Okta, Inc. Q3 FY2025 Earnings Call

Hi everyone. Welcome to Okta's Third Quarter of Fiscal Year 2025 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. 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 format allows listeners to review that information before this call. Today's meeting will include forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements regarding our financial outlook and market positioning. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance, or achievements to be materially different from those expressed or implied by the forward-looking statements. Forward-looking statements represent our management's beliefs and assumptions only as of the date made. Information on factors that could affect our financial results is included in our filings with the SEC from time-to-time, including the section titled Risk Factors in our previously filed Form 10-Q. In addition, during today's meeting, we will discuss non-GAAP financial measures. Though we may not state it explicitly during the meeting, all references to profitability are non-GAAP. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures and a discussion of the limitations of using non-GAAP measures versus their closest GAAP equivalents are 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. Our solid Q3 results were once again highlighted by strength with large customers and strong profitability and cash flow driven by continued spend efficiencies. While the macro environment remains consistent, we're encouraged by some positive data points in Q3. I'll touch on some of those and then get into other highlights from the quarter before turning over to Brett. I've mentioned previously that deepening our relationship with our partner ecosystem is one of our main priorities. We're already seeing good progress as all of our top 10 deals in the third quarter involve partners. These 10 deals were all over $1 million in annual contract value and, in aggregate, represented approximately $20 million in ACV. This underscores the value of investing in our partner ecosystem. The public sector also continues to be an area of strength. In fact, half of the top 10 deals that I just mentioned were in the U.S. Federal Vertical. We've made great progress with our presence in the public sector and believe we have a tremendous amount of runway ahead of us. Our largest customers remain an area of strength. The cohort of $1 million-plus ACV customers continues to be our fastest-growing cohort. In total, this cohort now represents approximately $1 billion in ACV. We were also pleased with the upsell and cross-sell activity in Q3, while the macro environment remains consistent, we're encouraged by some positive data points in Q3. I'll touch on some of those and then get into other highlights from the quarter before turning over to Brett. I've mentioned previously that deepening our relationship with our partner ecosystem is one of our main priorities. We're already seeing good progress as all of our top 10 deals in the third quarter involve partners. These 10 deals were all over $1 million in annual contract value and in aggregate represented approximately $20 million in ACV. This underscores the value of investing in our partner ecosystem. The public sector also continues to be an area of strength. In fact, half of the top 10 deals that I just mentioned were in the U.S. Federal vertical. We've made great progress with our presence in the public sector and believe we have a tremendous amount of runway ahead of us. Our largest customers remain an area of strength. The cohort of $1 million-plus ACV customers continues to be our fastest-growing cohort. In total, this cohort now represents approximately $1 billion in ACV. We were also pleased with the upsell and cross-sell activity in Q3. Specifically, we experienced strong growth of workforce customers buying more workforce products, as well as workforce customers buying customer identity. Okta's expanded product portfolio is allowing us to equip our customers with more industry-leading identity solutions to support them in their goal to operate more efficiently and securely. The threat environment has never been more hostile. Organizations are constantly under attack, and identity has become a primary attack vector. Okta's technology has become more important than ever in helping to prevent and mitigate these attacks. We're advancing our vision to free everyone to safely use any technology with the expansion of our unmatched portfolio of identity solutions through great product innovation. We're also accelerating our investments in the Okta Secure Identity Commitment, which is resonating with prospects and customers. We recently showcased that innovation at Octane, our biggest customer and partner event of the year. The energy at the event was terrific, as in-person attendance was up over 25% versus last year and represented hundreds of millions of dollars of pipeline. Attendees heard about the future of identity security and how Okta is responding to the evolving threat landscape. We highlighted more than 30 products, features, and capabilities across our workforce and customer identity clouds that will deepen our customers' security and help them create exceptional customer experiences while enabling us to reignite our growth with a focused approach. It's also great to receive validation on our strategy and vision from third parties. Okta was recently recognized as a leader in the 2024 Gartner Magic Quadrant for Access Management for the eighth consecutive year. Okta achieved the highest and furthest overall position for its ability to execute and completeness of vision in this research. We have a lot of optimism about the direction of the business. One of the things we're excited about is go-to-market specialization. In Q1 this year, we introduced a layer of specialization in the go-to-market team with a Hunter-Farmer model for the Americas SMB market. As we plan for FY26, we are planning for further specialization in our global go-to-market strategy to better align with the distinct identity buying centers of IT security and developers. Doing so will allow us to meet evolving market demands, help reignite growth, and create a win-win scenario that benefits both our customers and Okta, ultimately driving better business outcomes. To wrap things up, we remain hyper-focused on our top priorities of security, growth, and scale. Identity is security, and we are taking the right steps to advance our position as a leader in the identity market while remaining focused on investing for growth and driving spend efficiencies in cash flow. 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. We continue to build on the efficiency initiatives that we've been implementing over the past two years. Our Q3 financial performance was highlighted by continued strong cash flow and operating profitability, including GAAP profitability. I'll note that similar to the prior three quarters, as we have analyzed our key metrics, we could not attribute a quantifiable impact from the October 2023 security incident on our Q3 results. And while not quantifiable, the event likely had some level of impact. Our view on the macro environment is that it remains consistent with what we've experienced for the past few quarters. Organizations are scrutinizing budgets and rationalizing their software spend, resulting in lower assumptions for seats and our workforce identity business and MAUs in our customer identity business. These lower seat and MAU assumptions have put our net retention rate under pressure over the past few quarters, while gross retention has remained strong. Helping to partially offset the seat and MAU headwind is the success we've been having in selling more products to both our new and existing customers. Our relentless focus on innovation has been resonating with our customers, as approximately 15% of Q3 bookings were from new products. Okta Identity Governance continues to represent approximately one-third of the contract value when sold in a workforce deal. In addition to OIG, we're also selling new products like Okta Privileged Access, Device Access, Fine Grain Authorization, Identity Threat Protection, and Identity Security Posture Management. Our data tells us that customers that adopt more products have the highest retention rates, so we're excited about the trends here and the long-term contributions to the business. Now let's turn to our business outlook for Q4 and FY25. As always, we take a prudent approach to forward guidance. We are factoring in a macro environment consistent with what we experienced in Q3. We are no longer incorporating additional conservatism into our outlook related to the potential impacts from last year's security incident. For the fourth quarter of FY25, we expect total revenue growth of 10% to 11%, current RPO growth of 9%, non-GAAP operating margin of 23%, and free cash flow margin of approximately 32%. We are raising our outlook across the board for the full year FY25. We now expect total revenue growth of 15%, non-GAAP operating margin of 22%, and a free cash flow margin of approximately 25%. While we are still in the early phases of financial planning, we would like to provide a preliminary view of FY26. We're providing this preliminary outlook ahead of closing our biggest quarter of the year. We will provide formal FY26 guidance on our next earnings call, which will factor in our actual Q4 performance. We remain focused on profitable growth and continue to prudently factor in a macro environment that is consistent with what we've experienced over the past few quarters. As such, we're expecting a non-GAAP operating margin of at least 22%. We're targeting a free cash flow margin of at least 24%. From a revenue perspective, we estimate total revenue to be $2.77 billion to $2.78 billion, representing growth of approximately 7%. We believe these numbers are achievable while maintaining an appropriate measure of conservatism. 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.

Thanks, Brett. We have several hands raised already. We'll take them in the order that they are in and if you have follow-on questions you can get back in the queue so try to limit yourself to one question. That will kick it off with John DiFucci at Guggenheim. John?

Thank you, Dave. My question relates to something Brett just mentioned. Brett, you indicated that you are no longer adding extra conservatism to the guidance following the incident from last October, which I understand now. However, I want to clarify your guidance for next year as it's just the initial guidance. How should we interpret it? While I believe you handle your guidance well, I am considering that the past two years had a lot of variables. Should we look back at those years and evaluate whether your approach will be similar? I'm just trying to wrap my head around it.

Yeah John. Hey before you jump in Brett I want to just set the context at a high level. The Q3 was a solid quarter. And as we go into Q4 and think about next year, Brett can talk about the specifics on guidance, but we are, I think, being pretty balanced between optimistic about the future and all this new product momentum and all this large customer momentum, but also want to make sure we have the right level of prudence in our guidance. So it's always a balancing act, but I don't want the guidance question to kind of overshadow the momentum we see in the business and the optimism we see there.

Yeah, and Brett, or Todd, I apologize. I very rarely say this at the beginning, but it was a really solid quarter. It really was more than solid. It was really good. Then your whole team should feel really good about it.

It's one step. It's one step. We have a lot of work to do, but thanks for saying that.

In response to your question about guidance, John, if we look back a year, we faced a security incident that impacted our projections. At that time, we anticipated a 10% revenue growth for FY25. Now, we expect that growth to reach 15%. The difference between 15% and 10% is noteworthy, but I wouldn't anticipate such a significant change moving forward since the security incident is no longer a factor. There was considerable uncertainty during that period, which has now largely been resolved, as we haven't detected any quantitative impact from the security incidents in this quarter. That’s how I see it, John.

Okay. When I look back at the two years prior, you exceeded your original guidance by over 5 percentage points. I understand that this year's guidance is lower than last year's.

Yes. I think it's important to note that a couple of years ago, we were a much smaller company growing at a faster rate. This reflects the natural maturation of the business.

Yes. Another point is that Q4 has become significantly more important now, especially compared to five years ago when growth was quicker. Based on the guidance provided at the end of the Q3 call, Q4's performance will be critical for assessing our future. This is why our outlook for Q1 is particularly telling.

Okay, thanks a lot guys. Nice job.

Great. Let's go to Eric Heath at KeyBanc.

Thanks, Dave, and congratulations on the quarter, Brett and Todd. Todd, we’ve been hearing from some of your GSI partners about requests for proposals regarding the consolidated identity platform offering. I’m curious if that’s something you are noticing or tracking in your pipeline, or if it’s coming up more in customer discussions, as it seems to be resonating well with some of your partners.

We have made significant progress with Global System Integrators in the past year, and I am very excited about this. As many on the call know, managing identity can be complex, often more so than other tech areas, particularly in cybersecurity. This complexity has its downsides, as it can prolong the deal-making process and upsells. However, the upside is that once we establish a committed group of customers and systems integrators for their journey, it proves highly valuable for both the customer and the partner over a long period. A notable achievement in Q3 was securing a nearly $5 million annual recurring revenue deal with one of the largest tech companies in North America, marking the first phase of a larger initiative to overhaul their identity management. This initiative was driven by their Zero Trust transformation, indicating that even significant tech companies are in the early stages of their Zero Trust journey. We collaborated with a major systems integrator to scope and secure this deal, and there are even more exciting opportunities lined up as we execute the initial phase and achieve success before moving on to the next stages. This trend is reflected in a number of deals from the quarter, as all of the top 10 deals we executed saw partner involvement. We are effectively building our ecosystem and fostering trust with our partners, especially global systems integrators, who recognize the limited options available for scaled identity players. When it comes to an independent scaled identity provider that doesn’t lock customers into a specific stack, we stand out uniquely, and our distinct value is drawing partners toward us for mutual benefit.

I think the interesting aspect of the top 10 deals that Todd mentioned is the variety of partners involved. We have GSIs, ISVs, marketplaces, and traditional VARs all contributing. This diverse mix is why we continue to invest in these areas, as we've seen success like this in Q3.

Great. Next up, let's go to Gray Powell at BTIG.

All right. Great. Thank you very much. Before I ask my question, I just got to say, I really appreciate the 10 minutes of prepared remarks. And in fact, Brett, I think your section was probably shorter than DiFucci's question. So again, congrats on keeping it tight.

We do what we can, Gray. We do what we can.

My question is regarding the earnings season, which has been quite uneven across our security sector. It's encouraging to see your numbers improve. Could you share what stood out in this quarter compared to Q2? What changes were most significant? Additionally, how do you view the sustainability of this performance and your plans moving forward?

It was quite different than Q2 regarding our execution during the quarter and closing deals. Q2 was okay, while Q3 was very strong. It seems the reality is that the year is shaping up to be more back-end loaded than we initially thought in the first and second quarters, which is not uncommon in the company's history. However, this year appears to be more pronounced than we anticipated, indicating that Q4 is a crucial quarter. Our pipeline is strong, and it’s up to our team to execute effectively. We are motivated and aware of how important this is, and we are prepared to turn our plans into reality. We have several solid foundations to build upon, including large deals and new products. In fact, 15% of bookings this quarter came from these new offerings, which we hope will increase. New products are beginning to develop and may become significant contributors. Governance represents about 30% of the value of the deals. Okta Privileged Access is gaining momentum, highlighted by a notable win with a U.S. division of an Asian bank that purchased the entire suite of access management, governance, and privileged access. This trend seems like a common buying pattern, driven by the shift towards a Zero Trust architecture where identity management is crucial. For this particular division, compliance is key, and they require regulatory compliance for both applications and financial systems, which privileged access facilitates. We are seeing strong new products and large deals, plus good partner involvement, but we believe we can accelerate growth further. We discussed our guidance for next year and remain focused on this significant opportunity. Our growth and commitment to secure identity are our second highest priorities after security. While we are pleased, we are not satisfied and recognize there is much work ahead. Our team is energized to make it happen, and we are determined to succeed.

I'd add a couple of things, Gray, that actually may not have changed, but are positives for us in general. One is contract duration continues to be healthy for us. You can see that in the total RPO growth, right? That's now 6 points higher than current RPO growth. The other thing I would add is U.S. federal end of their fiscal year, we had a really solid close to that. So that was what you heard earlier, is a good portion of those top 10 deals. And I think that's just a continuation of our success in public sector. Think of public sector is actually one of our first forays into specialization, right? We've really focused on it. We've put a lot of effort on it. We've done a lot of stuff from an R&D perspective. And so that continues to also be successful for us in Q3 and is helping the results we see here today.

Understood, thank you.

Next, we have Gabriela Borges at Goldman.

Hi, good afternoon. Thanks for taking the question and congrats on a solid quarter. Todd and Brett, I wanted to pick up where they just left off on the 15% of bookings that are coming from emerging products. Remind us how that number compares to history. And Brett, you mentioned with the net retention rates, there are two dynamics impacting that. You've got the pressure on MAUs and C count and then you've got the tailwind from cross-sell. Talk to us a little bit about when you think emerging can offset the headwind in MAUs and C count and it's a long way of asking when you think net retention might trough? Thanks.

Regarding the new product mix, I don’t have the exact figures, but my intuition, based on being closely involved in the sales process for the new products, suggests that this is higher than in previous periods. This growth is primarily driven by governance and identity governance. There’s a close competition for second place between privileged access and identity threat protection, which appeals to our most security-conscious clients and significantly enhances their offerings. To clarify, identity threat protection can be thought of as an advanced version of multi-factor authentication. Its key feature is the continuous monitoring of security risks during a session. While multi-factor authentication and advanced multi-factor protect against phishing at login, identity threat protection actively tracks risk signals, such as changes in IP addresses, and works with solutions like CrowdStrike and SentinelOne to detect and address issues, ensuring proactive monitoring. This has made it a major contributor to our success. On the Customer Identity side, fine-grained authorization performed well this quarter along with our highly regulated identity solutions. We’re seeing promising growth from these new areas, which is more thrilling than just focusing on the 15% contribution because this 15% is driven by several emerging segments that have the potential to grow further, making us optimistic for the future.

Yes, Gabriela, I would add that the percentage has increased year-over-year because last year focused mainly on governance. Todd mentioned several products that are performing really well, which makes it clear that the percentage is rising, and this is very encouraging for us due to the reasons Todd outlined in his previous comments. Regarding Net Revenue Retention (NRR) and its impacts, the same factors we discussed earlier still apply. We've noted that license counts and Monthly Active Users (MAUs) are under scrutiny due to broader economic conditions. Additionally, older customer cohorts are still facing challenges stemming from the COVID period. For next quarter, which is the only forecast available at this moment, we expect a slight decline in Q4 due to these factors. While we maintain a healthy gross retention rate, the influences we previously mentioned remain relevant. We should focus on completing Q4 first before discussing our plans for fiscal year 2026, and once that is finalized, we will be able to provide more insights on how NRR will evolve throughout FY '26.

That all sounds good, thanks for the call.

Next up, we have Hamza Fodderwala at Morgan Stanley.

All right. Good evening, thank you for taking my question. Todd, I wanted to ask you about SEC recently launched an investigation or reportedly looking to launch an investigation on Microsoft and how they're bundling some of their security services. I'm curious if you have any comment on that? And maybe just what you tell customers about some of the risks around vendor lock-in? Thank you.

Yes, that’s a significant question. I’m not privy to the intricate legal or regulatory details, but bundling definitely occurs. The selling point is that purchasing from them will be more cost-effective. I often remind customers that by going this route, they are limiting their options. It's not always clear to customers how crucial identity is in this gatekeeping role. Strategically, it makes sense for major tech companies, including Microsoft, to sell multiple products alongside their identity solutions, as they all require a login system. There’s a strong temptation to use their identity service for broader identity and login purposes because it creates a powerful lock-in. If customers use their identity, they’re more likely to rely on more of their services. This can act as a loss leader. Our message emphasizes caution, urging customers not to make long-term decisions that will limit their choice and flexibility. We know that reducing choice leads not only to greater costs in the future but also to poorer outcomes since the best technology might not be available. This is especially crucial in terms of security, as we know security is an adversarial field and breaches often stem from compromised identities. If you become dependent on a single security toolset, your security outcomes won’t be as strong. This is the case I present to customers, and it’s beginning to resonate. While some potential clients might prioritize short-term savings by opting for bundles, an increasing number understand the importance of an independent identity platform. For instance, one of the largest tech companies in North America has recognized that spending money on Okta brings significant returns in security effectiveness and flexibility to integrate various technologies. Our efforts are gaining traction, and we’re undertaking something unprecedented—developing a comprehensive identity platform across numerous use cases, while remaining independent and neutral. We aim for our identity suite to work well together, but we aren’t interested in selling other security components or applications. We leave the choice of the best solutions up to our customers.

Okay. Let's go to Matt Hedberg at RBC.

Great. Thanks Dave. Todd, I wanted to circle back on the governance side of it. It was an interesting statistic you gave. And I guess when you look at the success you've had attaching governance to workforce deals, can you talk about the competitive landscape? And are there key elements of success this year that you think could parlay to next year? Maybe it's increased partner influence maybe some additional sales incentives to drive even further new product attach next year?

Yes, I think in many governance scenarios, particularly for customers without traditional on-premise ERP legacy technology, there isn't a solution. Often, governance solutions exist around legacy on-prem applications like SAP or Oracle, but customers will turn to us for applications outside of that, such as SaaS applications. They are realizing that these SaaS applications are increasingly critical for compliance and security, making sure access is controlled from a security perspective. We excel in that area. It's uncommon for a customer to replace an existing legacy governance solution with Okta governance for an on-premise application since the legacy solutions often meet all compliance needs and don't warrant changes. There’s an opportunity to focus on specific use cases around that. An interesting aspect of the governance market is the abundance of software available. This isn't a market where having decades of features is necessary to succeed, as there's plenty of existing software. I recall during my time at Salesforce, the platform was significantly simpler than Siebel, possessing only a fraction of its features, yet it performed exceptionally well. This reflects the governance market, where much software remains underutilized. Our product is well-integrated with access management, quick to implement, and users gain substantial value quickly. It integrates effectively with various SaaS applications and is increasingly connecting with on-prem applications as we innovate. Time to value is crucial, and I believe this is the strategy that’s proving successful in the market.

Next up, we'll go to Josh Tilton at Wolfe.

Thank you Dave. Brett, maybe one for you. the ongoing seat and MAU pressures that you guys are seeing this year, how does that, if at all, change your visibility into next year? And how are you kind of accounting for that in the guide that you gave today?

Yes, that's all included in the guidance provided today. It's a relevant question, Josh. There are two main factors to consider. First, on a macro level, companies are purchasing fewer licenses and are scrutinizing them more closely. By licenses, I refer to either licenses or MAUs, depending on the area of the business. Secondly, regarding the older customer cohorts, we anticipate that this group will largely be addressed by the end of the first half of fiscal year '26. Everything mentioned is reflected in the guidance, so I hope that clarifies things for you, Josh.

Next up, we have Jonathan Ho at William Blair.

Congrats on the strong quarter. Just wondering if you could give us some additional on the go-to-market specialization opportunity that you've referenced? And maybe help us understand why you see the need to do this now? Or what's maybe the impetus driving that?

Yes. I've spoken to many people and collaborated with Okta on go-to-market models for the past 5 or 6 years. There are essentially two ends of the go-to-market spectrum. One end is a general model where every representative sells everything with no specializations, while the other end is entirely specialized where each product has its own representative. The specialized model tends to yield better productivity and sales performance, but it also incurs higher costs. The challenge is determining how to position the organization on this spectrum as it grows, alongside its product portfolio and in response to market and competitive dynamics, to optimize growth and profitability. We believe there is room for greater growth than we currently observe. As part of our initiative to accelerate growth, we plan to implement more specialization, which may lead to some increased short-term costs. However, we expect those costs will be significantly offset by the anticipated growth. Additionally, we remain highly committed to profitability. We believe there is sufficient capacity within the business, considering our efficiency improvements and effectiveness investments, to implement this specialization while maintaining the profitability levels we are comfortable with and continue driving growth. More specifically, instead of all sales representatives at Okta selling all products, they will be more product-focused. There will be dedicated zero reps and dedicated Okta reps. The Okta reps are necessary because the product offerings have expanded significantly, making it challenging to sell governance, privileged access, access management, and customer identity effectively. They will specialize in selling the full suite of access management solutions, while Auth0 reps will concentrate solely on Auth0. This means focusing on developers and ensuring that every self-service customer who begins to upgrade transitions into a full enterprise deployment, as many small companies eventually become some of our largest customers. Our presence in the AI sector also reflects this, with substantial customers originating from self-service trials. The products are becoming more advanced, and it is increasingly difficult for one salesperson to manage everything. We see this as a growth opportunity and are determined to capitalize on it.

Yes, I would just add to that. If you think about it, Jonathan, it's really about productivity, right? If we just boil down to a simple metric, it's AI productivity, and we've seen nice gains this year in AI productivity, we think we can make those gains go even further by making this change in a portion of the organization, which goes back to Todd's point is we've built all these efficiencies into the organization, so you can balance with trying to go for more growth while also being healthily profitable as we are and expect to be in FY '25 and FY '26.

Great. Thank you.

Next up, we have Joe Gallo at Jefferies.

Hi, guys. Thanks for the questions. Can you just talk through Customer Identity, its performance this quarter and how you're thinking about that market growth rate? And then just given all the conversations around specialization, how should we think about the maturity of the channel and its ability to sell that product?

Yes, Customer Identity had a solid quarter, and we're very excited. It's now a business that exceeds $1 billion. Similarly, the Workforce business also surpasses $1 billion. The market drivers for Customer Identity are somewhat tied to security, but they differ for the Workforce side, which is often more focused on customer experience. For example, a large European online retailer signed up for Customer Identity in the third quarter, driven not by security concerns, but simply by the need for convenience. Their web experience and mobile app required multiple logins and IDs, and they aimed to consolidate that process. This segment is a critical and rapidly growing part of our business. We believe we can accelerate its growth by focusing more on the developer persona. We’ve observed that significant opportunities arise when use cases develop from the ground up; as something new is created and gains traction, it can transition into self-service and enterprise upgrades, and we want to capitalize on that potential.

Thank you.

Let's go to Mike Cikos at Needham.

Great. Thanks Dave and thanks for taking the questions guys. Just wanted to tap into the specialization comment, too. Can you either point to public sector where you guys arguably driven some of the specialization of Americas SMB. I'm sure you guys have your own internal data points you're watching, but what would you point us to, to help us get greater confidence that this specialization is the right approach? Because obviously, that's informing your decision, but it would be helpful to get it for us outside this year? Thank you.

Yes, there are several data points to consider. You mentioned a few already. The hunter-farmer model in the Americas small and medium-sized business sector shows some positive indicators, but it represents only a small segment of our operations. The public sector remains a larger focus for us, as it has a more substantial dataset and a longer history that gives us confidence. Additionally, we are monitoring sales cycles, engaging in conversations, and recognizing the growth potential in the developer-facing market. We believe that by concentrating our efforts and allocating dedicated resources, we can achieve significant additional growth. However, we have to consider the trade-offs involved, such as the costs associated with transitioning to this new model. We are assessing the ramp-up in growth against the increased costs of sales coverage. Based on our modeling and past experiences, we are confident that the growth advantages will surpass the associated costs.

All right. Next up, we have Madeline Brooks of BofA.

Good afternoon. So I think overall, we can all agree that this is a really strong quarter for you guys. So I think then when I take a step back and look at the market, I really want to kind of hone in on the 7% guide for next year. And if I just kind of extrapolate what new bookings was for this quarter, we can kind of get to an assumption that maybe the core workforce and SIEM markets are growing roughly 5%. And so I first want to clarify that 7%, does that include any upside from new bookings or new bookings from or from new products? Or are new products already baked into that guide?

Yes. All the products we have today are already baked in there, if that's what you're asking. I think the one that's the most material by far is governance, like we've talked about before. We are hopeful that some of those products that we've been describing here today continue to ramp like they have been in the last quarter or two and become more material. But frankly, the biggest new product in there would be governance. Hopefully, it helps there, Madeline.

Yes. And then so for my follow-up, I guess, if I look at the identity market, both Workforce and SIEM, both growing faster than that 5%. I mean kind of if we analyze performance here, is there anything that Okta can do better to try and just reinvigorate the growth in those core markets where the market is growing faster and that 5% growth rate would suggest just some share loss there and any thoughts there? Thank you.

We've given a lot of thought to this important question because our second priority is growth, while our first priority is security. Avoiding security issues is crucial, and we've made significant investments in both financial resources and execution to uphold our commitment to secure identity, which is built on four key pillars. A major aspect of this is strengthening our corporate infrastructure. We've put in substantial effort and made considerable progress in this area. Conversations with leading tech companies, CISOs, and other CEOs indicate that our internal security posture has improved significantly. Among the achievements this quarter, I take great pride in the strides we've made in security. There's still work ahead, as maintaining high security standards is an ongoing investment. We're dedicated to being one of the most secure companies globally, and we will keep executing on this front. Returning to your question on growth rates and market trends, it’s clear that our internal security advancements are beginning to resonate with prospects and customers. They view us as a company that has faced challenges, learned, and is now sharing valuable insights to help the industry combat identity-based threats. Our products, including ITP, Privileged Access, and governance solutions, are integral to fortifying our infrastructure, which benefits our customers as well. Strong security performance and minimal incidents can help us capture market share and possibly exceed our forecasts. Additionally, if we continue to execute effectively and enhance our go-to-market strategies, I believe we should be outperforming the market. If we do not grow faster than the market, it would suggest that the market predictions were incorrect. We’re confident that if we maintain our focus on addressing customer issues related to identity, there are plenty of challenges still to tackle and significant value to deliver. We are committed to being there for our customers to meet their needs.

Great. Next up, we have Shrenik Kothari at Baird.

Yes. Great. Thanks for taking my questions, and congratulations on the strong execution. The federal vertical remains a key growth driver, with half of our top deals in that sector, which aligns with the year-end focus on certifications, partnerships, and the DC-based teams that provide us with a competitive advantage. My question is how you view the structural shifts, such as budget changes and reallocations, that you anticipate following the elections starting next year. How do you intend to navigate these potential disruptions, even though it's still hypothetical?

Yes, I believe one of our successes is that out of our top 10 deals, five were in the U.S. federal sector. Among them, we achieved an exciting win with the Department of Defense. We had previously announced our first significant win with the DoD a few quarters back, and we have now followed that up with another major victory this quarter, which is a promising indication of future progress, along with strong quarterly results. Additionally, we secured a significant deal with the largest healthcare provider for the federal government, which contributes to the momentum we are experiencing. The focus on identity and security, along with the federal government's commitment to modernizing cyber initiatives, is largely nonpartisan, as everyone has a common goal of enhancing security. There's a widespread acknowledgement that nation-state actors are interested in targeting the federal government, and improving identity protection is a key defense strategy. Much of what is currently in operation is outdated and legacy systems, and I think the momentum we are seeing stems from a two-pronged approach focusing on cyber security and a long-overdue push to update technology, both of which we are capitalizing on in the federal sector.

Great. Next up, we have Rudy Kessinger at D.A. Davidson.

Thank you for taking my question. I want to revisit John's earlier question regarding the additional conservatism in the guidance for the breach. If we consider the magnitude of beats in certain figures over the last couple of quarters, particularly in CRPOs, it seems you've been exceeding expectations by 3 to 4 points each quarter. Can you specify if there was 1 to 2 points of conservatism in your CRPO guidance related to the breach over the past few quarters? Additionally, how should we interpret the level of conservatism in the Q4 CRPO guidance compared to previous quarters?

I would say the level of conservatism relates to both current RPO and revenue, as well as operating margin. These elements are interconnected. When I refer to operating margin, I'm talking about both operating margin and free cash flow. I don’t have a specific number for you, Rudy, but I can say it's unlikely to be the 10% to 15% range like I mentioned earlier, where we had 10% at this time last year and now expect 15% for revenue growth in FY '25. I just don't foresee that happening based on our current perspective. Additionally, this is part of the natural maturation of the company; as we grow larger, growth tends to slow down a bit. This is influenced by a security incident as well as the size of our company at this stage.

Let's go to Saket Kalia at Barclays.

Okay, great. Thanks for taking my question Brett, maybe for you. Can we just talk a little bit about new logo business in the quarter? I mean, I think we were all prepared for what was going to happen to net revenue retention but it seems like the new logo part of the business stabilized this quarter. Can you just talk about what drove that and whether that trend is something that can continue going into next year?

Yes. I mean frankly, we'd like the new logo numbers to be higher. I mean it was 150 quarter-over-quarter. One of the things that we've been obviously working on is the hunter-farmer model to try to improve that. That's 1 piece of the formula, right? Hunter-farmer is both new logos and also upsells as well. But yes, we think we can do better than where we are. And frankly, the good news is, look at our solid results we can produce when really mainly selling cross-sells, right? If you look at the current RPO growth of 13%, total RPO growth of 19%. There's a lot of opportunity inside the customer base at this point. I mean, Todd talked about earlier with 15% of the bookings coming from these newer products. But ultimately, that's just scratching the surface. We have a ton of opportunity inside the customer base. But to be clear, we want to be able to grow the logo count faster than this. Like I said, the good news is we've done a lot with the larger customers and also created $100,000, the $1 million cohort, so we've definitely have helped ourselves. But we look forward to producing frankly better than this.

Next up, we have Patrick Colville at Scotiabank.

All right. Thank you so much for taking my question. I guess, Brett and Todd, I mean, if I look back at this year 2024 to me, the standout success has been Okta's rapidly improving profitability. This time last year, you set the initial guide margins in fiscal '25 at 17%. In the press release, if now up to 22%. So I guess a 5-point beat. How should we think about Okta's ability to outperform your initial guide of 22% next year? And then also just, I guess, give us some color on how you're thinking about hiring because it looks like hiring has kind of picked up the last couple of quarters? All right, thank you.

Yes. From a profitability perspective, one of the things that we've talked about a little bit on this call is we really want to lean more into growth. If you think about the rule of 40, right, is the lens we manage the company through for years now. We want to lean more into the growth side of the equation. And so I wouldn't necessarily expect a bunch of upside. I mean we definitely set the guidance where we think it's achievable. But we do want to invest into the opportunity because we do see it out there. You've heard Todd's comments throughout this entire call of optimism of how we can go and get more of the market. And so we don't want to sit here and say, hey, the profitability is going to be way higher than what we've already guided to you because we want to go after that huge market opportunity. And we're making obviously all these changes and these investments, think about security Todd talked about earlier. The product innovation coming off the line has been really good, and we think we can expect more of that, the specialization topics we've talked about today, investing more in partners. These are all growth drivers. We really want to get after growth. And we are comfortable with the guidance we've given you here today, both top and bottom-line.

Thanks, everyone, for sticking with us for the call. Before we go, I just want to let you know that in addition to hosting several on-site and virtual bus tours, through December and January, we'll be attending the Scotiabank Global Tech Conference in San Francisco on December 10. So we hope to see you at one of those events. Thank you.

Bye, everyone.

Thanks, everyone.