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

Fatima Boolani here. I run the -- jointly run the Citi software equity research franchise here. And we're well into our afternoon sessions, and I am so thrilled to be hosting Brett Tighe, CFO of Okta, with me today. Thank you for being here.

Happy to be here. Thank you for having me.

Excellent. Well, I want to jump right in because I think we have a lot of ground to cover. So just at the highest level, look, I wanted to get a sense from you what's the latest on the Okta story. And particularly given the wide scope of developments that have transpired for business over the past year or so. So just wanted to get level set from there and kind of unpack.

Yes. The last time we did earnings, which was last week, I think most of you guys know that, published guidance a little north of $2.5 billion. We've got a business that's about 60% workforce identity, 40% customer identity. To be clear, what is what. Workforce identity is where we secure our customers', employees' and partners' identities; and customer identity is where we secure our customers', customers' identities. And so -- yes, one was growing about 16%, which was customer identity; the other was growing about 15%. So we've got 2 very large markets to operate in. We're making progress on margin, and really trying to penetrate the opportunity as fast as we can at this point.

We'll definitely get to the margin discussion in a bit here. But let's start with the workforce business. The workforce business, has historically been your flagship business. It's been the workforce business as well. Wanted to get a sense of what the market dynamics in the workforce are today? Bearing in mind that we've kind of been on a little bit of a macroeconomic roller coaster, especially as it relates to headcount and that's, of course, a very headcount-sensitive part of your business. So just with respect to if you can paint a picture of the demand dynamics have been like and how they've evolved since and through COVID? And just help flesh out some of those dimensions for us in the workforce pillar of your business?

Yes, absolutely. The Workforce business is the first business we had at Okta. We transitioned to customer identity a number of years later, but Workforce is the bigger side of the business, 60% of the business. Just to be clear, both businesses are over $1 billion in annualized contract value. So we're really excited about that milestone. But from a workforce perspective, we continue to make inroads into new product innovation. So historically, if you look at Okta, we're SSO or single sign-on, multifactor and Universal Directory, which is the core of the core of the offering. Over the last few years, we've been developing new products. One is governance or Okta Identity Governance. The other one and the third pillar, we look at the workforce business as being 3 pillars. One is access management, that original SSO MFA UG concept; governance being the second pillar; and then the third pillar being privileged access. If you go from first one of those to the last one of those, it's level of maturity. The access management part of the business, very mature in terms of product innovation. We still have ways we can make it better But that's the most mature side of the business. Governance is the most -- is the new -- the kind of like second most mature, over 1,000 customers now in governance. And PAM just counted came out a couple of quarters, so very nascent in that journey. So that's our product set. In terms of the market dynamics at this point we talked about the macro headwinds that we faced on both sides of the business. One side of the Workforce where it's seat based, right? So it's a number of employees or a number of partners you have. Customer identity is the number of monthly active users you have that's related to digital applications. But really from a macro perspective, we are seeing those headwinds. You see those affect the top line. But at the same time, we've been able to raise the bottom line while growth has slowed due to these macro trends.

Brett, you talked about a pretty significant market opportunity on the workforce side. Recognize we are in a different macroeconomic backdrop. But when I think about the Workforce business, several years ago, you were sort of compounding at the 35%, 40% growth level. You just talked about you're kind of running growth in the mid-teens level. What is the singular path back towards some of those higher growth rates that are in your control?

Yes, absolutely.

And then what's sort of constraining your ability from exogenous variable standpoint?

Yes, absolutely. Well, I'll take them backwards. So the outside is the macro. That is definitely hurting our seat count increases, whether it be mid-contract increases or at time of renewal. We do a lot of mid-contract upsells. And so not seeing those at the rate for licenses, we're still seeing them for new products, but licenses are being more challenged at this point, budgets are being more challenged at this point. Same thing for at renewal. In terms of what's in our control, which is 3 main areas, and I would say this applies to both sides of the business. One is new product innovation. You just heard me talk about governance now starting to be a sizeable business, greater than 1,000 customers. PAM becoming a new product that just came out in the last couple of quarters. We've also got Threat Protection. We've got Posture Management. There's all sorts of new products that we're releasing from a workforce perspective, that can help us grow even in this macro. And so that's one pillar of what we believe is really reigniting growth over the long term, not necessarily in the short term, it's going to take some time for these pillars to work, but new product introduction is definitely one of them. The second one is around specialization in the field. You've heard us talk about since the beginning of this fiscal year about the Hunter-Farmer model. So Hunter-Farmer is, we take our field in the Americas SMB business, small and medium-sized business. And we've split the field in between people who are hunting for new logos and those who are farming the installed base at this time. So we believe that will help with growth over the long term. And then I would say the third area is really around partners. As you guys have probably seen in some of our releases, we talk about the percentage of the business that is done through partner or on partner paper right now, it is greater than 40%. And that is to be clear, when the partner takes it on their paper when it's on their contracts. The influence is actually larger than that, but that's the easiest metric for us to convey. But there's multiple areas in partners that we actually improve upon. We can improve upon the reseller relationships that we have. We can improve upon the number of MSPs that we have. We talked about the first one we have with SoftBank a couple of quarters ago to access the Japanese SMB market. Marketplaces with AWS. If you guys remember, in Q4, we talked about that being about $175 million annualized business, growing 130% year-over-year. And then the other area that we're really focused on and the area we're going to lean more into is the GSI arena. Historically, they haven't been as interested in us, primarily because our professional services as a percentage of revenue has been fairly low. It's been around 2% lately, and it's harder for GSIs to build a book of business around that because Okta just works out a box. It's a very quick time to value. And so we've got some new things out there that we think we can interest them in and help them build identity businesses and help us basically close more business. So those are the areas. So if you boil it down to new product innovation, Hunter-Farmer or specialization, if you will, in the field; and then the third one around partner influence. We think those 3 areas we can help grow even if this macro stays the way it is, we believe we can we can grow faster in the long term with those 3 things. It will take some time, but we're optimistic about all 3 of those pillars.

And Brett, same question, but if you can take lens from a competition standpoint, right? The competitive dynamics in the marketplace have evolved since you've come on to the scene. So what are some of the maybe thornier challenges as it relates to how you're engaging with your customers in light of an evolved competitive backdrop? And maybe you can give us a sense of your win rates? And how your toe to toe with someone like a Microsoft, for instance, is bearing out? And maybe also a layer around some of the legacy really old guard incumbent set, I think some of us just forget still exist?

Yes. I would say the competitive environment has remained fairly similar. So if you look at the business, there's 2 different really sides of the business like we've talked about. One is Workforce, and the main competitor there is Microsoft. It continues to be the same, give it away for free with E5 versus paying for it with Okta. Our product we believe, is the best in market and demands that value. And so we've seen that as long as I've worked here, and I've worked here for 9 years. So I don't think that environment has changed too much. In terms of the other legacy providers that you mentioned on the Workforce side. It does seem to be more of the same, which is compete on price for what we believe is not as good of a product as ours. And so we do see that environment. That's been like that for a long time now. So that environment on workforce is fairly the same from what we've seen for years. And then from a customer identity perspective, it is the same market. It is buy versus build. We have to evangelize it, it's easier, faster, higher ROI to buy it from us than to build it yourself. And that's been the macro dynamic for a long time now. We need to continue to improve there. So -- both sides of the market seem fairly similar from what we can see at this point.

And just to finer point on some of the legacy competitors. It is remarkable that they still have a pretty fair share of the identity market. So from your standpoint and what you kind of hear from your sales organization, why has it actually been -- maybe a little bit more challenging to dislodge some of these obviously inferior capability competitors that are solving 1990's problems from an identity standpoint?

Yes, it's a good question. I think there's -- one of the benefits of identity is that once you put it in, it's kind of hard to take out, right? It's tentacles go everywhere, in the situation, which you're talking about is it's also hard to dislodge in those types of situations. But our catalyst is really when they start to struggle, right? If they're challenged to start a new use case. For example, I'll give you an example on the governance side. We had a Fortune 500 company try to implement one use case with one of the legacy providers. They spent an entire year doing that, couldn't get it up and running. They came to us. They had it up and running in 3 weeks. So the time to value and the value for our customers and the ROI is much quicker. And so now we've earned the right with that Fortune 500 company to not only go after all the new use cases, but also go after some of the older use cases that are already implemented. And so -- that is the play that we've been running for years. We are not a classic going and lift and shift everything out. That would be very hard and very difficult to do. We try to go win small pieces of business at a time, run the land and expand model. It's been working for us for years, and we're going to continue to do that. And I think that's why we can operate against some of these players in the long run is because we do drive a high ROI over the long run company.

Before I shift gears into peeling back the customer identity cloud pillar of your business. You talked a lot about the excitement with the rollout of OIG, PAM, IDSPM. So there's a lot of good stuff baking and incubating and ready to come to market for you to monetize. But we haven't necessarily seen it become visible in some of your forward-leaning metrics. So when you think about your RPO, cRPO guidance, what do you think is causing some of that stubbornness around, hey, you have momentum with some of these new products? So why has it been so stubborn in terms of its ability to manifest in driving better incremental growth as you look forward?

And you're talking just on the Workforce side or just across the board...

Just on the Workforce side specifically, yes.

Yes. I mean -- it takes time to incubate new products. I mean it's not like you just turn it on and it goes. We're now really hitting our stride with governance with the additional product capabilities. I mean our governance product can compete. I mean it's really good now. I don't think I could have said that 2 years ago when we first came out with it. I mean, it was a good product, but was it as great as it is today? No. I mean -- so you got to -- these things take time. And when you're talking about a business that's $2.5 billion or north of it, it takes time for those numbers to really add up. We're very optimistic about a lot of the new products, whether it be governance, greater than 1,000 customers, PAM completing that full workforce suite. And to be clear, that's our long-term strategic bet is -- the 3 pillars of a workforce product, people want to buy that from a single vendor, access management, governance and PAM and then having a security offering sitting underneath it. That is our long-term -- like our long-term bet around the workforce product. And so -- yes, some of these things are still very new. I mean, Threat Protection is barely GA, right? Posture Management just came out. I mean, we're talking about some new things that -- in the long run, yes, we think they're going to be accretive to growth. But we have to be patient with them and not just say, "Hey, why aren't you selling x million right out of the gate." Because the market's got to know one, see the value too, the field's got to be able to sell it. We've got a market. We've got to show get those customer advocacy stories out there. And so we're making traction, but it's going to take some time. But we are very optimistic about a lot of these new products. I mean, some are really -- I mean, not part of the term, but very cool. Clearly, there's some really neat stuff that can really help our customers either make their organizations more efficient or make them more secure or do both same time, which is something we're really trying to accomplish.

And I'm curious, historically, when you introduce adaptive MFA or life cycle management. If the attach rates on those types of incremental products on the core SSO MFA, if you can give us some kind of data points around that, so we can embrace for potential guidepost for, hey, at maturity, governance attach rates could look like XYZ, at maturity or 2 years from now, PAM attach rates could look like this and so on and so forth for [ IDDP ] and IDS PM. Can I throw another acronym, can I throw another acronym at you?

Yes, you've thrown them in there and just confuse everyone. We try to confuse everyone. So in terms of the attach, a lot of these products are designed to work all the way up and down the stack. When I say up and down the stack, I mean, in terms of customer size because that's how we segment our field. I wouldn't say -- I'm trying to think of an example of maybe where it wouldn't work. Maybe at the very bottom end of the market, some of the newer features may not be as interesting, but we are trying to do it so it's holistic across the board. I think the uplift we get from governance is really strong. I think everybody knows it, but I'll say it again, which is on the workforce contract value, it's about a 50% uplift. I'm not saying the rest of the products are going to give that, but they will create an uplift for us in those workforce contract value. So we're pleased with the traction on the biggest one so far. We need to now replicate that across all these other new products over the coming quarters and years.

Good. So the other 40% of your business, Customer Identity Cloud or the artist formerly known as SIEM. How would you characterize the performance in this business relative to some of your initial aspirations for scaling this? And how much would you say macro has been an influencing force on kind of maybe curbing some of your aspirations and seeing the type of growth you wanted to see?

Yes, I would say we think we can do better than where we are today. I mean our aspiration is to make 50% of the business workforce in 50% of the business customer identity, with both growing at a healthy rate. As I think everyone saw heard us talk about, we have spent a lot of time enabling the field. We've also changed how we operate tactically to be able to incent more customer identity in the overall sales plays and execution. . We're headed in the right direction. There are 2 stats that I would say are really positive, one is, the participation rate by the field continues to go up in customer entity. So what we do is we track who sells what and by what and basically, what product. If you look back 2 years ago, Workforce was pretty high and -- very high and customer identity was pretty far away. Over the last 2 years, we've seen those numbers come together. They are still not exactly equivalent. So there is still room for us to improve. So that's a -- headed in the right direction, but it's not exactly where we want to be. So proud of the team of where they've come to, but we still can improve. The second metric that came through in Q2, which was a real positive sign of things head in the right direction is, the number of deals for customer identity grew quite swiftly in the quarter. The problem is, going back to the macro comment that we've been talking about is that the average number of MAUs or the unit of measure for how we sell customer identity, declined at a fairly decent clip. And that goes back to people not wanting to commit too far out in terms of their contractual agreements. So although it doesn't come through in the current RPO numbers or the revenue numbers or the NRR numbers, that's actually a really good thing for us because we know 2 things. One, once we get a customer in -- so by the way, the number of deals is both new deals and upsell deals. So we know once we get a customer in, we historically get them successful, they get high ROI, and we have good gross retention rates and good net retention rates. So yes, short term, not seeing any of the growth, but in the long term, that's a really good thing. The other thing we know is, so that's for more logo -- new logos, if you look at the upsell transactions, if they are adding more products, we know there's a threshold at which they cross in terms of number of products, that also has a very high correlation to gross retention and net retention. So yes, short term, once again, not seeing it in the short term results in the long term, we know this is going to be good for us. So there's two good metrics in there that are headed in the direct direction, and we're really pleased with that.

And maybe unique from the Workforce side. Within customer identity, and correct me if I'm wrong, it's not a multi-SKU portfolio per se. A, is that accurate? And b, is there an opportunity to continue to build more modular functionality, so there's conversations with customers around you can start small and you can scale -- and scale to degrees that are -- have nothing to do with MAUs, right? So just more. So completely kind of untethering and kind of derisking yourself from constantly being tied and tethered to like the seat-based modalities?

Yes, absolutely. So there are actually different products that we do have in customer identity. So there are levels of which you can go up. You've got attack protection, you've got MFA, you've got all -- you have security center. We now have highly regulated identity, which is something that would be very applicable to financial services. We've got fine grained authorization. So there are more products that we are adding into the mix. And yes, we do want to the glide path just like workforce. So yes, we've got a lot of opportunity both on the MAU side and on these new products that are coming out to be able to not just be so tied to MAUs like you were talking about. And we're very bullish about customer identity in the long run. I mean it's definitely a huge market. We think it's about $30 billion. And we're going to keep driving into the opportunity to keep building new products. I mean -- another one is becoming more -- increasing our FedRAMP certification, right? There's a lot of things that we can do to help ourselves in that market and excited with what the team will come out. I would invite everyone to come to Oktane in a couple of months. It's in Vegas. You'll see a lot of new product introductions, not just on customer identity side, but also on the workforce side as well. It will be something to see.

Brett, just last one on customer identity. There is sort of a proxy exposure to kind of consumer trends, right? I think the way you also think about your market opportunity within CIC ties to kind of e-commerce or kind of online activity, again, very loosely, right? So if we think about those things as a proxy for, "Hey, when should some of these signals turn, so all of us can have more confidence that, hey, the CIC business is on the path to acceleration?" What are some of those kind of bigger picture macro signals that you're watching that could really engender a lot more confidence and conviction in your ability to get the CIC business back to 40%, 50%, 60% growth, which is what -- Auth0 which was your asset that you acquired was doing standalone?

Yes. So it's -- I would say there is obviously macro that is impacting it, so it's hurting us. I would say forget the macro aspect of it. The majority of our customers are still workforce identity customers and not customer identity customers. So if we just sold into our own customer base, that is a massive opportunity by itself. Yes, there are tons of customer beyond the 19,300, but there really is a lot of opportunity out there. It's upon us to be able to execute better, to be able to convince the market, they should buy it from us rather than build it themselves. . In fact, there's been customers in the past who thought they could build it themselves, try to go do it, and there's a variety of problems they run into and they come back a year later and ultimately buy it from us. So we need to improve our ability to remind the market that you should be getting it from Okta, not trying to do it yourself.

I think the other side of the equation here is there's been kind of a revamping of the go-to-market organization just at a philosophical level, but also boots on the ground level, right? You've been kind of shoring up a lot of your ramped and tenured sales capacity over the course of the last 2 years. So can you give us a little bit of a breakdown on kind of where you were about 2 years ago? I know you had a tremendous level -- you've delivered a tremendous level of improvement in levels of operating efficiencies at the company, right? But just specifically from a go-to-market perspective, a lot of the changes and the string of improvements that have transpired over the course of the last 2 years and how much of that has been much, much more focused on training and enabling right versus driving more capacity and this is a really long question, sorry. But you're potentially at the point where you're feeling good about the tenure. And so are we at the cusp of potentially seeing capacity growth after a period of you haven't really invested in headcount in that area?

Yes. We're pleased with the quota capacity at this point. We still feel like there's productivity gains that we can get out of the field at this point. We look at productivity per rep. We look at return on investment in pipe. We still think we can be better from where we are here. So we have driven down that sales and marketing as a percentage of revenue pretty healthily over the last couple of years, and we're pleased with that traction. But at the same time, we feel like the team could be more productive. And that's why we're looking to these other areas, these 3 growth pillars I talked about earlier, new products, you give your reps more things to sell. Usually, that's a good thing. You specialize them, Hunter-Farmer usually means they can have better productivity and partners, which is partially about delivering good deals, but also partially about reach can also help ourselves in terms of the efficiency to drive $1 of booking. And so -- we still think that we can do better from here, like we can grow faster than we're growing right now. Todd and I have definitely stated this publicly, we're not pleased with the growth levels. And that's why we're working on these 3 areas. And that will translate into what you're talking about with the efficiency and how to maximize that coming out of the organization.

So what -- we talked a lot about macro and then you just kind of gave us a really good detailed level of insight on how you're thinking about go-to-market. So bringing that conversation into large deals and large transactions and actually, some of the strength you've seen there, right, which is -- there's a little bit of a dichotomy, right? Because micro has been challenging, but large deals and large deal momentum has actually been pretty strong and actually pretty resilient, right? . So can you break that down for us a little bit in terms of some of the conversations and the demand patterns you're seeing with respect to some of these large deals that are kind of diametrically opposed, maybe what you're seeing in other parts of the market. I think North America Commercial/SMBs, a place where you've specifically called out that it's been a little wonky. So if you can just kind of parse out that dichotomy for us.

Yes. I think it boils down to really 2 main factors. One is enterprises can weather the storm with their balance sheets a little bit better. Even with that said, I'll give you guys an example of I was talking with I'm an executive -- I'm a [ directly ] sponsor for a handful of accounts, and I was even chatting with this person, Fortune 500 company. And we were talking about a couple of different opportunities inside the account, one on customer, one on workforce. And even with them, the budget was being scrutinized, let's put it that way, so they couldn't do everything they wanted. So even despite the strength in enterprise and strategic and I would put public sector in there as well, these are all organizations that can kind of weather the storm. And I think you see that with these results, whether it's the greater than $1 million ACV customers growing quite quickly or the stat we just gave us last quarter around over 40% of the Global 2000, now uses up from 33% a little less than 2 years ago. So those are all headed in the right direction. So I think it's -- one, it's balance sheet strength. I think there's also a secondary factor in there, which is one of the things where Okta really shines, whether it's on the Workforce side or on the customer identity side is complexity. If it gets complex, there is no other product in the market like ours. We are far better than everybody else, like a chasm of delta. And think about enterprises, public sector, you think complexity. They can have multiple identity solutions. They can have multiple business units. They can operate in multiple different geographies. They could have multiple different work -- I mean, it's all the things you think of a big company has, that causes complexity and identity. And that is where Okta really shines. We have done very well there because of that. So I think it's both balance sheet and also the fact our products are just directly aimed at those types of use cases. And we've been working on it for years to be able to help them solve as many as we possibly and we clearly do not cover all of them. We still need to do a lot of work on the product, but I think that's why you see the type of results you see in these bigger customers.

And is the view kind of the mirror image for SMB? Or is there something else going on with respect to, "Hey, maybe there's a little bit more price elasticity, price sensitivity in the small and mid-tier segment of the market."

I think they're just more cautious with their purchasing at this point. I think -- I would say, in general, comment I've said a bunch of times here in a bunch of times on the call last week and in callbacks is people are just more sensitive. It doesn't matter where you are in the stack, I think SMB is more sensitive, but I think they're just more sensitive about their spend at this point. That's why you see us talking about license counts folks being more thoughtful about that or MAU count on their customer identity side of the house. And we think from what we can see in all of our contracts, when they started, when they end. We see this lasting probably into, if not through the first half of next year based on kind of flushing out that, "Hey, maybe I have too many MAUs or too many licenses." That's based on our math, based on when the contract started based on when they're going to end and basically current market conditions. So we do believe this is this kind of economic effect on the businesses going to take some time to flesh out based on what we can see in the cloud right now.

And I'm going to jump the gun here, but is that one of the reasons why the view on net retention rates is going to remain muted for all of the reasons we discussed but also this particular factor, this hangover is going to last...

That's exactly. That is the main reason. You're going to have that hangover effect going through the end of the year. And also, we believe, has more of an acute impact on SMB, right. So if you looked at the net retention rate, the blended one that all of you see, the enterprise one is higher than the average, and the SMB one is lower than the average, and it's been that way for some time now, and we believe that, that trend will continue through the back half of the fiscal year.

Right, you're still doing a preponderance of your business in Americas, right? So international is still kind of a the 20% level. So that's both an opportunity, but I think it also begs the question, what is your vision to -- and potential to drive more presence and market capture internationally? So what are kind of some of the principal factors that you need to unlock to drive more velocity internationally?

Yes. I mean there's a combination. It's more direct investment, which is what we've been doing. And then the other one is something I've already mentioned, which is around partners helping us with reach. So -- if you remember, we talked about in the past, we've talked about MSPs, SoftBank, the Japanese SMB market. We need more of those MSPs. We need more distributors around the world. We need the GSIs to get involved here and help us with the international presence. And so it's really up to us to continue to drive that partner ecosystem in a variety of ways, whether it be in marketplaces, the traditional resale method that we've used for years. And so -- we look like -- we look at it and we look through and think there's a massive opportunity internationally because, look, identity is a problem that all companies have. It's not like it's a U.S. problem. It's not a small company problem, not a big company problem, everybody has this problem. If you have a tech stack. And so we're very bullish about the long run in international. Yes, we've got great leadership outside the U.S., and so it's going to be exciting to see what they do over the next couple of years.

We typically hear that other geographic theaters tend to be maybe slower on the tech adoption curve. So in some ways, are you victim to some of the other geographic regions maybe being generally behind the technology curve and that they -- since they have not decided to move to cloud and mass yet, you can't get pulled along with that. Is that part of part of it? I know it's more of a nuanced view?

I think it's a very good question, frankly. We tend to operate in the cloudy places that are very cloud-friendly. And we definitely feel like we can operate better than we're doing today. So yes, there is likely that effect on it. But if you look at the overall market, we should be able to penetrate more and that's why we're taking these steps that we've talked about. And like I said, I talked about partners a second ago, but really new product introduction helps us here, specialization helps us here. All 3 of these things are not, that we've been talking about, between the 3 NPI, Hunter-Farmer and partners. They help us worldwide. They don't just help us in the U.S. It's really there to drive growth across the board.

Another lens on the business is just public sector. Specifically, that's been a very strong end market for you. You really been punching really nicely and strongly there. So the momentum very good. Just from an execution perspective, what have you done differently there? And with respect to you kind of having more than your fair share of opportunity that's being captured there? And how much of that is potentially transferable to the way you do business with financial services or health care or other kind of sectors of the economy I recognize you don't have a verticalized sales approach, necessarily at present. But yes, just kind of the success factors in public sector and what's allowed you to drive so much momentum there? And how translatable or transferable that is?

Yes. I mean, public sector is, in some ways, no different than the private sector. They have the same technology challenges. They have to access like everybody else do. I think what the difference here is, focus. I mean, the certifications we've got on the federal side, whether it be -- we're now IL-4 with the ability to operate an IL-5 environments.

To the uninitiated, is that DoD business?

That is -- yes, that is DoD business.

So if you tell me, you're going to have to kill me?

Yes, that's exactly right. It's -- and then on the other side, we've got FedRAMP high in a lot of places. And we still can expand our certifications because not every single product is one of those IL-4, IL-5 or FedRAMP high. We still have some work to do there. And I think it's really just focused investment has led to the wins on the federal side. But if you look at public sector in general, state and local, you get a benefit from having those certifications. Because they look at it and say, "Oh, well, you're FedRAMP certified. Okay. Great." But that's just the U.S. This is -- back to your international question. We don't have a ton of certifications outside the United States. We have some, but we can improve there and be able to give our teams more of an opportunity. So I think it's focused Also, we've really organized around it, and we've got a great team running it. I mean Katy Mann does a great job of running the public sector for us from a sales perspective. And I think our partnership not only with our field, but also with the actual partners themselves is really strong there as well. So we look at that as a good growth opportunity in the long run. I mean we've done well, but we're still just scratching the surface. I think -- so to answer your question, it's really about focus and making sure that we can operate in an environment because it's -- there's a lot of like tactical stuff you have to do day-to-day that we don't all talk about it. It's hard on the team. And it's a lot of work, and they do a great job of it. So we should congratulate them.

I have to ask you the generative AI question or they'll throw me out of the software sector, if I don't.

Yes. You got to do it -- let's go through.

So what's the -- what's sort of the product and R&D philosophy around generative AI? And then what's the commercialization philosophy around Generative AI for Okta?

Yes, absolutely. So we use AI to help our developers write code, so that's definitely helping us.

And have you seen demonstrable productivity gains?

Yes, there's been some. Yes. Yes, absolutely. Depending on the function you're in, what I've been told is between 10% and 30%. So it's really -- it's been a boost of writing code, which is a positive for us. But then on the product side, it's -- I think that's the main area from an internal perspective where we use it. I think if we look at -- there will be areas that we will apply it to in the future, but I don't think they've really come to fruition at this point. And we haven't found the ROI to be there at this point. As we improve other things, right? Obviously, we want to be always improving and driving ROI for all stakeholders. But in terms of the product itself, I mean we've been using AI in the product to make decisions for years now, Threat Protection, one of the new products we were talking about on the Workforce side uses Okta AI to make decision. And what Threat Protection basically does, which is part of my very technical cool comment earlier, was we get to build to deliver to the market, continuous authentication, something no one's ever really done before because traditionally, what authentication has been as you make a decision, someone gets in the door, they go and access a bunch of applications. And you never check that it's Fatima accessing her Citi console on a regular basis. What continuous authentication does is it pulls in a bunch of signals from a bunch of different providers, you could think of the providers around us, CrowdStrike, Palo Alto Network, Zscaler, you kind of run down the gamut, to make sure it's still you doing your job. And so it's Okta AI sitting in behind it, saying, "Okay, wait, hold on. Fatima was just in New York. Why 10 minutes later, is she in Venezuela or Nigeria. This something feels weird." So it's a very -- really interesting -- a very cool way to use AI to say, okay, she's normally in New York. She was there 10 minutes ago, something feels strange. And what the system will do is that it will cut access to not only you, it will actually trigger something to the admins to say something seems strange, should we cut access to everybody. And not just in that one console you're doing, but everything you have access to. So it's -- because at that point, something feels strange, you maybe have been hacked. And so that's how we're using AI to try to help our customers is really make them more secure and not just a point of entry, but also post entry. So it's a really interesting product and I'm excited about it personally.

Brett, I wanted to kind of end our conversation and talking to you about resource allocation, capital allocation and investment priorities in broad strokes. But specifically, you have delivered Herculean improvements, as I mentioned earlier, with your cost structure, your profitability profile, your free cash flow conversion and your free cash flow generation. So that's fantastic. But what's the path from here, especially as you look to scale some of these new products. You're really galvanizing the go-to-market engine and your sales capacity? And then also specifically, as you kind of work through some of the security incidents from the last year, there's been such a concerted focus to make the organization secure by design. It's something that Tod talks about a lot. So when we think about those 3 components and how much improvement you've already delivered on an operating margin and free cash flow margin perspective, how can we have confidence that, hey, there is still scope to improve from here?

Yes. We've got -- yes, we thank you, by the way, for the compliment. I don't get that about the margin too often. I appreciate it. Yes, we've made a lot of improvements in how we operate in -- from an efficiency perspective, we've built these pillars of margin to be able to invest in things while also delivering very healthy margins like we are in FY '25 will give you a very good example, which is we have spend a lot of money on security this year while also having very healthy margins. So we intend to do that in the future. We want to be able to grow faster. We want to be able to invest in these things, but also have healthy margins at the same time. And we believe that the structure of what we've built over the last couple of years is afforded us that opportunity. So we look forward to executing against that in the future.

Fantastic. Well, time flies when you're having fun. Thank you, Brett.

Thank you for having us.

I appreciate it.

Appreciate it.