Okta, Inc. Q1 FY2024 Earnings Call

Hi, everybody. Welcome to Okta's First Quarter of Fiscal Year 2024 Earnings Webcast. I'm Dave Gennarelli, Senior Vice President of Investor Relations at Okta. With me in today's meeting, we have Todd McKinnon, our Chief Executive Officer and Co-Founder; and Brett Tighe, our Chief Financial Officer. Today's meeting will include forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including, but not limited to statements regarding our financial outlook and market positioning. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Forward-looking statements represent our management's beliefs and assumptions only as of the date made. Information on factors that could affect our financial results is included in our filings with the SEC from time to time, including the section titled Risk Factors in our previously filed Form 10-K. In addition, during today's meeting, we will discuss non-GAAP financial measures. Though we may not state it explicitly during the meeting, all references to profitability are non-GAAP. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures and a discussion of the limitations of using non-GAAP measures versus their closest GAAP equivalents 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 growth changes as we discuss our financial performance. And unless otherwise noted, each such reference represents a year-over-year comparison. And now, I'd like to turn the meeting over to Todd McKinnon. Todd?

Thanks, Dave, and thank you, everyone, for joining us this afternoon. Okta continues to build on its position as the leading independent identity partner. Our Two Clouds, One Okta strategy has really taken root with our go-to market team and our customers and partners love it too. The actions we've taken over the past few quarters to increase efficiency and improve profitability enabled us to deliver strong non-GAAP operating profit and record cash flow. We achieved these results despite increased pressure in the macroeconomic environment, which we anticipated when we introduced the FY'24 financial targets last quarter. We continue to take a conservative approach to our business outlook. We're also pleased to have turned the corner on the challenges we faced last year. Attrition in our go-to market team has significantly decreased over the past three quarters to its lowest level in two years. The number of fully ramped salespeople is close to a more normalized level as average tenure increases. And we're seeing positive trends in the number of sales reps closing Customer Identity Cloud deals. I'll now cover some of the highlights and achievements in the quarter that we believe position Okta for long-term success. Turning to our Q1 results, we added 450 new customers in the quarter, bringing our total customer base to over 18,000, representing growth of 14%. Like last quarter, new customer growth is an area that we believe has been impacted by the macro environment. We continue to see growth with large customers for both Workforce and Customer Identity and we are proud to work with some of the most important organizations in the world such as OpenAI, the US Air Force Recruiting Service, and AIA. In Q1, we added 150 customers with $100,000 plus ACV. Our total base of $100,000 plus ACV customers now stands at over 4,080 and grew 23%. We're also seeing continued strength in customers with over $1 million of ACV. We now have over 300 customers with $1 million plus ACV, which continues to be the fastest growing customer cohort with growth of over 40%. Here are just a few notable examples of customer wins and upsells in Q1, which come from a wide range of industries. A business line of a Fortune 500 semiconductor company was an exciting new business win in Q1. The company's legacy technology was complex, not adequately secure, and couldn't meet the needs of the business line. It selected Okta Workforce Identity Cloud to modernize its technology stack to meet industry compliance standards and for Okta's ability to address multiple identity use cases. The business line also selected Okta Identity Governance to manage partner access to critical collaboration applications. We continue to see great cross-selling between Workforce Identity Cloud and Customer Identity Cloud. Two great examples in Q1 were with Indeed and NerdWallet. Indeed, the world's most visited job site, started as a self-service customer and has since leveraged Okta Customer Identity Cloud to power authentication for its corporate customers. This quarter, the company expanded with Okta Workforce Identity Cloud, including Okta Identity Governance to bolster its security posture and improve the user experience for its approximately 13,000 employees. NerdWallet, a platform that provides financial guidance to consumers and small and mid-sized businesses, was another great example of cross-selling between our two clouds and a great illustration of how our customers layer on more and more Okta capabilities over time. NerdWallet has been leveraging Okta Workforce Identity Cloud since 2017 to secure access for its employees. Last year, the company added Okta Identity Governance to streamline its compliance processes. In Q1, NerdWallet further expanded with Okta as it replaced its homegrown Customer Identity Solution with our Customer Identity Cloud. Okta Identity Governance or OIG continues to show strong traction. The initial customer demand is validating the desire for a modern approach to governance, one that is cloud-based and integrates seamlessly with access management. In just the past six months, hundreds of organizations have purchased OIG, including Q1 wins with Indeed, Amplitude, and the Australian Football League. We're really excited about the future of OIG, especially since of the customers that have purchased OIG so far, their OIG spend is typically around one-third or more of their total Workforce Identity Cloud spend. It's great to see OIG off to a fantastic start. Never Stop Innovating is a core Okta value and we continue to make important advancements on that front. We made a number of significant product advancements for our Workforce Identity Cloud in Q1. Advanced phishing resistance is now generally available with Okta FastPass. FastPass gives end users a seamless user experience without passwords. It now protects users against phishing with advanced phishing resistance for the enterprise, covering every user on any device and major operating system. Okta Identity Engine began shipping with every new workforce customer in early 2022. We have made great progress in converting existing customers over to OIE and now over 40% of our workforce customers are on OIE. Building on this, we recently rolled out self-service OIE upgrades so customers can automate their upgrade. This self-service option will help accelerate the pace of upgrades, paving the way for even more customers to reap the benefits and power of OIE. More customers on OIE means greater opportunity to upsell our higher value services and also higher retention rates based on customers converting to date. We're now in beta testing with Okta Privileged Access. We're extending the same great secure access management as well as identity governance capabilities to privileged resources. Businesses will be able to easily integrate modern cloud infrastructure such as AWS, EC2, or Kubernetes into Okta for centralized policies and controls across the resources their workers need. Organizations are recognizing the value in the convergence of IGA, PAM, and Access Management, and Okta is in a unique position to address our Customers Identity needs with a unified identity solution. We continue to expect general availability of Okta Privileged Access by the end of this year. We're also innovating on Okta's Customer Identity Cloud, which processes billions of logins per month from around the world and provides a unique vantage point to both network traffic and application level security event data. All of this data enables us to identify patterns and detect anomalies as potential security attacks. We're harnessing that data for Security Center, which is now generally available for Okta Customer Identity Cloud. Security Center is a dashboard delivering real-time insights into potential attacks, allowing for security teams to respond quickly. In a heterogeneous technology world and an ever-expanding number of devices and applications, Best-of-Breed technology is the future to help foster Best-of-Breed. Okta continues to expand our technology partnerships so that our customers can deploy the most innovative solutions while enhancing security all while retaining freedom of choice. Here are just a couple of our latest technology partnership developments. We've had technology integrations and partnerships with Google for over a decade and have a deep base of shared customers. In the first phase of a new go-to market alliance announced last month, Google's Workspaces, global and public sector sellers will now co-sell Okta's Workforce Identity Cloud alongside Google Workspace. This expanded partnership will enable both Okta and Google to reach new customers through a Best-of-Breed approach to security and productivity. In partnership with Zoom last month, we announced Okta Authentication for end-to-end encrypted meetings for all paid joint customers. This new feature leverages Okta to authenticate a meeting attendee's identity to determine if a meeting guest is who they say they are. Critical to Okta's success over the years has been our indirect channel partners. Historically, Okta turned to partners primarily for reach and as Okta has grown, we've recognized the need to engage with partners more strategically. Last month, we unveiled our new partner program called Elevate. The program will recognize and reward partners for the full spectrum of value they can deliver to our customers and Okta from finding, developing and influencing to delivering, managing, and transacting. The more of these motions a partner offers, the more value they provide to Okta and our mutual customers. Streamlining operations and accelerating business technology are critical to establishing Okta as a primary cloud. To help drive these initiatives, I've asked Eugenio Pace, Co-Founder of Auth0, to take on the newly created role of President of Business Operations. Eugenio will turn his attention to the overall growth and operational excellence of Okta, including further accelerating our go-to market effectiveness and increasing automation across the company. Eugenio has a uniquely deep knowledge of the identity market and is an incredible partner. I've always been proud of our bench talent. So with Eugenio's new focus, Shiven Ramji, who has been a senior leader at Auth0 and Okta for nearly four years, will lead Customer Identity Cloud. To wrap things up, we delivered significantly improved profitability and record cash flow in the face of increasing macro-related pressure. At the same time, we continue to deliver value to our customers and underscore our leadership position through product innovation. Identity is a key building block for zero trust security, digital transformation, and cloud adoption projects. Trends that will continue in any macroeconomic environment as organizations look for ways to become more efficient while strengthening their security posture. Over the next decade, identity will become increasingly important, and we firmly believe that the winner will be independent, neutral, and will deliver a unified platform covering both Customer Identity and Workforce Identity across access management, governance, and privileged access. Okta is the best positioned company to deliver this to the market and expand on our leadership position, all while delivering profitable growth over the long-term. Now here's Brett to walk you through more of the Q1 financial results and our outlook.

Thanks, Todd, and thank you, everyone, for joining us today. We continue to make meaningful progress on the actions we've taken to drive efficiency in our cost structure. As Todd noted, we're achieving these results while investing in our platform and business to fuel our future growth. As we navigate the increasing pressures of the macro environment, we remain confident that we have set the path for profitable growth for years to come. I'll review our first quarter results and our outlook for Q2 and FY'24. But first, I'll start with some commentary on the macro environment. We're seeing increased macro headwinds on our business, most notably with new business across SMB and enterprise. These impacts were felt in varying degrees on a global basis. Similar to Q4, customers are requesting shorter contract term lengths and our overall business was weighted more towards upsells versus new business. We're also seeing smaller average deal sizes as a result. And finally, we continue to experience minor FX headwinds on our top line metrics which are incorporated into our reported numbers and outlook. Turning to our Q1 results. Total revenue growth for the first quarter was 25%, driven by a 26% increase in subscription revenue. Subscription revenue represented 97% of our total revenue. International revenue grew 23% and represented 21% of our total revenue. RPO or subscription backlog grew 9%. Impacting total RPO growth is the general shortening of term lengths of recently signed contracts. Our overall average term length is just over two and a half years. Current RPO, which represents subscription backlog, we expect to recognize as revenue over the next 12 months, grew 20% to $1.70 billion. Turning to retention, consistent with prior quarters, gross retention rates remain very healthy in the mid-90% range. Our dollar-based net retention rate for the trailing 12-month period remained strong at 117%. The sequential downtick in the net retention rate stemmed from a decrease in the upsell rate with both enterprise and SMB customers. Given the current macro environment, customers are not expanding seats at the rate they have in recent years, and we believe this trend will persist in this environment. On a positive note, we are seeing strong growth in cross-selling of products. 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'll be discussing non-GAAP results going forward. Looking at operating expenses. Total operating expenses for the quarter were lower than expected. The better than expected profitability is primarily due to the combination of revenue over performance and better than expected outcomes from spend efficiency measures. Total headcount at the end of Q1 was approximately 5,700. The sequential decrease primarily reflects the restructuring action taken at the beginning of Q1. Q1 free cash flow was a record $124 million, yielding a free cash flow margin of 24%. This includes the cash outlay of approximately $14 million related to the organizational restructuring. During the first quarter, we opportunistically repurchased $366 million of our 2025 convertible debt notes, resulting in a $31 million GAAP-only gain. We will continue to regularly evaluate our capital structure and capital allocation priorities. Our balance sheet remains strong anchored by $2.37 billion in cash, cash equivalents, and short-term investments. Before getting into our outlook, I wanted to provide an update on equity dilution. At our Investor Day last November, I indicated that our historic norms for net dilution were in the 2% to 3% range and that we expected that range to be elevated in the near term, primarily related to the change in our stock price. I'm pleased to report that due to changes that we implemented, including changes in our granting practices and slowed hiring, net dilution for FY'23 finished better than expected at less than 3.5%. And we now believe that dilution for FY'24 will be back within our historical range. Managing dilution will continue to be a focus area and we remain committed to further reduction over the long term. Now let's turn to our business outlook for Q2 and FY'24. Our projections continue to factor in the increased pressure from the macroeconomic environment. As a reminder, we've taken several actions to reduce our cost structure and increase our efficiency as an organization, which will benefit margins this year and beyond. With that as a backdrop for the second quarter of FY'24, we expect total revenue of $533 million to $535 million, representing growth of 18%. Current RPO of $1.71 billion to $1.72 billion representing growth of 14% to 15%. Non-GAAP operating income of $36 million to $38 million and non-GAAP diluted net income per share of $0.21 to $0.22. Assuming diluted weighted average shares outstanding of approximately 180 million. For FY'24, we are raising our revenue outlook by $15 million at the high end of the range. We now expect revenue of $2.175 billion to $2.185 billion, representing growth of 17% to 18%. We are raising our outlook for non-GAAP operating income by $25 million to $161 million to $170 million, which yields a non-GAAP operating margin of approximately 7% to 8%. Non-GAAP net income per share is raised to $0.88 to $0.93 assuming diluted weighted average shares outstanding of approximately 180 million. And we are raising our free cash flow margin outlook for FY'24 to approximately 12% from approximately 10% previously. Lastly, I want to provide a couple of comments to help with modeling Okta. Similar to years past, Q2 is expected to be the seasonal low for cash flow, and we are applying a static 26% non-GAAP effective tax rate for the fiscal year. To wrap things up, we've taken action to drive efficiencies in our cost structure while investing to fuel our future growth. And we're confident that we are positioning the company for many years of profitable growth. With that, I'll turn it back over to Dave for Q&A.

Thanks, Brett. I see that there are quite a few hands raised already, and I'll take them in the order. In the interest of time, please limit yourself to one question, and then you're welcome to queue back up with additional questions.

Thanks, Dave, and good afternoon, everybody. Was hoping you could help me out a little bit with somewhat the disconnect, I guess, between cRPO and how it's trending in annual revenue. I mean, annual revenue is inching up a point here, 17%, 18% but cRPO going the other way. So realizing that a lot of that is subscription revenue, it's already in the bank. But trends definitely are pointing the other way. So is that 14%, 15% guide, is that somewhat of a low watermark as we kind of contemplate the back half of the year? Thanks.

Hey, Rob. It's great to see you. I'll start with an overview, and then Brett can likely provide more details on the guidance. The quarter and the year have started off well. I believe our customer base is very strong. We're experiencing healthy gross renewals within the same range as previous quarters, which indicates robust customer strength. Additionally, there is significant momentum in discussions around the importance of identity. However, the macroeconomic environment presents a different scenario. We have noted increasing macro headwinds. Interestingly, this is reflected in our numbers with average deal sizes being slightly lower and new customer counts not meeting our expectations. On a positive note, metrics related to execution, such as sales force attrition and the number of sales representatives engaging in CIC deals, have shown improvement. Moreover, large deals exceeding $1 million and customers surpassing the $1 million ACV threshold have increased by over 40%. Overall, there are many reasons to feel optimistic about our solid and improving execution. However, the macro backdrop remains uncertain. That's a high-level view of our business and some insights into our outlook.

I can add a little bit there. I mean, I think from a current RPO guide, irrespective, obviously, we've been thoughtful about the macro. I mean, we talked about it over the last few minutes and how it's really been affecting us a little bit more every quarter. So we're being prudent about that side. And I think the other thing I want to make sure everybody remembers is current RPO does have some residual effect from those FY'23 execution challenges. It's not the major part of it, but that does also weigh on the growth as we go through this year.

Great. Thanks for the question. Maybe just to push a little bit further on macro. I think it sounds like the biggest impact is really just around deal sizes. But wonder if you could talk about what you're seeing through the first month of May or the first month of 2Q that's really changed. If you think about sales cycles, pipeline, etc., how does that kind of factor into the guidance you've laid out? Thanks.

Yes, our pipeline is strong. It's interesting because when we analyze the overall business, we see that the average deal size is decreasing. Conversations with customers focus on the significance of identity and the interest in our comprehensive approach, which offers Customer Identity, Workforce Identity, and Privileged Access Governance from a single source. The feedback has been very positive. On the qualitative side, we experienced a higher than usual number of deals that extended beyond the end of the quarter. While this is not ideal, the good news is that many of those have closed in the first few weeks of Q2. This indicates increased confidence and suggests that the issues we're facing are not about the perceived value or long-term strategy of identity solutions. Rather, they reflect broader trends in corporate behavior. At Okta, we are implementing this scrutiny internally as well, ensuring every purchase is thoroughly evaluated for efficiency and return on investment. Customers are now perhaps facing an additional level of budgetary approval that we hadn't seen previously, which does slow down some processes, but projects are still progressing. When I discuss these matters with CIOs from major companies, they express that identity solutions will enhance security, promote a more efficient workforce, and support digital transformation. There is a commitment to investing in these areas. Overall, we are executing well despite market uncertainties, and identity will remain a crucial focus moving forward, with us ready to meet market needs.

Can you guys hear me?

Hey, Josh.

Hey, guys. How are you?

Good.

Just a quick one for me, and I don't sorry to come back to the macro here, but I just wanted to clarify. Brett, in the same sentence, you kind of said increased macro headwinds but then you also reverted to similar to Q4. So I'm just trying to understand, did the macro actually get worse from last quarter or did it stay the same?

Yes, it definitely got worse. From what I recall, there are similar trends to Q4 regarding the new business versus upsell mix, which has been more heavily weighted toward upsells. This has remained consistent. The contract duration is still somewhat lower than our historical norms. New trends emerging include less seat expansions, referring to both workforce expansions and the monthly active users related to customer identity. We are observing this trend across both products. Additionally, from a geographical or segment perspective, there's no specific area being more impacted; it seems to be more widespread than before. Previously, we noted that small and medium-sized businesses were more affected, but now it's evident in both enterprise and small to medium-sized businesses. Overall, the situation has deteriorated from Q4 to Q1.

And just to finish the question was, if I look at the guidance for the full year that you guys are raising for revenue, does that assume that what you see today gets worse, kind of stays the same? And just maybe how should we think about the cRPO numbers for next quarter, maybe the year-over-year comps with Auth0 in the mix?

Yes, absolutely. It does, in fact, assume that the macro does get worse, both on the current RPO side and on the revenue side. So obviously, when we think about the guidance, both of them have got that incorporated. So in terms of the compares, I mean, what you heard me say a second ago, there is some residual impact from the execution challenges we had in FY'23 in the current RPO guidance. But obviously, we're being thoughtful with how we're thinking about the balance of the year, given what we've seen in the macro and how it's developed over the last few quarters.

Yes. One thing, quick thing there is Auth0 was in the comps last year, so that should be a like-for-like there.

Super helpful. Thanks, guys.

Yeah, sure. Thanks, Josh.

Thanks, Josh.

Hey, guys. This is Billy Fitzsimmons on for Sterling Auty. I'll steer away from macro for a sec. How do you both think about Okta's opportunity in the generative AI space and the identity opportunity with the emergence of AI applications?

I have some exciting news to share. I believe AI is incredibly important and is receiving a lot of attention yet may still be underestimated. It might seem like AI has emerged all at once, but it's actually the result of numerous significant trends, including advancements in algorithms, the evolution of platforms like TensorFlow, and the power of computing. A crucial element is the data; for instance, ChatGPT stands out because it benefits from advanced computing, algorithms, and extensive training on over two decades of Internet data. In our own business, we've incorporated AI into our products for several years, such as Threat Insights for the Workforce and Security Center for Customer Identity, using AI to analyze billions of authentications and protect customers from various threats on our platform. Our products are effective and will improve over time with better algorithms and more data, which gives us a significant advantage. We're also exploring innovative uses of AI, such as simplifying the configuration of Okta policies across many applications for our customers. This process can be complex, but we're prototyping AI solutions to auto-generate configurations and policy setups based on insights from over 18,000 customers, helping to minimize errors and accelerate implementation. Furthermore, this represents a major shift in technology that will lead to a multitude of new applications and industries. As these developments unfold, users and machines will need to log in to access various services, presenting an identity challenge that we can address. We're essentially providing the essential tools for these new ventures. A notable example is OpenAI, which uses our Customer Identity Cloud for ChatGPT. There will be thousands of applications needing identity solutions, and we are well-positioned to supply them. This is another promising trend for our business.

Thank you for taking my questions. I guess coming back to the guide, the cRPO guidance certainly implies second-half revenue guide, Brett implies growth exiting the year in the mid-teens, if not maybe even the low teens. And I guess, what can you guys, on the one hand, you talked about improvement in metrics with the sales force productivity and selling CIC, etc. I guess, what more do you have to do to maybe put a stop to the deceleration in growth even against a more difficult macro and maybe even potentially reaccelerate growth?

Sorry, my computer just froze. What was the question?

I can take it. I'm happy to take it. First of all, we're always improving and trying to get better. I've mentioned that we've made significant progress on some execution issues from last year. We've discussed healthy sales attrition, ramping tenure, and positive productivity from our sales representatives in terms of selling our CIC. We're actively working on various improvements throughout the company, such as enhancing our operational efficiency, effectiveness, product quality, and speed of product development, as well as strengthening our enablement and go-to-market operations. We will continue to improve. In terms of modeling and future expectations, we will feel comfortable once we see a quarter where trends like the mix of new business, renewals, and upsells turn around. That would indicate to us that the macroeconomic challenges are behind us and that the business can exceed the guidance we've provided.

Yes. I would just also add to that, that I would say that we remain committed to this profitable growth concept, right? I mean, we've been talking about this for a while now, and you can see it in this quarter with the margins that we had, 24% margins. On the free cash flow side, 21-point improvement. Non-GAAP operating margin was strong as well. There was a huge improvement year-over-year. So it's not just, obviously, we want to grow as fast as we can, but we want to grow responsibly and profitably as we move forward.

Good afternoon. Can you maybe help us understand where we are with the sales transition, productivity levels? And maybe what's left to be done at this point? You referenced the sales conditions right here. Thank you.

Jonathan, to provide an update, we are three quarters into a significant shift in how we position the Workforce Identity Cloud and the Customer Identity Cloud. We initiated this change in the second quarter of last year and announced it publicly in November, which aligns with the fourth quarter. The end of the second quarter marks the third quarter since our public launch and the fourth since we began internal work on it. This represents a major milestone that we have surpassed. To assess the effectiveness of this change, we consider both qualitative and quantitative data. Conversations with customers and industry analysts indicate a positive reception, which is encouraging. On the metrics side, we monitor how many sales representatives are engaging in Customer Identity Cloud deals, as this reflects their understanding and readiness to sell this new product suite. The trend has been promising, placing us in a healthy position. However, we are consistently refining our global go-to-market strategy, enhancing our top-level campaigns to drive demand generation, improving operational processes for converting leads into opportunities, and optimizing the overall sales funnel. The significant adjustments we made last year regarding the positioning of our product offerings and other changes are now in place. So, in summary, while we have successfully tackled major challenges, we are also committed to ensuring that our go-to-market strategy is running as effectively as possible. It's worth noting that our team has maintained strong retention, low attrition, increased deal closings, and has become increasingly productive, which is a positive indication of progress.

Yes. I would add one comment to that, Jonathan, which is the CIC trend that Todd talked about in terms of participation in the field is getting better. But the other thing that we saw in the quarter, which was a real strength was cross-selling across all products like whether it was more WIC products to a WIC customer or a WIC customer buying CIC. It's actually one of the fastest-growing areas we had in the company and was definitely accretive to growth in the quarter. So we're very excited about that trend because that really shows you're getting a go-to-market organization that has a breadth of understanding of how to pitch the value and how to deliver value to our customer base.

Great. Thanks. This is Ray McDonough on for John DiFucci. Maybe for you, Todd. How important is bringing IGA and PAM together to help maybe accelerate or ramp adoption of IGA? And I know it's early with the product, but do you see any delay or hesitancy in customers purchasing attention around IGA just waiting for the full release of PAM to put those two solutions together?

Yes, that's a great question. We don't have any concerns. Our Okta Identity Governance product has exceeded all of our goals, gaining hundreds of customers. It has delivered more value than we initially anticipated, particularly in serving some of the largest companies. We expected it to primarily attract new users without any existing IGA solution, but it’s also being used alongside other market solutions, which was an unexpected but positive development. Additionally, we have seen instances where it has replaced existing solutions, which I didn't anticipate, thinking users might be reluctant to replace their current systems, especially on-premise ones, with our new product. These are all encouraging trends. I believe that customers are not holding back on integrating IGA with Privileged Access Management. In fact, the integration of Privileged with IGA is likely to boost Privileged adoption, as it offers capabilities that were previously unavailable. Traditionally, Privileged Access management focused on admin accounts in isolation, but we’re now providing consistent access certification and visibility across all resources, including servers and Kubernetes, along with governance capabilities. Therefore, while there is potential for an upside, we are not seeing customers hesitate to adopt IGA due to the absence of the PAM integration at this point.

I wonder if you could maybe opine on kind of a story that's going on with investors. We're seeing the quantitative metrics here, the NRR is in decline, the average deal size that you talked about is ticking down, but you've got more products to sell in each deal and at least to this qualitative story of perhaps we're in more of a commoditization cycle for core identity. Okta has never been the cheapest. I think you've been proud of that. Stiff competition, there's kind of this platform consolidation narrative across security broadly. So I just wonder if you could maybe talk about that being a premium product with the environment arguably changing. I wonder if you re-evaluate that premium product strategy. And if you could maybe comment on the pricing environment broadly and how to compete now versus years ago, that would be helpful. Thanks.

Yes, we recognize that perspective. However, the data does not support it. Our win rates are still strong. While I noted a slight decrease in the average deal size, our unit pricing has remained steady. When we examine the data comprehensively and rigorously—a critical aspect of our culture—we do not see that narrative reflected. Given this, we believe our best strategy is to continue developing top-notch products for various identity use cases while packaging and selling them effectively. We strive to maintain our leadership position in the market. We are committed to winning and conduct thorough analyses with an open mind to ensure we are implementing the most effective strategy. Based on the data and our observations, both quantitatively and qualitatively through customer success and momentum in our Customer Identity Cloud, we are seeing significant interest not only in our core access management product but also in our IGA product, which has seen a strong launch, and our upcoming innovations like FastPass. We believe we have a winning strategy and will continue to execute it. It's great. Thanks for asking. Yes, I am still looking for a go-to-market president. This search is very important, and we have the opportunity to explore widely to find an exceptional candidate. There are only a few individuals with experience in scaling a company from $2 billion in annual recurring revenue to over $10 billion, which is our target for the upcoming years. Fortunately, our current team is doing an outstanding job, including our Interim Chief Revenue Officer, John Addison, and marketing and customer success executive, Eric Kelleher, as well as Eugenio, who is playing a crucial role. It's essential for us to enhance Okta's operational excellence in all areas, especially in strategy and growth operations related to go-to-market efforts. This includes our automation initiatives and IT projects that need to come together for success. Although this role is closely tied to the president position, we are committed to finding a great person for that role, and I believe we are making good progress.

Hey, guys. This is Billy Fitzsimmons on for Sterling Auty. I'll steer away from macro for a sec. How do you both think about Okta's opportunity in the generative AI space and the identity opportunity with the emergence of AI applications?

I have some important news to share. I believe AI is a significant development. It is attracting a lot of attention, and in my view, it is still somewhat underappreciated. While it may seem like AI has emerged all at once, it has actually resulted from a series of essential trends, including algorithmic advancements and the evolution from TensorFlow to large language models, along with increased computing power and, crucially, access to data. A prime example of a breakthrough application is ChatGPT, which owes its effectiveness to the data it was trained on, drawing from over 20 years of Internet content. So, data is essential. In our business, AI has been integrated into our products for several years. For instance, our Threat Insights service on the Workforce side and the Security Center for Customer Identity utilize AI to analyze billions of authentications, helping to protect our customers from various threats encountered on the platform. These products are robust and will improve further as we enhance our algorithms and data collection, leveraging our significant data advantage to identify patterns. We are committed to developing additional products that capitalize on data, algorithms, and computation. One concept we are exploring is how AI could simplify configuring Okta by automating the policy setup across numerous applications on the Workforce side or several on the Customer Identity side. Setting this up can be complex, but we are prototyping AI-driven solutions to auto-generate configurations based on what over 18,000 other customers have done, thereby minimizing errors and expediting time to value. This is a non-obvious application of our products. Looking at the bigger picture, we are witnessing a significant technological shift, with countless new applications being developed using AI. This transformation is likely to spawn new industries and will necessitate identity solutions for accessing these new experiences, whether for machines or users. Our role is to provide those identity solutions, similar to supplying picks and shovels to gold miners. Notably, OpenAI is a customer, and our Customer Identity Cloud powers the login for ChatGPT. This stands as a remarkable example of a successful application. There will be thousands of similar applications, all requiring identity solutions, and we are prepared to meet that demand. This is another encouraging trend for our business.

Yes, federal. Go ahead, Todd.

Yes, it's a crucial area for us. As you mentioned, there's the DoD military instance, and we recently achieved FedRAMP High, which is a significant advantage for our business. This is not limited to the federal level; we’re also seeing opportunities at the state and local levels. Over the past few quarters and continuing into the next, we've had large opportunities with states involved in major transformation projects. We have set ambitious goals for the federal sector this year, having made substantial investments, and we're excited about the potential to meet and even exceed our targets.

Yes, I would just add to that in the sense that if you remember last time we spoke for FY'23, federal specifically was the fastest-growing segment we had across the company, and that's a direct result of the focus we put on in FY'23. And I think that's created a lot of momentum for us as we're going to move through this year. I mean, you saw the US Air Force Recruiting Service sign on for us as a customer. So we definitely are excited about the opportunity in the long run.

Hey, I'm on for Andy Nowinski. Thanks for taking my question. Just a quick one. You mentioned the PAM is in beta. Any early customer feedback from that?

Yes, it's still early. It was released into beta about six weeks ago. However, customers are getting involved, and many of them were already aware of the roadmap. Consequently, they've focused their evaluation on the strengths of the product, particularly in dynamic environments that utilize many containers and cloud instances. They want to manage these environments with the same access management features that the core Okta platform offers, such as passwordless access, anti-phishing measures, and other capabilities. These customers are a great fit for this product, and it's off to a strong start. We anticipate that the next wave of customers will be more diverse and may not have been selectively chosen, which should provide valuable insights.

Got it. And then just real quick, any timing on when you might see the next wave of customers?

I would focus on the fact that we're on track for the end of the year GA.

Hey, guys. Thanks for the question. Todd, you've mentioned CIAM being a key focus area this year. Just any quantitative or qualitative update on the performance of CIAM versus Workforce. And then maybe just a quick update on the sales force's comfortability selling CIAM. Thanks again.

Yes, it is something we closely monitor. I have mentioned before that through my discussions with customers, both in my role as an executive sponsor for major accounts and while working on deals with new clients, I observe a relatively small number of significant cases compared to our 18,000-plus customer base and the number of deals we complete each quarter. I like to compare the quantitative aggregate data with my qualitative observations. Overall, there is consistent interest across both Customer Identity and Workforce customers, including those undergoing strategic transformations who want assurance that we will support them during large rollouts and substantial investments in Okta. It's crucial to note the number of sales representatives working on these Customer Identity and Access Management deals, as increased experience will lead to a well-balanced business moving forward and a sales organization capable of promoting both products at scale. Regarding the qualitative and quantitative aspects, the macro impacts we discuss, including smaller than average deal sizes and a trend toward upsells instead of new business, are consistent across both use cases. We initially thought one might be affected more than the other, but we don’t see that. This consistency also relates to market dynamics and competitive factors, as the two segments face different competitive sets. Interestingly, the trends we monitor are impacting both areas, which reinforces our confidence that these issues are macro-related.

Yes, I just would add to that in the sense that if you heard my comment a second ago around our cross-selling across the business, whether it's intra-cloud or inter-cloud, was really good. One of the bright spots in that was the cross-selling of CIC into other types of customers. So it's another good positive sign inside what we're seeing in the execution of the organization.

Thank you for the question. I apologize for shifting the focus back to macro factors, but I wanted to highlight that these trends we track are affecting both the CIAM, which gives us confidence that they are macro-related. I also want to add that our cross-selling efforts across the business, whether intra-cloud or inter-cloud, have been really strong. A notable highlight has been the successful cross-selling of CIC to different types of customers, which is a positive indicator of our organization's execution.

No worries. No worries at all.

I'm hoping to get a better picture or a more intuitive understanding about kind of where the macro headwinds are originating. So wanted to ask if you could elaborate about just, is this something that could be coupled perhaps the layoffs and hire increases that are ongoing ubiquitously across a whole range of markets? Or is this something perhaps more related to just general cost controls within organizations or is it something completely different?

It's a combination of both aspects you mentioned. When we consider the Workforce Identity Cloud, I've mentioned seat expansions. These expansions relate to our customers' employees, and they aren't hiring as many as they anticipated, which means they won't be purchasing more. They may actually have fewer than what they initially agreed to in their contracts with us. This trend is also observable in the Customer Identity Cloud, where commitments and expectations regarding their websites and customer-facing applications are lower than expected. Additionally, we are noticing that contract durations are becoming shorter than usual. Companies seem to be more cautious due to the prevailing macroeconomic uncertainties. Quantitatively, we see these trends, but qualitatively, we're hearing from the field that budgets are being tightened. CFOs and procurement are taking longer to finalize deals as they carefully consider how to approach contracts. So, we're observing a range of these factors that you mentioned, Fred, and I believe you've captured it accurately. No problem.

Hey, thanks for taking my question. So on the positive side, I know Brett mentioned that you guys have seen strong growth in cross-sell across products. So I'm assuming it's both Customer Identity as well as IGA beginning to move the needle in terms of ACV. But I mean, since you guys mentioned about the future of Identity Governance, you guys are seeing almost one-thirds or more of the total kind of Workforce Identity Cloud spend going to OIG. So just wondering, and I think you touched upon it in terms of essentially, the majority of the business still being greenfield, but the replacements are also in terms of your ability to win and RFPs exceeding your expectations. So can you provide some more color there? Has there been more replacements compared to last quarter in terms of the mix, how that's trending? Thanks.

Yes, I think these are really good questions. Let me break down the strong statistics regarding our cross-sell and upsell numbers. This includes scenarios where you have a Workforce product and then add multi-factor authentication, or have single sign-on and incorporate advanced multi-factor or governance features. There are upsell products within Workforce, as well as cross-sells both ways: if you have Workforce and then purchase Customer, or vice versa. In general, the data is very encouraging. Identity Governance Administration (IGA) is off to a strong start, although it is still in the hundreds of customers. While it’s driving optimism, it isn’t yet making a significant impact. We believe this will change over time, as it has made a quick initial entry into the market. One clarification I should make is that we initially thought the adoption would be mostly for new customers. It has a modern design and integrates seamlessly with access management, addressing all essential use cases and the integrations needed by cloud-centric and modern customers. What’s surprising is the trend of IGA being implemented alongside legacy systems. Even those who chose a legacy vendor for various reasons—such as inadequate expansion, lack of value, or insufficient breadth—are opting to use Okta Identity Governance alongside their existing setups. We have seen some replacements, but full replacements of IGA solutions are likely to remain uncommon. Once customers have these systems in place, they tend to work well and are not frequently modified. However, we also see a significant opportunity ahead. The current IGA market is relatively small, but with a strong product like Okta Identity Governance, we believe we can significantly expand it. That’s why these early trends are so encouraging.

Hi, thank you. This is Param Singh on for Ittai Kidron and thank you so much for squeezing me in. Firstly, I wanted to get a sense between the Customer Identity Cloud and the Workforce Cloud, how much of a cross-sell opportunity still exists. I mean, just trying to get a sense of out of the 18,000 customers, how many use both? And then I had a quick follow-up.

The opportunity is huge. I think just the Customer Identity and Workforce Identity, if our existing 18,000 customers had both fully all the products in both clouds, it would power success for many, many quarters.

I would actually say years.

Is there any way to quantify that? You have like 15%, 20%, 50%?

It's interesting that we've done some research on this. The challenging aspect is attempting to uniformly quantify the Customer Identity for our 18,000 customers because it's different from Workforce. In Workforce, you can estimate the number of employees by considering partners and contractors and then analyze the spending. However, with customers, you have to make assumptions about potential future developments, like the next big thing in technology or the level of digital transformation that various industries will undergo. This makes it more difficult to calculate, but we have enough information to recognize that if we execute well, there is a significant opportunity ahead. We think it's a good plan. We're always looking for ways to enhance our operations and efficiencies.

Thanks, Brett. We appreciate everybody attending today. Before you go, I wanted to let you know that we'll be attending the Mizuho Cyber Summit virtual event on June 12th. We'll also be participating in several bus tours this June, and we hope to see you at one of those events. So that's it for today's meeting. If you have any follow-up questions, you can e-mail us at investor@okta.com.

Thanks, everyone.

Thank you.