Okta, Inc. (OKTA) Earnings Call Transcript & Summary

Okay. Great. Hello, everyone, and thanks for joining us today. I hope the virtual conference is off to a good start for everyone on the line. So I'm Dan Bartus from the Cybersecurity and Data Networking Research team here at BAML. First, I wanted to say just a quick plug because it is relevant for this session today. We published a primer on cybersecurity yesterday, and it's a good overview of the entire space, if any of the listeners are interested. But one of the key themes of the primer that I'm hoping to highlight during this presentation is that for some time in security, and it's been accelerating now, we've seen a move away from perimeter security to something called Zero Trust. And we flagged that it puts much, much more emphasis on identity security in general. So it's great to have one of the clear identity leaders and one of the fastest growers in the space with us today, and that's Okta. And very lucky to have Bill Losch, the CFO of Okta. So Bill, first, thanks very much for taking the time in joining us.

Yes. Dan, thank you for having me here today.

Yes. Great to have you. And so I want to start high level on Okta in the market, and then we'll discuss a little bit more of the financials and your results from last week toward the end and hopefully, we can fit it all in this session. And so with that in mind, to start, identity has been around for a very long time, and you're competing against many companies that have been doing this for much longer than Okta. So simply, how did Okta seemly come along and reinvent the space in recent years?

Yes. I mean I think that you're right, that identity has been around for a long time. But I think that when you think about the history of identity, certainly until Okta came along and certainly prior to the last 10, 11 years, identity has really been more focused on kind of the old world, let's say, of the technology stack, where it was very vendor-centric. And basically, what identity was, was managing the credentials and doing the authentication for people to be able to access technologies and applications, but typically, from one vendor or a limited amount of vendors and also within their own firewall. And so the reality is that the capabilities and the reach and the functionality of identity, although important, was limited compared to where it needs to be today. Now, when you think about where we are today, most companies want to be able to access best-of-breed applications. They want to be able to find those applications and technologies that are the best for what they need to do or their employees need to do or what they need to do to get -- to be as productive as possible. And they want to make sure that those employees can access those technologies outside the firewall through any device or any means that makes sense to them, but obviously, need to do it in a very scalable and secure way. So what Okta has done or what we have done is really taken identity as somewhat more of a kind of connective between person and application within the firewall, and made it broader than that. And really, what we've been able to do is establish the -- what we call the Okta Identity Cloud, which is really a separate independent platform from any of those vendor applications or technologies that people want to connect to because, in effect, what they want to be able to do is connect to best of breed. And in order to do that, they need to have an identity platform that's independent, that's neutral, that can scale and that can do everything in a very secure way. And that's evolved from just connecting to cloud applications, but now it's connecting to different public clouds, whether they want to sit on top of AWS or they want to sit on Azure or whether they want to sit on Google. So it's a much more expansive need when it comes to companies wanting to basically connect to best-of-breed applications, as most companies do now, and so that's really why identity has become much, much more of an important and integral part of the technology stack than it was 10 or 11 years ago, and we've been able to capitalize on that better than anyone else.

Yes. Yes. That's a great foundation. And just to add to it, we've been mentioning Zero Trust a lot lately. What does Zero Trust mean to you? And what does it do for Okta's business?

Sure. So from our perspective, what Zero Trust really means is what it in effect says, which is that the historical means by which you as a company would secure your critical applications and technologies, either through firewall or basically, having control of those applications, is no longer the case. For the part -- the reasons that we -- that I mentioned a few minutes ago, the fact that you are able to -- or you want your employees and users to be able to access applications and technologies outside your firewall or outside devices that you control, meaning that they can use their own devices, and you want to obviously be able to do that securely, the challenge now is how do you do that securely. And really, the fundamental way to do that is that instead of that perimeter become -- being the firewall or the fact that you own and control all the devices and the technologies, it now has to be where the identity of the user is the perimeter. So much more focus and need to have granular authentication and access capabilities or access policies and be able to do that is really the fundamental way that you can provide security in an environment where you're, in effect, enabling your users to go outside the traditional perimeters. And that's really what it means for identity. And again, going back to what we do and the fact that we're independent identity platform, that's why it's so important that you have that identity platform, and that, that's what's really been a big catalyst of our business at Okta is companies moving into the security trust framework.

Yes. Yes. And you guys have really been able to move incredibly fast, adding new customers. But on the other hand, we do hear that identity is just such a complex deployment, and these can be kind of tough initiatives for those customers to take on. So can you discuss a little bit about your DNA and how you've been able to move so quickly? Is your DNA more focused in SMB, mid-market? Kind of discuss the trends in terms of moving upmarket to larger customers.

Sure. Sure. Well, certainly, when we started 10, 11 years ago, the primary focus was smaller, midsized companies, mainly because those were the companies that were moving toward a very -- in a more expedient way, cloud adoption and wanting to adopt the cloud because they were, by and large, in many respects, newer companies or brand-new companies or relatively young companies. I think that what we did early on, which has become very effective for us as we've moved up the stack, so to speak, is that early on, there was a focus on making sure that the integrations that we could do out of the box, so to speak, were really fundamentally built well so that the implementation of Okta was going to be as seamless as possible. And certainly, that was easier in environments several years ago that were less or primarily cloud. What we've been able to do, because we've built that fundamental base, is over time, as we've continued to improve our ability to do integrations, we've built more and more capabilities into the platform such that integrations can be done much more seamlessly,. We're continuing to do that with some of the things we've talked about recently with what we announced at -- or we announced last year and then talked more about some of the improvements we've made with the Identity Engine, which is really allowing customers to hook into and build more customizably, being able to use the Okta platform in a more customizable way, all of that has enabled us to be able to do these integrations and these implementations in much more complicated environments more seamlessly, and those complicated environments tend to be the medium-to-large enterprise. And so the reason we’ve started to see a lot of traction in large enterprise, especially over the last couple of years, and you can see that with some of the metrics that we've been reporting on, specifically, those customers that are paying us more than $100,000, that continue to grow very strong backlog -- contract and backlog, which we call RPO being very strong, is because we're seeing more and more traction with these large enterprises. And it's because of that foundation and the continuous focus we've made on improving how we do the integrations and how companies can customize on top of us, that's allowed us to do what is a very complex ecosystem or a very complex product, but do it in complex ecosystems in a much more seamless way.

Yes. And just to kind of double-click on your success with the larger enterprises. I think you have maybe -- I think, 20% of the Global 2000 now. So clearly, a lot of success with larger enterprises. When you're landing in these accounts, can you speak to which vendors or products you're seeing displacement of? Or maybe sometimes when you land, is it that you're addressing kind of greenfield cloud access, and you're sitting alongside some of the legacy providers, and there's an opportunity to expand within the organization and displace them over time?

Yes. I mean, I think, that there are examples of both. But what I would say is typically, the go-to-market and typically, the progression is that we come into the larger enterprise, where they have a legacy provider for their on-prem. And the reason that we're seeing in the last couple of years such a strong inflection point and ability to grow so much with large enterprise, is they certainly see us as the company that can move them to the cloud. So with their cloud strategy or their digital transformation strategy, which may be the case in their interaction with their customers, they see us being that on-ramp to it. But the other thing they've seen in the last couple of years is the fact that they, obviously, are going to operate in a hybrid world, probably for a long time. So there's going to be elements of on-prem, even with them kind of taking or adopting a cloud-first strategy. And what's happened is they see us as someone who can come in, frankly, be able to integrate or work with what they have on the on-prem side, and then, over time, migrate toward us, not just for the cloud, but their whole hybrid solution. So when we typically go in, it's not in a displacement-type vein. It is usually where we're coming in to kind of set the stage, so to speak, as I said, for them to move their cloud and then, over time, we see migration from their existing legacy on-prem providers to us.

That makes sense. And kind of continuing on the same theme here, you did mention success with customers with over 100,000 ACV. I think you have over 1,600 now. So when you look at these bigger customers and the ACV trends that are improving, how do you think about the balance between them buying more of the platform and buying more products and that driving growth versus adding additional users? Or maybe I'm curious if you view yourself as a premium-priced vendor in the market because we don't see as strong of trends across some of your peers.

Yes. I think there are a number of vectors where we can see expansion. When we sell into a customer, what we have been seeing, especially with the larger enterprise, is we do pretty significant initial sales because initially, what they're looking for is to bring us in, obviously, and to try to cover as much of their workforce base as makes sense. Now that can vary depending on whether we're brought in from a corporate standpoint, whether it's a division or how that works. But where the expansion opportunities come from is there's still expansion opportunities for adding more seats as, in the example I just gave, where maybe it's a division and they expand to other parts of the organization, certainly, there's expansion opportunities from a seat standpoint when they do acquisitions and they bring in other companies and they want, obviously, as best they can, to be as efficient with their business applications. So they want to use us as that central identity for everything. But there's also a lot of upside potential with the products because we're always innovating. And as we continue to enhance the features and functionality of the platform, there are upsell opportunities with more products and, in some cases, going from basically basic versions of the product to advanced versions of the product like basic MFA to adaptive MFA, doing the same thing with life cycle management, those kind of things. But the other big opportunity for us is the fact that we are one platform, but we really do service 2 tremendously large addressable markets. One is the workforce market, the other is the customer identity market. And we're the -- there are also biggest upsell opportunities as we may come in as a customer or we may -- a customer may start to use us for workforce and then have a consumer- or a customer-facing initiative, where they decide they want to use us because they know we work, we're reliable, we can scale. We can do it securely for their big customer initiatives. And so there's potential cross-sell opportunities between those 2 big markets within one customer, and the big benefit is it's all out of one platform. So once they've become confident of the scalability and security of the platform, it's a more logical progression for them to use us on the customer identity side and vice versa, if they start out as a customer identity customer to move to the workforce side.

Yes. That makes sense. A lot of drivers there. And I do want to dig into some more of your products and the use cases in detail. But -- and actually, I see some questions trickling in on some of the products. So we'll get to those. And I encourage everyone on the call, if you see the box on the bottom of the screen, feel free to send some questions in. I'll look to get to them. But just lastly, Bill, on differentiation. Wondering simply if -- I heard about the integrations, out of the box being a big differentiator years ago. I'm curious, is it still as big a differentiator as it used to be? And then just on integrations, maybe you can discuss a little bit about the new AWS integration that you guys announced last week.

Sure, sure. Yes. I mean I think that the depth and breadth of all the integrations that we have with all the technologies we have, which is over 6,500 and growing, is really a key differentiator for us, both as a company from a competitive standpoint, but also, more importantly, from a customer's perspective. And the reason for that is that all those integrations, obviously, provide the customer the ability to access a number of different applications and technologies, not just the big ones that a lot of people, like big cloud applications, but some that may be unique to their industries' front, some that maybe even ones that they've developed. And the ability to do that does a lot of goodness from the standpoint that those integrations allow there to be a lot more users who access the platform. And the combination of that runs a tremendous amount of data through the platform that we're able to cultivate and use to enhance our products, features and functionalities for the customer. So for instance, we talked about this a lot last year with what we call ThreatInsights or Okta Insights, which is basically our ability to use that data and information to enhance security. So it kind of goes back to what we're talking about with Zero Trust, where by taking that information and that data, we can much more granularly understand what a user -- when they're accessing from a certain device or a certain IP address or a certain location, and have much more granular policies and control over that. So you take that and apply that to all the products, it makes a tremendous difference from a value proposition to customers, and it creates this kind of halo network effect, where, because of the size and the depth and the breadth of the platform, more customers want to connect to it. And as more customers connect to it, it means more users and more users create more of this -- these data and network effects. And so it's that virtuous circle. And I think as we've been focused and continue to focus on enhancing the platform such that companies can be able to and developers can be able to develop more customizably what they want to do -- I don't know if customizably is a word, but it can be more customizable as to what they're using us for. That's just going to create more of these use cases that they can solve, which will create more users. So that's really why that is the big competitive advantage we have, and it's also the big value driver for our customers.

Got you. Got you. And just on the AWS announcement last week. Can you kind of just walk investors through how you used to integrate with AWS before? And what changed with this announcement?

Yes. I mean the -- we've been providing single sign-on or working with them from a single sign-on standpoint for a while now. I think what this is doing is really -- and what's exciting about it, is the fact that it's really addressing what customers have been asking for. And I think that from our perspective, we've always had -- a lot of our success has been driven by the fact that we are very, very focused on customer success. And everybody says that. But what we mean by that is we're very in-tuned to the customers asking us for things and thinking about it from a product road map standpoint and how we develop partnerships. And I think when customers are trying to basically think about how can we be able to integrate and use different stacks, different public clouds, have that best-of-breed capability to access what we want to access, us being able to partner with AWS to be able to provide that more granular level of automation -- access and authentication, is really important to them. And I think it's -- also was important to AWS to partner with us to be able to provide their customers that because that's important for them, that's important for -- from their perspective for their customers. And I also think it's just from their perspective and our perspective, is also a way we can partner together in a way that gives us advantages as -- from a competitive standpoint with other big public clouds.

Yes, yes. Got you. That's helpful. And shifting gears to the products, you guys have a lot of products and different features, but I wanted to first focus on the ones that are kind of getting you into what some term as the other swim lanes of identity and start to kind of blur the lines between you guys and some of your peers. So first, I wanted to ask about the Advanced Server Access offering. Can you discuss the success that you guys have had so far with that? And maybe you can -- as part of it, you can discuss how you view that competing with traditional PAM vendors like a CyberArk or BeyondTrust perhaps?

Right. Sure, sure. Again, this is another example of where customers were asking us for something, for a road map. And really, what that means is as more and more customers are starting to move their workloads into the public cloud, certainly, one of the key areas of that is moving servers into the public cloud. And the way they think about it is, certainly, with existing customers, is -- was that Okta is connecting our users to cloud applications now. As we move things to the -- as we move servers into the public cloud, we're also wanting to move into more of a DevOps type environment. So we want our developers to have access to those servers. Well, obviously, those servers -- having access to those servers is something that you absolutely want to be very secure and want to have an additional layer of granularity when it comes to security, and it just made a natural extension, so to speak, from an identity standpoint that if we're already connecting them as users to cloud applications, why wouldn't we also connect them to the servers and the public servers, cloud servers. So that's really what was driving that. I think when you think about how that mean -- what that means vis-à-vis some of the other providers, the reality is that we're always been focused on developing capabilities and developing features and functionality for our customers as they move to the cloud. And when you think about Privileged Access Management, there is still a tremendous amount of kind of need, so to speak, on on-prem software and on-prem. Because that's really where the center of gravity still sits from a privileged access standpoint, because you would still argue -- well, not argue, you would still say that most of the workloads when it comes to servers or infrastructure is still on-prem. Now we happen to think that, that is evolving over time to where more of that workload is going to move into the cloud. And what we focus on is how do we build our products, enhance our features and functionality to be able to be the identity provider from an access management standpoint for those cloud workload needs. And as we see more of that moving to the infrastructure, that's what we're focused on.

Got you. That's a great overview. And then on the Access Gateway, it seems like this product could really unlock a lot of the market that you guys weren't going after in the early days of the company. So can you talk about success with Access Gateway? And if perhaps this is an area where you would be clearly displacing some of the legacy competitors there?

Yes. I mean, Access Gateway has definitely -- it hasn't been out that long, but we've already seen a fairly meaningful impact. And the impact has really been -- to your point, it's really not so much that Access Gateway on its own has been a large incremental revenue driver to us as a separate SKU, but what it's done is it has opened up, we believe -- or I shouldn't say we believe, we have seen it open up and believe it will continue to open up more opportunities with larger enterprise, who may have been, let's say, not opening up completely their share of wallet to us or as much as they are now because they were still thinking that I've got to be able to still spend money on managing my on-prem software. I think what we're seeing is not necessarily all times like a complete displacement of what -- their legacy on-prem. We have seen it in some circumstances but what we are seeing is it definitely feels like it's moving more of their wallet share to us versus what they might have been spending on-prem so that they're able to reduce that wallet with their on-prem legacy providers. So we definitely are seeing that kind of traction.

Yes. Yes, that makes sense as well. And then I'm seeing some questions from investors on the Workflows product, which you guys recently announced. Maybe you can just give the basics of what is Workflows? And I think the more burning question is, do you want to go into identity governance more and compete with the likes of SailPoint?

Yes. So for us, we've had, for a long time, a life cycle management product and -- which is basically the basic product is, it's the provisioning and deprovisioning of workers, employees -- not necessarily employees, even nonemployees, contractors and such, through the life cycle of them for their company. And what Workflows was is really, again, coming back to this theme of taking policies and trying to allow customers to better customize it for their needs. And what I mean by that is kind of the out-of-the-box life cycle management that we provided probably solves -- and I'm -- this is just a rough estimate, this isn't an exact estimate, but just an order of magnitude, let's say, 80% of what they need. But there are, especially with larger enterprises, more complicated companies as far as policy management and how they wanted to be able to manage what their employees had access to or how they change that, those kind of things. What we really wanted to be able to do is provide a way for them to customize it toward what they needed, kind of built on the Okta platform and do it in a very seamless way so that it was actually somewhere where they could more effectively do kind of an if/then statement of if this person can do this, then they should be able to do that. And actually do it, if they wanted to, with no code. So you didn't have to have like a expert developer come in and do it for you, you could have administrators do that. And that was really what was driving it. And obviously, we just rolled that out -- this – at Oktane. So it's still early, but it's an add-on, so to speak, to our advanced life cycle management product. I think it’s a -- your question about how this impacts, let's say, the swim lanes, again, similar to what I said about Privileged Access Management, compliance and governance, that center of gravity is still on-prem, where most of the complicated compliance and governance requirements are still on-prem. And that being said, we believe, again, because more of the workflow and more of the workloads are going to -- and more of the applications are going to move to the cloud and are moving to the cloud, that over time, that center of gravity is going to move to the cloud. And our focus to this point certainly has been setting the policies and operationalizing the policies for companies as they -- with their employees on the cloud. But certainly, our focus is now going to continue to be enhancing that, which is going to involve more compliance and more governance. And so, as that center of gravity moves more to the cloud, that's where we're going to focus.

That's great. And well, only a couple of minutes left. So obviously, not going to hit the whole portfolio, but just quick on the customer identity side of things. Can you talk quickly about the split of workforce versus customer? And how do you think about the TAM on each side of there?

So we gave some data at the Investor Day last April, April 1, this past April. And when we think about the TAM, the way we've quantified the TAM is that for workforce, we think it's about a $30 billion TAM and customer identity is about a $25 billion TAM. So both very significant addressable markets that, obviously, there's a lot of room for us to grow into. I think we also gave some metrics to give investors some idea of the relative size of the businesses above. And at the end of fiscal year '20, this past fiscal year, workforce was 77% of our business -- our annual contract value at that point, and customer identity was at 23%. And so what's happened is, looking at those same metrics, customer identity has grown faster than workforce. Workforce is obviously growing fast also. Now customer identity was starting off a smaller base. But what's happened then is as a percentage of the business through the end of last year, customer identity was incrementally growing, but workforce is still a substantial majority of our business.

Got you. Okay. Great, Bill. Tempted to squeeze another one in before the clock, but I think we're out of time. So Bill, thanks very much for the time, and thanks, everyone, for tuning in.

Yes. Thank you, Dan. I appreciate the time, and thank you, everyone, for listening.

Great. Thanks a lot.

Take care.