Okta, Inc. (OKTA) KeyBanc 2023 Emerging Technology Summit (Transcript)

Okta, Inc. (NASDAQ:OKTA) KeyBanc 2023 Emerging Technology Summit March 8, 2023 ET

Company Participants

Brett Tighe - CFO

Conference Call Participants

Eric Heath - KeyBanc Capital Markets

Unidentified Company Representative

Great. Let's get started.

Eric Heath

I'm Eric Heath of the enterprise software team here at KeyBanc. Pleasure to have Brett Tighe here with us with Okta and we also have Dave Gennarelli from IR here as well.

Question-and-Answer Session

Q - Eric Heath

So Brett, let's just jump right into it. Maybe get the macro question out of the way. So talk about from your lines what you saw in the macro, how things kind of transpired from 3Q to 4Q and maybe into the early parts of 1Q here?

Brett Tighe

Yeah. There is -- in terms of what we saw in Q3 and Q4, actually similar signs of macro degradation. So one of the things that I think a lot of you've heard me talk about is really this new business versus upsell mix and just being much more weighted toward upsells, in both the pipeline build and also the sales in the quarters that -- at Q3 and Q4.

So that's one major impact that we're seeing. I mean it just makes sense, right? People buy from vendors they trust and know and have long relationship with. You can see that in our gross retention rates. You can see in our net retention rates, our customers tend to really enjoy working with us. So that's one thing.

The other side is around contract duration. We saw a bit of a contraction in contract duration in the quarter in Q4 specifically. And we believe that's directly related to companies just being a little bit more thoughtful with their long-term contracts and making sure they're thoughtful about it as we go into this time of uncertainty, right?

And then the third component is, those are the quantitative things that we can track are like -- two things that we can track in the stats that the way we run our sales operations. The third is really kind of qualitative, which is around just talking with our sales leaders and then talking with their customers, talking about budgets being a little bit smaller than they have or projects need to be delayed for budget reasons. So those are the three main areas that we've seen it really from a macro perspective.

Eric Heath

Yeah. So the marginal change was the contract duration you saw in?

Brett Tighe

Yeah. That was really the marginal change. Yeah. That would be the main change. Yeah. Just kind of -- you could see in the back half, we definitely feel like we're seeing it somewhere.

Eric Heath

Yeah. So I wanted to talk big picture with you for a moment and talk about the long-term opportunity. Aside from the -- maybe internal challenges at the beginning of the year and there's a tougher macro that’s happening at the moment. But is there anything that's changed structurally in your view in the marketplace from a year ago when we were talking about this being a 35% growth opportunity over a multiyear time horizon, I know there is some changes that had happen, but anything just in the market that is perhaps different than a year ago in terms of the opportunity you see long term?

Brett Tighe

No. I mean other than the macro we just talked about, obviously, that's going to put a headwind on things. We look at that $80 billion TAM that we talked about before and we still believe in that. So I believe there's a large opportunity out there, can't say one way or the other 35% or what the right number is in the future. But ultimately, that $80 billion is out there. And frankly, we're making better penetration of that even just in Q4. I mean some of that $80 billion are related to Okta identity governance, right? I think a lot of us -- a lot of you guys heard about us talk about the success in the quarter, and that's a portion of it, but we want to continue to penetrate that $80 billion because, obviously, there's a big opportunity out there.

Eric Heath

Yeah. So let's break down that opportunity a little bit. Let's start on the SIEM side. It's the newer side, if you will, and more interesting with the all three acquisition. So I think there's a lot of things that a lot of us in this room probably get excited about that opportunity. It's one, it's potentially larger than workforce. It's less competitive with Microsoft. Arguably, it's more greenfield and you're extracting low level development work, which I think is always something we're seeking to do is make developers more productive. So talk about how you see that opportunity for your business? And then secondly, I would also maybe challenge you a little bit in terms of why haven't we seen SIEM kind of take off faster thus far?

Brett Tighe

Yeah. Look, we're excited about both sides of our business, workforce identity and customer identity. I know a lot of the people talk about customer identity because it's the newer thing. It's a little sexier like you said, you get excited about it. We get a lot of questions about, we are excited about both sides of the house. Because they both have a large amount of opportunity. Like I said, $80 billion, our revenue guide is $2.17 billion at the top end of the range. So we've got a lot of room to run on both sides of the house. So I want to be very clear about that. We're investing in both sides because there is that large opportunity in both.

But in terms of customer identity cloud, there's a lot of opportunity there. I mean, there's a lot of exciting things going on there. I mean when we think about Customer Identity Cloud, we think about really two main used cases. I want to make sure we're all clear on this. One is B2C and the other SaaS applications, right? And B2C, the example is, go to any website that you have on your phone right now or on your applications on your phone, we should be able to be at the front end of that. In terms of SaaS applications, I'm pretty sure you guys all know what SaaS applications are, right? We want to be able to secure all the SaaS applications identities as well. So there's a lot of exciting things out there.

Why can we not go faster? Why haven't we gone as fast as we would like because it is we would have liked to have gone faster in FY '23. We have some of the challenges that we've already talked about around sales rep attrition. Clarity of message in the market with our customers, our partners and frankly, our own field, but we feel like we've made a lot of changes over the last six months to be able to address those things. And ultimately, address the market as fast as we possibly can.

Eric Heath

Yeah. Do you see any sort of catalyst that really kind of speed the adoption of SIEM to commercial solutions because obviously there are a lot of in-housing doing yourself projects that people are doing. Is there anything that catalyzes the SIEM promotion?

Brett Tighe

Yeah. I think there's a few things that we see. One is modernization efforts, right? So you can imagine going into the uncertainty of the macroeconomic situation that we have in the future. You're not going to want to spend a bunch of developer time on non-core activities, right? You want to have an efficient developer motion because you want to be focusing on that core business that you run. And so we can provide that by obviously selling you or customer identity solutions. So that's one thing for us.

I think also making a better experience for customers, right? If you think about -- when you go to, let's say, any B2C application and you get asked a bunch of questions before you purchase it because people are trying to -- the vendors trying to identify you and do a lot of things in the background. Like that's a bad experience, right? We want to be able to create a seamless but secure identity solution and -- for our customers' customers, right? Because it's a terrible experience when you go through those and it slows down buying, right? And when you're talking about a potential downturn in the macroeconomic situation or the macro economy, you want to make sure revenue is as easy to get to as possible. Those are the two things, efficiency and really making a quality experience for our customers' customers.

Eric Heath

Yeah. So let's shift over to Workforce. And I think it's been surprisingly resilient or surprising to some, maybe less so to you if that Workforce has been able to maintain this high growth for quite a while. You just said 30% ACV growth this quarter and is still a strong number. What keeps Workforce a high growth business going forward? Where are you under-penetrated? What are some of the opportunities that remain for you to keep this a high-growth engine?

Brett Tighe

There's -- I mean, there's a ton of opportunity out there in Workforce, right? It's been a budget line item for a long time. So for our field, they know what to go after. They know what to look for. It's very templatized. And there's just a lot of -- there's a lot of opportunity out there. There was an IDC report that we quoted in our Investor Day back in November talking about how, for the first time, cloud just surpassed on-prem in terms of identity implementations. And so that means there's still a lot of greenfield out there. There's still a lot of -- I wouldn't say greenfield. So there's a lot of opportunity to replace the older legacy technologies. That's why I just said what I said about Workforce is still very exciting to us because we do see that as a huge opportunity for growth in the future.

Eric Heath

Yeah. How important is IGA and PAM to that Workforce?

Brett Tighe

Yeah. It's definitely -- I mean, there is a reason why we're developing these products and have had some very good success on the Okta identity governance solution just in a couple of quarters of selling it. Obviously, PAM coming out. EA this year, first half of this year, we think that once you combine those classic access management plus those couple of products, we're going to have a really solid solution for identity for a lot of different types of customers. That's what's interesting about identity, right? We've all talked about in the past. It's not a small company issue. It's not a large company issue. It's not U.S. versus international. It's not a segment or a type of industry or anything along those lines, everybody has this problem and so that's why we're excited about the opportunity.

Eric Heath

Yeah. So on [indiscernible] let's talk about that. I think you guys expressed some excitement the last call that you guys are seeing success there. Two things, so what are the low-hanging fruit opportunities that you see in IGA? I understand you're not trying to go into the old school, IGA, where you're going to on-prem like deep into the stack, if you will. So what are the opportunities that you're going after in the IGA?

Brett Tighe

Yeah. We're designing Okta identity governance right now for something we did with access management with the Workforce, the traditional Workforce product, which is go after that small and medium size us that could or the traditional solutions out there, right? So there's a whole swath of customers, tens of thousands of customers out there that want a solution for this, but couldn't either afford it or couldn’t take the time to implement it. Obviously, if you look at our implementations, we do deliver time to value very quickly.

You can see that in the professional services as a percentage of revenue. It doesn't take that much to turn on Okta and make it very successful, right? We've -- last quarter, I think it was not 3% right of total. And so, we've got a really great product, and we intend to do the same thing with Okta identity governance, right? And so yeah, it's not going to be go after the sale points of the world. We've got -- granted, we've had some great success top to bottom in terms of segments.

Small customers even up to the largest customers, you heard the other day around NOV or you've heard about Kindra in the past. But ultimately, we want to go after the small and medium-sized businesses that haven't been able for the solution in the past or take the time. So we're excited about the opportunity, especially given how much success that we've had in the first couple of quarters.

Eric Heath

Right. So with those enterprise customers, are they using you in a call it a segment of where are they using it just for SaaS applications or cloud environments? How they are…

Brett Tighe

It's really cloud environment, right? I mean we do have Okta Access Gateway, but that's really more about moving workflows to the cloud rather than being a true on-prem solution. And so -- yes, we're -- it's really -- when you see those enterprise and strategic customers, it's more around cloud forward organizations rather than the on-prem focus.

Eric Heath

Makes sense. So let's talk about the go-to-market side a little bit. Just talk about the way things evolved in fiscal '23 and some of the actions you've taken to correct some of the execution challenges and some of the proof points you're seeing to let us to express to us that you're seeing either stabilization or improvement on the go-to-market side?

Brett Tighe

Yeah. Ultimately, the challenges we had in '23 stemmed from all the success that we had in '22, actually. So if we look -- if we flash back if we look at Q4 of FY '22, when we're thinking about planning, we're thinking about how many reps to add in, what do we want to do with the field. We looked at the productivity at the time, there were two different fields. There was a zero field and there was an Okta field.

And we looked at the productivity of both and they were doing very well. And so we thought the best thing in terms of efficiency and operational cadence over time would be to bring them together and also add a bunch of reps into the field because we looked at this productivity and said, well, the opportunity is really quite great at this point. And so let's go ahead and stand on the gas for growth.

And so you get into Q1, and so you've now combined fields, you've had the traditional account changeovers, like we do every fiscal year, we added a bunch of reps and what ultimately ended up happening is we overcut on the territories. We made them too small. The quotas became very challenging to get home on. We also did not do our best work in terms of clarifying the message in terms of where do you sell Okta, where do you sell zero. So we made it confusing for our team.

We may confusing for the partners and be confusing for the -- for current and potential customers. All that slams together to have a field that looks at their number and says, I'm not sure I can make it. I'm going to go ahead and leave and try to go elsewhere. And so that is traditionally not in the way of Okta has been a place where you come and thrive, you make a lot of money and you deliver a lot of value to your customers.

And so we had more attrition in Q1, Q2 than we would have liked, historically high -- attrition in Q1 and Q2. And so the things that we've done is we obviously slowed down hiring during the middle of last year, you heard me talk about that a couple of quarters ago. We implemented some system solutions. We also clarified the message and just said simplification. This is where you sell a customer identity cloud, that's B2C websites and SaaS applications.

And then Okta SIEM is sold really only in [indiscernible] solutions in that situation. And so clarified the message, slowed down the hiring, made it easier to get to your quota. We did do some compensation things to ensure things got a little bit better. Attrition in the back half of the year and Q3 actually was the lowest it had been, I think, in two years. Q4 was another strong result.

Ultimately, the proof will be in the pudding in the next couple of quarters because now we're going through the Q1 changeover. People are getting to reassign their accounts. Comp, quota, all that good stuff, territories are being assigned. But the thing is, we have: one, from a compensation perspective, we believe we have a very solid compensation program combined with the quota and the size of the territories because we didn't really add any bid in the last half of the year.

So we now have these territories that are stable. The accounts actually have not really changed that many hands. In other words, normally, we would have a lot of changing one. There isn't as much change in Q1 this year. And so we feel between the compensation, the size of the close, the size of the territory, the lack of change in the accounts. We think that we've done everything we can at this point to continue to have this good trend on attrition.

But like I said, it's really -- the next couple of quarters will prove out whether or not we're successful. We need to obviously, keep an eye on this and making inroads. Now what I will say is qualitatively from what I heard at sales kickoff, people were excited and ready to go and excited about the patches and they see a path their number. So that's a good first signal. But obviously, the proof will be in the numbers in the next couple of quarters, Eric.

Eric Heath

Yeah. So maybe to summarize, so you feel good in the changes you made. Do you feel like a lot of these changes are behind us, and now it's more just minor tweaks, and we're done making any meaningful changes at this point?

Brett Tighe

At this point, that is our belief. But obviously, if something goes wrong us or something goes really well on us, we're going to adjust and change as we see fit.

Eric Heath

Okay. I will stop here and just see if there's any questions before I keep going. All right. So let's talk about -- I want to talk about the channel a little bit in terms of how you're reorienting or evolving your channel program, if you will. So cloud marketplace is becoming a bigger opportunity. The GSI is becoming a bigger opportunity. And I think you talked about the GSIs more so on the SIEM side. So one, just talk about the channel strategy broadly. And secondarily, like how the -- what the role the GSI is going to play in? Are they going to -- is SIEM something that gets them more interested and more engaged with them?

Brett Tighe

Yeah. So we'll start with the strategy, which is -- so historically, we talked about around 30%-ish of our revenue has come through one variation of the channel, whether it be VARs or marketplaces or GSIs in total. Historically, that has been very weighted towards the VARs. That's where we've had a tremendous amount of success, and we continue to have a lot of success with the VAR channel. We want to be able to expand our approach here to really to diversify our approach, which is -- we've had a lot of success with the VARs. We want to continue going down that path.

But also the GSIs, obviously, are very important. We've historically had a challenge getting the GSIs and SIs involved because what I just said around our professional services as a percentage of revenue is fairly small because Okta, you turn it on, it works, right? That's a great product, but it's actually a little bit of a headwind with these system integrators because they want to be able to build big practices. They want to be able to drive a lot of revenue in terms of their own organization off of implementations.

To your point around SIEM, yes, we do believe SIEM is part of the digital transformation or modernization efforts. And so ultimately, we think that those opportunities will attract the SIs and GSIs. We've got to do some work there. We've got to be able to continue to improve those relationships and show the value to these SIs and GSIs, but ultimately, we believe that's a path for growth for us.

And then the third one, like you said, you heard, you guys hopefully all went to Investor Day or at least had a chance to listen to it. AWS is there in marketplaces are obviously on the rise, right? And AWS is a big partner of ours. A lot of our product is run on AWS. And so we're the premier cloud provider. They've got thousands of reps selling on our behalf.

And so we're excited about the marketplace is because a lot of people want to go buy thorough the way these marketplace design their EDPs or their purchasing agreements with their customers, it makes a lot of sense to buy out of these marketplaces. And so that's a third vector for us in terms of growth in the future. So it's ultimately about diversifying our partner channel and expanding our reach over time.

Eric Heath

Great. So let's talk about the guidance a little bit. I mean, you rightly laid out, I'd say, a cautious fiscal '24 guidance on the 3Q call. You exceeded your 4Q expectations. You saw some stabilization improvement on the go-to-market side, so that definitely helped. And then you definitely gave us some better margins. So I think I definitely appreciate that. So talk about the approach to guidance, I guess, on this most recent quarter.

I mean, you exceeded on 4Q, you kept the same growth outlook of that 16% to 17% revenue growth, but like I said, margin upside. So are you taking some extra conservatism on the top line given the maintenance of the revenue growth or some of the cost-saving initiatives that you're putting in, are they potentially coming to the expense of some top line. Walk us through that?

Brett Tighe

Yeah. So from a top line perspective, we did raise it by $25 million. So yeah, the growth is roughly the same, but obviously, we increased it by $25 million to the top end of the range. We're just being thoughtful about all the challenges out there today, right? I mean one, we're very early in the year, so there's no reason to get in front of our skis. But the things we're taking into mind is really the macro headwinds that we've talked about. Obviously, we're in the middle of a go-to-market leadership transition.

And then the two items we talked about today and really over the last couple of quarters around sales rep attrition and customer identity cloud performance, right? Those things, we're not expecting to get better on that attrition factor. We're being thoughtful about that being very prudent. So that's where we're thinking about from a revenue perspective.

In terms of margin, the way we're thinking about margin is really a reflection of how we look at the business in general, balancing growth and profitability over the last several years. And so, we're doing what we've done forever. So growth has slowed down. We saw it slowing down in FY '23, right? And so you heard me talk about Q2 earnings, Q3 earnings and obviously, the last earnings around slowing down hiring, rationalizing real estate, basically creating a cost envelope that would expand margins pretty significantly because we saw that growth going down a little bit.

And so we're doing -- we're just doing what we've done forever, which is balancing growth in margins. And so we're going to continue to do that, not just in '24, but in '25 and beyond. And so -- yeah, I don't think we're over rotating to our margins or under rotating towards growth. We're trying to do what we've done before is balance the two and make sure that we're healthily growing the top line and doing it in a profitable way.

Eric Heath

Yeah. That's great. I mean if we do see some upside on top line, if execution improves and macro stays relatively solid. Should we expect to see kind of that top line flow through to the bottom line or would you reinvest some of that upside or do you think about that?

Brett Tighe

It really depends on the opportunities, right? And one of the things that we're really focusing on this year is ROI is obviously something we focused on for a while, but we want to raise the level and make sure, hey, it's a really strong possibility of return. Also, time line of return is there as well. So if we see opportunities that we can invest and get a good return off of and it's going to make a difference either growing the business, we're actually expanding margins because there's both of them, right? You could do both types of investments. And so we'll take them one at a time and make sure we're doing the right thing, not just for the results in '24, but ultimately '25 and beyond.

Eric Heath

Yeah. A couple of minutes I thought to survey this -- yes, one in the back.

Unidentified Participant

Yeah. Can you talk a little bit more about [indiscernible] product you shared, like what should we expect as an operating feature parity with the other large scale operating [indiscernible].

Brett Tighe

Yeah. So to be clear, we're going to be early access in the first half of this year. But in terms of product offering right now, we've got Advanced Server Access, right? We've got Linux boxes, Windows boxes. We'll expand to other use cases inside server access as well. But we'll come out with -- I don't think we're going to try to compete with CyberArk to answer your question directly because I think that's probably what you're asking me, which is, we're not going to try to go compete with CyberArk, right. We're going to come up with obviously a lighter version, they've been developing that product for years, right.

And so we're going to do what we've done with the other areas of our business around access management on the workforce side or IGA just heard me talk about it. We want to address small and medium sized business use cases first. and eventually work our way into that enterprise and strategic segment, but it is not our intention to go, hey, we're going to do a bunch of CyberArk rip-outs. That they've been developing products for years. We're not going to be able to have a cyber compete on day one, we're going to have to be thoughtful about that and try to deliver value to the customers who are asking us for this in our own customer base at this point.

Eric Heath

Anything else? Right. Maybe just to squeeze one last one in here. I mean you did have a notable customer example in the quarter with Open AI, I think -- it wasn't a customer win, but a customer expansion in the quarter. I mean I think the data suggests that it's a 100 million MAU company. You guys probably know better, but does this make it your largest SIEM customer? And I mean, are you handling all that capacity through all three (ph)?

Brett Tighe

Yeah. We don't have a problem with the capacity. It is -- we have tons of large customers with [indiscernible]. So this is another good win for us. We're excited about it for a variety of reasons. I mean everyone seems to bring it up because it's an exciting technology. But ultimately, it just indicates how amazing that business model could be because they started out paying us $20 a month with a credit card swipe and now you can see the massive scale that it's at. And so that's one of the things really excited about customer data cloud. We obviously have a great product. We have a great developer motion. We have a great developer brand with zero products. And so we're excited about winning more open AIs in the future.

Eric Heath

Yeah. That's great. I will leave it there. Thanks very much, Brett.

Brett Tighe

Thanks, Eric.