Okta, Inc. Q2 FY2024 Earnings Call

Hi, everybody. Welcome to Okta's Second Quarter 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-Q. In addition, during today's meeting, we will discuss non-GAAP financial measures. Though we may not state it explicitly during the meeting, all references to profitability are non-GAAP. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures and a discussion of the limitations of using non-GAAP measures versus their closest GAAP equivalents 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. 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 focus on improving execution and efficiency has delivered solid top-line results, along with significant improvements to operating profit and cash flow. Brett will walk you through more of the financial details and discuss why we believe the macroeconomic environment, while still challenging, has stabilized relative to the last few quarters. I'll now cover some of the highlights and achievements in the quarter that we believe position Okta for long-term success. I'll start with a few notable examples of customer wins and upsells in Q2, which come from a wide range of industries. An exciting new win this quarter was with one of the largest shipping and transportation lines in Europe. As the company sought to move more of its workloads to the cloud, it lacked a strong identity solution and struggled with manual and time-consuming processes. Okta Workforce Identity Cloud, including Okta Identity Governance or OIG, will enable its thousands of employees and partners to seamlessly access the company apps and systems while bolstering its security posture and improving compliance. A Global 100 consumer packaged goods company was an exciting new Okta Customer Identity Cloud win. The company sought a flexible developer-friendly solution that would help improve the experience of their digital customers. The company will be deploying Okta across multiple customer-facing web, mobile, and IoT applications, as well as across different brands. This is a great beginning with a customer that will have massive expansion opportunities over time. Ryder Truck Rentals was an exciting upsell. Ryder has been leveraging Okta Workforce Identity Cloud, including Okta Customer Identity Solution since 2019 to secure access for its employees and business partners. This quarter, Ryder selected Okta Identity Governance to replace its legacy provider for Identity Governance, access request flows, and access certifications. OIG was deployed in just weeks and with the power of Workflows, Ryder will significantly improve the onboarding experience for new employees while reducing costs. And here is an example of landing a new customer with OIG as the lead product. A leading global provider of Customer Experience Solutions selected OIG for its extensibility and value. OIG will enable the company to streamline lifecycle management, ensure employees have the right level of access to their resources, and leverage the power of Okta's Workflows platform to customize complex identity governance requirements. In all, we added 350 new customers in the quarter, bringing our total customer base to over 18,400, representing growth of 12%. New customer growth is an area that we believe has been impacted by the macro environment, which has resulted in a sales environment that is more conducive to expanding existing customer relationships. The net customer adds also reflect increasing strength with larger organizations and public sector agencies. We continue to see strong 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 ADT, Mars, and General Services Administration. In Q2, we added 125 customers with $100,000-plus annual contract value or ACV. Our total base of $100,000-plus ACV customers now stands at over 4,200 and grew 19%. Similar to last quarter, our fastest growing cohort was customers with $1 million-plus ACV. In fact, we had a record number of $5 million-plus total contract value deals. When you look at the total contract value of the top 25 deals in the quarter, the aggregate value was over $100 million. Large organizations have incredibly complex environments that require greater flexibility. Yesterday, we announced Okta for Global 2000, which is the industry's first identity architecture that gives companies the flexibility to choose which business units, processes, and technologies to run centrally and which to decentralize. Flexibility was built into Okta's core architecture from the beginning. Okta for Global 2000 makes it even more flexible with enhanced security controls and ease of use. It's a very powerful competitive differentiator against monolithic platforms that force companies to work only with their technology stack. This solution has already been a critical component of large new and upsell transactions. A great example of this is a long-time Okta customer, NTT Data. Their hub and spoke deployment includes one central engine as the hub that powers the various Okta organizations in NTT Data's Identity Ecosystem. Okta for Global 2000 provides NTT Data with the ability it needs to manage a distributed set of users with separate domains and IT environments. Product innovation has long been core to Okta's success, and this is a banner year for new products. We continue to be enthusiastic about the early customer reception and momentum of Okta Identity Governance. We have been pleasantly surprised at both the size of the organizations purchasing OIG as well as the range of scenarios that OIG has brought on, from replacing home-grown solutions and competitor displacements to being deployed alongside an existing identity governance vendor. It's particularly encouraging to see that nearly half of the OIG business booked in Q2 came from customers that hadn't previously purchased Okta Lifecycle Management or Workflows, which were the building blocks of OIG, and we continue to see a significant spend uplift with customers buying OIG as it's typically a third or more of their total Workforce Identity Cloud spend. Another notable OIG customer win was with Grubhub, a long-time Workforce Identity customer. They added both Okta Identity Governance and Advanced Server Access to their product suite to reduce manual upkeep and bolster security of servers and on-premise applications. We also continue to look forward to the launch of Okta Privileged Access or OPA later this year. Since our update on the Q1 earnings call, OPA has moved from beta into early access. Okta Device Access is another product in early access that we're excited about. This extends Okta's seamless authentication experience to protect the first vulnerable user touchpoint, the device login. According to the 2022 Verizon Data Breach Investigation Report, among security incidents associated with misplaced or stolen devices, 60% are desktop or laptop computers. These devices remain the last frontier where access to corporate resources is protected by just a password. This means that sensitive information such as locally stored documents and logged-in applications are at risk. Okta Device Access enables Identity-powered MFA immediately when the device is powered up and when attempts are made to unlock the device. This has been one of the most highly requested capabilities by our customers in the last year. This is also timely. Just last month, the White House held an MFA modernization event. Organizations desire this technology as an added layer of security, which has the extra benefit of possibly helping to reduce their insurance risk premiums. I mentioned NTT earlier as part of Okta for Global 2000, and I'm excited that they're also an early adopter of Okta Device Access as they continue to build upon their zero-trust security strategy. We'll talk more about our products and our roadmap at Oktane, which we're hosting in San Francisco the first week of October. At the event, we'll go into more detail about what we're working on and the biggest area of technology interest in decades, AI. AI is a paradigm shift in technology that has transformative opportunities for identity from stronger security and faster application development to better user experiences and more productive employees. Okta has been utilizing AI for years with machine-learning models for spotting attack patterns and defending customers against threats, and we'll have more exciting AI news to share at Oktane. Just like how every company has to be a technology company, I believe every company must have an AI strategy. More companies will be founded on AI, more applications will be developed with AI, and more identities will need to be protected with a modern identity solution like Okta. A great example of this is how Okta's Customer Identity Cloud is being utilized for the massive number of daily log-ins and authentication by OpenAI, which expanded its partnership with Okta again in Q2. Finally, I want to share some bittersweet news. My dear friend and Co-Founder, Frederic Kerrest, will continue to serve as Vice Chairman of Okta's Board of Directors but will not be returning to Okta in an operational capacity. His contributions to Okta cannot be overstated. Of course, we'll remain highly connected, and I'll continue to work closely with Freddy as he provides guidance and helps formulate our strategy from his Board seat and remains committed to helping Okta achieve our long-term goals. We're all very happy for him and forever grateful for what he's done for Okta. I look forward to my continued partnership with Freddie in the years ahead. To wrap things up, we're pleased with our overall performance in Q2 and the advancements we've made in execution and efficiency. It's always a good reminder that identity is a key building block for zero-trust security, digital transformation, cloud adoption projects, and now AI. These trends will continue in any macroeconomic environment as organizations look for ways to become more efficient while strengthening their security posture. We're still very early in what we believe is a massive addressable market, and we're positioned to expand on our success because of Okta's independence, neutrality, and ability to deliver a unified platform covering customer identity, access management, governance, and privileged access, all while committing to delivering profitable growth over the long term. Now, here is Brett to walk you through more of the Q2 financial results and our outlook.

Thanks, Todd, and thank you, everyone, for joining us today. We're pleased with how quickly the actions we've taken to drive efficiency in our cost structure have taken root. As Todd noted, we're achieving these results while investing in our platform and business to fuel our future growth. I'll review our second quarter results and our outlook for Q3 and FY '24, but first, I'll start with some commentary on the macro environment. While macro headwinds, including a minor FX headwind to revenue, continued to impact our business, we believe the environment stabilized in Q2. Our view is based on trends stabilizing or modest sequential improvements in contract duration, average deal size, the split between new business versus upsells, and seat expansion within upsells and renewals. Pipeline builds were healthy, but new pipeline continues to be skewed towards upsells. We also experienced further improvement in metrics related to our go-to-market team, including average tenure, ramp in the number of sales reps closing Workforce Identity and Customer Identity deals. While these are all encouraging data points, we believe it's prudent to maintain a cautious near-term outlook. Turning to Q2 results. Total revenue growth for the second quarter was 23%, driven by a 24% increase in subscription revenue. Subscription revenue represented 97% of our total revenue. International revenue grew 18% and represented 21% of our total revenue. Looking at the ACV split between Workforce Identity and Customer Identity. Workforce ACV grew 22% and represented 61% of total ACV. Customer Identity ACV grew 29% and represented 39% of total ACV. Over the long term, we expect the mix to trend towards fifty-fifty with healthy growth in both. RPO or subscription backlog grew 8%. The general shortening of contract term lengths signed over the past several quarters has impacted total RPO growth. However, in Q2, we were pleased to see a modest sequential increase in contract term lengths. Our overall average term length remains just over 2.5 years. Current RPO, which represents subscription backlog we expect to recognize as revenue over the next 12 months, grew 18% to $1.77 billion. Turning to retention. Consistent with prior quarters, gross retention rates remained strong in the mid-90% range. Our dollar-based net retention rate for the trailing 12-month period remains strong at 115% and was driven by both upsell and cross-sell activity. Similar to last quarter, the sequential downtick in the net retention rate was a result of the macro environment, where customers are not expanding seats at the rates they have in recent years. We believe this trend will persist in this environment. I'll reiterate that the net retention rate may fluctuate from quarter to quarter as the mix of new business, renewals, and upsells fluctuates. As I've noted previously, we've experienced a macro-related shift in our business mix to more upsell and cross-sell versus new business. Before turning to expense items and profitability, I'll point out that I'll be discussing non-GAAP results unless otherwise noted. Looking at operating expenses. Total operating expenses for the quarter were lower than expected. The better-than-expected profitability is primarily due to revenue overperformance and our continued focus on spend efficiency measures. Total headcount at the end of Q2 increased slightly to approximately 5,800. Q2 free cash flow was $49 million, yielding a free cash flow margin of 9%. Free cash flow was significantly better than expected driven by billings and strong collections. During the second quarter, we opportunistically repurchased $142 million of our 2025 convertible debt notes and $242 million of our 2026 convertible debt notes. This resulted in a $42 million GAAP-only gain. Over the past two quarters, we've repurchased $750 million of debt, resulting in a $73 million GAAP-only gain. We will continue to regularly evaluate our capital structure and capital allocation priorities. Our balance sheet remains strong, anchored by $2.11 billion in cash, cash equivalents, and short-term investments. Now, let's turn to our business outlook for Q3 and FY '24, which factors in the current state of 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 third quarter of fiscal year '24, we expect total revenue of $558 million to $560 million, representing growth of 16%. Current RPO of $1.780 billion to $1.785 billion, representing growth of 13%. Non-GAAP operating income of $53 million to $55 million and non-GAAP diluted net income per share of $0.29 to $0.30, assuming diluted weighted average shares outstanding of 180 million. For FY '24, we are raising our revenue outlook by $30 million at the high end of the range. We now expect $2.207 billion to $2.215 billion, representing growth of 19%. We are raising our outlook for non-GAAP operating income by $50 million to $215 million to $220 million, which yields a non-GAAP operating margin of 10%. Non-GAAP diluted net income per share is raised to $1.17 to $1.20, assuming diluted weighted average shares outstanding of 179 million. We are raising our free cash flow margin outlook for FY '24 to 15% from 12% previously. On a dollar basis, that's a raise of approximately $70 million. Lastly, I want to provide a few comments to help with modeling Okta. We are applying a static 26% non-GAAP effective tax rate for the fiscal year. We expect free cash flow margin in the low double digits in Q3 and to continue to grow into the mid-teens in Q4. To wrap things up, we're optimistic going into the second half of the fiscal year. While the pressures of the macro environment remain, we are confident that we've set the path of profitable growth for years to come. We continue to focus on initiatives to drive the top line while making significant progress to drive improvements to our operating and cash flow margins. And finally, we're excited to see everyone at Oktane. In addition to all the great things we'll be talking about on the product side, we'll be hosting an executive panel session for analysts and investors with Todd, myself, and Eugenio Pace, our President of Business Operations. 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 order. In the interest of time, please limit yourself to one question so that we can get to everyone. And then, you're welcome to queue back up with additional questions. So, first off, we'll go to Rob Owens at Piper.

Great, Dave. Thank you, and good afternoon, guys. Was hoping you could talk a little bit, sort of unpack for us the guide and just the sequential change. When you're talking about the macro, you mentioned stability, but still having a level of conservatism. And so, as we see this stability, A, can you help explain just the sequential and the guide; and B, maybe speak to some of the metrics relative to customer count, large customer metrics, when those should turn the quarter, net retention rates, cRPO as well. Thanks.

Hey, Rob. We're really happy with the results in the quarter, particularly a couple of the things you mentioned, the large customer momentum. The top 25 deals were over $100 million of TCV in the quarter, which is super strong. You mentioned the customer counts and it's definitely an area that we think is related to macro. Our customer adds are really influenced by the small business part of our business. We looked into that, of course, and we manage that closely. The logo churn in that number is very consistent with the last several quarters. I think what's happening is that smaller businesses aren't making new purchases, and as the economy picks up from here, we think eventually it will pick up. We're not sure when, but as it picks up, we believe that part of the logo count will increase. On the high-end customers, the $1 million-plus ACV cohort was one of our strongest quarters ever for that cohort, including some big new wins. We had one of the leading global companies in customer experience and support sign a completely new customer to Okta with over a $1 million ACV deal, all around OIG. We're seeing a lot of new business momentum in the largest companies in the world, which is pretty satisfying. Yes, a lot of good stuff to point to in the quarter, but I think the macro environment is still, while stabilizing, not as healthy as it could be for us and our business is reflecting that to some degree, especially the forward outlook.

Yes. I would just add to that, Rob. We talked about the big deals. We actually had one of the strongest big deal quarters ever in the Company's history. We talked about some stats, but in general, it was a very strong big deal quarter. But that wasn't the only highlight; there's a bunch of highlights. I mean, Todd talked about it about Customer Identity participation. That's up into the right. A lot of good things we're seeing in the business. A lot of great execution by the go-to-market team that we're really proud of, in spite of this macro headwind. In terms of your question more specifically on the current RPO guidance itself, it's really a reflection of what we were just talking about in terms of the macro headwind. Yes, it did stabilize in the quarter, but we're being prudent with our outlook at this point given it's still a significant headwind for the field in terms of growing the business.

Thanks.

Next up, let's go to Ittai Kidron at Oppenheimer.

Hey, guys. Solid numbers. I guess, Todd, maybe you could give us a little bit more color on OIG and maybe kind of parse it by the customer base. First of all, just to clarify, this applies just to Workforce customers, correct me if I'm wrong, but maybe you can dig a little bit into the install base, what percentage of your base already had the first couple of modules of the platform before and how adding the latest component changed the dynamics from a demand standpoint? I'm just trying to get a sense of how much of this was greenfield versus there was already a pent-up demand for it, number one; and number two, with the incremental new module, what is the upside just of that incremental to the existing base? I know the whole platform can add a lot, but it sounds like you already have a lot of customers on there. So, trying to get to the deal-type year of upside.

The first thing you ask about, you said it applies to Workforce. OIG, we can sell OIG to any customer. OIG is a great upsell for Customer Identity customers. It's not as directly integrated into that part of the business because usually that's managed by a separate team and kind of a separate process, but we do sell OIG to Customer Identity customers. And that's a good expansion point in terms of increasing the value of the whole customer, but the real synergy is with the Access Management product. It just makes a lot of sense. If you think about the system that is controlling and doing access management for which applications you can access at work, it makes sense that that tightly integrated governance system does approvals and routes to your manager to approve access. When we look at our go-to-market and the ability to sell OIG, we have a bunch of customers that just have Customer Identity Cloud, and we often have the potential to land the first Workforce deal with OIG. So, in terms of the penetration and so forth, the product is off to a very strong start. It's been generally available for a few quarters now. It's exceeding our expectations. And not just in terms of numbers and revenue, but also it's exceeding our expectations in terms of the companies that are deploying it alongside legacy governance products, but also the competitive displacements. There was a great win with Ryder Truck Rentals, which is a Fortune 500 and Global 2000 company you've all heard of. It was - they had a legacy product, looked at OIG because we have other Workforce products in that account. They looked at OIG a year ago and decided it wasn't feature-rich enough, but they were struggling with enhancements on their legacy product and ended up bringing in OIG this past quarter to replace it, so those are pleasant surprises. We feel really good about OIG and also really excited about Privileged Access. Okta Privileged Access is on schedule for general availability in Q4 of this year. Lots of exciting stuff in the entire product suite, and those two examples are pretty exciting.

One more thing, Ittai, I just wanted to clarify. Hopefully, you heard earlier, but in terms of spend and upsell amounts that we're getting out of this, it's really about a third on average and the customers who have it, it's about a third of their total Workforce spend right now. So, it's a significant potential upsell in the entire 18,400-plus customer base. So, we're excited about the opportunity as we move forward.

Can you tell us how penetrated are you into that 18,000, like what percent already have this?

There's still a lot of opportunity to go.

It's a new product. I mean the component, it's - as you - there's the Lifecycle Management part of the product, and then there is the Workflows part of the product, and then there is the wheel that rounds it out is the access certifications and the access requests part of it. The penetration rates in our installed base is the highest for single sign-on and multi-factor authentication. The next highest, but not nearly as closely penetrated as multi-factor or single sign-on is Lifecycle Management. The next highest is Workflows. The only companies that have Governance, the SKU Governance actually have the certifications and the access requests. There is a lot of room to run here and we're really excited about it.

Very good. Thank you.

Let's go to Joe Gallo at Jefferies.

Hey guys. Thanks for the question and nice quarter. CIAM has held in really well with ACV growing 29% year-over-year on tough comps. How should we think about the durability of that business? Is the sales force more at ease selling it now? And then you noted broad macro stabilization; does that have an outsized impact on CIAM? Thanks.

The data that we have for this quarter and the data we look at pretty closely in terms of your question about the sales force's comfort with Customer Identity is that there are more reps doing Customer Identity deals. At a healthy level, just the participation conveys a lot of things. It conveys the rep's familiarity with it, their ability to execute the opportunities, et cetera, et cetera., so that we're comfortable with that. Overall, I think that the opportunity for Customer Identity can be as much contribution to revenue as Workforce. We strive for a 50:50 split over the long term and we think they both should be growing. Both markets are big and both should be growing quickly. We think it has a lot of durability. It is different in that it's more, as we've talked about before, it's more of a build versus buy. The competitive dynamic is different. It's really a, the developers are choosing to buy something versus open source or build something themselves. The Workforce Identity side has more established players, legacy players. Those companies are more used to buying a solution there and there's a different dynamic with the big platforms offering Workforce Identity along with their apps and services. Our strategy is to be the leader in Identity, and we are the only at-scale independent and neutral player in Identity. Our strategy is to double-down on that by covering all the Identity use cases. It's really important that we cover a customer, and cover all the parts of Workforce, go to the market, and say listen, Identity is a key part of your technological infrastructure and a key business driver for you.

Thank you.

Go to Adam Tindle at Ray J.

Okay. Thanks, Dave. Todd, thanks for confirming the Privileged Access product for GA in Q4. I'm wondering kind of a two-part question, one, if you could give us maybe any feedback that you've gotten in that Early Access. And if you could compare it to the OIG product just to put it in context for us, that would be helpful. And then secondly, if we kind of zoom out to a bigger picture, you've often talked about a unified platform of Identity and if I fast forward, you're going to have Workforce, Customer, OIG, and the PAM products, sort of a holistic platform, wondering what that enables. If you've considered new go-to-markets like bundling and any update on the head of go-to-market alongside that would be helpful.

No worries. Yes, if I can remember them all, I'm going to be very proud of myself. First question was comparing Governance and Privileged Access, they are very similar in terms of the reception of the beta and now with Privileged Access to move into Early Access. A big value driver of the solutions is how natural it is to be integrated into Access Management. So, for example, with Privileged Access, you're using Privileged Access to manage access to these resources like servers and containers and route accounts on servers, and that’s integrated with the access management system for these companies for all their apps and importantly tied into the governance system. You can actually do a workflow approval on who should get access to a container or a server the same way you do for finance or collaboration apps, your auditors can see a single report that attests to the fact that the right people have access to all resources. So, I think we're off to a good start with Privileged Access. In terms of the go-to market with Privileged Access, I'm seeing a little bit of a new audience for us with infrastructure teams. That being said, on the government side, there's a ton of opportunities to close because as we noted the implementation of orders, they're really not working that well. In terms of bundling, our go-to-market structure is set up to take advantage of it. As you may know, we have one sales team that's the tenure of our sales reps. The ability to sell across the clouds is healthy. The last thing is the search for a go-to-market President is progressing. We’re meeting a ton of people, it’s an important search to get right.

Thank you.

Next up, let's go to Anushtha Mittal at RBC.

Hey, thanks for taking my question. I'm Anushtha on for Matt Hedberg. I wanted to ask a question on the legacy replacement opportunity for Access Management. It feels like there are some large legacy replacement deals starting to come up for grabs. So, how do you think about this opportunity and what are some catalysts that can help shift customers away from these legacy vendors to the Okta platform?

I think it's a really insightful question. If you look at the growth drivers and potential market potential and the TAM being realized for Okta, it's a really big factor. The traditional way to do Identity is through a big on-premise installation. The more they move to the cloud, the more likely they are to choose a cloud modern next-generation solution like Okta. The first catalyst is really cloud technology. The second catalyst is the products are getting better. The fact that we have new launchings and Okta is the only identity management provider that can do phishing-resistant authentication across every client device, everywhere. That positions us. Those two catalysts will help us continue to take advantage of this opportunity over the long term.

That's helpful. Thank you.

You're welcome.

Next up, we have Eric Heath at KeyBanc.

Hey, can you hear me?

Loud and clear, Eric.

Appreciate it. Todd, I guess just for you on the execution side. Just curious where do you think we are in terms of what inning on the execution side, and maybe what's left to go? That's just the first part. And the second one, I just wanted to follow up on OIG. How much is the sales force at this point is kind of enabled to sell OIG and are you starting to feel the confidence yet to kind of get more aggressive and kind of roll this into the playbook and start to more displacements in perhaps the enterprise installed base?

I'm assuming that when you asked about the current status of our execution, you were referring to the integration of the Customer Identity Cloud and issues related to employee turnover, which we have discussed in previous quarters. I believe those challenges are largely behind us. Looking at the clarity of our two cloud offerings and the involvement of our sales representatives in Customer Identity Cloud deals, I feel positive about these aspects. The main concern is the impact of the macroeconomic environment and its duration. Overall, we believe our go-to-market strategy and sales team can achieve greater productivity. We know there is always room for improvement, and there is much we are actively working on. However, the macroeconomic situation remains uncertain. We have our insights factored into our forecasts, but we need to monitor how our productivity balances between the macro conditions and our potential moving forward.

I think one of the highlights, Eric, is the cross-selling tailwind that we've been receiving. So, that really highlights the team is executing and being able to deliver the value proposition to customers and I think that's a really good indicator of why things are working, because we have been doing some great cross-selling over the last few quarters, thanks in part to releasing Governance and obviously Device Access came out this last quarter and is adding to that as well. So, a combination of the products continuing to roll-off, if you will, plus the improvements we're making to the product and the execution from the field, just really improving, thanks to the tenure statistics and ramp percentages. So, we're pleased with how the team has been executing.

You also asked about how much of the sales team is ramped on Governance, okta identity Governance. It's like any new product, a product that is still early in its lifecycle and go-to-market, but exceeding expectations. There is still more ramping and education; the sales team is comfortable quantifying the opportunities. It's going to take several quarters, but once it does, we have a great at-scale sales team to take it broadly to market.

Thanks, Todd.

Next up, let's go to Angie Song at Morgan Stanley.

Hi, thank you so much for taking my question. Just a quick one from me. Could you just remind us of how big the federal vertical is for Okta? And have you been seeing an uptick in momentum in this vertical in the last quarter, as you achieved FedRAMP High? Thank you.

The federal sector is a crucial part of our strategy. They have clear requirements to utilize multi-factor approaches and invest in modern identity solutions. I spent about a week in Washington last quarter, and I noticed, as I have known for some time, that they have the most structured programs for identity. Every major agency has a dedicated office or department focused on identity. They are modernizing just like everyone else. We have received our FedRAMP High authorization, which is very exciting. Several prominent customers supported us in obtaining that authorization. Additionally, the state and local governments are also important for our business, so between the federal, state, and local sectors, there is a significant demand for identity solutions, and we are performing well in those areas, which is a major focus for us.

Hey Angie, I would just add it's we're still in the early innings. We still have a lot of opportunity there. So keep that in mind.

Let's go to Stefan Schwarz at Wells Fargo.

It's Wells Fargo. I'm here for Andy Nowinski. Thank you for taking my question. I wanted to ask about OIG. First, could you provide an update on how many customers are currently using it, and if you could share any insights on how pricing has exceeded expectations in terms of competitive displacements that you previously mentioned? Also, what are your thoughts on the sustainability of this going forward? Thank you.

Yes. The number of customers has exceeded our expectations significantly. Also, the size of the deals, they're very positive surprises on the upside, which is great. What we're seeing is that the OIG business is usually a third of an increase of 30% plus on the total workforce spend. I think we have a better solution. We think we can make the market bigger, but we also think there are a lot of stories that are really encouraging. So, I think with regard to sustainability, we’re really excited.

Thank you.

Yes, let's go to Shaul Eyal at Cowen.

Thank you. Good afternoon, folks. Congrats. I want to double-click on Brett's commentary on contract duration, seeing sort of stability. Maybe even improvement? Is that driven by additional modules? Is that driven by pricing? And maybe, Todd, just a word about the competitive landscape, Microsoft, some other companies out there? I appreciate it. Thank you.

Yes, I'll take the first part and let Todd take the second part. Around the contract duration, contract duration did tick up slightly in the quarter. It's driven by those big deals. So you heard about all the big deals we closed in the quarter, and bigger deals typically come with bigger duration. The success we had in enterprise and strategic and large deals lent itself to the slight uptick to that contract duration in the quarter.

Yes, on the competition question, something we obviously think about a lot. The quantitative answer is that the competitive environment is very stable. The numbers we look at are win rates and the gross retention rate, which remains healthy. On the qualitative side, two things have proven really important competitively. First, companies are seeing Identity as critical. They're seeing it as a strategic partner in their technology infrastructure. The second thing that's important, customers perceive that facilitating choice and flexibility with a comprehensive offering. We've seen strong demand for our products, notably with major companies like NTT and others doing well.

Thank you so much. Appreciate it.

Next up, we have Bill Vandrick at Scotiabank.

Hey, you've got Bill Vandrick on for Patrick Colville. So just looking at the cRPO guide, it calls for 13% growth next quarter. How should we think about how that will translate to fiscal '25 revenue growth?

It's a good question. Thank you. I would actually correlate a couple of things. Well, first and foremost, like before I get into the correlation, as a reminder, or Q3 earnings, we're going to stick with our historical precedent, and we're going to give you an early look on FY '25 revenue. It’s a prudent look at us five quarters out. In the meantime, if you want to bridge that gap between now and then, I would look at a couple of things. I would look at the dollars of current RPO right, and they will roll off into subscription revenue over the next 12 months. You can look at historical correlation and figure that out. Pair that with the trend this year, that's about 23% growth that we just produced in Q2, $560 million and 16% growth in Q3, and then Q4 you can imply that based on our fiscal year guide, that's about 14% year-over growth. Combine that trend with the current RPO historical correlations to get you in the rough area for FY '25 but we will come out with our first look, like I said, in the Q3 earnings in about 90 days' time on FY '25.

Thanks, Brett.

Go to Ray at Guggenheim.

Great, thanks. Todd, you mentioned a couple of times that you continue to be surprised by the types of accounts that we're deploying the Governance solution. It was just noted a couple of questions ago that OIG potentially accelerating PAM adoption. As you think about the general availability of PAM later on in Q4, do you see the same potential with that product and potentially displacing existing solutions or penetrating larger accounts, or do you still expect the PAM solution to kind of attack this greenfield opportunity more down market?

I don't necessarily agree; we've seen success in really large companies, organizations. One of the lessons that OIG is that the segmentation we thought would be the applicability of solutions wasn’t accurate. We think the same could happen with Privileged Access. The reality is, we have great offers and products with Okta, and I think we will have a lot of success in larger accounts as well.

Great. Thanks for the color. That makes sense.

Hey, let’s go to what I believe is Caroline at Goldman Sachs.

Yes, thank you. Quick one from me is just on Okta's new partner program. I think you launched that in April of this year. Just curious what the initial reception to that has been? Given the differences in go-to-market and workforce and customer, kind of how does that translate to the partner strategy in each of those clouds?

Yes, the revamped purposes behind the partner program were sound. We aimed to focus more on our most valuable partners. We launched this initiative a couple of quarters ago, and it's performing well. We're observing strong partner contributions in the pipeline. Overall, while it's not solely related to that program, the changes made to it, partnerships remain extremely important for Okta. We are experiencing significant growth with Google Workspace, and AWS Marketplace continues to expand. Our relationships with Global Systems Integrators are critical, especially in large enterprise workforce, where they handle substantial business, making these partnerships essential.

Alright, thanks everybody. We've got to end it here. Before we go, I just want to let you know that we'll be attending several conferences this quarter, as well as bus tours. We'll be at the Goldman Sachs Conference in San Francisco on September 5, the Wolfe TMT Conference in San Francisco on September 6, also at the Citi Conference in New York on September 6 and the Piper Sandler Growth Conference in Nashville on September 13. We hope to see you in San Francisco for Oktane and our Executive Panel Summit on October 4. So that's it for today's meeting. If you have any follow-up questions, you can reach us at investor@okta.com. Thanks, everybody.