Okta, Inc. Q2 FY2025 Earnings Call

Hi, everyone. Welcome to Okta's Second Quarter Fiscal 2025 Earnings Webcast. I'm Dave Gennarelli, Okta's Senior Vice President of Investor Relations. 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 on our IR website. This posted commentary contains much of what would historically be the opening commentary, including the customer commentary, product-related news and a review of our financial results. This format allows listeners to review that information before this call. Today's meeting will include forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause our actual results or performance to materially differ from those statements. These statements represent our management's beliefs and assumptions to date. And except as required by law, we assume no obligation to update them in light of future events or new information. Information on factors that could affect our financial results is included in our SEC filings, including the Risk Factors section in our last Form 10-Q. During today's meeting, we will discuss GAAP and 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 of our GAAP and non-GAAP financial measures is available on our earnings press 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 call over to Todd McKinnon. Todd?

Thanks, Dave, and thank you, everyone, for joining us this afternoon. Our solid Q2 results were highlighted by strength of large customers and continued spend efficiencies, leading to record profitability and strong cash flow. All of this while facing a challenging macro backdrop. Identity is security and has become a critical component of an organization's overall technology strategy and defense against today's cyber threat environment. Poor customer experience and technology fragmentation stand in the way of organizations meeting their business imperatives of growing revenues while cutting costs in a secure and compliant manner. Identity is the technology that solves this challenge and Okta has the most comprehensive identity platform in the market today. Okta's vision is to free everyone to safely use any technology. We're advancing that vision through incredible product innovation and extending our unmatched portfolio of identity solutions for workforce and customer identity. Just this past quarter, we launched the general availability of three highly-anticipated additions. The first is Identity Threat Protection with Okta AI for workforce customers, which is powered by insights from across an organization's security stack. Identity Threat Protection continuously detects and responds to identity threats both during and post-authentication, amplifies security signal sharing, and orchestrates remediation actions to support identity threat detection and response strategies. Also for workforce customers, we launched Identity Security Posture Management. This solution empowers customers to take control of their identity sprawl and harden their security posture through identity-focused risk analysis and prioritized insights that help drive remediation. For the customer identity market, we released highly regulated identity. This solution delivers financial-grade identity with elevated security, privacy, and user experience controls for sensitive customer operations beyond login. That's tremendous innovation we're delivering to our customers. We have a strong pipeline of new products and features that we'll talk more about at Oktane, which takes place October 15th to 17th. Come join us in Las Vegas for the biggest identity event of the year. You'll hear from Okta's leadership team along with fellow industry experts to discuss the future of identity and why it's not just the first line of defense, but the backbone of a company's holistic security strategy. We'll also be hosting a Q&A session for analysts and investors at the event, featuring myself, Brett, Eugenio Pace, our President of Business Operations, and Jon Addison, our CRO. As we head into the second half of FY '25, the priorities we started the year with remain our top priorities today: security, growth, and scale. I'll take a moment to touch on the first two priorities. On the security front, in addition to delivering world-class identity solutions, Okta is driving change with the Okta Secure Identity Commitment, which is our long-term pledge to lead the industry in the fight against identity attacks. Since announcing this commitment, we've made significant progress in implementing new security measures and solutions. These investments are raising the bar for identity security and further establishing us as a trusted partner. On the product security front, we released enhanced bot detection features across customer identity cloud. We've reduced credential stuffing attempts and malicious bot traffic by more than 90% for some of our largest customers. Our unwavering focus on security helps elevate the entire industry in the fight against identity-based attacks. Check out our updated Okta Secure Identity Commitment white paper that was just published on our website today for more details. What's really interesting is how Okta Secure Identity Commitment has triggered a new type of conversation with customers and prospects. As we improve ourselves, we help elevate the industry. Organizations are now reaching out to Okta to better understand the enhancements we've made to our own security posture so that they can take these best practices and implement them in their own environments. These best practices, combined with Okta's products, are helping our customers be more secure and do it faster. These types of conversations are incredible for building long-term partnerships of trust with our customers. Our second priority, reigniting growth, includes several prongs. The primary initiative is growth through our new and existing product offerings. Okta offers customers a platform of identity solutions for a holistic approach, including password-less access management, governance, privilege access, threat protection, posture management, and customer identity. A great success story for our new products is the rapid uptake and contribution of Okta Identity Governance. In less than two years, OIG already has over 1,000 customers. Another key growth initiative is deepening our relationships with key channel partners, especially global systems integrators, and leveraging them to enhance our global expansion. In Q2, the average size of deals conducted through partners was over three times larger than our average direct deal. Furthermore, eight of our top 10 global deals had partner contributions. Today, more than 40% of our revenue mix is generated through indirect channel partners, and we believe we can drive that number meaningfully higher. To wrap things up, we're really excited about expanding our modern identity platform with new products and features. Identity is security and Okta has an unmatched array of identity products that are helping to solve critical security needs, drive customer experience, and optimize technology infrastructure for our customers. We're taking the right steps to advance our position as a leader in the identity market while remaining focused on investing for growth while driving spend efficiencies and cash flow. I look forward to seeing many of you at Oktane in Las Vegas in about six weeks. 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. Just a quick reminder that most of my typical commentary on 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, but we'll focus my commentary on broader topics before getting into our business outlook. The challenging macroenvironment continues to show up in our business in a couple of notable ways. First, it's impacting our mix of new business versus upsells, which remains weighted more towards upsells. And second, organizations are scrutinizing budgets and rationalizing their software spend, resulting in lower Monthly Active User assumptions in our Customer Identity business and fewer seats within our Workforce Identity business. These actions are relatable because Okta has been going through the same exercise of rationalizing our own software spend over the past two years. We expect this trend to continue in the current economy. On the positive side, our platform strategy is working. We're selling more products to our new and existing customers, including new products like Okta Identity Governance and Okta Privileged Access. And our data tells us that customers that adopt more products have the highest retention rates. Before getting into the Q2 financial review, I'll note that similar to the prior two quarters, as we have analyzed our key metrics, we could not attribute a quantifiable impact from the security incident on our Q2 results. And while not quantifiable, the event likely had some level of impact. We will continue to monitor this as we move through the rest of FY '25. Moving on to some financial highlights. We continue to build on the efficiency initiatives that we've been implementing over the past two years. Our Q2 financial performance was highlighted by record operating profitability, including achieving GAAP profitability for the first time. Cash flow was strong as well. Once again, the primary area of strength was with large customers. Our fastest-growing cohort was $1 million-plus ACV customers. Global 2000 companies typically have the most challenging identity needs because of the complexity of their infrastructure. This is where Okta shines and is another great proof point of our success with large organizations. We now count over 40% of the Global 2000 as Okta customers. That's great progress, but it also represents a lot of runway to increase our overall penetration of this group, as well as a tremendous opportunity to expand our footprint within these accounts. We're also seeing continued positive trends around weighted-average contract term length for contracts signed in the quarter, which increased year-over-year, particularly with new customers. That's a great sign of customer confidence with Okta. Now, let's turn to our business outlook for Q3 and FY '25. As always, we take a prudent approach to forward guidance and we have not made any changes in our approach. We are factoring in a challenging macroenvironment consistent with what we've experienced in Q2. We also continue to incorporate some conservatism into our outlook for the remainder of this fiscal year related to potential impacts from last year's security incident. For the third quarter of FY '25, we expect total revenue growth of 11%, current RPO growth of 9%, non-GAAP operating margin of 18%, and free cash flow margin of approximately 20%. We are raising our outlook across the board for the full year FY '25. We now expect total revenue growth of 13%, a non-GAAP operating margin of 21%, and a free cash flow margin of approximately 23%. To wrap things up, we're pleased with the progress we've made to drive operational efficiencies. We've demonstrated exceptional leverage in our model over the past two years, and we remain focused on delivering profitable growth for years to come. With that, I'll turn it back to Dave for Q&A.

There're 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, we'll take our first question with John DiFucci of Guggenheim.

Thanks, everyone. I don’t usually say this, but the results look impressive. I typically don’t commend the team on a quarterly basis, but you all are doing well, especially considering the challenges from a year ago and how you've managed the company. We see the positive impact in the field and the results. However, I want to address something that might get a chuckle from Brett. I hope it’s a laugh and not a tear. One area that’s receiving some negative feedback is your guidance for current RPO. I realize Dave may not want to choose me again after this. Various factors influence that, and you're among just four out of thirty companies that actually advise people to pay attention to it. Essentially, you're signaling that you expect to see single-digit growth in revenue over the next year, which I don’t believe is the case, and I know you don’t believe it either. Yet, people interpret the current RPO as a leading indicator for future revenue growth. I truly wish you would reconsider this. Only a few companies engage in this practice, and two of those regularly explain on calls why it may not be effective. I don’t want to come across as negative because I genuinely believe you did a great job, and the sentiment is shared by others. However, it turns into a bit of a numbers game, and I understand that’s not how you want to manage the business. You shouldn’t run it that way.

No, it's really good feedback, John. I really appreciate it. When we assess the business, there are many positive developments. The success with large enterprises is the fastest-growing segment, and we have new products as well. Looking ahead at our guidance and long-term opportunities, we feel very optimistic and recognize that many things are going well. In the medium term, particularly over the next couple of quarters, we need to be cautious as we navigate the impact of the security incident. We've put in a lot of effort both with customers and internally to enhance security and shift that experience from a negative to a proactive approach. However, we plan to be conservative in our outlook regarding that aspect. As for guidance, this is simply a careful strategy. Additionally, the economy continues to present headwinds and challenges, consistent with trends from previous quarters. We would like to see more stability before we feel confident in adjusting our guidance upward.

Okay. And I think no issues at all with the revenue guide, because you said a precedent, it's the current RPO. But anyway, I'll get on the line...

Appreciate the feedback, John. I look forward to our continued debates.

Okay. Let's go to Shrenik Kothari at Baird.

Yeah, thanks for taking my question. So, good to see when you guys called out the indirect channel partners contributing more than 40%. And just in light of your commentary on the macro, right, of course, this is kind of stable, but still kind of challenging, which is impacting the new business and the upsells. Just curious, what specific, like, let's say, initiatives in place to deepen the relationship with the global systems integrators, right? You did mention about it, Todd. And can you just share like how the GSI motion is kind of taking place in terms of how you guys are engaging, the number of deals, deal sizes? Any insight into kind of cycle lens around those kind of deals and those kind of metrics that would be great.

Partners are extremely important to us. We've discussed in previous calls the investments and focus on our partner program. We launched the Elevate Partner Program a few quarters ago to prioritize our channel partners and ensure they are equipped for end-to-end servicing, including pre-sales and post-sales support. The statistics regarding our partners are encouraging, with about 40% of our business billing routing through partners. We believe there's room for improvement and are working hard to enhance that. You mentioned other aspects of the partner program, especially with ISVs. A recent significant workforce deal we secured this quarter involved a Fortune 500 transportation company, sourced through a security ISV partner. This ISV facilitated the introduction, aligning with the customer's desire for a zero-trust strategy that includes a comprehensive security and identity solution. We also have Managed Service Providers to discuss, but what excites me most is the progress we are making with global systems integrators. We are gaining strong momentum with them, who recognize the demand for modernizing identity and transforming technical infrastructures for improved identity management. When GSIs assess the market, they observe two different approaches: platform companies like Microsoft that seek to consolidate everything under their umbrella, and independent, neutral identity platforms. In contrast to legacy software companies facing their own issues, Okta stands out sharply. This is why GSIs are increasingly interested in partnering with us. I am personally invested in this initiative, which is a high priority, and I look forward to sharing more measurable progress in the coming quarters.

I want to emphasize that it's not just Todd working on this; the entire management team is involved. A good example is one of our GSIs that recently met with our executive leadership team to discuss how we can collaborate more effectively. We have dedicated teams for each of these partners, and we're fully engaged in the details of how we can support each other to maximize our mutual profits. While we're mentioning GSIs, this level of collaboration is happening across many areas of the business that Todd just discussed. We're committed to investing time and energy to demonstrate to our partner community that we are serious about working together and advancing these opportunities.

Yeah. And hopefully, I know a lot of the folks on the call and the notes I've read are picking up with better partner sentiment about Okta, and just in terms of our ability to effectively work with Okta and partner effectively with the community. And that's something very good to hear and we continue to focus on that to make that even better and make the ecosystem even stronger supporter of Okta.

Got it. Thanks.

Thanks, Shrenik. Next up, we have Annick Baumann from Jefferies.

Hi, guys. I'm on for Joe Gallo today. I just wanted to ask, where are you in your sales enablement journey as it relates to Customer Identity Access Management specifically? Any key milestones to call out? And how did that impact performance this quarter?

We're still working hard on that. It's very important. I think it's improving, but it's not yet at the level we aim for, which means we can still enhance our sales productivity. When I refer to sales productivity, I'm talking about the entire go-to-market process from marketing to conversion to sales execution. I believe there's still room for improvement in productivity, and while it's moving in the right direction, we haven't reached the levels I believe we can achieve, especially in terms of fostering growth and increasing efficiency across the business.

The metric we have monitored for a long time is the participation of the field in CIAM deals, both in closed deals and in the pipeline. We track this by workforce and by product to assess our trends. We've discussed this for several quarters, and this number continues to improve. However, as Todd mentioned, it isn't quite where we want it to be. We believe we can perform better in this market, which is significant, and we are very optimistic about the long term. The changes we are implementing, such as enhanced enablement and adjustments to our organizational structure, should assist us in the long run, even with the macroeconomic challenges we are currently facing.

Great. Next up, we have Madeline Brooks from BofA.

Great. Thanks so much for taking my question. Two quick ones for me. The first, Brett, was more on your rationalization commentary. I guess, I understand the CIAM side, but on the workforce side, we've been hearing about a lot of breaches in the news and pretty big notable ones like Snowflake, AT&T, these stem not just from Privileged Access Management security, but just basic identity security, not having multi-factor authentication enabled, right? So, I guess, I'm struggling a little bit to see why companies would rationalize something like Workforce Identity spend. So, if you could just give us a little bit more color in terms of maybe where they're rationalizing or also to is the market maybe just more mature and saturated? And then, I have one more follow-up question after that.

Yeah, Madeline, if I could jump in for a moment?

Yeah. Go ahead.

First of all, it's interesting to note that 85% of overall breaches involve some form of compromised identity, which is staggering to consider. If a company or organization enhances their identity security, they could significantly reduce their breaches. Historically, modernizing identity required extensive upgrades, especially with legacy systems. Okta has made it easier to add components like multi-factor authentication over the years, yet it remains a substantial challenge for organizations. With our new products such as Identity Governance, Identity Security Posture Management, and Privileged Access, the time to achieve a tangible security return on investment is shorter. Calculating security ROI can be tricky, especially when a lack of breaches makes it hard to justify investments, so companies must make risk-based decisions. For instance, with Identity Security Posture Management, once it's installed, it identifies security vulnerabilities across various systems and identity providers quickly, allowing organizations to reduce risk almost immediately after purchase, even during the demonstration phase. This aspect of our product portfolio is expected to drive growth, even though we've seen an increase in security breaches, particularly identity-based breaches, which hasn't accelerated the pace at which companies upgrade their identity systems as one might expect.

A couple of years ago, we anticipated that this customer identity project would grow by 15%, leading us to plan for purchasing 30% more licenses. Now, we believe it might only grow by 10%, so we are considering buying 5% more and will evaluate if we really need additional licenses based on whether it reaches that growth target. The situation has changed a bit.

Got it. And then maybe just one more quick one too, changing gears, federal. And I kind of agree with John's comments, right, as we all hear really positive things in the channel. So, I guess, I'm just trying to pair the current RPO guide and kind of outlook for next year versus what happened this quarter. Was this more of an outsized federal quarter? Is that kind of what those numbers are pointing to, or was federal business kind of more normalized for what we've seen previously?

Federal is certainly more aligned with typical expectations compared to what we've seen. It hasn't had an excessive impact on the current RPO. One thing to remember is that, similar to some other companies, the average duration within our current RPO can vary quite a bit. Ours does fluctuate, but not significantly. This is part of the challenges that others have mentioned. Regarding our guidance, there are two main factors to consider, as Todd mentioned earlier. The first is the macro environment, which we previously discussed, including a decrease in upsells that used to contribute more to our license count and Monthly Active User count. Although we added more new customers this quarter, it wasn't at the level we desire and we believe it's being affected by the macro environment. The second factor is the security incident. While we haven't identified any measurable impact on our financials, our performance has indeed been affected by the incident. We are remaining cautious as we move through the latter half of the year. It's important to note, as Todd emphasized earlier, that security is a top priority for us in terms of investment. We've made significant progress towards our goal of becoming one of the most secure companies globally. Today, we updated the Okta Secure Identity Commitment, sharing what we've accomplished in the past 90 days and our future plans. We are dedicating extensive resources to this because we consider it a highly important strategic initiative.

So, it's to drive growth or...

Absolutely, we aim to drive growth and be one of the most secure companies in the industry. We are fundamentally an identity company, and security is a crucial aspect of that identity. Our goal is clearly to establish ourselves as one of the world's most secure companies.

Great. Thanks so much for the time team.

Okay. Let's go to Charlotte Bedick at JPMorgan.

Hi. Thank you so much for taking the question.

Hi, Charlotte.

Hi. I'm on for Brian Essex.

Yeah, you guys have a lot going on today. We understand.

Great. Quick question. I know you discussed strength in large enterprises. Can you share your insights on the expectations for the SMB and mid-market environments going forward? Thank you.

SMB continues to be affected by the macroeconomic environment. For instance, the enterprise net retention rate is higher than the overall rate, while SMB is lagging behind. We've observed this trend over several quarters, with enterprise performing stronger and SMB struggling, which we believe is directly linked to the macro conditions. In our guidance today, we maintain that the macro environment has been stable for several quarters, and we anticipate it will remain consistent in the latter half of the year, which is reflected in our guidance and today's commentary.

And with that, do you expect like net dollar retention to stay pretty much level at where it is?

Right now, let's start with our net retention, which is based on gross retention. That remains healthy. In Q2, we saw a decline from 111% to 110%, primarily due to the absence of seed upsells that we've mentioned before. We expect that trend to continue in the second half of the year and anticipate some pressure on net retention. We see it decreasing for those reasons, including the macro factors we've discussed and the impact of small and medium-sized businesses on the overall net retention rate.

Great. Thanks for taking the question.

Great. Next, let's go to Joe Vandrick at Scotiabank.

All right. Yeah, this is Joe on for Patrick Colville. So congrats on reaching GAAP profitability. Should we expect that to be the new normal going forward in fiscal '25 and fiscal '26? And then, it looks like sales and marketing declined in the quarter. Is that going to be a continued source of leverage this year?

So, the first question around GAAP profitability, I mean we don't guide GAAP profitability, but we're very pleased with the overall results of becoming GAAP profitable. Frankly, it's a result of all the work we've been doing over the last several years around rationalizing software spend, rationalizing costs, real estate, moving people into lower-cost regions to be able to allow us to invest back into other areas like security. You've heard us talk about security a lot. We've been able to improve these margins while also putting a lot of money into security to become one of those great security companies, one of the world's most secure companies out there. And so, as we continue to go forward, I don't have any expectations one way or the other in terms of GAAP, in terms of guidance, but we are continuing to improve margins. As you can see by the guidance today, we increased our expectations for FY '25. In terms of sales and marketing as a percentage of revenue, yes, that has definitely created some leverage for us as part of getting to GAAP profitability and as part of the margin improvements we've seen. Right now, the way we look at it is we want to be able to invest correctly to be able to drive growth, but doing also in a responsible way. So, driving that profitable growth as best we can. So, I'm pleased with the progress we've made on both margins and also sales and marketing as a percentage of revenue, and we'll execute against our targets for the balance of the year.

Sure. At a high level, we want to plan the company and set our investment assumptions based on the Rule of 40. Within that framework, our main focus is on prioritizing growth. One of our key objectives is to reignite growth. We are considering how to invest in order to reaccelerate that growth, which is essential. Additionally, we are always mindful of stock-based compensation and shareholder dilution, which significantly influences the gap between GAAP and non-GAAP in our business. While GAAP profitability is the final outcome, it isn’t our primary focus in our planning; we are more concerned with the overall framework of the plan.

Thanks, Todd and Brett.

Okay. Let's go to Manraj Bevli at Bernstein.

Hi, thanks, guys. This is Manraj on for Peter Weed from Bernstein. Firstly, congrats on a great quarter. But a quick question here. Why do we try and impute the average land ARR per new customer, right? And it seems that that's growing and it's growing pretty quick despite challenging macro. So firstly, just wanted to understand is the tip of the spear or the land product kind of changing, what is causing that land ARR to expand? Number one. And I have a follow-up question as well.

In terms of our approach, we focus on securing customers and ensuring their success rather than worrying about the initial acquisition. Our strategy is to attract customers, help them succeed, and ultimately encourage them to increase their usage of our products over time. This has resulted in strong net revenue retention for us. While I can't specifically address the calculations you’re making, our primary objective is to bring in as many customers as possible, support their success, and foster long-term relationships with them.

I want to provide some insight into our internal thinking. The success with large enterprises is very promising and represents a significant part of our future. Currently, 40% of the Global 2000 has made some kind of purchase from Okta within their organization. These sales may be larger than what we see with small and medium businesses because of the budget capabilities of these large organizations. However, we believe we are just beginning to tap into their full potential. For example, we recently secured a deal with a Fortune 500 transportation company that has 80,000 employees, and we see opportunities for significant growth by selling them Customer Identity and other product capabilities. Therefore, it is possible for deals to increase in size as we engage with large enterprises, while also having substantial upsell opportunities due to the vast potential within these accounts.

Got it. Thank you. And a quick one, a couple of people asked about this before, but we saw acceleration in RPO recently, right, yet to sort of see that trough in current RPO. When can we see acceleration on current RPO as well?

Well, we're excited about the total RPO acceleration, right? I mean we've seen it go from below the growth of the current RPO to above the growth of the current RPO and that's really on the back of what Todd has been talking about, which is longer contract durations, primarily because we're doing deals with the enterprise and strategic and large organizations. And typically, they buy for longer-term than the SMBs, which usually a little shorter. And so, you see the overall effect in the total RPO numbers. You can see it in the numbers we talked about earlier about the Global 2000. We're now greater than 40% of the Global 2000. That's up from 33% of the Global 2000 less than two years ago. And like Todd was saying, a lot of those are starter deals in that Global 2000. There's a lot of room to run as we solve more and more identity use cases inside those accounts, let alone all the other 60% that we don't have right now. There's a lot of opportunity. And so, we're pleased with the outcomes in terms of the contract duration. This is the third quarter in a row. We've seen a good trend of contract duration getting a little bit longer. And you see it in the results here from a total RPO perspective.

Perfect. So, the total average contract duration inching up. All right. Thanks, guys.

You're welcome.

We'll go to Mark Cash at Raymond James.

All right. Thanks, Dave. Yeah, this is Mark on for Adam. Yeah, so Todd, you've been talking about the platform consolidation opportunity across workforce, customer identity governance for a while now. And now considering potential concerns some organizations may have because with consolidating across your IT average, do you think this concern plays into the identity space? Or do you view this consolidation opportunity still fully intact?

I think it's a really good question because when I talk to customers, they know they have thousands of vendors. Even a small to medium-sized company has around 1,000 vendors in their technology stack. They understand the need to standardize in some areas, but they are also aware that reducing the number of vendors too much can lead to lock-in and a lack of choices. The case we're making is that focusing on identity is one of the right areas for standardization, as it offers good integration across the identity stack, enhances security outcomes, lowers costs, and increases revenue. Reliability and the risks associated with relying on a single vendor are also important considerations. It really comes down to how the products are designed, the backup plans, fallbacks, and the proven track record of reliability, which we have established over the years. Okta performs well in this aspect. If you were to ask 20 CIOs and CISOs to rate Okta on security and reliability, we would want that feedback to be industry-leading in both areas. That’s why we're committed to maintaining our reliability, robustness, and trust in this regard, ensuring we invest wisely to confidently claim that we are industry-leading and world-class in all aspects of security.

Great. Next up, let's go to Trevor Rambo at BTIG.

Great. Thanks, guys. This is Trevor on for Gray Powell of BTIG. So maybe switching back to products. What have you guys been doing to help train up sales reps on the Privileged Access Management product? Because I know it often targets a different buying center than your core Identity Access Management. I'm just trying to parse how you're thinking about the potential ramp in PAM versus OIG? And I know you guys said OIG is now at 1,000 customers, which is great. So, more color on how PAM is going and maybe also some more color on how initial demand for ITDR is going as well would be helpful.

On PAM, it appears to be developing differently compared to OIG. I don't think the enablement and uptake by the sales team are the same as they were for OIG, which was more intuitive for the salespeople to market. PAM reminds me of when we first launched multi-factor authentication. At that time, we didn't offer it initially and later introduced it as part of Okta's offerings. It became our first significant security solution. The sales team approached selling it as a comprehensive package that included identity management along with multi-factor authentication, rather than promoting it as a standalone solution. I believe PAM will follow a similar path. For instance, this quarter, we secured a deal with a Global 2000 transportation company that included PAM. It was a new customer sourced through an ISV and featured both OIG and PAM as well as core workforce identity and FastPass Multi-Factor Authentication. This is significant because the sales team presented it as part of a complete solution, differentiating us as a newer player in PAM. It's more effective for us to address how our integration with governance and access management enhances the overall platform. Thus, I'm optimistic about PAM, considering the market size in ARR and its differentiation within our workforce suite.

Awesome. Thank you. Anything else on ITDR? And how that...

ITDR, which stands for Identity Threat Detection Response, is the industry term we are using. We are very excited about our product, Identity Threat Protection, or ITP. This product can be thought of as an advanced version of multi-factor authentication, significantly enhanced. It features deep integrations with the entire security ecosystem, including companies like CrowdStrike, Zscaler, Netskope, and Palo Alto Networks. It provides continuous threat detection even after login. When you log in and are working in your applications, if a threat is detected by Palo Alto or CrowdStrike, our product will recognize that signal and log you out of all your applications, even if you're mid-session. This ability to terminate a session is highly powerful. I view this offering as a natural expansion beyond advanced multi-factor authentication and a step up from there. However, a challenge we face is that many companies are still in the early stages of adopting multi-factor authentication and phishing-resistant biometric authenticators. It will likely take time for organizations to mature in this area. One of the most exciting developments in the second quarter is that we gained traction with well-known security companies, as they expressed enthusiasm about the enhanced protections our Identity Threat Protection product offers.

Awesome. Thanks so much for the color.

Yeah, happy to help.

Thanks, Trevor. Okay. We'll go to Brian Wilcox at Cleveland.

Thanks, guys. Brian on for Ben Bollin today. Brett, you had mentioned the new logos, maybe not exactly where you would like them to be and largely attributable to the macro. What gives you confidence that it's the macro, and it's not the security incident from last year that's pressuring new logos?

We review all the key indicators and don't see anything related to the quantifiable aspects of the security incident in the math. We've mentioned this for the last three quarters. Our analysis points more towards macro factors. There are several indicators that suggest this, like upsells, win rates, and pipeline creation. Overall, everything seems to indicate macro influences rather than the security incident. We are closely monitoring the situation and will keep you informed if anything arises. For the past two to three quarters, we haven’t found any significant effects from a new logo perspective. While we want to perform better than adding 200 net new logos this quarter—an improvement, but we believe we can grow much faster—we're focusing on three main growth initiatives: our partner strategy, new products we've discussed, and specializing in the field with the hunter-farmer model we've implemented over these past two quarters. All of these are intended to drive long-term growth. However, we are currently navigating a challenging macro environment that has persisted for several quarters.

Thank you. I have one follow-up question. If we consider the challenges from limited seat expansion and reduced hiring or customer acquisition, can you share your insights on the pricing environment regarding renewals and whether there is room to implement price increases or if customers are resistant to price hikes?

The pricing environment really hasn't changed on either side. So the real headwind is from the license counts that we've been talking about on both Workforce and Customer Identity side.

Thank you.

No problem.

It looks like we have one more question from Michael Richards at RBC.

Hey, guys on for Matt Hedberg. Thanks for taking the question. Maybe going back to the hunter-farmer model, you know, I'm just curious on how that's trended relative to your expectations. And is there any expectation that this will move to other parts of the business in terms of different customer segments other than the SMB? Thanks.

It's too early to assess the situation since we're only two quarters in. The first quarter involves a lot of changes with new territories, new teams, and various adjustments. It's been a short period, and we're still seeing how the hunter-farmer model is functioning. However, we are optimistic about the long-term potential. We believe that specialization will benefit us, and as you heard from Todd during this call, we have a significant number of products and a large customer base of 19,300. We recognize the importance of specialization and see it as a key driver of long-term growth. We will have more information as the year progresses, but we anticipate that it will take a few more quarters to evaluate its success.

Right. Well, I don't see any more hands raised. So with that, before you go, I just want to let you know that in addition to hosting several on-site and virtual bus tours this quarter, we'll be attending the Citi Conference in New York on September 5th, the Goldman Sachs Conference in San Francisco on September 10th, the Piper Conference in Nashville also on September 10th, the JPMorgan Software Forum in Napa on October 8th, and of course, as Todd mentioned, we've got the Oktane Conference in Las Vegas, October 15th to 17th. So, we hope to see you at one of those events. Thanks, everyone.

Thanks, everyone.