Okta, Inc.

Hi, everyone. Welcome to Okta's second quarter of fiscal 2025 earnings webcast. I'm Dave Gennarelli, Okta's Senior Vice President of Investor Relations. 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 on our IR website. This posted commentary contains much of what would historically be the opening commentary, including the customer commentary, product-related news, and a review of our financial results. This format allows listeners to review that information before this call. Today's meeting will include forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause our actual results or performance to materially differ from those statements. These statements represent our management's beliefs and assumptions to date, and, except as required by law, we assume no obligation to update them in light of future events or new information. Information on factors that could affect our financial results is included in our SEC filings, including the risk factor section in our last Form 10-Q. During today's meeting, we will discuss GAAP and 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 of our GAAP and non-GAAP financial measures is available on our earnings press 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 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 call over to Todd McKinnon.

Todd. Thanks Dave, and thank you everyone for joining us this afternoon. Our solid Q2 results were highlighted by strength with large customers and continued spend efficiencies leading to record profitability and strong cash flow. All of this while facing a challenging macro backdrop. Identity is security and has become a critical component of an organization's overall technology strategy and defense against today's cyber threat environment. Poor customer experience and technology fragmentation stand in the way of organizations meeting their business imperatives of growing revenues while cutting costs in a secure and compliant manner. Identity is the technology that solves this challenge, and Okta has the most comprehensive identity platform in the market today. Okta's vision is to free everyone to safely use any technology. We're advancing that vision through incredible product innovation and extending our unmatched portfolio of identity solutions for workforce and customer identity. Just this past quarter, we launched the general availability of three highly anticipated additions. The first is identity threat protection with Okta AI for workforce customers, which is powered by insights from across an organization's security stack. Identity threat protection continuously detects and responds to identity threats both during and post-authentication, amplifies security signal sharing, and orchestrates remediation actions to support identity threat detection and response strategies. Also for workforce customers, we launched identity security posture management. This solution empowers customers to take control of their identity sprawl and harden their security posture through identity-focused risk analysis and prioritized insights that help drive remediation. For the customer identity market, we released highly regulated identity. This solution delivers financial-grade identity with elevated security, privacy, and UX controls for sensitive customer operations beyond login. That's tremendous innovation we're delivering to our customers. We have a strong pipeline of new products and features that we'll talk more about at Octane, which takes place October 15th to 17th. Come join us in Las Vegas for the biggest identity event of the year. You'll hear from Okta's leadership team, along with fellow industry experts, to discuss the future of identity and why it's not just the first line of defense, but the backbone of a company's holistic security strategy. We'll also be hosting a Q&A session for analysts and investors at the event, featuring myself, Brett Eugenio Pace, our President of Business Operations, and John Addison, our CRO. As we head into the second half of FY25, the priorities we started the year with remain our top priorities today. Security, growth, and scale. I'll take a moment to touch on the first two priorities. On the security front, in addition to delivering world-class identity solutions, Okta is driving change with the Okta Secure Identity commitment, which is our long-term pledge to lead the industry in the fight against identity attacks. Since announcing this commitment, we've made significant progress in implementing new security measures and solutions. These investments are raising the bar for identity security and further establishing us as a trusted partner. On the product security front, We released enhanced bot detection features across Customer Identity Cloud. We've reduced credential stuffing attempts and malicious bot traffic by more than 90% for some of our largest customers. Our unwavering focus on security helps elevate the entire industry in the fight against identity-based attacks. Check out our updated Okta Secure Identity Commitment white paper that was just published on our website today for more details. What's really interesting is how Okta's secure identity commitment has triggered a new type of conversation with customers and prospects. As we improve ourselves, we help elevate the industry. Organizations are now reaching out to Okta to better understand the enhancements we've made to our own security posture so that they can take these best practices and implement them in their own environments. These best practices, combined with Okta's products, are helping our customers be more secure and do it faster. These types of conversations are incredible for building long-term partnerships of trust with our customers. Our second priority, reigniting growth, includes several prongs. The primary initiative is growth through our new and existing product offerings. Okta offers customers a platform of identity solutions for a holistic approach including passwordless access management, governance, privilege access, threat protection, posture management, and customer identity. A great success story for our new products is the rapid uptake and contribution of Okta Identity Governance. In less than two years, OIG already has over 1,000 customers. Another key growth initiative is deepening our relationships with key channel partners, especially global systems integrators, and leveraging them to enhance our global expansion. In Q2, the average size of deals conducted through partners was over three times larger than our average direct deal. Furthermore, eight of our top 10 global deals had partner contribution. Today, more than 40% of our revenue mix is generated through indirect channel partners, and we believe we can drive that number meaningfully higher. To wrap things up, we're really excited about expanding our modern identity platform with new products and features. Identity is security, and Okta has an unmatched array of identity products that are helping to solve critical security needs, drive customer experience, and optimize technology infrastructure for our customers. We're taking the right steps to advance our position as a leader in the identity market while remaining focused on investing for growth while driving spend efficiencies and cash flow. I look forward to seeing many of you at Octane in Las Vegas in about six weeks. 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. The challenging macro environment continues to show up in our business in a couple of notable ways. First, it's impacting our mix of new business versus upsells, which remains weighted more towards upsells. And second, organizations are scrutinizing budgets and rationalizing their software spend, resulting in lower MAU assumptions in our customer identity business and fewer seats within our workforce identity business. These actions are relatable because Okta has been going through the same exercise of rationalizing our own software spend over the past two years. We expect this trend to continue in the current economy. On the positive side, our platform strategy is working. We're selling more products to our new and existing customers, including new products like Okta Identity Governance and Okta Privileged Access. And our data tells us that customers that adopt more products have the highest retention rates. Before getting into the Q2 financial review, I'll note that similar to the prior two quarters, as we have analyzed our key metrics, we could not attribute a quantifiable impact from the security incident on our Q2 results. And while not quantifiable, the event likely had some level of impact. We will continue to monitor this as we move through the rest of FY25. Moving on to some financial highlights. We continue to build on the efficiency initiatives that we've been implementing over the past two years. Our Q2 financial performance was highlighted by record operating profitability, including achieving gap profitability for the first time. Cashflow was strong as well. Once again, the primary area of strength was with large customers. Our fastest growing cohort was $1 million plus ACV customers. Global 2000 companies typically have the most challenging identity needs because of the complexity of their infrastructure. This is where Okta shines and is another great proof point of our success with large organizations. We now count over 40% of the Global 2000 as Okta customers. That's great progress, but it also represents a lot of runway to increase our overall penetration of this group, as well as a tremendous opportunity to expand our footprint within these accounts. We're also seeing continued positive trends around weighted average contract term length for contracts signed in the quarter, which increased year over year, particularly with new customers. That's a great sign of customer confidence with Okta. Now let's turn to our business outlook for Q3 and FY25. As always, we take a prudent approach to forward guidance, and we have not made any changes in our approach. We are factoring in a challenging macro environment consistent with what we've experienced in Q2. We also continue to incorporate some conservatism into our outlook for the remainder of this fiscal year related to potential impacts from last year's security incident. For the third quarter of FY25, we expect total revenue growth of 11%, current RPO growth of 9%, non-gap operating margin of 18%, and free cash flow margin of approximately 20%. We are raising our outlook across the board for the full year FY25. We now expect total revenue growth of 13%, non-GAAP operating margin of 21%, and a free cash flow margin of approximately 23%. To wrap things up, we're pleased with the progress we've made to drive operational efficiencies. We've demonstrated exceptional leverage in our model over the past two years, and we remain focused on delivering profitable growth for years to come. With that, I'll turn it back to Dave for Q&A. Dave?