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

Hello, everyone, and thank you for joining us for our virtual Growth Stock Conference. My name is Jonathan Ho, and I'm the cybersecurity technology analyst for William Blair & Company. With us today is Todd McKinnon, the Chief Executive Officer of Okta. Before we begin, I'm required to inform you that a complete list of research disclosures for conflicts of interest is available at our website at www.williamblair.com. Todd, thank you so much for joining us today for our conference. For those that are maybe a little bit less familiar with the company, can you give us a brief overview of Okta and just maybe help level set folks in terms of the background?

Jonathan, thanks for having me, and thanks for William Blair for hosting me. It's great to be here and get a chance to speak with everyone. Okta, our vision at Okta is to enable anyone to safely use any technology. So we're really about enabling people and companies to use technology. We do that through our products and platform, which are, we call it the Identity Cloud. And the specific use cases we provide customers is that we help them connect their employees to all the technology they need to be productive at work, their email, their apps, really universally, any technology they need to connect to we'll do that securely with a log in system and with identity management system. And then for our customers, customers, we provide the same capabilities. We help our customers log their customers into their websites and mobile apps and provide the password management, the security, the single sign-on, and that's really the mechanism with which we enable them to use technology.

Excellent. Excellent. I guess when we sort of look at Okta and sort of the company's rise to dominance in the identity access management space, with the company evolving over a period of time from kind of a point solution to now a platform provider. Can you help us maybe understand sort of the longer-term perspective. What does that end game for Okta look like as the platform grows and evolves? And how do you -- what are the steps for you to get there?

I like that term dominance, I like that. I like to -- but really, it means that we're providing a lot of value to customers. And I think if you look at the evolution of our company, we're not the first identity management product or system. And I think what we were -- we were fortunate in a couple of ways. One was that with the rise and the -- really what's become the common future of architecture of cloud computing. And also other things that are happening with every company trying to get online and have a better customer experience and then really what happened with mobility and especially in the past year with remote work. All of these trends made the problem that identity management solved really a pressing problem. So you have all these cloud applications, you want to connect to them remotely. You have to do it securely. You have to make sure your customers can log into your new web apps or your mobile applications identity became more important than ever before. And then at the same time, we built this cloud-first identity management platform, the Identity Cloud, that provided a very adoptable and pre-integrated and this complete solution that solved the security and the ease of use. And so there was a really good timing for these trends to come together. That's really driven this market. From really what, 7 or 8 years ago, people said, "How big of a company can you build around identity?" We've never seen a big identity company. They've always been bought when they're smaller, they kind of petered out. But these macro trends, more cloud, more security, more digital transformation, along with, I think, a much better product and platform has really catalyzed our success. But we are -- we believe that we're -- it's still early in our journey, and we're then we're just getting started. And I think when we look at the future, it's really about making sure that the evolution of the future is around Identity is really one of the primary clouds in the enterprise. And what I mean by primary cloud is organizations are going to have thousands and thousands of vendors with the variations of technology that are enabled by different devices, IOT, different types of connectivity, applications, platform -- development platforms. They're going to have thousands of vertical applications, but they're really going to have 5 or 6 key vendors. These are going to be around things like maybe collaboration or infrastructure as a service or ERP, back office, financial data, and we think it's really -- for our future, it's critical that identity rises up to that level. And it is one of the 5 or 6 key platforms that enterprises invest around. And we think it's -- if we do our jobs right, it will have earned that right because it supports tons of use cases around Identity and connects all of the users to all the other platforms. So all the major platforms and all the other thousands of different platforms. So having an independent and neutral primary cloud is something we're very, very focused on over the next 5 to 10 years.

Absolutely. When you think about sort of the broader digital transformation trend, what does that sort of mean? Like how does Okta participate in that in terms of enabling that digital transformation for your customers?

Well, I think our 2 big market segments, one of them is workforce identity, which is helping our customers, employees and partners and contractors log in to all the technology they need to be productive in. And when you talk about digital transformation, in some cases, people are talking about just modernizing the tools for their workforce, particularly in a lot of knowledge workers have had, obviously, digital tools for a while now, but what's happening with -- I mentioned all of these new types of vertical applications. In a lot of cases, you're getting companies that are getting digital tools to every employee and every contractor and every partner for the first time. So maybe it's a blue-collar worker or it's different use cases that didn't have -- didn't need core collaboration apps, but they -- there's a new application that can make them super productive. And participate in a more seamless way in the business process of our customers. So that's -- this modernizing technology, whether it's just a simple like on-premise to cloud for a knowledge worker or connecting and getting nonknowledge workers in the workflow for the first time, we help our customers do that and do it securely. On the usual -- but the majority of the time, people say digital transformation, are talking about the products and services. So it's the car company that's building the mobile app and the website to connect with their customers and disintermediate their supply chain so that they compete more effectively with Tesla. And that's happening in every industry, especially -- we talk a lot about COVID from the workforce side and enabling people to work remotely and having to do that securely. But it's having just as big of an impact on the customer identity side, where we participate, which is companies are reinventing themselves to make sure they can directly connect to consumers that are more online than ever that are -- they're not going to the retail store, they're looking first for the online version of that. And then the second choice is, everyone is seeing the charts of how e-commerce has accelerated through COVID. So we can help them by solving the identity challenges of that. And all of these customer-facing interactions have an identity component. You have to log that person onto the site of the mobile app, you have to make sure it is who they say they are. It's a verified identity. It's authenticated correctly. The security risks are taken into account, and we help the customers -- we help our customers do that for their customers.

Absolutely. Absolutely. And maybe talking a little bit about sort of this customer-facing opportunity. The acquisition of Auth0 appears to be pretty complementary to your own homegrown solution. Can you help us understand maybe what the differences are between selling to DevOps teams and infrastructure teams? And maybe what makes Auth0's product a little bit more suited for that type of channel?

Our total addressable market is $80 billion, and it's broken down $50 billion in the workforce identity market and then $30 billion is this customer identity and access management market. So it's a very -- just quantitatively, it's a big percentage of our TAM. Now I think even more than the quantitative part, qualitatively, when you think about this concept of building this primary cloud and really in the next 5 or 10 years, rise at this level where a big enterprise is going to spend $20 million, $30 million, $40 million a year on one of these primary clouds. You have to cover a broad set of use cases for that customer. And if you look at, broadly speaking, like they have their workforce people and then they have customer and so you got to cover both of those sides to have -- to really have the -- to earn this right to be one of these primary cloud. So that's why customer identity is so important to us strategically. Now when you break down that $30 million of TAM, there's really some subsegments in there that market. There's one segment of it, which is more of a -- they want more of a preconfigured solution. They're offering a service to their customers, but it's -- they want something that plugs in quickly. They don't have to write a lot of code, it maybe integrates with out of the box, SaaS applications that they're using to provide that customer service and so that's part of the market. And the second part of the market is really the developer-led applications built from scratch. The developers want to control every pixel on the screen, every bite. And that's -- and so doing customer identity for those types of developers for that type of user and for those types of requirements is a separate segment. So what we've done with Auth0, who is from the beginning of their company has focused exclusively on the developer, we've combined both of those, and it really gives us the clear leadership position in this $30 billion of TAM. The -- in terms of you asked a question about the buying cycle. The buying cycle between those 2 parts of the market are -- it's literally -- or it's as you would expect, the developers that are building solution, it's more of a try. It's more of a building the prototype, put the API calls into the app from the beginning. And then later on, you sell to the development executives or the -- in case it's the CSO that's overlooking the compliance of that application. The subset that market is more preconfigured, it usually starts from a tops down sale. And that's traditionally where Okta has done very well. So I think these things coming together are very complementary, as you mentioned, and we're -- it's a very important part of our strategy, and we're excited about bringing this to the market as one integrated solution.

That makes a ton of sense. I mean just maybe delving a little bit deeper into that integration process. I mean how do you sort of assure customers that are buying one side or the other that they're not buying a product that will be considered superseded by the other platform over time? How do you sort of take the best of both worlds and sort of come up with a product road map?

It's a great question. It's something we're very focused on. The acquisition of Auth0, it closed only about a month ago. So we've had a month of working together closely sharing data and analyzing the opportunity. And the good news is that there's lots of good news. All of the assumptions we made pre-deal have been validated, particularly on the complementary nature of the customer bases. And there is a decent amount of shared customers, but they're shared customers in a way that's complementary. You'll see a different group, one group using Auth0 for customers. Another group using Okta for customer identity, but for a different initiative and then maybe workforce identity as well. So all that pre -- the theories about the deal, pre-deal, have been validated. So that's one thing that's very positive. The second thing is that -- and this is -- gets to your question about communicating with customers and about -- and the expectations going forward. It's important for people to understand, well, the 2 products, Okta customer identity and Auth0 customer identity. If you zoom out enough, they look similar. When you get close to the details, they're actually quite different. And the details on how you use them and the way the APIs work and what they -- what their strengths and weaknesses are. And so we've got to explain that to customers, first of all. Because if customer is concerned about supporting both solutions, they probably don't understand how complementary they are. And once we explain that to them, and they get the idea of how critical they both are to our strategy to have the best solution in the SIEM market and the build of this primary cloud. It becomes more clear that we're going to invest and maintain a little bit of both of them going forward. Once you clear that, there are a lot of obvious ways that we can integrate these things. Like one example that's really important for people to understand is that both services get a valuable amazing amount of threat data. People trying to attack from certain IP addresses. So one of the obvious integration is you can combine that threat data, and make both platforms more defensible because they're leveraging the threat data from the other platform. So that's one area of obvious synergy. There's many more of these as well, whether it's -- we have a low-code workflows platform service. That's -- it's very straightforward for Auth0 platform to be able to call that. And then -- and there are other areas where we can call there. So it's -- there's a lot of synergy there that we're going to be communicating to customers about how the platforms are integrated going forward.

Thank you for the additional color on that. When we think about sort of the typical customer that's buying the CIMS platform and enterprise workforce from the same vendor, what are sort of the synergies that they're looking for, like, to me, it's always seemed like these are pretty different use cases. People don't use the same directory necessarily between their customers and their enterprise. Why are people sort of buying this together? Why does it make sense for them to be bought together?