Good day. And welcome to the Okta Second Quarter Fiscal 2020 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dave Gennarelli. Please go ahead.

Good afternoon. And thank you for joining us for today's conference call to discuss the financial results of Okta's second quarter of fiscal 2020. With me on today's call are Todd McKinnon, Okta's Co-Founder and Chief Executive Officer; Bill Losch, the Company’s Chief Financial Officer; and Frederic Kerrest, the Company's Co-Founder and Chief Operating Officer. Today’s call 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 position. 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 the Company’s financial results is included in its filing with the SEC from time-to-time, including the section titled Risk Factors in its previously filed Form 10-Q. In addition, during today's call, we will discuss non-GAAP financial measures. 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. Reconciliation between GAAP and non-GAAP financial measures and discussions of the limitations of using non-GAAP measures versus their closest GAAP equivalents is available on 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. On today’s call, 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-on-year comparison. And now, I’d like to turn the call over to Todd McKinnon. Todd?

Thanks, Dave, and thanks, everyone, for joining us today. Our results mark another exceptional quarter of execution and financial performance. Total revenue grew 49%, subscription revenue grew 51%, calculated billings grew 42%, and remaining performance obligations or RPO grew 68%. We added 450 new customers in the quarter, bringing our total customer count to 7,000. Once again, we made broad additions across our enterprise customer base with 46% growth in customers with annual contract value greater than $100,000. And once again, over half of these additions were from new customers. We now have over 1,200 of these $100,000-plus customers, which demonstrates our enterprise momentum and the increasingly strategic role that Okta plays in our customers’ environment. Our momentum is powered by the massive and inevitable shifts that are enveloping companies today, the rapid growth of cloud and hybrid IT, digital transformation, and security. Identity plays a critical role in each of these megatrends, and organizations are trying to adopt Okta because we're uniquely able to address the broader set of use cases across even the most complex technology environments. Now, I will share a few customer wins from the quarter. The first is a Fortune 50 company that wanted to replace its existing identity system with a cloud-based identity solution that would support its hybrid environment while also deploying a Zero Trust security strategy. It was one of our largest contracts ever, and it covers Okta workforce products for over 400,000 global employees and contractors with secure access to hundreds of cloud and on-prem applications, as well as Okta customer identity to improve access to its partner portal. Deploying Okta will also provide visibility of application usage and reduce IT friction by automating the provisioning of cloud applications. Next, American Century Investments, a leading global asset manager, was a new customer identity win. The company chose Okta to replace its legacy customer identity system with a cloud-based identity platform that will provide both authentication and step-up authentication for its retail website and mobile application. The company selected Okta's customer identity products to provide a seamless and secure registration and login experience for its over 600,000 customers. A great upsell was with the French company ENGIE, a global 500 multinational electric utility. This upsell is a fantastic illustration of how customers are expanding their relationship with Okta to help solve both their workforce identity and customer identity needs. ENGIE first adopted Okta's workforce identity products to support its cloud-first strategy and quickly deliver a scalable, reliable infrastructure that facilitated collaboration among its employees. This quarter ENGIE purchased an array of Okta's customer identity products to accelerate its digital transformation for the users of its large B2B customers. Going forward, Okta will be the identity standard across all ENGIE business units. And finally, while we just launched Advanced Server Access a few short months ago, we've already had some notable wins, including an upsell with Discovery, a Fortune 500 entertainment company with a global portfolio that includes Discovery Channel, HDTV, Food Network, TLC, Eurosport, and GolfTV. It’s a great example of how our new products help expand our use cases with existing customers. Discovery first adopted Okta to serve its diverse mobile workforce and support its cloud-first initiatives. This quarter, Discovery purchased Advanced Server Access to help protect its infrastructure and extend the seamless authentication workflows to Linux and Windows machines. We believe that great customer wins like these are just the tip of the iceberg, and that's why we are making a concerted effort to focus our energy on winning the world's largest organizations. Companies are recognizing that their success depends on their ability to quickly and securely adopt the best technologies for their workforces and customers. Every company needs to become a technology company. And we built the Okta Identity Cloud to enable that transition with the speed, scale, security, and flexibility that our customers require. A good indicator of our progress with winning the world's largest organizations is the overall strength and 68% growth in total RPO. This is evidence that our deal sizes are getting larger and the contract term lengths are getting longer. In fact, when looking at the top 25 contracts booked in Q2 by total contract value, the average contract size doubled when compared to Q2 last year. While that’s great progress, we still have a significant opportunity to further expand our business with these large organizations. Winning the world's largest organizations continues to be an important part of our overall strategy, and we remain focused on expanding our platform to better serve them. To refresh what I’ve talked about before, we are focused on building products and features that can leverage more integrations. Doing so unlocks more use cases, attracts more customers, and generates more data insights that can be harnessed to build better products that make our customers more successful. It's a virtuous cycle where more customer success translates to more customer wins, which translates into more customer success and so on. So, we’re winning more customers. Now, let’s talk about the products that are increasing the use cases with our customers. Last quarter, I talked about a number of new products and features that we introduced at Oktane. We're transitioning our offering from products to a componentized platform, and the investments that we have made in this area are really starting to bear fruit. We’ve opened up the platform into customizable blocks that enable unlimited use cases with the Okta Identity Engine. We’ve introduced new functionality to our customer base like extensibility with Okta Hooks. We’ve also added new products like Okta Advanced Server Access to secure access to critical infrastructure and Okta Access Gateway to extend the Okta Identity Cloud to on-prem apps. These are all great examples of how we are creating the preeminent platforms to help customers successfully adopt any technology. We're still in the early days with each of these, but we’re very encouraged by the level of interest we’re seeing in these new enhancements and products especially with our large enterprise customers like Discovery that I mentioned earlier. We look forward to sharing more of this new product momentum as well as some additional enhancements we’re making to the Okta platform at a new customer event, called Okta Showcase on October 10th in San Francisco. Please stay tuned for more details on that event. The last thing I’d like to say before I hand it over to Bill, is that we're very pleased to be recognized as a leader by the analyst community for our vision, strategy, and ability to execute. Earlier this month, Okta was once again named a leader in Gartner's Magic Quadrant for Access Management. Okta defined this category, and we’ve been the leader since this quadrant was created. You really have to see the graphic where we’re placed in this year's Magic Quadrant because it’s absolutely striking and serves as validation that we’re pulling further ahead of the competition. This recognition of our sustained leadership comes on the heels of Forrester Research recognizing Okta as a leader in their Identity-As-A-Service for Enterprise Support. We value this recognition by the industry analysts because what it really means is that our customers are having great success with Okta and have the confidence to reference us with the analysts. With that, I'll summarize by saying it was a very strong quarter for us, driven by continued execution and market momentum. We are seeing great traction on all fronts and remain focused on capturing the massive opportunity in front of us. Thanks again for your time. And now, I’d like to turn the call over to Bill to walk through our financial results. Bill?

Thanks, Todd, and thanks again to everyone for joining us. I’ll go through our results for the second quarter and then discuss our business outlook for Q3 and the full year. As Todd mentioned, we maintained strong momentum we had exiting Q1 and experienced strength across the board with better than expected growth in many areas, including revenue, calculated billings, and RPO. Total revenue was $140 million, an increase of 49%, driven by 51% growth in subscription revenue. Subscription revenue now represents 94% of our total revenue, up from 93% in Q2 last year. Revenue from outside of the U.S. grew 45% and represented 16% of revenue, which is consistent with Q2 last year. We continue to view our international business as a long-term opportunity and are investing strategically to expand our international footprint. Total calculated billings grew 42%, and current calculated billings increased 44%. The strength in billings continues to be driven by both new and existing customers across enterprise and commercial. Billings also benefited from stronger-than-expected bookings within the quarter. Total RPO or backlog, which for us is contracted subscription revenue, both billed and unbilled that has not yet been recognized, was $914 million, representing a growth of 68%. As Todd mentioned, the exceptional growth in total RPO reflects the success we’ve been experiencing with large enterprise customers where the contracts tend to be much larger in total contract value and longer in length, up to five years in some cases. As we continue to see success with winning the world's largest organizations, we expect the average contract size and term length to trend upwards over time. Current RPO, which represents subscription revenue we expect to recognize over the next 12 months, also experienced strong growth of 52% to $461 million. As I mentioned last quarter, RPO should be viewed as an additional metric to gauge our performance in the quarter. The year-over-year growth in current RPO is a more meaningful metric when viewed along with subscription revenue and billings growth. Billings can sustain variability caused by changes in invoice duration and invoice timing, while RPO can reduce some of the variability seen in billings because it eliminates variances in these invoice dynamics. However, RPO can be influenced by factors such as contract duration and renewal cycles. Turning to retention. Our dollar-based net retention rate for the trailing 12-month period remained strong at 118% and represents a one point sequential decrease. The slight decrease is as expected and is impacted by the large initial deal sizes we’re achieving with large enterprise customers. As I mentioned last quarter, the net retention rate may fluctuate a bit from quarter to quarter. We expect it to remain very healthy as we continue to experience growth in initial deal sizes. Before turning to expense items and profitability, I would like to point out that I will be discussing non-GAAP results going forward. Turning to gross margin. Subscription gross margin was 82.6%, up 230 basis points, and total gross margin was 77.2%, up 390 basis points. Gross profit grew 56%. Now, looking at operating expenses. Total operating expenses for Q2 grew 34%. Consistent with prior quarters, the increase was primarily driven by sales and marketing investments as we look to capture more of our large addressable market with more of the world's largest organizations and expand geographically. The overall expense growth aligns with the commitment we’ve made to invest in our strategic priorities, which include driving business with the world's largest organizations, strengthening the network effects of our platform, expanding our presence with Customer Identity, and investing in security with the Okta Identity Cloud. As usual, the biggest component of the spend increase is related to scaling headcount to support these strategic initiatives. We've been successful in attracting and retaining great talent, and total headcount grew 40%. We continue to invest in our business as we scale favorable growth. Operating loss in the second quarter narrowed to $10 million for a margin of negative 7% compared to negative 20% in the same period last year. This is better than expected and primarily driven by our revenue outperformance. The timing of Oktane, which was held in Q1 this year versus Q2 of last year, also benefited the year-over-year compare and operating margin this Q2. Net loss per share was $0.05 with 115 million basic shares outstanding as compared to a net loss per share of $0.15 with 107 million basic shares outstanding in Q2 last year. Turning to cash flow. Operating cash flow was negative as expected due to typical seasonality. Operating cash flow was negative $1.1 million or a margin of negative 1% compared to negative 6% in Q2 last year. Free cash flow was negative $4.3 million. Free cash flow margin improved to negative 3% compared to negative 12% for Q2 last year. We continue to expect to end the year with positive free cash flow and also expect to see continued variability in cash flow margins due to ongoing fluctuations in working capital, the growth in enterprise business, and seasonal factors. We ended the second quarter with $557 million in cash, cash equivalents, and short-term investments. Moving on to our business outlook. We remain optimistic about the current demand environment. Based on our strong second quarter results, we are raising our full-year outlook. Consistent with our approach throughout this year, we're using this opportunity to reinvest the upside we’re experiencing in investments to innovate our platform, fuel growth, and further enhance our competitive positioning. As a result, while we increased our profitability outlook for the full year, we've adjusted our Q3 outlook to invest some of our better than expected Q2 profitability. For the third quarter, we expect total revenue of $143 million to $144 million, representing a growth rate of 35% to 36%; non-GAAP operating loss of $17.5 million to $16.5 million; non-GAAP net loss per share of $0.13 to $0.12, assuming shares outstanding of approximately 117 million. For the full year of fiscal '20, we are raising our guidance and now expect total revenue of $560 million to $563 million, representing a growth rate of 40% to 41%; non-GAAP operating loss of $64 million to $62 million; non-GAAP net loss per share of $0.44 to $0.42, assuming shares outstanding of approximately 116 million. In summary, we had another strong quarter, and we are looking forward to building on this momentum in the second half of the year. We're uniquely positioned to capitalize on the tailwinds and extend our leadership in the market. We’ve achieved great progress over the past several years, and we believe we're just getting started. The investments we’re making today will help propel our future growth and solidify Okta's position as the standard for both workforce and customer identity. We are encouraged by the progress we've achieved and look forward to capitalizing on the tremendous market opportunity in front of us. With that, Todd, Frederic, and I will take your questions.

And we will go first to Heather Bellini with Goldman Sachs.

I wanted to ask if you could talk about a little bit about just the competitive environment and maybe share a little bit, given the cloud native heritage, if you could share a little about how customers are starting to react to your products that also can be deployed on-premise, and kind of how you see that playing out and how you see if that changes any of the competitive dynamics that are out there today. Thank you. And then, I have a follow-up.

Yes. This is a good question. It’s a really important part of how we think about the world. The major competitive dynamic really for the last several years has been, is a company moving to the cloud or are they not. And when a company is moving to the cloud, we do very, very well. And the good news for us is that every organization, every industry is moving to the cloud. And we are very differentiated because we’re very, very differentiated between most solutions because they weren’t built in the cloud, they weren’t pre-integrated to thousands of services, they can’t be upgraded, they can’t be continuously connected to everything in the company's environment. So, that's something we’ve benefited tremendously from. We added a product that you’re referring to, I think Heather, called Okta Access Gateway. We announced that at our conference back at Oktane. And really what that does, it’s a bridge to help those customers move a little bit faster over to the cloud. So, it connects Okta back into their on-premise environment, gets more of their on-premise environment connected to Okta more easily and really accelerates that journey into the cloud. And it’s still early for that product but it's off to a very strong start. And we're seeing early success with it, and we’re expecting big things over the next months and years.

Great. Thank you. And then, just a follow-up for Bill. Bill, if you would share with us, I mean, your very strong RPO growth this quarter, just wondering from a demand perspective, there's been some concern of late just about slowdown in the overall macro environment. And obviously, you guys are still in hyper growth mode. But, have you guys noticed any change in sales cycles or anything that might make you think that the environment is a little bit more challenging than it was say three months ago?

Yes. Heather, we're not seeing any of those types of things. We’re seeing very strong macro demand for our product. We're feeling because of these tailwinds that we have been enjoying for a while now, moving to the cloud, companies digitally transforming themselves, focusing on security, these tailwinds will continue to remain C-level priorities. And as a result of that, we’re feeling that from a demand standpoint, demand is very strong for us.

One thing about the second quarter is that it was very balanced. In terms of success across the board, whether it was geographically, across segments of our business, or the federal business, it was very balanced. If there was an underperformance in one area, it was compensated by another area, leading to overall balanced success.

We’ll go next to Jonathan Ho with William Blair.

Hi, good afternoon, and congratulations on the strong results. I wanted to begin by asking for more details about the outperformance in the larger deals. Can you provide insight into what is driving this? Is it primarily due to cross-selling, upselling, further market penetration, or multi-product deals? It would be helpful to understand what some of the key factors are.

Hey, Jonathan. This is Frederic. Thanks for the kind words. As you mentioned, we're very excited about the traction we're experiencing with some of the world's largest organizations, and the overall strength in the RPO reflects our progress in that area. We're seeing larger deal sizes and longer contract lengths. For instance, the average size of the top 25 contracts booked in Q2, as Todd mentioned, has doubled compared to last year. We're increasingly noticing large organizations adopting the cloud, considering ways to implement it both internally for workforce management and for customer identity management. A good example is a new Fortune 50 customer of ours focused entirely on workforce deployment. They are exploring Zero Trust strategies and witnessing upsell opportunities. A specific case is ENGIE, which has been a strong workforce customer for a long time and is now looking at Customer Identity and Access Management solutions. Over the past couple of years, there's been significant innovation in both our platform and in the introduction of new products, enabling us to penetrate new areas within these large organizations. For example, we won a new Fortune 500 account with Pacific Life this quarter, where we began with customer identity management, as they aimed to create new portals for a different type of customer. This reflects their search for innovation. With the extensive capabilities of the Okta Integration Network and the Identity Cloud, we are well-positioned to tackle many of these complex use cases now.

Yes. And I'll just add to that. The largest organizations have a lot of things we can help them with. There's a lot of complex technology, and there is a lot of friction in adopting technology there. And we can help smooth that and speed their time to value across the board. But, not only are their initial deals large, but there's a lot of white space too over time because they have so much need. So, we're not only just excited about the size of the deals initially, but we're excited about the potential to grow in these accounts over time.

Got it. As a quick follow-up, you have mentioned the server access product. I'm curious, especially in relation to the public cloud, whether some of the recent breaches have increased interest or if there's an opportunity to address some of the existing concerns.

There's a lot of interest in the products. And it's particularly strong in more modern development shops where they're doing DevOps processes, and they're being really agile in how they iterate and get code out. And that's where you're seeing some of these breaches happen. And people are moving so fast and trying to innovate that sometimes they don't lock down the servers or lock down the S3 buckets like they should. So, Advanced Server Access is a great fit for that. It fits into these modern software development processes and it can help close down some of these security risks, whether it's shared administration credentials, servers, using weak passwords, user accounts not created and maintained on the servers, we can help shore that up, and it's a great fit in this modern software development world.

Thank you.

And we’ll go next to Alex Henderson with Needham.

Great, thank you very much. Just one quick question on the deal lengths. So, when you sign a five-year deal, I assume that you’re not providing any incentive for longer-term deals that you’re in fact basically just extending because of their desire as opposed to incenting that. Is that correct?

Yes. That is correct. I mean, what we’re finding is the larger enterprises, because they are looking to Okta to really be the secure and scalable identity standard for them across their complex hybrid environments, are really looking for that long-term partnership with us, where we can address use cases now and we can address use cases as they evolve for them. So, they’re really the ones driving the lengths of the contracts from the standpoint that it really for them is a deep partnership over time.

Great. I just wanted to make sure that was accurate. The primary question I wanted to ask is around the Oktane pipeline. I continue to be incredibly impressed by how many people show up for that conference. And my sense is that it’s delivered a substantial pipeline of leads that you’re now running down. Could you give us some sense of what your lead book looks like at this point? How long it takes to close the leads that we’re generating from that tradeshow?

I don't have those numbers. However, I know that Oktane is extremely impactful for both existing customers who are discovering the full range of our platform and new prospects who are hearing our story for the first time. We aim to communicate the breadth of our products effectively so customers understand the value we offer. This is crucial, as we also highlight the core product while demonstrating the range available. Each year, we notice significant effects on the marketing funnel and sales outcomes from Oktane, which is why we continue to invest in this event. It serves as a key strategy for us, and we are pleased with its influence, confident that it will yield positive results again.

One last quick question if I could. The Ping filing indicates they are preparing to go public. How often do you encounter Ping, how do you see them competing, and can you provide any insights on what they might say or how you might position yourself against them? Thanks.

I mentioned earlier that the market has divided into legacy systems and the future of cloud computing. Over the past five years, it has become clear that everyone recognizes the importance of being in the cloud or transitioning to it. This is the direction of the future. Most of our competitors are rooted in legacy systems; they are software firms that belong to established product suites, like IBM’s identity products or Computer Associates, or they could be niche vendors like Ping. However, all of them are based on legacy on-premise software. The market has effectively determined that cloud computing is the future, which is reflected in our results, which are twice the size and growing at double the pace of Ping.

We will go next to Sterling Auty with JP Morgan.

Yes. Thanks. Hi, guys. So, Todd, you mentioned kind of the change to the packaging and of products and the componentized nature of it. What does that do to pricing and how the procurement process actually works relative to how you had it structured previously?

Transforming our products into a component-based platform is primarily focused on accommodating a wider range of use cases. This approach provides customers the flexibility to use Okta seamlessly for situations that may previously have been challenging or unfeasible. It's not just a matter of adjusting prices; it's about ensuring that the platform and products can cater to all the various needs of our customers. For instance, some may wish to start by using just a small portion of our multi-factor authentication system, while others might want to handle authentication through us but depend on third parties for address and identity verification. All these scenarios are managed by what we refer to as the identity engine, which enhances our capabilities significantly. In essence, this initiative promotes greater flexibility and power to address a broader array of use cases, ultimately leading to an increase in users and product sales.

Excellent. And then, one follow-up. I missed if you said it on the competitive landscape, but that server access solution, what do you see in terms of head-to-head competition, if there is an RFP or what is the other alternative that customers are considering before they actually purchase your solutions?

Yes. It's a great question. Really, we’re competing with bad security. So, we go into an environment and if they have shared admin credentials or not, they're using one admin account across all their operators or all their engineers, we can go in there and put fine-grained access control, very easy, very flexible, works in all of the DevOps workflows that that company has. So, it's really that evolving modern development in DevOps environment is really greenfield. We're not competing with people like CyberArk or some of the other PAM products. Those are more for traditional IT, PAM workloads, and we partner on those. We're really focused on more of a modern development DevOps type workflows.

And we’ll go next to Melissa Franchi with Morgan Stanley.

Hi, guys. This is Hamza Fodderwala in for Melissa Franchi. Thank you for taking my questions. I wanted to follow up on the macro question. Obviously, that's top of mind for companies and investors. I know it’s still early days, outside the U.S., but did notice that the international revenue growth decelerated quite a bit, versus 50% year-on-year in Q1. Anything to read into there, whether it's the currency or underinvestment? Yes. Then, I have a follow-up.

Yes. I mean, the international growth remains strong. One of the things you have to think about is the outperformance of the U.S. So, as a percentage of the business, it remained consistent. So, it is still very strong. I think that the comments I made earlier on the macro environment, that's worldwide as far as demand for us. We still believe that given the key factors that we’re benefiting from these key tailwinds that we’re having of companies moving to cloud, transforming themselves digitally, and focusing on security, this is true both here in the U.S. and outside the U.S., and they're going to be we believe high C-level priorities. In addition to that when we talk about the success we're having in the world's largest organizations, we are talking about the world's largest organizations. So, we are seeing success outside of the U.S. Todd mentioned one of those companies being ENGIE in Europe. So, we’re seeing very strong demand across the board.

Got it. And just a follow-up. Could you help us square maybe billings growth came in around 42%, current RPO and subscription were above 50% year-on-year. Is that just duration? I know that there were some early renewals in Q1 as well, if you could help us sort of understand the puts and takes there?

Yes, we believe that current RPO is a significant metric when analyzed alongside billings growth. Our current RPO has increased by 52%. We find it meaningful because it addresses the timing issues related to invoices and provides a clearer picture when compared with billings, especially given the timing fluctuations we experienced in the first and second quarters.

And we will go next to Francois Yoshida-Are with Berenberg Capital Markets.

Hi. I’m on for Joshua Tilton. I believe until now the large enterprise businesses have mostly been direct. Can you just comment on what contribution from partners and specifically system integrators was driving enterprise business this quarter?

Yes, happy to do that. So, I mean, we're seeing that the investments we’ve been making in the partner channel continue to pay off. We’re investing those both domestically and internationally, especially as we find more global reach, and scale is going to be an important part of our strategy. You talked specifically about the system integrators like Deloitte, Accenture, and PwC as examples continuing to be very strong partners of ours. The reality is, when we talk about the world's largest organizations, they always have relationships with at least one if not all of those in different parts of the organization. All of those large system integrators are thinking about how they can both enhance their identity practices and enhance the security posture of their customers, but they’re also thinking about how they can help them build digital transformation practices too. That's what Accenture, Deloitte, and PwC think about. Conveniently, the Okta Identity Cloud becomes so strategic that we can help them with both of those things. Both helping their customers become more secure, adopt the cloud more easily, but also, as they think about enhancing their relationships with customers and partners and vendors. So, those partnerships are going very well. We’ve had strong continued support from them at our conferences and events that we go to as well as the number of employees of theirs that are getting trained and certified on the Okta service continues to grow very fast. We're very excited about those partnerships. And I think there are very bright days ahead.

Thank you for that. And just one more follow-up. As you move into the enterprise, how do we think about the competitive positioning of the product suite with single sign-on and multifactor authentication? We think that it's going to be highly disruptive, but in regards to lifecycle management, what is the demand like there, and do enterprises view that product as enough from a functionality perspective?

The competitive position in the world's largest organizations is very solid. We are pleased with our ranking in the recent Gartner Magic Quadrant. This positive feedback stems from Gartner's discussions with the world's largest organizations, many of which are already our customers. Their success and willingness to share their experiences with Gartner are strong endorsements of the value we provide. Large organizations have numerous use cases, including single sign-on, multifactor authentication, and lifecycle management. We are dedicated to enhancing our products to ensure they are flexible and capable of addressing all these use cases. This applies across our entire product range, whether it’s single sign-on, multifactor authentication, or lifecycle management. Additionally, the Okta Access Gateway serves as a bridge for large organizations transitioning from on-premise systems to the cloud, allowing them to connect Okta with their legacy infrastructure during the migration. While we are recognized as leaders in the industry, we continue to focus on improving our products because there is significant value we can deliver overall.

Two things I would add to that are the first as we mentioned in the prepared remarks that Fortune 50 new customer of ours, one of the big things they were looking for specifically was around reducing IT friction by automating the provisioning of applications. So, that speaks specifically to their lifecycle management interest. And then, in addition to that, as we’ve discussed our new workflows, capabilities are going to continue to strengthen the end-to-end use cases we can provide for large organizations for automating multi-application, multi-step workflows, HR as a master, employee onboarding and offboarding. There is just a lot of opportunity there. And we're very excited to provide that value for large organizations.

We’ll go next to Andrew Nowinski with Piper Jaffray.

Great. Thank you and congrats on a great quarter. You talked about getting into more large enterprise deals which contributed to your RPO growth. Can you just give us any color on the large enterprise customers and how they're using the product relative to internal workforce versus external customers? Really just wondering if that mix is different in those large deals versus your historical customer base.

Thanks Andrew for the comments. Yes, absolutely happy to talk about that. I think, what you're seeing is that there are more and more opportunities for us to help large organizations. Think about, again these three macro trends they are addressing. So, whether it's trying to reduce costs and accelerate with the cloud, whether it's enhancing security, whether it's trying to accelerate their revenue streams and think about growing their business, using customer identity and access management, you're really seeing them use more and more components of the platform in both of those use cases, both the workforce and customer identity management. So, there's nothing significantly different than what's happened in the past. We have had large organizations as customers for some time. I think, what is exciting is all the new ways that they are able to find value quickly with specific parts of the organization and the application suite, and then grow from there. A good example is, we put out a commentary today about Cengage, a large customer of ours, one of the largest providers of learning digital learning for university students. I mean, they have been a customer of ours just a couple of quarters, and within six months we were able to deploy our customer identity and access management to tens of millions of students for the new fall quarters and fall semesters in college that are just starting right now. So, I think that time to value and that speed to market is something that is very attractive. And the fact that we can help them get started quickly, find success, find value and then grow with us, I think pertains well for the times ahead.

That’s great. Thank you. And then, maybe just one follow-up. Your new customer adds of 450 were very strong again, but it is surprisingly consistent over the last five quarters, regardless of the seasonality in the quarter. I'm just wondering why is your new customer growth perhaps not increasing or accelerating, considering you’re getting into these more of these large enterprise customers in a relatively new segment now. Thanks.

Yes. I mean, you’re right. The 450 customers, it is a fairly consistent growth we have every quarter between 400 and 500, and that has remained in line with that historical trend. What I’d point to is really the larger enterprise, the significant growth that we continue to have in the large enterprise, we grew 46% year-over-year in the greater than $100,000, but even more than that is the fact that with these new customers, the larger enterprise customers, we’re doing bigger deals, and we’re doing longer term lengths. That’s reflected in the 68% growth rate on the RPO that we talked about, it’s also reflected in the metric we’ve been talking about where the 25 largest contracts we booked this quarter were double what we booked last quarter. And so, as we think about the business, obviously where we’re focused on is adding new customers but we’re also focusing on adding those large enterprise customers as we talked about, winning the world’s largest organizations. And we’re seeing a lot of success with that, with larger deal sizes, longer contract lengths, and overall value.

And we’ll go next to Gray Powell with Deutsche Bank.

Great, thanks for taking the questions. Just a couple. So, I know, there are a lot of metrics to focus on, and maybe I'm oversimplifying things. But, if I look at the absolutely dollar growth in subscription revenue in Q2, it almost doubled off the pace of Q1. So, can you talk about the main driver there, how much of that is normal seasonality versus interim sales productivity and execution in the quarter?

Yes. What we are observing is primarily driven by the business traction we are seeing with large enterprises. When we look at the metrics related to RPO, specifically the long-term RPO and total RPO, we see that the growth of current RPO has accelerated quarter-over-quarter. This acceleration is due to longer contract lengths and significantly larger values, which is really what is contributing to the trends you are noticing.

Got it. That’s helpful. And then just on the product side, really quickly, how should we think about the opportunity with the advanced server access products? And I know it’s, but the customers that have signed up so far, what kind of uplift are you seeing on the overall build of Okta?

It's an important area to evaluate and comprehend. We consider this frequently. The product became generally available a few months ago at Oktane, and the initial success has been very encouraging. We're acquiring new customers while also expanding with existing ones. We've achieved significant success, particularly with companies engaged in modern agile development and utilizing infrastructures or services for software deployment. Looking ahead, we're very optimistic about the future of software development. The early signals are promising, and we are also aligned with a substantial macro trend. As evidenced by our other ventures, creating a product that aligns with major trends like cloud computing, digital transformation, or security is highly advantageous. We are very enthusiastic about this opportunity.

And we will go next to Gregg Moskowitz with Mizuho.

Okay. Thank you very much and congratulations on a good quarter. Most of my questions have been asked. But Bill, I was wondering if it were possible to provide a little more color around how much your average contract duration changed this quarter on a year-over-year basis as well as what your expectations are around duration over the next two quarters or so?

Yes, our average contract duration has been between 2 to 3 years. As I mentioned earlier, the longer contract lengths with our large enterprise customers have contributed to this, and we expect that trend to continue. We believe that as we continue to win more of the world's largest organizations, the average contract length will increase over time.

Okay. That's helpful. And then, just as a follow-up, if you look at headcount, it again grew about 40% year-over-year. Do you continue to expect the higher end growth rate to accelerate in the back half?

So, as I mentioned in my prepared remarks, we experienced positive growth in Q2, mainly due to increased revenue. We intend to set that aside and reinvest it in the latter half of the year, particularly in Q3. These additional investments will focus on customer-facing positions and innovations related to those roles. Consequently, we anticipate that headcount growth will speed up in the second half of the year.

And we’ll go next to Keith Bachman with Bank of Montreal.

Hi. Thank you very much. I was wondering if I could ask about the market segments. In particular, if you think about employee versus customer, could you give us any dimensions on growth rates between the two segments? How you really see this unfolding over the next couple of years in terms of which being a larger TAM in terms of incremental opportunities? And then, how you see the pricing variances between the employee and the customer segments? Thanks very much.

So, the workforce market or what we call workforce identity is still and continues to be our largest piece of our business and continues to be very strong. The customer identity also contributes to incremental upside growth and is also growing well. We think that the addressable market on both those markets is very big, which is what's exciting for us in many ways because we’re one platform which services those two markets. And so, there's a lot of synergies between those two that allows us to do a lot of upsell and cross-sell with our existing customers and with potentially new customers when it comes to workforce, moving them then to customer identity and vice versa. So, we feel really positive about that. I think from the standpoint of pricing. Just from an overall pricing structure, workforce is based on a named user pricing structure and customer identity is based on an active user pricing structure just because of the different nature of the users. But like I said, we think they are both big opportunities for us and feel good about our ability to grab those opportunities.

One thing…

Okay. Just as a follow-up, please continue.

One thing that often gets overlooked in competitive discussions is that we are the only company with significant scale in both of those businesses. This sets us apart. Referring to the Gartner report, it highlights that customers greatly appreciate a vendor capable of offering both services. We are very enthusiastic about being able to provide both, as it enables us to approach potential clients in diverse ways, creates more upsell opportunities, and is a crucial element of our strategy.

Okay. Well, that actually was my follow-up in terms of the competitive dynamic because Ping in the registration statement talks about a fairly meaningful size of revenues from the customer side. And I just want to tease out a little bit. I think you answered the question. Do you see any different competitive landscape between the employee and the customer side? It sounds like you don’t really see a difference from your competitive landscape, if you look at ForgeRock or Pint or yourselves or some of the legacy players?

I believe there is a distinction in how ForgeRock is perceived on the customer side, leading to some differences among competitors. The main discrepancy in customer identity lies in whether to build a solution or buy one. We are highlighting that there is a scalable and proven option available that can address their needs without requiring them to develop something in-house. On the workforce side, building a solution internally is not common, as leading vendors like Okta can provide the necessary services, and this understanding is well established.

We’ll go next to Rishi Jaluria with D.A. Davidson.

Hi, guys. This is Hannah on for Rishi. Thank you for taking my questions. First, just following up on an earlier question. I was wondering if you could talk about how long it takes to ramp new hires to full productivity. And if you are facing any challenges with the tightening labor market?

Yes, happy to talk about that. In terms of ramping new customer-facing employees, we continue to see very strong learning and development internally in the organization. Obviously, with the success that we're having in the market, customer-facing, our account executives talk to each other. And so, we’re getting better and better quality of talent every day. So, that’s the first thing is just when you think about who's coming to Okta and their interest level, we are certainly attracting the quality of salesperson that we were not able to do 24 months ago. Secondly, in terms of the tightening labor market. When you think about what we're trying to do, we're trying to hire the best people across the entire organization whether it’s customer-facing, R&D, engineering, or otherwise. Those people are always well-employed. And so, we are always looking for the best folks. We haven't seen any significant change in our approach or in the results. You see the very strong 40% headcount growth in the first half, and we expect that to continue strong throughout the rest of the year. And we're very excited about that.

And then, a second question. I know that there's a slight decel in the dollar-based net retention rate, and that was impacted by larger initial deal sizes. Is there anything you could talk about how we should think about that going forward, especially as you continue to land larger and larger customers?

Yes, I think you're correct that this was influenced by larger initial deal sizes. As we mentioned, RPO grew by 68%, and we're not only seeing longer-term deals but also larger deals. To refer back to an earlier point, the average size of the top 25 contracts we booked in Q2 doubled compared to Q2 last year, with a significant number of these contracts coming from new businesses, which means they represent large initial engagements. These larger initial deals will affect our figures. We believe that the net retention rate will stay healthy, similar to what we saw this past quarter at 118%, but it might fluctuate somewhat, remaining within a range of a few points above or below that level.

And we will take our last question from Shaul Eyal with Oppenheimer.

Thank you for taking my question, gents. And congrats on the quarter. This is Yi in for Shaul. Just two quick questions. The first one is, in terms of the larger size deals, what is the duration in terms of the sales cycle between the large ones as compared to the small SMB ones?

Yes, that's a good question. We've noted the overall strength with large organizations, where deal sizes are increasing and contract lengths are extending. Strategic identity is becoming more critical for these large organizations, and when they make decisions, they're typically looking at three to five years. We're observing this trend. For small and medium businesses, while these decisions are still significant, we see annual contracts being built upfront, but there's a growing trend towards multiyear contracts across all business segments.

Okay, fair enough. And the last question is, you mentioned about the displacement opportunity on legacy on-premise vendors like IBM as well as CA, do you have an estimate of how many customers this opportunity can be in the magnitude of it that I guess Okta could take advantage of?

When I consider our opportunity, I see it applicable to every company. The challenge with some of the legacy technologies is that they were not widely adopted; only a few of the largest organizations could afford to spend tens of millions on identity implementation. Therefore, our opportunity extends far beyond just the largest organizations. While those are important strategically, it encompasses a much larger scope. There is a significant desire among the largest organizations to move away from legacy technology, and it is now our responsibility to continue executing and delivering a robust, industry-leading platform that can assist those customers in making that transition, which is our main focus.

At this time, I would like to hand the call back over to Dave Gennarelli for any additional or closing remarks.

Thanks, operator. As Todd mentioned in his opening commentary, we’re going to be hosting a customer event called Showcase at our headquarters in San Francisco on October 10th, and you can look for more information on that next week. We’ll also be hosting a number of bus tours source and we’ll be marketing in Boston, New York, and Los Angeles this quarter, as well as attending the Berenberg, U.S. Stockpicker Conference in New York on October 3rd. So, we hope to see you at one of those events. Thanks.

That does conclude today’s conference. We thank you for your participation.