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

Great. Thanks so much, Chris. My name is Alex Henderson. I'm the Needham Security and Networking Analyst. Great to have Okta here today. Brett, it's good to see you. Let see -- it as what 20 minutes ago, we did a one-on-one.

Yes. Long time no see.

It's good to see you again. But we have a lot of people dialed in. If you have a question, we're going to do a fireside chat. If you have a question, we have the Wall Street transcripting link up so you can type it in, and I would be more than happy to pass that along to Brett. And the more questions coming from the audience, the better it is, frankly, in my opinion, so please don't hesitate to use that. And with that, welcome. Glad to see you again. And maybe you could just start off with a little bit of background on what's happened over the last couple of quarters of volatility that we've seen there. And I think a significant improvement in the operational structure, particularly over the Auth0 side that's now setting up.

Yes. Well, thanks for having me, Alex. I really appreciate you taking the time to host me today. So yes, I think maybe a little update on how the business has been doing. So if you listen to the Q3 earnings call, we talked about progress on a few things that we've been working on. So first couple of quarters of the year, we had some challenges around a few things, right? There was really elevated attrition in the field and then execution issues around customer identity cloud. And so we saw in Q3 a trend going in the right direction. The attrition really improved, improved to a level that we haven't seen for almost a couple of years at this point. And then from a customer identity cloud perspective, we had the highest participation in the field in customer identity cloud deals. And so not where we want it to be, it's trending in the right direction, but it's still better than what it was. And so we look at both of those challenges as it takes time to fix, right? We had a good quarter. We're pleased with the quarter, but we're not going to rest on one quarter and all of sudden, things are done. We got to continue to focus, continue to go in the right direction. And then I think the third thing that we talked about was really macro and how that has changed. Q2, we talked about how it was. We saw at the very end of the quarter and not much, but in Q3, we saw it definitely get worse. And so we are expecting it to continue to trim that direction as we move forward. So...

Just to remind people, you're on October Q3, January Q4.

Yes. Sorry about that. Yes, January 31 fiscal year. So that's definitely -- so we saw trending in Q3 a worse from a macro perspective, like I said, we do expect it to get worse.

So let's dig into the Auth0 acquisition and kind of the trajectory of that. My initial response to the acquisition was this is a great acquisition. You guys are bringing in a whole slew of skills that you really didn't have before, tying directly into the coding community in a way that you weren't there before. The consumer market is a higher growth arena with a lot more untapped space in front of it than what is probably a little bit more mature enterprise side. It seemed like a really good acquisition. But the other side of the coin, you already had a consumer franchise that was more enterprise-oriented and less coder centric. And it seemed like for the first couple 2, 3 quarters, that they were kind of at odds with each other. Is that a fair description because now it sounds like you've gotten all of those on the same page, working off the same script, and instead of competing with each other in the field, they're actually amplifying each other in the field?

Yes. I wouldn't say they were competing with each other, at odds with each other. I just -- we kept the business as separate that first fiscal -- well, for like 3 quarters that -- kind of the last 3 quarter of fiscal year '22. Because both businesses were doing really well, and we didn't want to want to mess them up because they're trending in the right direction. You saw the results in FY '22. They are really strong. And I think today, bringing them together, yes, we've hit some speed bumps, if you will. But ultimately, we still view this as a great long-term acquisition. I mean, do you say yourself, Alex, one of the things that Okta lacked was that developer-friendly kind of like up -- kind of build it from the ground up kind of approach. And that's something that we need to continue to kind of bring together as our organizations continue to [ melt ] and continue to go towards this potential that we have as an organization. We need to continue to invest in customer and cloud. We need to continue to invest in workforce identity cloud as well. But we need to just bring everything together because both companies were great and are great together, we just need to amplify what made each of them great.

So as we look at that coming together, the other issue was that during that period of the volatility and change sales leadership and some other things going on back then, you've seen a very high level of attrition. And particularly, it sounded like the attrition was higher at Auth0 and higher in the sales organization there. That seems like it's reversed quite substantially. And frankly, this environment is one where sales attrition is highly unlikely to be as big a factor, given the economy. So can you talk a little bit about the attrition rates, where it peaked? And how much has it improved? And what are you seeing now?

Yes. I mean, it peaked in the first half of the year, so first half of the fiscal year of last...

Through the July time frame.

Yes, exactly. Q1, Q2 of fiscal year '23, which are, like I said, January 31 is our fiscal year end. The Q3 numbers really kind of got tremendously better and then specifically to the sales organization, the nonsales organization -- the go-to-market organization is probably a better term. Even the non-go-to-market organization also helped. And I think there are some things that we have implemented specifically for the go-to-market organization around enabling the field, making sure messaging was clear. We did some things around compensation. So I think some of it is related to the activities that we've done and the strategic kind of like programs we're running, I also think that the macro has also helped us on both areas. So I want to sit here and say, "Oh, it's all Okta management and the brilliance or anything like that." I'm sure we've gotten some benefit from the macro environment, just given there just isn't as many jobs out there today than there were 6, 12 months ago. So...

So I get the first question in from the field. We have over 100 people in the audience. I'm not -- was not expecting a fair amount of them. When was the last comp plan -- no, so when was the comp plan for FY '24 introduced? How did it change versus incentive structure for FY '23?

Yes, FY '24 has not been released yet. We've got to finish our fiscal year '23 first and then early February is where we'll release all of our comp plans. And we are going through our comp planning today. We're obviously going to make sure we don't make any of the mistakes that we did last year. And I would say, the comp line was part of the challenge. I would say, there are other things that we could have done better. We probably hired too many reps. And so you saw that was one of the activities that we did. So we slowed down rep hiring, which then makes territories bigger, which then makes opportunities bigger, which means people make money, right? So I wouldn't only focus on the compensation side of the house. I would say, also the activities about how we do pipeline, how we actually carve territories. So new quotas, all that sort of stuff is going to be -- we're going to be very thoughtful about all those things when we go into 2024 -- FY '24 because we don't want -- I don't want to be sitting there talking to all of you guys in 6 months, 9 months about the same issue. So we definitely -- when we made the changes in '23, it wasn't just about '23, it was about thinking through how those changes would affect '24. And so we wouldn't have a repeat of the issue in the first half of 2023. So...

So integration has now smoothed out. The attrition rates have come down. Those were two of the largest things. But I don't think you've decided to fully bank on the attrition improvement. So when you talk about your outlook to people lately, I think you're still assuming a relatively high attrition rate or the rate of improvement in the last quarter was not necessarily a trend line in...

Yes. If you look at a few things like -- yes, I mean, that's exactly right, Al. So if you think about attrition, you think about customer identity cloud, those were two things that we definitely got better at in Q3. But in my opinion, one quarter doesn't make a trend. I want -- we want to string a few quarters together on both of those before we can start saying that the job is done. I just don't think that it's prudent to say that we're through all of it. So just being thoughtful with how we're thinking about the future.

Now if I shift gears from the Auth0 side to the employment side, while the positive comments about consumer coming out of most of our field checks, we've actually heard a little less positive on the enterprise side, mainly because it seems like there's some saturation going on over there. I think the Street is quite worried about Microsoft, but we haven't heard that Microsoft is having an impact. But to some extent macro, the VARs are telling us their business is slowing somewhat. Can you talk about the impact on that side of the business? And to what extent you think there might be a little bit of saturation there.

I don't -- we don't think there's any saturation, frankly, there. I mean even if you look at -- if you heard -- if you remember what I talked about at Investor Day back in early November, was around, "Hey, we've got a huge portion of the Fortune 100 We've got a big portion of the Fortune 500." And if you remember what I said is even in our largest customers, in those customers, we still think there's a tremendous amount of room to run. And that's because we feel like there's a lot of starter deals in there, whether it be in number of licenses or if it's in products, we feel like we're underpenetrated in a lot of our customers. And so even in places where people are using less, let me use a very simple example of MFA, right? There's MFA and then there's advanced MFA. A lot of our customers still just use MFA, which is a text, right, which we know is phishable, we've seen those challenges. You could go to a more phishing-resistant factor like Okta Verify, which is -- obviously, we have it all in our phones at Okta. It's great -- its a super -- it's an amazing tool. But that's just a simple example of like even in that situation where, yes, they have one of the products that we have, they could really upgrade into a bigger product there. So I think, from an overall workforce perspective, we still feel there's a lot of room to run there. I mean if you include the IGA, TAM in there, we think it's around $50 billion. And clearly, we don't have $50 billion, not even close to that. So I think...

So let's take this a step further then. I mean to the extent that the VARs are telling me one thing, and you're suggesting that there's a different reality than what they're expressing. I know that you focused very heavily on sales capacity expansion and have done somewhat less on the channel development. Is that a -- is that disconnect between those two comments, a function of needing to do more to invest in the SIs, the GSIs of the world and to build out a more robust VAR; channel? I think that's something that you're actually stepping up to. Is it not?

Yes. So I would say, just a stat we've talked about in the past is we've said about 1/3 of our business runs through the channel, right? And so that continues to be the case. And yes, I think, Alex, I think you might have heard me talk about earlier today, which is around -- we need to continue to invest in our partner ecosystem. We need to -- obviously, the vast majority of that third by the way is VARs, that's a vast majority. And so we need to invest more in the ecosystem to continue to do what we've done with the VARs. We also need to expand more into the RSI and the GSIs. We've got a couple of RSIs, but the GSIs haven't paid attention to us enough because I mean look at our professional services revenue as a percentage of total, it's 4%, right? And so GSIs really want to have build a practice. And so we think customer identity could be one of those vectors for them building practices around and could ultimately make it so it's worth their time to come in and be a part of the ecosystem with us. And then there's the third vector, which is marketplaces. And you heard from AWS at Investor Day around the opportunity there in marketplace. I mean how many thousands of reps does AWS have, they get quota retirement for anything that runs through the marketplace for Okta. AWS sees how valuable it is to have a partner like Okta in terms of identity. So we look at it as a kind of a three-pronged approach between marketplaces, the SI, GSI community and then also the VAR. So yes, we do need to do more there. And it's actually -- when we're thinking about our strategic goals, it's an area that we focused on as we move forward.

So clearly, the question of Microsoft comes up and -- in probably every one of your meetings, I'm guessing...

Wouldn't be a meeting without one.

Wouldn't be a meeting. So I want to make sure this is a meeting then.

Yes, yes, we got -- I'll just get it out of the way.

Let's hit it. So there is clearly anxiety among the buy-side and sell-side analysts that Microsoft E3, E5 bundles have security and particularly identity security in them that in a tougher environment, they would then use that thing they're already paying for rather than use the Okta product that they may also be paying for when that redundancy of payment is something they can streamline. How hard is it for somebody to do that? And generally speaking, have you seen any evidence of that trajectory changing?

Yes, we haven't really seen a material change there. But what I would say is, I mean, Microsoft has always been there, and Microsoft will always be there. There is no world where Active Directory doesn't exist or Azure AD doesn't exist, right? I mean the vast, vast majority of our companies -- our customers have Microsoft, right? They're a great competitor. They're a great company. If you want to be a single-stack company, Microsoft's going to win. We're not going to be able to compete with an E3 or E5 agreement if it's 100% of your stack is on Microsoft, right? But I think there's less and less of those customers out there, right? You have to believe in a world where ServiceNow, Salesforce, Workday, Zoom, I can keep going for the next 20 minutes on number of customers that wouldn't -- or companies out there wouldn't exist. And that's where I think Okta really shines. So it's -- once you step out of that single-stack mentality, that's where we do well. And I think -- I mean, we do well even -- actually, for years, we've done a great job. We've been doing access in the Microsoft products better than they have. You can look at the ratings on their website. But I mean, they're going to make them better, right? Like it's their stack. They're going to make it better. You can't expect that to continue. So ultimately, we believe that if you're interested in a multi-cloud world or you're interested in a heterogeneous world, whether you're using Salesforce or CRM or Slack or Zoom and some Teams, like it's just -- that's where I think Okta really shines in...

So if that's the logic behind it, what about the empirical support for the theory? Any evidence of any change in your trail of business, your pipeline that reflects Microsoft competition?

Nothing that we can see at this point. I mean, we had another strong renewals quarter. You think if anywhere you would see it, you think the most direct way we could see it is in the renewals piece, and we haven't seen it yet. In fact, we had a really good quarter at Microsoft in Q3. So...

Great. So let's shift gears back to the question that came in here. So this one is how has sales productivity trended through FY '23. And then, what is implied in FY '20 for guide from the sales productivity perspective?

Yes. So given the challenges that we've had, sales productivity has not trended where we want it to be through Q3. Q3 was better than it was before, but it's still not at historical normals. And so when we think about the FY '24 productivity, if you think about the things I talked about around it, we don't expect attrition to get better from here. We don't expect customer identity to get better from here. We don't -- we expect macro to get worse. There is going to be some disruption from some sales leadership changes. We expect productivity not to really do that much better in FY '24. We're being conservative because there are -- yes, we've had some good news in Q3, but we're also not expecting that to replicate it. So we're being thoughtful about how we think about productivity in '24.

So given there's two very distinctively different pieces of that question, can you maybe break it out a little bit between the enterprise-oriented business and the consumer-oriented business within that context? I think you saw most of the volatility was early on the consumer side, not so much on the other side.

No, no, not necessarily because think about it there's -- so there's -- the two main factors in terms of productivity that we saw for the first half, and it does still have that impact in Q3, which is attrition and customer identity. Customer identity yes, clearly, that is customer identity. But attrition is both, right? It's going to affect both the workforce and customer identity because you have newer reps who don't have all the effects on both sides of the business. So I don't want to sit here and say it's only customer identity. We're going to -- you have to have headwinds in both because of the attrition is affecting the entire field. So yes, that's how we're seeing things. I mean, obviously, we're working on improving our attrition like we had quarter -- in Q3. Let's see how Q4 does, how Q1 through Q4 of next year goes. We want to be able to improve the productivity on both workforce and customer identity, and that's really our goal for next year. But obviously, we're being thoughtful about how we think about it when we talk with all of you guys.

So looking at the macro condition, the slowdown that you say you haven't seen as evidence of in your trailing results and to some extent in your pipeline, can you just takes a little bit between geographies? Is it more international? Has it come to the U.S. in a meaningful way? Second, can you talk about size of customer? Split it that way a little bit. And then, again, between enterprise and consumer, so 3 splits.

Yes. I would say -- well, I would say the most obvious is in -- well, in -- let's just go geo first. Geo, it was really U.S. commercial that we saw the most. And then -- but it's going to tie back to segment. That's the most clear-cut thing that we can see right now, which went through the end of Q3, which was -- if you look at EMEA enterprise, we had actually closed a fair -- a handful or a fair amount of really nice size deals, like big deals. And so I think that helped EMEA from an overall perspective, right? But if you look at where we're seeing it more as U.S. commercial, and I think it's more SMB in general across the world as opposed to, is it EMEA versus Americas, I think it's -- we're seeing it more on that SMB side of the house. And I think that just makes a lot of sense when you think about it. They don't have quite the balance sheets that your enterprise and strategic customers do. Their budgets aren't as flexible. They don't have access to capital like the enterprise does. So it's just -- that's where -- that's one of the kind of like, "Okay, this makes a lot of sense to be macro because it's just starting to show up in places that it just makes sense, right?" And then I mean the other way...

You mean enterprise versus consumer?

I wouldn't say I have cut that -- is very definitive on that at this point. But I will say, going back to what I was just going to say is specifically in SMB, talking to some of our leaders, you're hearing the qualitative side of the house, which is around budgets being delayed or budgets being cut, right? And so I don't have quantitative for that. I mean the other stuff I have all [ quantity ] for, but that's also just speaking with our sales leaders through the end of Q3, They're like, "Man, we're hearing a lot more around just budgets being slowed down, budgets being cut." And so that also gives us an indication that it's really more SMB-focused.

Okay. Guys, you got another 15 minutes. If you want to get some questions in here, I'm more than happy to pass them along. In the meantime -- and I've got plenty of -- I can ask either way. But can you talk a little bit about the IGA, that product ramp and where you are on it, when it goes GA and what the initial focus will be and how you expect that to do in this environment?