Okta, Inc.

Hi, everyone. Welcome to Okta's third quarter of 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. 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 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. 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 are 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 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. Our solid Q3 results were once again highlighted by strength with large customers and strong profitability and cash flow driven by continued spend efficiencies. While the macro environment remains consistent, we're encouraged by some positive data points in Q3. I'll touch on some of those and then get into other highlights from the quarter before turning over to Brett. I've mentioned previously that deepening our relationship with our partner ecosystem is one of our main priorities. We're already seeing good progress as all of our top 10 deals in the third quarter involve partners. These 10 deals were all over $1 million in annual contract value and in aggregate represented approximately 20 million in ACV. This underscores the value of investing in our partner ecosystem. The public sector also continues to be an area of strength. In fact, half of the top 10 deals that I just mentioned were in the US federal vertical. We've made great progress with our presence in the public sector and believe we have a tremendous amount of runway ahead of us. Our largest customers remain an area of strength. The cohort of 1 million dollar plus ACV customers continues to be our fastest growing cohort. In total, this cohort now represents approximately 1 billion in ACV. We were also pleased with the upsell and cross-sell activity in Q3. Specifically, we experienced strong growth of workforce customers buying more workforce products, as well as workforce customers buying customer identity. Okta's expanded product portfolio is allowing us to equip our customers with more industry-leading identity solutions to support them in their goal to operate more efficiently and securely. The threat environment has never been more hostile. Organizations are constantly under attack and identity has become a primary attack vector. Okta's technology has become more important than ever in helping to prevent and mitigate these attacks. We're advancing our vision to free everyone to safely use any technology with the expansion of our unmatched portfolio of identity solutions through great product innovation. We're also accelerating our investments in the Okta secure identity commitment, which is resonating with prospects and customers. We recently showcased that innovation at Octane, our biggest customer and partner event of the year. The energy at the event was terrific as in-person attendance was up over 25% versus last year and represented hundreds of millions of dollars of pipeline. Attendees heard about the future of identity security and how Okta is responding to the evolving threat landscape. We highlighted more than 30 products, features, and capabilities across our workforce and customer identity clouds that will deepen our customers' security and help them create exceptional customer experiences while enabling us to reignite our growth with a focused approach. It's also great to receive validation on our strategy and vision from third parties. Okta was recently recognized as a leader in the 2024 Gartner Magic Quadrant for Access Management for the eighth consecutive year. Okta achieves the highest and furthest overall position for its ability to execute and completeness of vision in this research. We have a lot of optimism about the direction of the business. One of the things we're excited about is go-to-market specialization. In Q1 this year, we introduced a layer of specialization in the go-to-market team with a hunter-farmer model for the Americas SMB market. As we plan for FY26, we are planning for further specialization in our global go-to-market strategy to better align with the distinct identity buying centers of IT security, and developers. Doing so will allow us to meet evolving market demands, help reignite growth, and create a win-win scenario that benefits both our customers and Okta, ultimately driving better business outcomes. To wrap things up, we remain hyper-focused on our top priorities of security, growth, and scale. Identity is security, and we're taking the right steps to advance our position as a leader in the identity market while remaining focused on investing for growth and driving spend efficiencies and cash flow. 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. We continue to build on the efficiency initiatives that we've been implementing over the past two years. Our Q3 financial performance was highlighted by continued strong cash flow and operating profitability, including gap profitability. I'll note that similar to the prior three quarters, as we have analyzed our key metrics, we could not attribute a quantifiable impact from the October 2023 security incident on our Q3 results. And while not quantifiable, the event likely had some level of impact. Our view on the macro environment is that it remains consistent with what we've experienced for the past few quarters. Organizations are scrutinizing budgets and rationalizing their software spend, resulting in lower assumptions for seats in our workforce identity business and MAUs in our customer identity business. These lower seat and MAU assumptions have put our net retention rate under pressure over the past few quarters, while gross retention has remained strong. Helping to partially offset the seat in MAU Headwind is the success we've been having in selling more products to both our new and existing customers. Our relentless focus on innovation has been resonating with our customers as approximately 15% of Q3 bookings were from new products. Okta Identity Governance continues to represent approximately one third of the contract value when sold in a workforce deal. In addition to OIG, we're also selling new products like Okta Privileged Access, Device Access, Fine Grain Authorization, Identity Threat Protection, and Identity Security Posture Management. Our data tells us that customers that adopt more products have the highest retention rates, so we're excited about the trends here and the long-term contributions to the business. Now let's turn to our business outlook for Q4 and FY25. As always, we take a prudent approach to forward guidance. We are factoring in a macro environment consistent with what we experienced in Q3. We are no longer incorporating additional conservatism into our outlook related to the potential impacts from last year's security incident. For the fourth quarter of FY25, we expect total revenue growth of 10% to 11%, current RPO growth of 9%, non-GAAP operating margin of 23%, and free cash flow margin of approximately 32%. We are raising our outlook across the board for the full year FY25. We now expect total revenue growth of 15%, non-GAAP operating margin of 22%, and a free cash flow margin of approximately 25%. While we are still in the early phases of financial planning, we would like to provide a preliminary view of FY26. We're providing this preliminary outlook ahead of closing our biggest quarter of the year. We will provide formal FY26 guidance on our next earnings call, which will factor in our actual Q4 performance. We remain focused on profitable growth and continue to prudently factor in a macro environment that is consistent with what we've experienced over the past few quarters. As such, we're expecting a non-GAAP operating margin of at least 22%. We're targeting a free cash flow margin of at least 24%. From a revenue perspective, we estimate total revenue to be $2.77 billion to $2.78 billion, representing growth of approximately 7%. We believe these numbers are achievable while maintaining an appropriate measure of conservatism. 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?