Okta, Inc. (NASDAQ:OKTA) NASDAQ Investor Conference June 11, 2024 4:30 AM ET
Company Participants
Brett Tighe - Chief Financial Officer
Dave Gennarelli - VP of IR
Conference Call Participants
Joseph Gallo - Jefferies
Joseph Gallo
Hi, I’m Joe Gallo. I lead Cyber Research at Jefferies. Thank you all for attending. Today we are delighted to have Brett Tighe, CFO at Okta. He's been there for almost a decade. Before that he was also at salesforce.com, for I believe, 11 years in various finance roles. And then we also have Dave Gennarelli, who runs IR at Okta.
Okta, I'll let Brett describe in more detail, but Okta is actually what secures all of you in this audience. So at Jefferies we really care about our clients. And so for customer identity, we actually use Okta. We care less about our employees. We use another vendor, I won't talk about that, but I just wanted to get back there. But, Brett, really appreciate you joining us here today. Maybe the room is certainly filled with some generalists maybe just to give a background on what Okta does and why it's so mission critical for security.
Brett Tighe
Yes, absolutely. Thank you, Joe. So happy to hear that you're -- happy Jefferies customer, we do you need to get that other side. So, I'll talk about both sides of the business real quick. So there's -- Okta is two main businesses. One is workforce identity, and that is where we secure our customers, employees and partners identities. And then what Joe was just talking about is there's a second side of the business, which is customer identity, where we secure our customers' customers identities.
If you look at the business in total this year, we're guiding a little north of $2.5 billion of revenue growing around 12% for fiscal year '25. If you look at that, it's just in the very early innings of what we think the total addressable market is. Total addressable market, we believe in total is about $80 billion. That is broken down between workforce being about 50 and customer identity being about 30 billion of that. So you can see that we're very early on in this opportunity.
The way we deliver the product is via cloud infrastructure. So, it's a multi-tenant offering. In most cases there are some situations where we do offer a single tenant or a hybrid on-prem connector, for those who are making that transition from on-prem over to the cloud. In terms of a couple of their financials. I talk to you about the revenue side of the house in terms of margin this year we’re guiding about 19% to 20% non-GAAP operating margin, and about 22% free cash flow margin. So, at scale, generating a good amount of margin. So that's just a quick overview.
Joseph Gallo
Awesome. Thanks. That's helpful context. Maybe to start super high-level on macro and the environment before we drill into Okta, there's been a wide dispersion of results so far, right in cyber and broader software. I think cyber is hung in better, but what are you seeing out there when you look at budgets. Is AI cannibalizing budgets, where is cyber in the prioritization, and then maybe if you can talk about enterprise versus SMB as well?
Brett Tighe
Yes, absolutely. So macro is definitely a headwind to us. We've talked about it for several quarters now. We don't see it getting worse or getting better at this point. When you look at our guidance for the balance of the year, we're assuming really the macro as it is today, which is a headwind and it's a headwind in a variety of ways, but the main one that we see it as a new logo acquisition, it is harder to do business with new customers at this point.
If you look at the last several quarters, for us, most of the business or most of the net new ACV is coming from an upsell side of the house. Upsell being either seats or from cross-sell. And when you dial-in and you dive deeper into that, it's really more cross-sell than it is more seats. People are much more thoughtful about their budgets at this point and their contractual spend.
So, when we look at it from a segment perspective, what, Joe you're just saying, enterprise seems to be holding up a little bit better than SMB. So it's been a challenge a little bit more from a small, medium sized business, I think, just with the assumption they don't have quite the balance sheets that the enterprise and strategic customers do. Also, we do service public sector and have done quite well there recently as well. So think of that being very much like enterprise and strategic, the balance sheet is much stronger for those government agencies.
In terms of AI versus security, we haven't seen any difference to be honest with you. It feels like we're still high priority identity or security is still a very high priority for not only our current customers, but also any prospects out there.
Joseph Gallo
That makes sense. And we would expect cyber to continue to be resilient. So, despite those macro challenges, you still grew cRPO 15%. You guide it 2Q to 10% to 11% growth and historically, you've been very prudent. I won't ask you the degree of prudence, but maybe as we think through upside drivers or top drivers of growth, what are the three or four things that can maybe eventually reaccelerate growth?
Brett Tighe
Yes, so if you look at the top three strategic initiatives we have this year as a company, first one is security. Second one is reigniting growth, and the third one is scaling the organization to continue to improve the leverage of the business. So, I'll dive into the second one, which is reigniting growth. So we have come up and driven a lot of new products lately. So, you can look at governance, you can look at PAM, customer identity is obviously a massive opportunity that we continue to expand in with fine grained authorization. So improving the product set, so our sellers have more to sell to our customer base. The other one is expanding our partner ecosystem.
So historically, Okta has been reseller focused or traditional reseller focused, think SHI, CDW and the last time we spoke about it, about 40% of the total revenue stream came through the partner channel with the vast majority of that being the reseller organization. Now, there are two areas that we want to get more deeply ingrained in, which is the cloud service providers like AWS, which we announced last quarter at the end of Q4. It was about $175 million of ACV or Annualized Contract Value growing about 130% year-over-year.
The other area that we need to invest more into is the GSI community. We have historically not had as much attention from them, primarily because Okta is easy to turn on. That's one of the benefits of Okta. A lot of times you just -- you go and purchase it, it turns on pretty easily, there's a very light amount of implementation work. You can see that through our professional services as a percentage of revenue, it's only about 2% of total revenue, at least in Q1. And it's been about 2% to 3% for the last couple of years.
So, we need to be able to improve our relationship with the GSIs and focus on them and show them how identity can play into one of their practices and make them a lot of money. So, those are the areas that we're from a partner perspective we're focused on.
And then the third area is something we just implemented in early February, which is a hunter-farmer model in our America's SMB business. So, I talked about earlier that new logos are harder to attract right now. So what we saw in our quant that we felt that was the best decision for us was to split our lower end SMB meetings, small and medium sized businesses, our lower end customer sizes into a hunter model, which is a rep who only gets paid money when they bring in a new logo versus a farmer who is farming the current customer base.
So, we think that those three areas, the new products, the partner ecosystem, and a hunter-farmer should help us reignite growth over the medium-term. I'm not saying it's over the near-term. I mean, in a SaaS revenue model, it's hard to accelerate that in such a short timeframe. So, it'll take us some time.
Joseph Gallo
That AWS number is super eye popping. Is that the only marketplace you're on? Are you investing in other marketplaces? And then how do you think about what inning we are in, in that AWS? Is that a long runway? Is that helping you move further down market? Maybe just give us a little more details there?
Brett Tighe
Yes, it's -- we have a -- I think, a special relationship with AWS. We're one of the largest users of their service, just from a pure AWS perspective. So, we've got a very close partnership. Yes, I mean, we're excited about the partnership, I think there's still a lot of room to run. And I think it'll get us both SMBs and enterprise strategic. So I think it's definitely a good opportunity for us.
In terms of the other marketplaces out there, we are in early days with GCP , and Azure, not so much given, they are a competitor. So we're looking to continue to build out the GCP side, not just from a go-to-market partnership, but also from a product perspective, having a diversity of platform because we are actually on all three platforms at this point. But the vast, vast majority of it is AWS.
Joseph Gallo
So $2 billion business, $80 billion TAM, you've had fantastic improvement in margins the last year.
Brett Tighe
Thank you, Joe.
Joseph Gallo
How do you think of a -- we're credits too, we really have. How do you think high-level and then a few follow ups, but how do you think high-level about the growth versus profitability because you obviously, the investors in the room on profitability, but you also want to make sure you're not under investing to capture that TAM.
Brett Tighe
Yes. So, we’re going to do the same thing that we've done for years, which is manage the business through the lens of the Rule of 40. We’re balancing growth with profitability, if there's opportunity to grow faster, we're going to take it if there's an opportunity to create leverage, we will do that. I think we've done a really nice job of increasing leverage over the last couple of years. It's taken a lot of work by a lot of people across the company. And I think we've built the pillars to be able to not only invest in the business, but also create leverage.
So, it's something that's paying off specifically actually in FY '25 to be able to deliver these types of margins, while also investing a lot of money in areas like security or reigniting growth or scaling the business. I think, I'm really proud of the team, but there's still long ways to go.
Joseph Gallo
And then how do you think about the sales and marketing side of the investment? Where are we on capacity? Are we still hiring? How do we think about efficiency going forward and then you guys have made a ton of structural changes in the last few years. Is there anything left to do on the go-to-market side?
Brett Tighe
Yes, I mean, from a capacity perspective, we feel like we have the right amount of capacity for the balance of the year. Right now what we're looking for is, I kind of look at is capacity as the glass and the water level is in the glass as the productivity and we still are not overflowing the glass. When we see productivity get to a certain point, we'll start adding more in, but at this point, we feel happy where we are. In terms of potential changes in the field, we're always looking at new things and making sure that we're getting the best ROI out of the things we're doing today.
So, for example, with the hunter-farmer, that's only been in place for a quarter now. We're optimistic that it'll be accretive to both logo count and growth in the future, but it's only in a smaller segment in a larger geo, there's a potential that we could expand beyond that, but we want to make sure that it's successful first before doing something like that.
Joseph Gallo
And then how do you think through the sales forces capacity to sell everything? Because I mean, really, in your tenure as CFO, you've gone from largely one product to then adding a major SIEM customer identity market, as well as IGA and PAM in the last couple years. And so is that an easy sale or complex sale? How do we think about the sales versus ability or so?
Brett Tighe
I think we are getting better. I would say that there's areas like customer identity, which is a massive market in its own right. We have definitely gotten better. We actually track participation in the field of which deals you participate by product. So for example, if you look back 2 years ago, the vast majority -- vast, vast majority of field was in a workforce identity deal, because that's our -- that's where we came from. That's where we started.
If you look 2 years ago, the delta between the workforce participation and the customer identity participation in the field was, I mean, not super scientific. But like this, let's just imagine that. If you could flash forward 2 years, this number has basically stayed the same, but they're getting closer together. So we are getting better. There is still improvement in the field to get better on customer identity.
In terms of the newer products like governance, PAM, posture management, threat protection, fine grained authorization, I think those are still a ways off in terms of maturity and in terms of the field beyond to sell them. Some of them are easier sales. The governance tool is basically an extension of our lifecycle management and workflows tool, which is under the workforce identity cloud.
That is an easier sell for a lot of our sellers, because it's tangential to what we've done for years and had a lot of success and things that are a little further a foot like a PAM offering we will take longer for us to be able to sell, because it's something frankly, not exactly what we've sold in the past. So, it's something new, and it'll take some time.
So, we need to be patient, we need to enable the field. We want to make sure the products are good enough to be able to compete. I mean, there's a lot of things and a lot of steps to releasing a product, not just you come out, hey, there's a new product here, you got to actually do a lot of steps to make the field successful, because you want to show the field that they can make a lot of money. And then they'll get out there and they'll sell it. So …
Joseph Gallo
Let's double click on the customer identity side of the business. I think a lot of people in the room are probably familiar with the workforce side. You compete with Microsoft, Ping, and we'll talk about that later, but what is the competitive landscape on the customer side? And how do you think about the durability of growth in that business? Because I know your aspirations are to kind of get to a 50-50 business?
Brett Tighe
Yes, those are our aspirations. And to be clear, I should have said this earlier, in my intro, which is about 60% of the business is workforce and about 40% is customer identity. Look, the competitive environment there's really a buy versus build. We need to convince the market, they need to buy it from us than build it themselves. One of the key metrics we have internally is, number of developers on the platform, right, because that's one of the key personas that we need to go after.
Customer identity is an interesting market and since the developer is very important because they could be starting as a hobbyist, starting with a very low dollar or even free self service subscription. I'll give you an example. Open AI, one of our largest customers now is, it started out paying us, I think it was like 100 bucks a month. And then they -- it was a monthly credit card thing. It was nothing and because the open AI dev team was starting to experiment with our product. Over time, they realized how valuable it was and then upgraded into an enterprise contract and had been doing up-sells over a variety of quarters over the last couple of years.
So, it's -- that's -- that developer up motion is very important for us. So we need to be able to continue to make inroads there. Another stat that we've talked about in terms of the developer at motion is about 45% of the new logos that come into the customer identity business come from that self service subscription, either the free or the paid. So, think of it as another area of pipeline for us.
Then there's also a top end sale that we do from a Head of Product, Head of R&D, Head of Marketing, even a CIO very rarely I see so, but so it's a -- it's an interesting market to work in and there's a lot of opportunity. The thing is it's not like workforce. There's some dynamics about workforce, not just the developer up motion, but also the fact that customer [identity] is fairly new.
Historically, this has been [kludged] together with a bunch of different simple technologies, and it's not really scalable for the people who are trying to build it themselves. And so, we need to teach that market, they need to buy it from us, as opposed to trying to figure it out on their own. So, a lot of work to do there, there's a lot of opportunity there. We hope to continue to make a lot of inroads there.
Joseph Gallo
Earlier you said one of the growth drivers was leaning more into the channel. Historically, the channel is always coin operated, right? They do what's in the best interest for the channel as most people do. You being a super easy to deploy and use solution doesn't necessarily help them build up a services portfolio around -- now that you have customer identity in full force, now that you have IGA and PAM, is that helping you make inroads with the channel? And then as the CFO, are there any other levers you can pull to help drive the channel motion?
Brett Tighe
Yes, I mean, that's definitely the products are an important -- those new products are important areas for us to be able to explore with the partners, the GSI, specifically. Yes, I mean, if you think about customer identity, if you're going to, if you're a GSI, you can build an application business, identity being one of those pieces, or there's tons of new applications being built on a regular basis.
Governance, our tool does work out of the box, and is very flexible. We think it's a lot better than the legacy products out there. But there's a lot of work before you actually turn the product on in a governance tool. You got to figure out who has access to what, when, right. And so that work, it's not coding, right, it's basically just figuring out, oh, Joe should have access to this system at this time, and make sure he doesn't have too much access. So those are definitely the main area is product focus, but frankly, as an organization, we need to be better about being partner friendly.
In fact, at our executive staff meeting a few weeks ago, with 40 top people in the company, we brainstorm for a couple hours as a team, and then as individual groups and functions like G&A, sales and marketing, R&D, of how we can operate as a more partner friendly organization. Because not just developing the products, we have to be open to it -- to ourselves and how we operate the business. So, there's a variety of things that we're working on to try to push that forward. And this is not something that's going to result in numbers, being produced overnight. This is a multi-year journey and a long-term relationships that that we want to have with a handful of these GSIs.
Joseph Gallo
Maybe going back to the workforce side, you guys recently launched -- the last year IGA and then this year, I guess in December, PAM. How are those businesses going? And then as financial analysts or investors, how should we track the traction of those businesses?
Brett Tighe
Yes, governance is off to a start that definitely beat our expectations. We're up to hundreds of customers at this point. But frankly, if you think about that compared to the 19,100, plus customers we have, it's just a rounding error on upsell opportunity just on that front. So we're doing well. And like I said earlier, it's an easier transition for that sale for our field than probably some of the other things like PAM, I mean, privileged access just came out in basically a quarter ago. So it's very early on.
But the bottom line is what we're trying to drive here is a -- as a workforce platform that has three major pillar -- pillars to it. One is access management, something we've always done historically I think, single sign on, multifactor, universal directory, that's the core access management that we started with early on in the company's history, then you've got the pillar of governance, and you've got the pillar of PAM. We do have dozens of customers now who've purchased all three, even though the PAM products only been out for about a quarter at this point. So we that is a our long-term strategic bet. Into the market is these three pillars that people want to buy all three of them because frankly, each individual product is very powerful. But together, they're more powerful and add more value to our customers and frankly, improve their ROI, which is what we want to be able to drive from a customer success perspective.
Joseph Gallo
Obviously, you as everybody else has seen seat based pressures. But is there a world where PAM and IGA can help re accelerate your NRR going forward?
Brett Tighe
Yes, I think in the long-term, yes. Right now to be able to move that NRR it's a very large number. We have to sell a lot of IGA and a lot of PAM to be able to get that number to move because remember, it's a $2.5 billion business at this point. So it's definitely -- it will be helpful over the long-term. I wouldn't expect it in the short-term, given the size of the businesses at this point.
Joseph Gallo
At RSA, you guys made a ton of product announcements. What were the top two or three that you think are most important?
Brett Tighe
Yes. For us, it's really the security based products. So we had talked about threat protection before, but threat protection is something we continue to talk about, which is continuous authentication. So a lot of the -- a lot of situations are stolen sessions right now when you think about security incidents. So what continuous authentication can do is say okay, Joe is still Joe doing what Joe should be doing on the laptop or computer and what system he's going after. And instead of okay, Joe's gotten in and we just forget about it. Continuous auth is there to be able to improve the security footprint of our customers. That was one of them.
And then the other one is really around posture management. It's also a workforce identity tool, which is how to look at your current setup and say do you have problems? I think we've all heard about service accounts. And that's been a challenge for a lot of companies. One of the things that posture management does is takes a look at your infrastructure and says, how many service accounts are sitting there open, basically. And so that's one of the many tools that it can do. But that's one of the ones that I think everybody is aware of given the challenges that folks have had across the world with service accounts [indiscernible]. Excited about the security offerings because we believe it's -- it underscores the importance of security and the importance of identity insecurity, but also adds a security layer. And then frankly, we can land new customers just with like posture management, for example. So it's once again trying to add to the bag for our sellers to be able to make a call [ph].
Joseph Gallo
And then given you're the CFO, what are the financial implications of these announcements? Are they top line drivers? Are they more gross retention rate stabilizers? How should we think about it?
Brett Tighe
I'd say a little bit of all of it, right. I mean, it's in the long run should be able to help with NRR, or net retention rate. Should be able to help in theory with gross returns, should be able to help with growth. I mean, it's all across the board, frankly. So -- yes.
Joseph Gallo
And then earlier you mentioned an increased focus on security. You obviously had a cyber incident, a while back, maybe just describe that briefly. And then update us on how customers are thinking about that incident.
Brett Tighe
Yes, actually. So I just talked about service accounts. And so that was the core of the issue that we had in October. And if hopefully, all of you had a chance to see, we published the Okta secure identity commitment, which is a blog, you can go look it, it's on the investor website and it's on our own website, you can have a look at it. But it's really got four main pillars to it, which is making our infrastructure as a company better and making our product even more secure; being leading with best practices with our customer base, and then leading the market. Those are the four main pillars. There's like 15, 16 pages, you can go through and see everything we've already accomplished, and everything that we're planning to do out in the future, because we want to be one of the world's most secure companies, identity and security, and we want to be able to get there over the years. So that's a key part of the commitment to our customers is to really be better when frankly we weren't at our best last October.
Joseph Gallo
Have you seen any changes in pricing? Any changes in gross retention or a contract duration, anything from the incident?
Brett Tighe
No, we haven't seen any, like really quantifiable evidence of the impact to the financials from the security incident. But look, there's a potential that we're just not picking it up in our financial data, right? Think about someone who was thinking about Okta, but never actually looked at Okta after the incident, we'd never find them in our data anymore, because they're not in Salesforce or not a lead, they're not a contact. And so there's a potential it's out there, we just can't seem to find it from a material perspective in the financials, and frankly, when speaking with parts of the field.
Joseph Gallo
And your biggest competitors also had an incident like -- have that helped you with the federal business? Like, I guess, how would you describe federal traction? And like, where is the U.S government in identity adoption and where can it be?
Brett Tighe
Yes, very -- I mean, it's very early on in our public sector business. I mean, we've been having some really nice deals. The team has done a great job, we've got great leadership in that part of the organization. We've got great products. We spent a lot of time on US FedRAMP certifications, which is not only helps you with U.S federal business, it helps you with sled business, it also helps you learn how to get these certifications in other countries around the world. And so we believe we're very early in that opportunity.
In terms of your question around Microsoft, maybe it's helped us, I haven't heard anything one way or the other. But look, we believe we can win with or without those. And we want to be able to solve as many use cases as we possibly can to be able to address and solve as many problems that our customers have.
Joseph Gallo
Maybe for the final question, if you had a magic wand to remove one constraint from your business, is there one thing that you would remove to help turbocharged growth or whatever it may be?
Brett Tighe
Macro. Macro. I just think it's still a heavy headwind for us. And I think I'd love for that to go away. But we're not going to sit here and wait for the macro to turn around to try to reignite our growth profile. That's what we talked about earlier with these products, the partnerships and then the hunter-farmer model. We were not going to just let the macro control us, we want to be able to be better than we are today. So yes, I'd take macro out of it all day long.
Joseph Gallo
Awesome. Brett, really appreciate the time today. Thank you.
Brett Tighe
All right. Thanks, Joe.
Question-and-Answer Session
A -
[No formal Q&A for this event.]
