Okta, Inc. Q4 FY2024 Earnings Call

Hi, everybody. Welcome to Okta's Fourth 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. At around the same time that the earnings press release hit the wire, we posted supplemental commentary to the IR website. This posted commentary contains a large portion of what would historically be the opening commentary, including customer commentary, product-related news, and a review of our financial results. This new format allows listeners to review that information before this call. It also allows us to spend more time discussing other news items and strategy while leaving more time for Q&A. 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 results. 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. We're pleased with the strength of the business to close out our FY ‘24. Q4 was highlighted by record quarterly profitability and cash flow and strong top line results. Our Q4 financial performance was solid and suggests minimal impact on our financial results stemming from the security incident. The incident is now behind us, but we're using the learnings to reassess and strengthen the security aspects of our own infrastructure, as well as help ensure customers benefit from our experience by further strengthening our products and policies. This morning, we launched an initiative called the Okta Secure Identity Commitment, which is our long-term commitment to lead the industry in the fight against identity attacks. This new initiative encompasses Project Bedrock, which is aimed at hardening our ancillary and corporate systems and further strengthening our products and services. The Okta Secure Identity Commitment extends even further to champion customer best practices that enable our customers to be highly protected and elevate our industry to be more secure from identity attacks. We want our customers to benefit from our depth of experience, so we are further strengthening our customer policies to help ensure our products are deployed with Okta's best security practices. Identity has become a primary attack vector and Okta is at the forefront of the fight against identity-based attacks. Okta ThreatInsights has detected and prevented over 2 billion malicious requests in the last 30 days alone. We've reduced credential stuffing attempts and malicious bot traffic by more than 90% for some of our largest customers just over the past 90 days. And we're shaping industry best practices with 100% of Okta employees using Okta FastPass with phishing-resistant, passwordless authentication. I encourage you to read more about the Okta Secure Identity Commitment in the blog we posted today. Of course, all of this has to be backed up with great products. Okta has long been the leader in modern access management. We've started tapping into two more large market opportunities with the launch of Okta Identity Governance last year and Okta Privileged Access just a few months ago. Okta is changing the game with our unified platform approach and we already have several customers that have turned to Okta for the combined benefits of our Access Management, Governance, and Privileged Access. We're helping organizations make it easier for their employees and users to safely access their applications and help protect them from today's threat actors. From time to time, we augment our organic innovation through M&A. Earlier this month, we closed the acquisition of Spera Security, an identity security platform to provide our customers with richer insights and technology to elevate their identity security posture management. At the start of each new fiscal year, I'd like to show you our top priorities as an organization. As you might expect, security is our top priority as a company for FY '25. This covers everything from driving a company culture with a security-first mindset to our own security architecture as well as our products and services. The second priority is reigniting our growth. The obvious end result pertains to topline across regions and products, but to get there, we need to focus on our overall go-to-market operational excellence, further increase our competitiveness in our core markets with enhancements to both our workforce and customer identity clouds and strengthen our growth vectors in key industries, newly introduced products and cross-cloud initiatives. Our third priority is scaling Okta from a technical perspective. Our goal is to set the company up for success in order to be a $5 billion and then a $10 billion-plus company. This means investing in changes to reduce operational friction and drive global scale. This priority is intended to help fuel the first two priorities of security and growth. Before wrapping up my comments, I want to congratulate Eric Kelleher on his promotion to President of Customer Experience and Communications. In this elevated role, Eric will oversee marketing, customer-first and communications and continue to go lead the go-to-market organization with Jon Addison, our Chief Revenue Officer. Eric has been with Okta for seven years, most recently as Chief Customer Officer. His primary focus will be driving growth, building brand loyalty and enhancing the overall customer experience. I'm pleased with the strength and stability of our current leadership team going into the new fiscal year. As we head into FY '25, I've never been more energized and excited about Okta's future. We're expanding on the world's most robust and modern identity platform, and we have a strong pipeline of products and functionality powered by Okta AI. All told, we're well positioned to capture the large market opportunity in front of us. And finally, I want to thank the entire Okta team for their tireless effort and thank you to our loyal customers and partners who put their trust in us every day. Now, here's Brett to cover the financial commentary and talk about how we're positioned for long-term profitable growth.

Thanks, Todd, and thank you, everyone, for joining us today. As Dave said at the top of the call, we've evolved our earnings call format. Most of my typical review of the quarterly financials was published on Okta's Investor Relations website at the same time as the press release. I'll cover a few of the financial highlights, we will focus my commentary on broader topics before getting into our business outlook. I'll start by sharing our view on the security incident and the macro environment. When analyzing our key metrics, we couldn't attribute a quantifiable impact from the security incident on our Q4 results. While not quantifiable, the event likely had some level of impact. We'll continue to monitor this as we move through FY '25. All things considered, our solid Q4 financial performance suggests minimal impact on our financial results stemming from the security incident. The macro environment during Q4 was relatively consistent with what we experienced in Q2 and Q3 of FY '24. In short, it's stable, but still challenging. Moving on to some financial highlights. We're pleased to achieve Rule of 40 again for FY '24. For FY '24, we generated a non-GAAP operating profit of 14% versus negative 1% last year. And free cash flow margin of 22%, up from 3% last year. That's tremendous progress for a single year. Our Q4 financial performance was highlighted by record profitability and cash flow. We were encouraged by our strong top line metrics and pipeline growth. Weighted average term length for our contracts signed in Q4 hit a two-year high. We continue to see an increase in the number of sales reps selling both Workforce Identity Cloud and Customer Identity Cloud products and experienced particular strength with large customers. We signed a record number of million dollar plus ARR contracts in Q4, capping a year in which the number of million dollar ARR contracts increased by over 30%. We added 150 customers in the quarter. The sequential decline in new customer adds reflects ongoing business trends of increased weighting of upsell versus new business resulting from the current macro environment and strength with large enterprise customers versus SMBs. Now I'm going to address one of the actions we're taking to drive new business and reignite new customer acquisition. Starting at the beginning of this quarter, we shifted our direct sales team that focuses on the SMB market in the Americas to what's commonly referred to as a hunter-farmer model. That means we now have a team of account executives focused on driving new customer acquisition and a separate team of account executives focused on upsells within our installed base. We believe that we're still very underpenetrated within our existing base of nearly 19,000 customers. This natural evolution will enable us to drive better results with both new and existing customers. Over the past several quarters, one of our strongest customer segments has been with large million dollar plus ACV customers. Our indirect partner ecosystem has played an important role in our success in this area. In fact, eight of our top 10 deals in Q4 were either resold or influenced by partners. From our traditional ISVs, system integrators and solution providers, these partners help us scale and provide tangible value-add to our customers. Recall that we introduced a new partnering framework called Elevate last year. The new program recognizes and rewards partners for the total value they deliver to Okta and our customers from finding, developing and influencing to delivering, managing and transacting. Today, more than 40% of our business mix is invoiced through our indirect channel partners, up from about one-third just a couple of years ago, and channel partners help influence an even greater percentage of our business, helping drive that number is the strong contribution from the AWS marketplace. Okta continues to be a premier identity and access management partner for AWS globally. AWS now generates over $175 million in annual contract value for Okta, growing at over 130%. We look forward to even more success as we go forward. We're also starting new market routes to broaden Okta’s availability further. We recently entered into an agreement with SoftBank Corporation as a managed service provider in the Japanese market. SoftBank is embedding a customized version of Okta Workforce Identity Cloud into its recently launched business concierge device management. This allows us to reach the approximately 16,000 Japanese companies and 2.4 million devices that utilize the managed service. It's the beginning of what we believe will be a new strategic path to market and the first step in an exciting new go-to-market motion for Okta. One last item I'd like to call out before turning to our outlook is share dilution. Actions we've taken over the past two years to reduce dilution have yielded great results. Building on that progress, starting in Q1, we will settle employees' tax obligation due at equity vesting through the net share settlement method. This will lower dilution because instead of issuing and settling shares into the market to cover the withholding tax, we will fund the estimated tax payment from corporate cash. In FY '25, we expect this change will reduce dilution by approximately 1.7 million shares compared to our prior tax withholding method. Ultimately, making for a 1% benefit to our basic share count. This will have no impact on free cash flow. Now let's turn to our business outlook for Q1 and FY '25. Over the course of the past several quarters, we've put significant effort into positioning the company for profitable growth for years to come. Over the past 18 months, the actions we've taken to drive efficiencies in our cost structure have yielded impressive results. The headcount reduction action we took earlier this month was part of our ongoing assessment to optimize our cost structure. The action also supports our strategy of increasing headcount in high talent, lower cost regions such as India and Poland. The majority of the approximately 400 positions that were eliminated were in supporting roles within the go-to-market team. As always, we take a prudent approach to forward guidance. We are factoring in a stable but still challenging macro environment consistent with what we experienced over the past few quarters. And while our Q4 results were solid, we're operating some conservatism into our outlook as we continue to monitor potential impacts related to the October security incident. And lastly, while we are still finalizing our FY '25 model, when we provided our preliminary FY '25 outlook last quarter, the expected cost savings from the headcount reduction was factored into those assumptions. Again, you can view the more granular guidance details in our press release or posted commentary. For the first quarter of FY '25, we expect total revenue growth of 16% to 17%, current RPO growth of 13%, non-GAAP operating margin of 18% and free cash flow margin of approximately 25%, which is inclusive of a cash impact of approximately $24 million related to the headcount reduction. We are raising our outlook across the board for the full year FY '25. We now expect total revenue growth of 10% to 11%, non-GAAP operating margin of 18% to 19% and a free cash flow margin of approximately 21%. To wrap things up, 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. With that, I'll turn it back over to Dave for Q&A.

Great. Thanks, Brett. I see that there are quite a few hands raised already, and I'll take them in order. And 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 with that, first up, I see Brian Essex from JPMorgan. Brian?

Yeah. Thanks, Dave, and congrats on the nice results, team Okta. Maybe, Todd, for you, my one question. Could you maybe address what you're seeing on the macro side? I understand your comments and Brett's comments and just trying to understand what you're seeing that may give you better confidence in better performance into next year? Are you seeing things improve? And do you anticipate better traction in the mid-market? Or are you going to continue to rely on large enterprise? And maybe part C of that, could you maybe disaggregate a little bit gross retention versus upsell, cross-sell, so we can get an understanding of what underlying the net dollar retention metrics is really moving from quarter-to-quarter?

The macro environment is stable, but definitely more challenging than it was a couple of years ago. As we look ahead to FY '25 and beyond, we are considering this challenging yet stable environment as the new normal. There is a noticeable difference between large organizations and mid-enterprise and smaller companies. Large organizations appear more willing to invest in technology because identity is a higher priority for them; they possess significant technology infrastructures and are focused on moving to the cloud and modernizing. This shift offers substantial return on investment as they can secure and manage more people and drive various projects. It feels like the macro economy is more favorable for large enterprises, even if that's not technically accurate. This is reflected in the results, with million-dollar deals increasing over 30%. I mentioned in our prepared remarks a sizable transaction with a telecommunications company in North America in Q4. Their legacy identity product was coming off support after 10 to 15 years, leaving them with no choice but to replace it. Many mid-market companies lack a similar legacy identity issue, often relying on on-premises active directory. This illustrates that for large enterprises, the need to address specific business challenges and evolve their technology stacks enables us to assist them effectively.

Right. Got it.

Yes, you asked a question about retention.

Yeah, as part of that. Yeah.

The gross retention remains strong in the mid-90s. The net retention number has decreased slightly, as seen in the results. With the growth slowing down, we haven't been able to execute as many upsells compared to the past, which slightly compresses the year-over-year comparisons. However, gross retention is still healthy in the mid-90s, and as we continue to focus on reaccelerating growth, we expect improvements over time.

I would like to add, Brian, that one of the macro factors we consider is the upselling of seats on the workforce side and MAU-upsells on the customer identity side, which continues to present challenges. The expectations for economic activity are not strong, affecting both the workforce and customer identity segments. The strength in upselling is primarily coming from cross-selling, whether it's related to IGA or customer identity or workforce identity moving in different directions. We've observed solid cross-sell performance over the past few quarters. It's important to be cautious about licensed counts, and that cautiousness is reflected in our net retention rate as seen today.

Got it. Helpful. Thank you.

No problem. Next, let's go to Eric Heath at KeyBanc.

Thanks, Dave. And I'll also echo, nice set of results here. Todd, I wanted to follow up on your opening remarks. I'm curious to hear more about those comments about the security incident being behind you at this point. Was that more so a comment about the security enhancements you implemented internally? Or is that more so a comment about sales cycles? And customers at this point, getting more comfortable with the steps you’ve implemented and their willingness to make a commitment to Okta. And then if I could ask one for Brett, just along the similar line of questioning, the customer logo ads were a little bit weaker this quarter. So just curious if there's all, in any case, just a little bit more pressure on the new logo as a result of that?

Yeah, Eric, it's interesting. When we say this issue is behind us, we mean that we have addressed the specific problem from October by closing it out, releasing the third-party report, and responding to customer concerns about that incident. However, security is an ongoing concern. Following this issue, we are continuing to strengthen our focus on cybersecurity both internally and externally. In fact, we just launched a significant initiative called the Okta Secure Identity Commitment, which outlines our plan for the coming quarters and years. This includes continuously enhancing our corporate infrastructure and ensuring that our products are secure by default. We are also investing in capabilities that proactively secure all identities and infrastructure, such as identity threat protection with Okta AI and our recent acquisition of Spera. We are very excited about the advanced identity security features in our products and our goal to enhance the industry’s defenses against identity attacks. With 85% of data breaches involving identity issues, including account loss and password attacks, there's a significant opportunity to improve overall cybersecurity by advancing the industry's approach to identity-based threats. We also want our customers to learn from our experience with this issue. In conversations with numerous customers about security, they want to understand the specifics of our situation, but the discussion quickly shifts to how we can help them think comprehensively about their own security posture and better protect against identity attacks. It becomes a proactive dialogue, which is what our customers expect from us, and it aligns with our expectations of ourselves. We will continue to prioritize this focus.

I just want to emphasize that from a financial perspective, we've identified our top priorities for the year, with security being number one. We are investing significantly in various areas to strengthen this priority. If you're considering your profit and loss statements, it's important to know that we are heavily investing in security as it is our foremost priority, and we take it very seriously. Regarding customer accounts, the addition of 150 net accounts this quarter is simply an extension of trends we've observed over the past several quarters. The mix of our business, in terms of bookings and pipeline, has increasingly favored upsells compared to the past. This is reflected in the customer account numbers we are presenting today. Additionally, as Todd mentioned, we've had more success with larger enterprises while facing some challenges with small and medium-sized businesses. This is why we are adopting a hunter-farmer model for the small and medium-sized business segment in the Americas. We want our teams to concentrate on acquiring new clients, as shown in the presentation from November 22 at Oktane, where we discussed how annual cohorts consistently upsell over time. Therefore, as we analyze our fiscal data and consider changes, prioritizing new logo acquisition has clearly emerged as crucial. While acquiring new clients is important, upselling is equally essential. We need to focus on both areas because we now have a wide range of products to sell. We aim to introduce more specialization in the field to support this effort. We have numerous exciting products being released, such as Governance, PAM, customer identity solutions, fine-grained authorization, and highly regulated identity offerings. We want to empower our sales teams to maximize their productivity. Ultimately, the hunter-farmer model is a strategy we've been contemplating, and we are now implementing it as we head into FY ‘25, as we believe it will facilitate profitable growth for the business.

Okay. Let's go to Hamza Fodderwala at Morgan Stanley.

Great. Good evening. Thank you for taking my questions and congrats on a strong finish to the year. Brett, I was really surprised by your comment around average contract term. I think you said being at a two-year high. I think the trend was maybe shifting down a little bit on the duration front. So I'm curious, how did you guys turn that around? What do you think it means as far as customers committing with Okta longer term? And is there anything that we should consider throughout the year as it relates to RPO and CRPO metrics with respect to duration? Thank you.

We are very pleased to see the increase in contract duration. It has improved across all major categories, including both new business and renewals. This reflects how committed our customers are to us. Additionally, as we mentioned earlier, the incremental business in Q4 came primarily from larger customers, who typically sign longer deals. Therefore, if we were to focus on smaller deals, we would likely face some challenges in contract duration. Signing more larger customers generally results in longer contract durations. We are happy to report a growth in total RPO of 13%, up from 8% last quarter. While I can't speculate on future trends, things look positive for us right now, and we are excited about the potential for FY '25 if this trend continues.

Next up, we have Peter Levine at Evercore.

Thanks guys for taking my question. Maybe, Todd, just for the quarter, I think your commentary around not seeing as much of an impact, is there anything different that you did over the past couple of months versus the incident in ‘22 that kind of gave customers a little bit more reassurance around what you're doing, the product security?

It’s interesting. It feels quite familiar to me, and the approach is straightforward. It involves a lot of communication and specific meetings with customers who are concerned about this issue and the broader cybersecurity challenges facing the company. This often leads to a more proactive discussion about how we can collaborate as partners. In terms of the company’s response, I've noticed a significant investment of time from not just the executive team but the entire go-to-market organization, which performed exceptionally well in the fourth quarter. I want to acknowledge everyone in that organization for their efforts in delivering solid results. However, it does require a lot of time, focus, conversations, and management, especially in sales cycles where our deals are strategic and can become complex. Managing escalations regarding security issues can slow down the process, which is a headwind in closing deals. While this clearly had some impact, it's challenging to quantify when assessing close rates, comparing results with guidance, or measuring growth. We're pleased with our performance and will continue to be vocal and proactive about communicating security measures and how we can combat identity-based attacks. In the past 30 days alone, we thwarted 2 billion malicious attacks aimed at our customers. Identity attacks are a recurring threat; we experienced one in October, and it’s vital for us to enhance our efforts in defending our customers and the industry at large. You'll notice a shift toward a more proactive approach in our dialogues going forward, moving away from the reactive stance we adopted back in October.

All right. Thank you.

Let's go to Madeline Brooks at BofA.

Hi, team. Thanks for taking my question. Looking at the results of 16% CRPO growth compared to 12%, that's a significant increase, especially considering the current economic climate. I'm curious if there were any particularly large deals that contributed to this, beyond the mention of larger deals in general. Were there any that exceeded the $1 million mark, or was this growth primarily due to a broader increase in the pipeline? I'm attempting to understand the reasons behind this notable growth and whether it's indicative of a one-time occurrence or a trend that may continue.

We had nothing, I mean the overall trend of million dollar deals was strong as we mentioned, growing 30%. There wasn't a one-off big deal that was really outsized compared to prior periods. So yeah, I would say it's more of a broad range or broad based strength in the large customers.

Yeah, I would just add in there, Madeline, just echoing what Todd said, we just had a really good quarter from large deals in general. But when I say large deals, it’s not just the million dollar deals, but a lot of deals from $100,000 up, right? Because if you think about the $100,000 customers, the average ACV is the largest it's ever been. So going and penetrating those large customers and getting good size deals out of them in addition to those million dollar contracts, the ARR contracts, which was a record in the quarter, it's just all around. There was a lot of good momentum in large deals. Just really nice job market team just in general across the board. I'm going to echo on what Todd said. I should have said in the first answer, which is go-to-market did a great job and we're both super proud of them.

And just to clarify, I mean, I guess this is more of a surprise on your end or was it like kind of pull-forward demand that you could see?

The large deal pipeline was in good shape, so it was encouraging to see it come through, especially considering some uncertainty surrounding the security issue. It was expected, as we were aware of the strong large-deal pipeline. This strength applies to the overall pipeline as we approach FY '25, which is significantly stronger than it was at the start of FY '24. This is one reason we feel confident in our guidance for FY '25.

Great. Thank you so much.

Next up, let's go to Rudy Kessinger at DADCO.

Hey, guys. Thanks for taking my question. Not much commentary, I think in the prepared remarks you posted or the early part of the call here about Privileged Access. I know it's only been out a few months now, but just what's been the early traction with it? What kind of pricing uplift are you seeing with customers who are adopting it and any other color you can share on that front?

I would say it's on track, possibly even exceeding expectations. It's still early, but we successfully converted the early access customers we targeted. They are enjoying the product and seeing results. More importantly, they are recognizing its synergy with the rest of our platform. This new kind of privileged access is modern, quicker to deploy, cloud-native, and integrated with governance and our entire access management stack. It's not just about the privileged access market or potential total addressable market; it's more about companies that currently lack a privileged access solution compared to those using outdated on-prem solutions that they host in their own data centers. This product is designed for more modern infrastructures with cloud-based servers and Kubernetes clusters. It's meant to integrate smoothly with Okta Access Management and phishing-resistant authentication, along with governance products that connect with collaboration tools for a seamless process. We're seeing early but positive signs from customers valuing this proposition. We believe the typical workforce spend is x, and governance might bring a 30% uplift, with privileged access potentially offering another 30%. That's how we're framing it, and early indications support that. We have more data on governance, which has been in general availability for a full year, showing a strong track record of a 30% plus uplift from the governance product over workforce. Initial signs from Privileged Access Management point to similar potential uplifts.

The other thing I might add is what Todd was talking about having this product suite across access management, governance and PAM, having a single pane of glass, if you will, we've already got a handful of customers that have all three this early on and see that vision and believe in that strategic direction that we're going. So exciting early times for us in terms of that, the three pillars on the workforce side of the house.

That is very unique. No other company offers access management, privileged access, and governance together. CyberArk excels in privileged access and has some access management due to a recent acquisition, but their governance is lacking. Other vendors also do not provide both privileged access and governance. We are the first to offer all three components. If our theory is correct and customers prefer this integrated platform, which can enhance security and provide greater flexibility, we expect to see long-term benefits from this.

Super. Let's go to Rob Owens at Piper.

Great. Thanks for taking my question. I was hoping you could drill down a little bit around that NRR metric? And just noting that it had been flattish kind of the prior three quarters. So with this fall off, just kind of trying to understand that that point in time NRR relative to a lot of your commentary in terms of seeing no fall off and/or kind of the upsell cross-sell motion that you saw success with. Thanks.

Thanks, Rob. Regarding NRR, we’ve been discussing its decline for several quarters. We started this conversation in late FY '23 due to the macro challenges impacting seat upsells. While our cross-sells are performing well, we’re facing difficulties with both seat upsells and MAU upsells related to customer identity, which is affecting our NRR metric. We ended up at around 111%, which aligns with our expectations, so kudos to the finance team for their prediction. The question many may have is where we see this going from here.

Yeah, absolutely.

Yeah. I mean, like we said today earlier, we had good gross retention, mid 90s, like we've talked about for several quarters now. And so where do we think it's going in FY ‘25? Based on our new business versus upsell mix expectations in FY ‘25, based on what we can see in the pipeline today, based on how the business has performed throughout FY ‘24, we see us kind of trending in this 111% range. Now there's a potential for the balance of FY ‘25. We haven't done anything beyond FY ‘26. But there is a potential it could swing a couple points either direction, and that's really going to boil down to how good our new business versus upsell mix assumptions are. So if we have more new business in a quarter and it crowds out upsell, well, that's going to be a little bit of a headwind to net retention. If we have a little bit better upsell quarter than we expected in terms of mix, well, it's going to be a little bit of a tailwind to net retention. So we think we trend in this kind of channel of a couple of points plus or minus this 111% where we are today for the balance of FY ‘25.

Thanks for the color, Brett.

Let's go to Joe Gallo at Jefferies.

Hey, guys. Thanks for the question and nice fourth quarter. I understand conservative, but maybe just walk us through your CRPO guide in 1Q, which I think is the first ever sequential decline. And then Todd, your second priority was reigniting growth. What are the biggest upside catalysts there? Is it international, CIAM, IGA, PAM, cross-sell? Maybe just help us unpack where the highest ROI upside catalysts are in the top…

I'll begin by addressing that. We are highly focused on it. I believe the main catalyst is sales productivity, which we have discussed for some time. The growing experience of our sales team and their familiarity with our primary product lines, workforce, and customers is contributing positively. Currently, we see that the experience within our sales team is at a favorable level, and we are beginning to notice an increase in their productivity as well. I believe there is still room for more improvement in the next couple of quarters, which will positively impact our overall growth. This represents the most immediate and measurable potential boost, and we are actively supporting our sales team to ensure their success and retention. Our priority has been on maintaining stability as we transition into this fiscal year, specifically in terms of our quota-carrying representatives, their territory assignments, and targets. This continuity is essential for achieving a strong start in the first half of the year, especially following the excellent performance of the team in Q4. I would consider this a significant factor in the short term. Following this, I think the largest growth driver will come from opportunities in large enterprise deals. In relative terms, Okta has considerable potential in this area. We can refer to ourselves as a mid-enterprise company among the largest global companies. While we have made good progress, there is much more we can achieve. Additionally, customer identity presents a significant opportunity for us as well. Over time, we believe it could represent half of our business; it currently accounts for 40% and is growing at a faster rate than workforce-related offerings, with the potential to surpass that growth. These are a few key areas I’d like to highlight, but many factors contribute to them, including efficiently managing our go-to-market strategies and ensuring we have the right products to meet compelling use cases in both customer identity and workforce identity. Our solutions cater to companies of all sizes, from small to large. We have a strong focus on growth as we recognize it is a substantial market opportunity. We understand the reasons behind our growth slowdown and are not satisfied with this trajectory; our goal is to reverse it as quickly as possible.

I just want to mention before addressing the current RPO question that on the customer identity side, the percentage of representatives selling customer identity continues to rise. However, it's still not at a 50-50 split as we aspire to achieve. There's room for improvement. Last week during our sales kickoff, we dedicated a significant amount of time to empower our team regarding customer identity, spending nearly all of Friday on this effort. It's a crucial area for us. We will also modify some internal operations, particularly regarding deals and pipeline management, by focusing more on customer identity relative to workforce identity. We are implementing several operational changes that we believe will enhance productivity in customer identity. While trends are positive, we anticipate that these adjustments could yield even better results. Now, regarding current RPO, as a reminder, at these growth levels, there are some unique dynamics in Q1. It is our seasonally smallest bookings quarter, while Q4 typically represents the largest, leading to a quarter-over-quarter decline in dollars. This is something we can expect not only this year but in the years ahead. Therefore, it shouldn't be surprising in a year when we discuss this again as this pattern is likely to continue due to the seasonal nature of our business. As we've discussed, being an enterprise-focused business usually results in Q4 being the peak and Q1 the lowest in bookings.

Thanks guys.

Let's go to Trevor Rambo at BTIG.

Hi everyone, this is Trevor from Gray. Thank you for taking my question and congratulations on a strong quarter. I want to revisit the OIG, which has been operational for a little over a year now. When do you anticipate sharing any statistics on ACV or revenue as it becomes a more significant part of the business? Additionally, could you share your long-term vision for the product and how substantial you believe it could become in relation to your core workforce IAM over the next two, three, or four years?

We're very excited about it and since we launched it into general availability a year ago, it has consistently surpassed our expectations each quarter. One significant aspect of this product is that it's not only an upsell opportunity, with potential upsells exceeding 30% for workforce customers, but it also enhances our overall vision and makes our product suite, especially with PAM included, much more appealing. Beyond the revenue generated from that SKU, its strategic impact on our workforce business is even greater. This raises the question of how large its potential could be. We can estimate its size, and IDC provides breakdowns of the identity segments, indicating a certain portion for this. However, over time, it may become more challenging to distinguish how many new customers we attract because of this suite versus how many sought out privileged access and subsequently purchased other features like access management and identity governance as additional benefits. You should consider it as a unified and attractive offering for the workforce. That's how we perceive it.

Great. Thank you.

Let's go to Peter Weed at Bernstein.

Thank you. It's encouraging to see the increasing free cash flow; I know it has taken considerable effort, and it's great to see that positive trend. One thing that stood out to me this quarter is the relatively modest number of new customers acquired. You've pointed out that churn didn't increase, so technically the same number of customers were brought in, but there was a drag due to fewer new businesses joining. Do you consider this result to be a new normal, or do you expect it to pick up again with the sales strategies you are implementing? Historically, we've been around 400 new customers per quarter, give or take 50. I'm curious about what was different in Q4, as it seems like a time when you could exceed expectations with increased bookings and more customers making deals. What specific factors contributed to the performance in this fourth quarter?

We don't want this situation to continue. This is not the new norm. Our goal is to drive growth, and we are actively prioritizing efforts that will contribute to that growth. One key area is customer accounts. We have discussed the focus of our go-to-market team in the corporate segment in North America, which is shifting to upselling existing customers rather than seeking new ones. This represents a significant structural change, and it is one of many adjustments we have made as we enter this fiscal year. John, Eric, and Eugenio are clearly laying out their strategic priorities for the go-to-market approach. Brett highlighted some of these changes, including operational adjustments to streamline the selling of customer identity and the hunter-farmer model change in corporate North America, which is crucial. Eric and Kerry, along with the marketing team, have implemented numerous pipeline and marketing execution changes. These initiatives are part of a strategic plan designed to reignite growth, which is essential. Regarding customer accounts, looking at the numbers for Q4, it appears that larger companies performed better than smaller ones. I don't believe this is a new trend, but we need to consider that customer accounts are primarily driven by smaller customers, where fluctuations can be more pronounced. For customer accounts, aside from the hunter-farmer model, we are excited about our managed service provider program. For instance, SoftBank now offers a customized version of Okta's workforce products as a managed service to their 16,000 clients in Japan. While we won't count these as our customers, it demonstrates our efforts to extend our reach. As we pursue more MSP agreements globally, these will not only increase the number of clients that MSPs can transition to Okta but will also provide upselling opportunities as those deals develop. This creates a scalable channel for customer acquisition, which is quite powerful. Additionally, we have many self-service customer identity clients that aren't included in our customer counts as they pay for self-service. However, once they upgrade to enterprise, they do count. Investing in this self-service procurement channel within our customer identity cloud is another means by which we aim to achieve broader new customer growth over time, especially in the smaller company segment, which necessitates varied programs to encourage expansion.

Thank you.

Yeah, I would just add one comment to that in the sense that I echo what Todd said. This is not the customer adds that we want to have, but it demonstrates that we can put together a pretty nice quarter just by going after the 19,000-ish customers we have today. There is a tremendous amount of room to run in our current customer base. And that's just something we're real proud of and we can really still access. And one of the reasons to go to the hunter-farmer is that, for the farmers to be able to go out and get additional business. So, yeah, I echo everything Todd just said, but just want to make sure you guys heard that as well.

Okay. Next up is John DiFucci at Guggenheim.

Thank you. I think this question is for both of you guys, Todd and Brett. You have so much going on with changes to go-to-market and also early opportunities in IGA and PAM, and even CIAM. I guess, how do you think about balancing those huge opportunities with delivering that great cash flow this year? Peter talked about what you did this quarter, but you increased the cash flow guidance for the year. And I almost hate asking this question because I think investors really appreciate what you're doing on cash flow. But Brian asked my first question, my first two questions with the seven that he asked. So I guess I just want to make sure you're comfortable with your investments in both go-to-market and product to be able to sort of satisfy those because it just seems like, Todd, you painted that picture of the platform. That's huge and compelling.

I see three key factors at play. First, with slower growth, there’s increased leverage; this is just how it functions. We invest in go-to-market strategies, and it takes time for these investments to yield results. When growth decelerates, whether due to macroeconomic factors or challenges in execution over the past few years, that creates leverage dynamics. Our model has substantial leverage, which is reflected in our cash flow or net income. Secondly, like many companies, we are exercising more caution with our finances and adopting a more disciplined approach to spending. Culturally, the entire organization recognizes that money isn't free anymore, and we can’t pursue growth at any cost; we must be more measured in our spending. We have a smart and capable team who are identifying areas for frugality, savings, and efficiency that allow us to either return value to shareholders or enhance profitability, or invest in other avenues for growth. Many people inquire about how we are financing initiatives like the Okta Secure Identity Commitment and wonder how we can increase profitability despite the costs. A key part of the answer lies in our ability to find efficiencies in other areas. In this case, it's less about the amount spent and more about our prioritization. We are focusing on security, as evidenced by our concentrated efforts in Q4. Lastly, we are making long-term structural investments that may temporarily reduce profitability but will position us well as we aim for significant growth in the future, whether that's through enhancing internal systems, maintaining a healthy mix of high talent and low-cost regions globally, or pursuing internal automation projects that I’ve previously discussed with many of you. Overall, it’s a combination of many factors, and I’m proud of the progress we’ve made, yet we recognize there’s more work ahead and plenty of opportunities to seize.

I want to thank the entire company for their support; it's not just Todd and me sharing the good news, and we both appreciate it. However, I want to address the concern about whether we are spreading ourselves too thin and how many initiatives we can manage. The strategies we've discussed today are aimed at driving specialization. The hunter-farmer model is a specialized approach that allows team members to concentrate on what works well instead of attempting to cover everything. For instance, on the farming side, team members will gain insight into customer usage and identify specific use cases we can address. This will naturally lead to greater specialization in the field. The hunter-farmer model is essential for fostering this specialization, especially with the abundance of products available and the new products being launched. We need to empower our teams, which is why we invest time in enabling them at SKO, particularly around customer identity. Our goal is to take focused initiatives in specific areas rather than a scattershot approach. This effort aligns with the efficiency we've achieved over the past four to six quarters, reflected in our free cash flow margin results and other financial metrics. We are committed to driving specialization to avoid being spread too thin.

Makes sense guys. Keep it up. Thank you.

Hi, good afternoon. Just in terms of your channel engagement commentary, can you talk a little bit about what actions you're taking and what you expect to see? I guess, like, how do we measure your success in terms of that indirect channel engagement and things like the AWS Marketplace? Thank you.

Sure, I can address that. Regarding our partners, as we mentioned before, we relaunched our partner program, Elevate, early last year and concentrated our efforts on a smaller number of partners. This is in line with John's earlier question about focusing our activities rather than spreading ourselves too thin across the partner channel. This focus has contributed to our success with AWS, which has seen a 130% year-over-year growth, bringing in $175 million in annual contract value. This demonstrates that we are building a significant business. Our approach is helping us become more partner-friendly. The fact that 40% of our total business is now on partner contracts is a strong indicator of our progress, up from about a third a couple of years ago. The actual influence is even greater than that figure suggests, as it reflects only what has been sold directly on partner contracts. I encourage you to keep asking how that percentage is evolving and how our influence is progressing. We are seeing many positive indicators, and while we are moving in the right direction, we believe there are still many opportunities for improvement in various areas. So please continue to inquire about this topic.

Our success and impact with the global system integrators is crucial as we expand our identity platform into the largest organizations worldwide. I've been dedicating time to strengthening relationships with these global SIs, as every major company undergoing an identity transformation relies on a strong partnership with them. Historically, we haven't positioned ourselves as the preferred partner for these global SIs, but market changes are working in our favor. More enterprises are transitioning to the cloud, which has become increasingly important for identity needs since traditional identity models are becoming obsolete. This cloud transformation heightens the requirement for a new identity platform, prompting organizations to seek advice from global SIs about their next steps. The stronger our partnerships become, the more we will benefit. Additionally, traditional identity companies are now facing challenges due to private equity ownership and concerns about merging roadmaps, leading both global SIs and large customers to reconsider their partnerships. All these developments are setting us up for success, and I’m excited about the time and effort we're investing in this area.

Excellent. Thank you.

Okay. We're going to take two more questions. The first one from Roger Boyd and the second one from Andy Nowinski. Roger?

Oh great. Thanks for squeezing me in. As it relates to Spera and just the broader suite of identity security solutions you're building out, what's been the early feedback from customers on that direction? And can you just remind us about how you're thinking about monetizing versus speaking in some of these security solutions like ITDR as you push towards the goal of a more secure Okta? Thanks.

Customers are highly interested in both identity security and specifically the Spera acquisition. The identity security market has evolved significantly over the past few years. A few years ago, it focused mainly on ensuring on-premises Active Directory was secure. Now, as more companies adopt modern identity stacks like Okta, the focus has shifted to securing not just Okta but also all applications and cloud infrastructures. Customers seek a comprehensive view of all their identities and associated risks across various platforms, including Okta, Azure Active Directory, Amazon, Google, and Salesforce. As they engage more with modern identity solutions, they are also inquiring about the tools and technologies that can provide protection. Offerings like identity threat protection with Okta AI and the Spera product will support this need. In terms of pricing and packaging, these will come with additional licensing fees. Identity threat protection can be seen as an enhancement over advanced multi-factor authentication, incorporating phishing-resistant factors and better integration within the security ecosystem, including features like universal logout. Similarly, Spera will provide visibility into not just Okta’s security posture but also the surrounding applications, functioning as a central data repository and priced independently.

And our last question goes to Andy Nowinksi. Andy?

Thank you for including me today, and congratulations on a strong quarter. I want to discuss the effectiveness of your platform that you highlighted. You shared various go-to-market strategies you're implementing. However, it seems you're not adopting a strategy like Palo Alto, which encourages customers to purchase the entire platform. Did you ever consider using that approach to achieve the revenue growth and acceleration you're aiming for, perhaps to reach your goals sooner?

We consider various strategies for pricing and packaging our offerings. When we look at how we've priced governance and privilege, it encourages customers to purchase all three components together. This is due to their tight relationship, making it clear that a buyer of one will likely want to acquire all three. The way we’ve designed the products and the specific use cases support this. On the other hand, customer identity and workforce identity often appeal to different buyers and members of the C-suite. Therefore, while there is an advantage to obtaining both from a single vendor, it is not as strong as purchasing the workforce product, which is typically sold directly to security and IT teams. The customer identity aspect is somewhat less connected, and although we may consider adjustments as we expand, no changes are currently planned. The key point related to your question is that our efforts, whether in customer identity, identity security, or other product areas, are driven by a clear strategy: we aim to be the leading independent and neutral identity company. We strongly believe that the market and industry needs an independent leader for greater choice, flexibility, better integration, and enhanced value for customers. To achieve this, we must have products in every category, including customer identity, access management, privilege, and governance. Our strategy necessitates establishing a foothold in all these areas, which is what we are currently executing. This strategic message has remained consistent for over seven years, and we are committed to continuing this approach for the next seven years and beyond.

Okay. We appreciate everybody attending today. Apologies to those we didn't get to. We keep running long. So just to note, this quarter we'll be participating in the Morgan Stanley TMT conference in San Francisco next Tuesday the 5th, the KeyBanc Emerging Technology Summit in San Francisco next Wednesday the 6th, and the William Blair Tech Investors Virtual Conference on March 15th. And that's it for today. If you have any follow-up questions, you can reach us at investor@okta.com. Thanks.

Thanks, everyone.

Bye-bye.