Okta, Inc. Q4 FY2022 Earnings Call

Hi, everybody. Welcome to Okta's Fourth Quarter and Fiscal Year 2022 Earnings Webcast. I'm Dave Gennarelli, Vice President of Investor Relations at Okta. With me in today's meeting, we have Todd McKinnon, our Chief Executive Officer and Co-Founder; Brett Tighe, our Chief Financial Officer; and Frederic Kerrest, our Executive Vice Chairman, Chief Operating Officer and Co-Founder. 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 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 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. 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. The reconciliation between GAAP and non-GAAP financial measures and a discussion of the limitations of using non-GAAP measures versus their closest GAAP equivalents is available in our earnings release. You can also find more detailed information in our supplemental financial materials, which include trended financial statements and key metrics posted on our Investor Relations website. In today's meeting, we 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. Also note that the acquisition of Auth0 closed on May 3, 2021, and unless otherwise specified, each reference to Okta refers to the combined company inclusive of Auth0. 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. We closed out another fantastic fiscal year with strong Q4 results. Our consistent execution was fueled by our market-leading products for both workforce and customer identity, coupled with our relentless focus on customer success. We experienced strength in both core Okta and Auth0, which reflects Okta's position as the leading cloud-native identity management platform addressing the $80 billion identity market opportunity at scale. The three megatrends that are driving Okta's business, the deployment of cloud and hybrid IT, digital transformation projects and the adoption of Zero Trust security in an environment of increasing incidents and breaches are only gaining momentum and Okta is best positioned to capture the market that is moving toward us. And nowhere was the momentum more evident than in our results. I'll start with a quick recap of our Q4 financial results and then get into some of our other notable highlights from the quarter. In Q4, RPO grew 50% and current RPO grew 60%. Total revenue grew 63% and subscription revenue grew 64%. Okta stand-alone total revenue grew 39% and Auth0 revenue was $56 million. We're reaching more customers than ever before. We added over 1,000 new customers in Q4, which was a record. Our total customer base now stands at 15,000 and grew an impressive 50%. We continue to do very well with large enterprise customers. In Q4, we added a record 275 customers with $100,000-plus annual contract value or ACV. These new $100,000-plus ACV customers continue to be balanced between new customers and upsells. Our total base of $100,000-plus ACV customers now stands at over 3,100 and grew nearly 60% in Q4. We also continue to have strong momentum with even larger contracts. We had record new adds of customers with both $500,000-plus and $1 million plus in ACV. We now have nearly 600 customers with an ACV of $500,000-plus and nearly 200 customers with an ACV of $1 million plus, both of these groups grew approximately 60%. Our momentum in these large customer wins is a good proxy for our business with large enterprise and government organizations. It's clear that the focus and energy we've put into better serving these largest customers is paying off. Here are just a few notable examples of large enterprise wins in Q4, which come from a wide range of industries. Fifth Third Bank, a Fortune 500 company was a fantastic addition to Okta because it included both Okta Workforce and Auth0 as Fifth Third Bank continues on its digital transformation journey, implementing a cloud-first identity solution to support its workforce and digital banking platforms. Kyndryl, the world's largest IT infrastructure provider was a great customer win for both Okta Workforce and Auth0 this quarter. Kyndryl has approximately 90,000 employees and was formed from the separation of IBM's managed infrastructure services business. A fantastic upsell in the quarter was with Block, the parent company of Square and Cash App. Block had been using Okta for its workforce when the Company needed an identity solution to support its M&A activity, integrate with its systems and preserve its brand. This quarter, the Company expanded its investment with Okta, as it integrates its recent acquisition of Afterpay. This expansion will allow Block to seamlessly integrate thousands of employees who will have access to internal applications, while also preserving the Company's branding across its numerous businesses. And similar to last quarter, we continue to see early success in cross-selling between Okta and Auth0 customers. A great example in Q4 was Carvana, a Fortune 500 e-commerce platform for buying and selling used cars that has been a longtime Okta workforce customer. Carvana recently expanded the partnership and selected Auth0 to provide its partners and dealerships access to its marketplace platform, which provides Carvana customers with a broader selection of vehicles. I mentioned that we experienced strength in both core Okta and Auth0. So now let's take a look at the split between customer identity and workforce identity in terms of ACV. For this particular metric, the growth rate is considered in both comparison periods. Total SIEM ACV grew nearly 60% and now represents a significant portion of total ACV. Within this, Okta standalone SIEM ACV grew 47% and Auth0's ACV grew 81%. Workforce ACV grew 37% and represented 63% of total ACV. That's fantastic growth across the board. We're still less than one year into the combination with Auth0, and to date, we've been able to accomplish job number one, which was to maintain the momentum of both businesses. We're even more excited about the future because starting just last month, the go-to-market organization has been unified under Susan St. Ledger's leadership. One team driven by the relentless pursuit of making our customers successful, selling both Okta and Auth0. This all crystallized with an incredibly energetic annual sales kickoff meeting that we held in person a couple of weeks ago. There is nothing else in the market today that even comes close to Okta's capabilities. The combination with Eugenio and the team from Auth0 is helping us realize our vision of identity as a primary cloud, delivering best-in-class experiences for our customers and winning the SIEM market faster. Now let's talk about product updates. Customers are seeking a cloud-first approach to their Identity Governance needs. Last quarter, I mentioned the beta for our new Identity Governance offering. The feedback has been amazing. Diya Jolly, our Chief Product Officer and her team have spent the past couple of months prioritizing and enhancing the product. This month, we are excited to initiate early access to a limited number of customers as we fortify our go-to-market team and partners with content for enablement. We expect Okta Identity Governance to launch in North America by midyear and globally by year-end. Okta Identity Governance is a natural priority to bring to market at scale as the use cases of modern Identity Governance align well with Okta's strengths in existing products like workflows and lifecycle management. The opportunity for Okta Privileged Access is significant as well. We're making great progress, developing new PAM functionality, and we will have more news on these developments over the course of this year. We'll talk more about both products at our Oktane22 event. After two years of hosting Oktane virtually, this year, we're excited to host Oktane in person in San Francisco. To do so, we've moved the date of the conference to the second week of November, so be sure to mark your calendars. Oktane is a fantastic event to connect with customers and partners and share our vision for identity, and also a great event to hear from our customers as to why they turned to Okta. Time and time again, you'll hear customers highlight Okta's independence and neutrality. Okta provides our customers the freedom to deploy best-of-breed applications and does this through deep integrations that other monolithic platforms can't provide or don't want to provide because of their competing products. Today, identity has become a strategic component of any organization's infrastructure in a world where cloud adoption continues to proliferate. We believe that in a few years from now, there will be just a few primary clouds that really matter inside an organization. Together with Auth0, we are establishing Okta as a primary cloud and the standard for digital identity. We're doing this by adding more users, more customers, and increasing the use cases we can address, which all accelerate network effects. Identity is the connective tissue to all of the other primary clouds as it facilitates choice and flexibility while enhancing security and reducing risk across other technologies. In summary, the Okta and Auth0 teams accomplished so many highlights this year. For example, we surpassed the $1 billion revenue mark and added over 5,000 customers. We now have nearly 30% of the Global 2000 as customers. We expanded our portfolio of products including Okta Identity Engine, our next-generation identity platform, which is now generally available. Both Okta and Auth0 continue to perform well in Gartner's Magic Quadrant. We continue to attract and retain incredible talent, growing our employee base by nearly 80% to just over 5,000. We made tremendous progress in our ESG efforts, including achieving 100% remote workforce and submitting to the Carbon Disclosure Project for the first time. With this, we're further strengthening our market leadership position. We've come quite a long way since I founded the Company 13 years ago. We're proud of the great progress we've made as a team, but as we look ahead, we know we are just scratching the surface of the $80 billion total identity market opportunity. I want to thank our employees, customers, and partners who place their trust in us every day. Before we get to the financial review, I want to congratulate Brett Tighe on his appointment as our CFO. Brett has been an incredible asset to Okta since he joined seven years ago. He's one of the primary architects of our long-term financial model and has really excelled in both internal and external-facing responsibilities since stepping into the role. Now, here's Brett to walk us through more of our Q4 financial details and how we're raising our outlook for FY '23.

Thanks, Todd, and thank you everyone for joining us. I'm excited to officially be in this role. I've seen tremendous growth during my seven years at Okta, and we are still just scratching the surface of the $80 billion identity market. I look forward to working together with the team to capture this opportunity. Before I get into the results, I want to take a moment to share my top priorities as CFO. First and foremost is executing against our near-term financial targets as well as our long-term financial goals. I'll detail the near-term targets in a few minutes. Our long-term financial goals anchor on at least $4 billion of revenue in FY '26 with organic growth of at least 35% each year and a 20% free cash flow margin in FY '26. To achieve these targets, we must continue to scale the Company from a people and processes standpoint, including investing in talent across all areas of the Company, as well as in systems to prepare us for the next phase of growth. I'm focused on ensuring that Okta will continue to make the right investments that support our growth. At the same time, we will continue to be prudent with how we allocate capital. My second priority is ensuring that we continue the seamless integration of Auth0 across all facets of the Company. Now that the back office and go-to-market teams have been fully integrated, we will continue to refine our systems and processes to ensure that the tremendous growth opportunity we see will be realized. We are off to a great start and recognize there is still a lot of work to do. With that, I will now highlight some of the results for the fourth quarter as well as provide our business outlook. Total revenue for the fourth quarter accelerated to 63%, driven by a 64% increase in subscription revenue. Subscription revenue represented 96% of our total revenue. On an Okta stand-alone basis, total revenue grew 39%. Auth0 revenue net of $2 million and recognized purchase accounting adjustments was $56 million. RPO, or backlog, which for us is contracted subscription revenue both billed and unbilled that has not yet been recognized, grew 50% to $2.69 billion. Current RPO, which represents subscription revenue we expect to recognize over the next 12 months, also experienced strong growth of 60% to $1.35 billion. This strong growth in current RPO was driven by strength across new and existing customers for both Okta and Auth0 as demand for our products remains robust, fueled by the macro trends that have been driving us for years. Total and current calculated billings grew 91%. Calculated billings includes the effects of billings process improvements that were implemented at the end of the first quarter of FY '22. Excluding the billings process improvements, calculated billings grew 71%. Turning to retention, our dollar-based net retention rate for the trailing 12-month period increased to 124%. This was driven by the strong upsell motion we are seeing with our existing customers across both Okta and Auth0 as they expand on both products and users. Consistent with prior quarters, gross retention rates remain very healthy and reflect the value of our products to our customers. As always, the net retention rate may fluctuate from quarter to quarter as the mix of new business, renewals and upsells fluctuates. Before turning to expense items and profitability, I'll point out that I will be discussing non-GAAP results going forward. Now looking at operating expenses, total operating expenses grew 81%. The growth in expenses is primarily attributable to the inclusion of Auth0. Total headcount now stands at just over 5,000 employees, up 79% year-over-year. Moving to cash flow, free cash flow was $5 million, which yielded a 1.3% free cash flow margin. The sequential decline was driven by investments we are making to scale the business and was primarily related to higher headcount. We ended the fourth quarter with a strong balance sheet anchored by $2.5 billion in cash, cash equivalents, and short-term investments. Now let's get into our financial outlook. The secular market tailwinds and our leadership position in the identity market continue. We're making great progress integrating Auth0 and continue to be prudent and thoughtful about the rate and pace of near-term synergies. This is reflected in our guidance. With that as a backdrop, for the first quarter of FY '23, we expect total revenue of $388 million to $388 million, representing a growth rate of 55% year-over-year. Non-GAAP operating loss of $51 million to $50 million and non-GAAP net loss per share of $0.35 to $0.34, assuming weighted average shares up to 155 million. For the full year FY '23, we are raising our revenue outlook by $35 million from the preliminary guide provided last quarter. We now expect total revenue of $1.78 billion to $1.79 billion, representing growth of 37% year-over-year. Additionally, we expect non-GAAP operating loss of $185 million to $180 million and non-GAAP net loss per share of $1.27 to $1.24, assuming weighted average shares outstanding of 157 million. Included in this outlook are expectations for increased sales and marketing investments to help us capture the large market opportunity in front of us. This includes further investments to build out our go-to-market operations in key areas such as SIEM, international and public sector. Lastly, I want to provide a few comments to help with modeling in Okta. First, for Q1, we expect current RPO to be in the 50% range; second, the billings process improvements that were implemented last year have led to some confusion regarding specific billings commentary on a one-time basis for clarity. We expect Q1 FY '23 billings of approximately $385 million to $390 million. When viewed on a like-for-like basis, Q1 billings growth would be approximately 50% to 52%. For the full year FY '23, we expect billings to be approximately $2.18 billion to $2.19 billion. The FY '23 billings growth rate experiences a headwind of approximately 9 percentage points due to the process improvements impact. When viewed on a like-for-like basis, billings growth would be approximately 35% to 36%. Be sure to reference the supplemental slide in our earnings presentation, which outlines this modeling detail. From a seasonality perspective, we anticipate billings in the second half of the year to represent roughly 60% of the full year total, which is consistent with normal seasonality. And finally, we will continue to invest in our growth in FY '23 and beyond. As such, we expect free cash flow margin to decrease a few points year-over-year. To wrap things up, we had a great quarter and end to the fiscal year and are extremely excited about the $80 billion market opportunity in front of us. Okta is very well positioned to build on its strong foundation and market leadership position in both Workforce and SIEM, which gives us continued confidence in our near-term and long-term outlook. With that, I'll turn it back to Dave for Q&A.

Thanks, Brett. I see that there are already quite a few hands raised, so we'll jump right into them and I'll take them in the order as they came in. And in the interest of time, please limit yourself to one question and one follow-up question. So with that, I'll go to Matt Hedberg at RBC. Matt?

Thanks, Dave. Thanks, everybody, for the time. Todd, maybe I'll start with you. There have been strong results to end the year, first of all. But there have been a lot of questions on the competitive environment and just the strength of the identity market, which, clearly from your results, look strong. Can you talk about the importance of identity as we emerge post-COVID? Because it strikes me that there's a lot of opportunity not only for net new but also large replacement deals from some legacy installations?

Thank you, Matt. We are genuinely excited about this. We've discussed this often, and it resonates because it's absolutely true. As customers increasingly pursue cloud applications, they also want to develop on cloud infrastructure, enhance customer experiences, and achieve all of this securely. These trends create significant shifts that favor our market position, as effective execution of these goals requires identity solutions. This marks a substantial technological transformation. Twenty or thirty years ago, identity was included as part of another platform, such as a Windows server or identity solutions from vendors like Oracle or CA. However, the landscape has changed. Today, identity plays a crucial role in these trends, and to bring cloud technology to employees, transform customer experiences, and ensure security, an identity system is essential. That’s what we offer to customers of all sizes, and it’s the basis for our success. The reality is that not everyone is aware of this yet. When speaking with ten CIOs, perhaps three might acknowledge that identity is the future and a pivotal platform for them, crucial for maintaining competitiveness. Only about three out of ten recognize this, and likely two of those are our customers. The good news is that awareness is growing daily, especially among decision-makers who understand that to implement Zero Trust and have technology choices, identity is key. We provide the leading identity platform, and our focus is on ensuring everyone understands that. Regarding the impact of COVID-19 on our business, many have inquired about it. There were some positive trends as organizations quickly adapted to remote work, but there were also challenges as industries navigated their own impacts and priorities. Our investment levels were somewhat uncertain, yet our growth was driven by these macro trends. Looking ahead, our priority remains to position identity as the primary platform encompassing both customer and workforce identity, scalable and adaptable to customer needs. That’s why I’m enthusiastic about the momentum and results in the SIEM business. In terms of competition, we are highly differentiated. While we have some point competitors lacking the scale or breadth, larger platforms like Microsoft have identity solutions that don’t match ours. Ultimately, they are focused on selling their collaboration or infrastructure rather than offering customers choice and flexibility. These factors are contributing to our success.

Super helpful. And then maybe just a quick one for Brett. First of all, Brett, congrats on the promotion. I'm wondering, from your operating margin guide, how much of that is Auth0? And maybe how should we think about the timing of a return to more positive margins?

Absolutely. Thanks, Matt, and thank you for the kind words. From the operating margin guide, it's really both businesses. I would say, as a reminder, Auth0 is an earlier-stage business than Okta stand-alone is. So the unit economics there are a little different than Okta’s on a stand-alone basis. Now, from a long-term perspective, you're probably asking about the long-term framework. We're going to operate the business the same way we have from day one. We've always looked at the Rule of 40 and balanced revenue and growth together. When there are great growth opportunities, we're going to seize them. And obviously, when we're seeing margin offerings, we're looking to balance the two. It’s something we've done for years now, and we will continue to do so in the years to come.

All right. Let's go to Jonathan Ho at William Blair.

I just wanted to maybe start out with the integration of Auth0 and maybe can you talk a little bit about the sales force integration effort? And maybe where you're seeing some successes?

Yes. Thank you for the question, Jonathan. We are very excited about the integration of Auth0. We're very excited that it's been done in just under a year from where we are because we announced the acquisition a year ago tomorrow. The most important point is the go-to-market organization has unified under Susan's leadership on February 1. You heard Todd talk about one team, which I think is a great position to be in. We put together a lot of the core systems that we're using to run the business. Those are all running on one platform. So we have unified visibility into all of that and how it's working. There are a couple more pieces we need to finish up in terms of finalizing some systems on the back end, but those are just about ensuring we're working as one organization going forward. And so far, you can see the results. I mean, the results speak for themselves. This is even before we had this unified go-to-market organization. We've got great opportunities in large organizations where we're landing with Okta Workforce and Auth0. We've got these great cross-sell opportunities like Carvana, who has been a longtime workforce customer and then became an Auth0 customer. I think there are many different synergies that we're starting to see already. Overall, when you look at where SIEM is and how far it's come, it's about 6% year-over-year growth, but I think we're just getting started in this big opportunity, which is the exciting part for us.

Yes. Thank you, Jonathan. One thing I'll add to Freddy's comments. The strategic reason for this acquisition is that identity is one of the most primary important clouds in our customers' environments. To be that primary cloud, you have to support both use cases. You have to support workforce and customer identity. Furthermore, the customer identity use cases were really divided between what the Okta SIEM platform does and what the Auth0 platform does. Now, Auth0 is more developer-centric; you can customize it, extend it, and control every bit. The Okta platform is more pre-integrated and low code. The idea is that these are complementary platforms. And when I look at the results, you see that bear out in the results. You see 81% growth in the Auth0 platform over the last year-on-year comparison, and you see nearly 50% growth for the Okta SIEM platform. So you're seeing two complementary platforms helping us drive significant success in this market, which unlocks this concept of being this critical, critical primary cloud for every organization in the world.

All right. Let's go to Ittai Kidron at Oppenheimer.

And Brett, my question is for you. I want to dig into Matt's question around the operating margin loss target for fiscal '23. I have to say, I mean, a great quarter, but that was certainly a number that caught me a little off base. So, can you give us a little bit more detail on the plans for the year as far as headcount additions? And what is the run rate loss that you expect to have exiting the year? Is fiscal '23 a peak year? I mean, are we finally, from here, moving into much stronger profitability? I think some of the comments I'm receiving from the business this year was certainly a little bit off base with regards to their core assumptions. So, any more color on the opportunity would provide a little more comfort and behind logic.

Absolutely. Ittai, I'm happy to talk about that. So if you think about a SaaS business anywhere, right? You must invest in front of the demand or invest in front of the opportunity. We've really got a $1.79 billion guide, which, by the way, we're very excited about in terms of revenue for FY '23. But we've got an $80 billion market out there. So we feel the best opportunity is in front of us, and we need to invest into that opportunity. In terms of specific areas where we're spending, we're adding quota-carrying AEs and salespeople across the board, whether it be sales engineers or areas in pipeline generation. Clearly, there's a huge opportunity in front of us, and that's where we're going to invest. Additionally, we're also going to invest in the product side of the house. When you add this many customers, you've got to be able to support them. It's going to be a little up and down across the P&L from an investment perspective because we're just scratching the surface. I mentioned earlier in the call, we've got so much upside in this market opportunity that it would not be the right decision not to invest into the opportunity because we see a tremendous amount of momentum in the market today.

Is this a big year? Are we improving thereafter? Is this a peak year?

Well, I mean, I think if you look at our long-term goals that we have in front of us, right, we've got revenue of $4 billion, growing at least 35% each year between now and then and also a 20% free cash flow target. We are going to balance growth in margin just like we have in the past. You'll see that period between now and FY '26.

Okay. Let's go to Andy Nowinski at Wells Fargo.

Congrats on a great quarter. Just a few questions maybe on your upcoming IGA product launch. It sounds like it might be generally available a little bit later than previously expected. Can you just talk about whether there were any significant changes coming out of that beta test before making it GA?

The IGA product is actually a little bit ahead of schedule. There might be some confusion about when we talked about it last year, being available in the first quarter of this year? We were talking about EA or beta or GA, but the internal schedule has been clear along. We're a little bit ahead of that. The beta, which is ongoing right now, is going very well. We're seeing success with a lot of different sizes of customers. It's a natural complement to our advanced lifecycle management product, with significant new value for customers and new things they can do to automate their business with access requests or access certifications, which is very natural extension of our core product line. We're very bullish on that. On the PAM side, I think PAM is actually a little behind what we originally thought. The reason why is because as everyone knows, our product advanced server access is really in the PAM market today. We’re focused on server admins and controlling access to servers, and we've done a couple of shifts after learning more about the PAM market. We made some decisions to add some of that capability into the Advanced Server Access product and then put more additional capability, which is going to take a little bit longer in the PAM product. You'll see that, that's being pushed out a little bit, but we still expect to make progress on that this year, and we'll be talking more about that as the year unfolds and leading up to Oktane in the fall.

And then just a clarification, did you include any contributions from the IGA solution in your revised annual outlook given that it will be GA and midyear, I think you said?

No. We're making very conservative assumptions that it won't have any contribution there.

Next, we'll go to Adam Tindle at Raymond James.

Okay, Todd, I just wanted to maybe take a step back on the fiscal '23 plan. You talked before about going through a strategic planning process into this, the different outcomes that you considered. I'd imagine that you had some that were involving showing a consistently improving ability, for example, and maybe the flip side of risks to a more profitable growth plan. What got you comfortable deciding on more aggressive spending near term?

I'm happy to provide some insight on that. It's actually quite straightforward the way we approach it. We've been consistent about this for the past five or six years. We evaluate the efficiency of our investments across the business, particularly the clear connection between investment and payback in terms of new revenue in sales and marketing. We focus on that efficiency. As long as we can keep improving efficiency, we'll keep investing. We're always going to act prudently. Our goal is to enhance cash flow over the long term and aim for a free cash flow margin of 20% over time, but we prioritize efficiency. The key factors we assess are our internal efficiency, growth rate, market conditions, and customer success, which guides us in seizing opportunities.

I would add to that a little bit. First and foremost, we've always had a bias towards growth. But we always look at efficiency and always managed on a rule of 40. The guidance you've seen today and the commentary earlier in the call still reflects that. We are definitely managing at a rule of 40, and we believe that's the right thing to do to capture the opportunity in front of us because it is a massive one.

Makes sense. And Brett, for you, just wanted to marry the qualitative commentary versus the quantitative messaging here. Qualitatively, we're seeing a lot of acceleration in large customers. The demand environment is incredibly healthy. You're investing in the public sector. In the past, you've talked about focusing on current RPO as a key metric, and it was growth in the past. That's beginning to invert based on your guidance, and I'm just wondering if it could be continuous to how current RPO should track for fiscal '23?

Thank you for bringing it up. I'm so happy you brought up current RPO. It's my favorite metric, which you can see clearly was a strong quarter in Q4. The guidance we've given you today of low to 50% range for current RPO in Q1 is also quite a strong guide. The combination of those two factors translates directly into the increased guidance of $35 million up to $1.79 billion, growing 38% year-over-year at the top end of the guidance.

Next, we'll go to Eric Heath at KeyBanc.

Great. Congratulations. So Todd, Brett, I did want to ask on the quarter on Okta stand-alone. I think most of your peers showed some acceleration this quarter. It looks like Okta stand-alone decelerated maybe one point. So just anything you can call out in terms of the quarter that might have been a little softer than you might have expected?

Yes. We're very excited about that 39% Okta stand-alone revenue growth. So Eric, thanks a lot for bringing that up. When you look at the size of the business, I mean, the workforce business is already 63% of the total business. It's a $1 billion business significantly year-over-year. You add in what's going on the SIEM side and we’re very pleased with that as well. We look at the business holistically. Obviously, there's a big opportunity there. We’re very poised to take on the existing landscape. You can hire account executives who know how to sell enterprise IT, they know where to go find it. There are a lot of legacy Oracle, IBM, CA, RSA solutions that over time, we're just going to slowly rip and replace. Obviously, our dollar-based net retention continues to be 124%, up from 122% last quarter. That's because our motion of landing and expanding inside these large organizations is going very well. On the workforce side, that business is going to continue to perform. That's why you see us coming into these natural adjacencies like IGA and TAM. It's not as that we're sitting here and wondering what we should build next. Much of that is driven by customer demand. You mentioned IGA and the early access this month to a limited number of customers; that’s going to launch in North America by midyear, and globally by year-end. The customer identity access management market has gone from nothing when we went public five years ago to a $30 billion TAM today, where we are the clear leaders with the only cloud-native identity management platform. That is why you're seeing that business experience almost 60% year-over-year growth. The competitive landscape is still greenfield, where we can help customers be successful. They have a shortage of developers. They need to focus on their core businesses. The more we can make it easy for them to just take identity off the shelf and integrate it with their applications and infrastructure, the better off they will be. We see that as a huge investment opportunity. So, we're very excited about the overall growth in the business. If you told me when we started that we would have this business today of 5,000 employees being on almost $400 million revenue quarter, growing 63% year-over-year and accelerating, I would have taken that in a heartbeat. What I would say, though, is that we're very excited about 315,000 total customers. We're very excited about adding a record 1,000 last quarter.

That's great. And then just one follow-up on that point, I mean, great to see the large customer adds in the NRR. Any way we should think about the change to the formula for large land versus expansions, and maybe what effect it might have on the NRR rate?

Yes. I mean what I would say is, we have continued success with large enterprise. Obviously, we gave everyone an update in April of last year when we had Investor Day regarding the over 500,000 and over $1 million ACV customers. Those numbers now are almost 600 and almost 200, respectively. That reflects growth to about 60% year-over-year compared to 50% year-over-year in the Global 2000 customers. Todd talked a little about some examples at the beginning. I mean, that’s great. But again, I think the opportunity ahead is really large. Look, when you come out with new products, things like IGA, which is critical to our organizations, it's not about the 2,000 companies today using an on-prem solution. It's about the next 25,000 and 50,000 who want that functionality and will never implement a on-prem legacy product. They're looking for a modern cloud solution. Same is true with PAM. You look at advanced product and, for example, Zoom uses our Advanced Server Access to protect its production structure for its servers worldwide. Those are the future opportunities starting when we think about our trajectory going forward. Absolutely, the landing and expansion strategies are performing well. Historically, we've talked about a 115% to 120% range. I know it's ticked up over that. When it gets bigger, it means we're cross-selling and upselling. When it goes down, it means we have too many new logos. So we're doing our best to balance that. It shows a very good approach to helping customers succeed.

Great. Let's go to Alex Henderson of Needham.

I wanted to go back to the PAM commentary. My understanding is the PAM, the only thing you can time of launch was on the governance side. Can you give us any clarity on when you expect the PAM products to launch, and how we should be thinking about that in terms of the timing to get to market?

It's an important area for us as we expand on the workforce side of the house to expand what the platform can do. If you look at what customers are building, more and more are developing software themselves, which means they have critical servers and containers they need to secure. Our leading access management platform is mapped to those resources. Our Advanced Server Access product allows a customer like Zoom to get tons of value because they must manage thousands of servers where many operations people and developers access them securely, which, by the way, is remote because they don't want to go to the same office and access the same dedicated data center. It’s in cloud data centers and remote work. As for the expectations regarding financial results, we have taken a very conservative assumption this year.

So, we don't have a date for the launch of that product at this point. The second question I had for you is on the operating spending. I really was trying to get a handle on what rate of staffing capacity you're adding specifically to the sales capacity. Obviously, the spend is up substantially, and you're much more aggressive. Are the capacity adds being set up not just for this year but for next year, coming in at close to a 50% increase in sales capacity?

Absolutely. Alex, I'll take that one. You sound like you know our business clearly very well. Whenever we're building capacity, we're building for the upcoming year. We’ve historically built in the year for the following year. So we're going to continue to do that in FY '23. When Todd discussed our sales efficiency, it’s about finding the right balance here to add as much capacity as we can while also balancing that efficiency level as we go after this market.

Is that 50% number reasonable?

Yes, I'll let you draw your own conclusions, but we're trying to grow as fast as we can.

All right. Let's go to Rob Owens at Piper.

Curious around Auth0, any high-level guidance as we think about next year? I know you're going to tell me we're not going to break it out for you. That being said, anything regarding seasonality and kind of how should we think about the growth of that and SIEM overall?

We're investing a lot in making sure SIEM is successful. The proportionate investment in Azure is significant, but we're also investing a lot in the Okta SIEM platform. You're right; we're not going to break out specific expectations regarding growth rates beyond the guidance we've already given. But if you look at the top three priorities for the strategic plan of the Company next year, winning that market ranks number one. You can imagine this has a lot of importance based on being successful with the developer motion of Auth0, but also broadly speaking, growing the SIEM business aggressively. It's essential to execute on this vision of a primary cloud, and I’ve said before we need to provide both.

Going forward, we're going to continue to bring out work for you on both markets on a regular basis like we have in the past, so, we'll definitely keep everyone informed on the progress in both markets because they are both very important to us.

All right. Next, let's move to Adam Borg at Stifel.

Maybe just on the channel business. I'd love a quick update on the overall channel strategy in the quarter, and maybe just as a quick follow-up. I know Auth0 more is a bottoms-up sale to developers, but I was just curious what kind of opportunities there are to get the channel more involved with Auth0?

Thanks, Adam. We are very excited about our channels overall, especially this quarter. Our channel consists of various participants, many of whom have longstanding relationships with large organizations, assisting them with security and digital transformation. This includes large account resellers, value-added resellers, regional partners, and global systems integrators. A significant example of this is Kyndryl, which was formed from the separation of IBM's managed infrastructure services business. They chose to partner with Okta instead of IBM, partly to utilize our Workforce solution and SIEM, and they aim to integrate Okta for their customers. Achieving this level of reach and scale is significant for us and we're thrilled with the rapid growth, supported by our team of nearly 5,000 employees. Our efforts to unify the sales organization are progressing well, and bringing in nearly 100,000 employees from the top service provider presents a tremendous scaling opportunity. Moreover, customers today are seeking independence and the ability to deploy the best technologies, which drives our business. Our partnerships with AWS, where we are the sole managed identity provider, and Google, along with large SaaS providers like Salesforce, Workday, and ServiceNow, demonstrate this. They integrate us into their solutions, allowing for faster and more effective deployments. The channel represents a significant aspect of our operations, and the market is leaning towards independence and neutrality, which aligns with many of our interests in achieving customer success. We are looking forward to what lies ahead. Specifically regarding Auth0, they operate on a developer-first model that has proven successful. They also have many free accounts and credit card customers that present upselling potential for enterprise. We are just beginning to integrate our go-to-market organization, which will enhance our understanding of these dynamics. There are numerous opportunities ahead, and we are genuinely excited about their future development.

Yes. One more thing I'll add. Auth0 didn't have a huge presence with the global SIs before. Now that they are part of Okta, we're working on getting Auth0 into the hands of the global SIs because they want to build digital transformation projects for their customers. This is a big area of boost in terms of our relationship with the global systems integrators.

Great. Well, I still see nine hands raised. We're getting short on time, so let's try to get to a couple more. We'll go to Taz at Guggenheim.

I'm on for Greg. On IGA and PAM, I know you said that they’re not really baked into the guidance, but how should we think about the potential for them once they go live? How quickly should they contribute to billings once they go live?

They provide two things. One is they allow more customer value, which means you can upsell. They provide a broader set of capabilities. Many of these larger companies adopt the new identity stack piecemeal, one by one. Okta has traditionally been very strong in doing that. As we build out the workforce side for the entire suite, encompassing PAM, IGA and our broader workforce capabilities, this is going to significantly increase value, attracting potential new customers. I can't really speculate on the pace of contribution once they go live.

All right. Let's go to Trevor Walsh at JMP.

Todd, you mentioned at the outset around some key drivers, one being Zero Trust initiatives. Can you give us a little detail of how this plays out in engagements? And maybe this is a good one for Fred to chime in too. Is it a broader RFP where there's the network component, the identity component coming together? Or have they made their choices and are bringing Okta in after the fact?

I would divide it into two camps of customers. One is those trying to determine what Zero Trust means and how they get there. For those customers, you see them making more traditional identity management decisions, looking for multifactor authentication, ease of apps, or wanting to provision some apps on the back end. This helps them say, 'Here's the road map or here's the blueprint to get to Zero Trust.' Now that you've made this identity system, they can look at our integration network with over 7,000-plus pre-integrated systems. We can help guide them down the Zero Trust journey. There’s another more advanced set of clients who know what they want for Zero Trust and are coming to leaders like Okta, Zscaler, and CrowdStrike by saying, 'These three components are what will provide my Zero Trust together; let's purchase them together.' I've been working with large accounts with people from Zscaler and CrowdStrike. We are having productive discussions with organizations.

Just to add some specific examples, north of 80% of the Global 2000 now have stated initiatives around Zero Trust security. FedEx is a very successful customer. When we met with them originally, they had this on the whiteboard: this is a Zero Trust initiative. That was the key initiative in place with Okta at the center of that. It has gone from a buzzword three years ago, where people were unsure how to execute, to now having architectural documents that allow for clear templates with ideas for customers and how other organizations of a similar size, scope, and scale tackle their Zero Trust initiatives. It may not be the most novel approach, but it is valuable for customers, especially since they are no longer the guinea pigs attempting to make this happen alone. It’s a significant change in customer behavior.

Let's go to Hamza at Morgan Stanley.

Hey, guys. Thanks for taking my question. Todd, maybe a question for you. If I look at bookings growth for you and some of your peers as well, it seems to be a lot more back-end loaded than it has been in prior years. As we return to the office or some semblance of normality, are you seeing those larger digital transformation initiatives starting to return? Is that starting to contribute more to your bookings? And how would you characterize the pipeline going into '22 relative to how you felt going into '21?

Pipeline is strong. I'm very excited about the pipeline. The quality, depth, and maturity are all looking great. I can't confirm if there is a back-end question. I don’t have that analysis in front of me, but I didn’t feel it was any different this past year compared to previous years. Regarding those big digital transformation deals, they were paused as clients shifted tactics to achieve remote workibilities. They quickly got back to them, focusing on significant customer identity projects or bigger initiatives that are not just reactions to the environment.

All right. Thank you very much for taking the question, folks. Brett, congratulations from me as well. Todd, could we speak to some of the organizational changes that have occurred, particularly at the top end of the Company? I know we had you last month, you were super excited about the integration of the sales forces and see Susan running, but it looks like Eugenio is handing off for Auth0, and it seems like there have been changes in our seat as well. Can you give us a sense of that a little bit to see how you're aligning things and how the culture between the two organizations is being maintained as you try to ensure momentum with the Auth0 franchise?

Yes. Eugenio is the CEO of the Auth0 product unit. He doesn’t oversee sales directly, but he manages almost everything else from research and development to customer success and much of the demand generation team. This is a significant role. We are seeing synergy on the revenue side, as all Okta representatives can now sell all the products, which boosts their capacity. There is significant potential for growth from this integration. Eugenio's Auth0 product unit is achieving results, and he anticipates great performance this year. Additionally, Brett has joined us as our new CFO. In searching for a replacement, I spoke with many candidates, but Brett stood out as exceptional. I am thrilled to welcome him permanently. John's onboarding as CMO has also been very successful. That change was unexpected, but he is doing an excellent job. While some changes were surprising, most are aligned with our goal of succeeding in the SIEM market and aggressively scaling the company. I am very excited about the future.

Okay. We're going to go into overtime a little bit here, but we'll try to get to a couple more. We'll go to Patrick Colville at Deutsche Bank.

Congratulations to Brett. Let me ask another question about margin, but I will ask about subscription gross margins. They were down this quarter 150 bps. Is this due to mix, discounting, or competition? Can you talk to that? And how should we model this line for fiscal '23? What's baked into your operating margin guidance? Is there continued erosion on the subscription gross margin line?

Around gross subscription margins in Q4 and for FY '23, we are investing the upside back into the business. We want to prepare for future growth. You can see CRPO laying the details for Q4 as well as my commentary for Q1 CRPO growth as well. We're actively putting money back in and investing to capture demand out there. So, there is likely a headwind on subscription gross margins, and that’s part of where we’re investing.

Let's go to Rudy Kessinger at D.A. Davidson.

If I look at your last earnings report, you showed that Auth0 grew 81% year-over-year, which is a significant acceleration from Q2. How much has cross-selling into the Okta installed base driven this versus just core strength in new customer acquisition and upsell within the Auth0 base?

It's really been both. You can see in references we've talked about today. It’s a strong showing from Auth0 alone. Even before their acquisition, some Okta customers may not have been as comfortable with a private company; but now Auth0 is part of the public Okta umbrella. You can see Auth0 customers who've expanded their investments into Okta. We have mentioned a few of those references last quarter in our earnings script as well as today in some prepared remarks.

Okay. Let's go to Josh at BTIG.

Thanks for taking my question, guys. Just a high-level one for me. There was a stat out in February that only 22% of Microsoft Azure Active Directory customers have MFA, and that kind of struck me as pretty low. I'm curious how does that compare to your customer base? How do you guys think about the broader MFA opportunity? Do you expect any tailwinds to your MFA business now that Salesforce has made it a mandate?

The opportunity is significant for MFA. We discuss these advanced customers that have figured out the Zero Trust architecture and are choosing strategically. Yet, many customers are still doing what some consider basic tasks like adding MFA and securing their environments. Many of the hacks we see are still targeting accounts that aren't properly locked down when they should be, or are easily compromised because they lack multifactor authentication. The reason for this is not due to negligence; it's the complexity of executing it. Our platform streamlines the process, allowing connections to all applications so that you can set up MFA with ease, which, notably, supports Face ID and Windows Hello integrations. Customers are using this, and thus, it's a big part of our strategy to help customers become secure.

Okay, last question. We'll bring it home with Fatima Boolani at Citi.

Thank you for squeezing me in. Brett, this one's for you. I'll keep it tight. You didn't mention process improvement. I'm assuming it's a nonissue here. But can you just update us on whether you’ve mechanically achieved all of the timelines on the contracts, and if the entire installed base has been recalibrated under the operational process improvements umbrella? How should we think about billings and cash flow seasonality for fiscal '23 as we lap some of those compares?

Yes, absolutely. So yes, the process changes have been fully implemented, and the entire customer base is included. Granted, not everybody is out of billing since then, but the full customer base is engaged. In terms of billing seasonality, we expect about 60% in the back half of the fiscal year, which is normal compared to what we’ve seen over the past few years. Free cash flow will follow the same historical seasonality that we've had in the past. So, not any major differences there.

All right. That's it for today, folks. Thanks for tuning in. Before you go, I want to let you know we'll be attending a few investor events this quarter. We'll be at the Morgan Stanley Conference, which is in person in San Francisco on March 8. There's also the Daiwa Investment Tokyo conference that we'll be attending virtually on the 8 as well, and the Wolfe Research Software Conference that will be attending on March 23. So that's it for today. If you have any follow-up questions, you can e-mail us at investor@okta.com. Thanks.