awesome customers and partners around the world 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. Just a quick reminder that most of my typical commentary on 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. our solid Q1 financial performance continues to suggest minimal impact on our financial results stemming from last year's security incident. Consistent with last quarter as we analyzed our key metrics, we couldn't attribute a quantifiable impact from the security incident on our Q1 results. And while not quantifiable, the event likely had some level of impact. We'll continue to monitor this as we move through the rest of FY25. The macro environment during Q1 was relatively consistent with what we experienced over the past few quarters. In short, it's stable but still challenging and most notably having an impact on our mix of new business versus upsells with existing customers. Moving on to some financial highlights. Over the past several quarters, we've put significant effort into positioning the company for profitable growth for years to come. The actions we've taken to drive efficiencies in our cost structure have yielded impressive results. Our Q1 financial performance was highlighted by record operating profitability as well as record free cash flow, resulting in a free cash flow margin of 35%. The cash flow performance is even more impressive when considering it includes a $22 million impact related to the headcount reduction action at the start of Q1. Another highlight in the quarter was Q1 subscription gross margin of 83.5%, which represents an increase of 420 basis points when compared to two years ago. The improvement reflects the cost-saving initiatives we've taken that have resulted in lower platform costs. We expect subscription gross margin to remain in the 83% range and flex down slightly for the rest of the fiscal year as we invest in the business across key areas such as security, public sector, and customer support. We were encouraged by Q1's strong top line metrics and pipeline growth. Public sector was a particular area of strength led by our largest ever public sector deal. In fact, five of our top six deals in Q1 were with public sector organizations. And despite the strong quarter for public sector deals, which are typically one-year deals, weighted average contract term length for contracts signed in the quarter increased year over year. We added 150 net new customers in the quarter. This primarily reflects the ongoing business trends of the current macro environment, resulting in increased weighting of upsell versus new business and continued strength with large enterprise customers. Once again, our fastest growing cohort was large customers with $1 million plus ACV. Now let's turn to our business outlook for Q2 and FY25. 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. We also continue to incorporate some conservatism into our outlook as we continue to monitor potential impacts related to last year's security incident. Again, you can view the more granular guidance details in our press release or posted commentary. For the second quarter of FY25, we expect total revenue growth of 13 to 14%, current RPO growth of 10 to 11%, non-GAAP operating margin of 19 to 20%, and free cash flow margin of approximately 5%. Keep in mind that cash flow in Q1 was a record and that Q2 is seasonally the lowest quarter of the year. We are raising our outlook across the board for full year FY25. We now expect total revenue growth of 12%, non-GAAP operating margin of 19 to 20%, and a free cash flow margin of approximately 22%. To wrap things up, we remain confident that we've set the path of profitable growth for years to come. Our balance sheet is strong with a net cash position of approximately $1.2 billion. And we continue to focus on initiatives to drive the top line while driving operational efficiencies. With that, I'll turn it back to Dave for Q&A. Dave?