Welcome everyone to day one of the Citi Tech Conference. I'm Joel Omino. I am a Research Associate on the software team, and I support Fatima Boolani in covering Okta. And so we're very happy today to have with us Okta's very own CFO, Brett Tighe.
Yeah. Happy to be here.
Thanks for joining us, Brett.
Thanks for having me.
Perfect. So I think to get started on this discussion, maybe just give us an overview and an update on where Okta is today in terms of your story and moving from, you know, the Access Management that we're all familiar with, to some of the exciting things you're doing-
Mm-hmm.
-in, in the identity space.
Yeah, absolutely. So as a reminder, we've got two main sides of the business-
Mm-hmm.
One is Workforce Identity, the other one is customer identity. Both are trending well. You guys can look at the earnings results. Both had good growth in the quarter. But, you know, Workforce Identity is really comprised of three major product lines. One is Access Management, the second one is Governance we just came out with, and the third one is Privileged Access, which will be going GA later this year. It's in early access at this point. And then we've got customer identity, which secures our customers, customers' identities. And so, that's really the kind of like map of the overall company in terms of the product lines. You know, guidance is about $2.2 billion this year, at the top end of the range for revenue and margins. We're guiding about free cash flow around 15% for the year. It's really how things are playing out right now.
Then maybe could you talk about why Okta is making these changes, right? What are you seeing in the market? What are you seeing from customers in terms of wanting to have IGA, PAM, and all these-
Yeah.
-parts, from one vendor?
Yeah, it's part of the natural progression, right? So if you remember, we started in Workforce Identity, really Access Management. Started as a, you know, accessing that small, medium-sized business all the way up through the lower enterprise, and over the years, we've been able to expand into the strategic arena, you know, the highest end accounts, the Global 2000 accounts. And so if you think about that from an Access Management perspective, naturally, you want a Governance tool that sits beside that, and then naturally, you're gonna want to have a privileged Access Management tool as well. And for us, we look at it as a complete platform, and that's what our customers have been asking us for. "Look, we want to access via, you know, our, our...
to our critical resources for our employees, for, you know, you know, A, B, or C applications." And so we wouldn't be, it wouldn't be, as efficient to go to another Governance vendor or another PAM vendor, and so that's why we've built out the entire product suite. Obviously, Governance has only been GA for a few quarters. PAM is going to go GA later this year, and so we're excited about the opportunity to be a single pane of glass for our customer base and really address as many of the identity use cases out there as possible.
Mm-hmm. Okay, certainly. And we'll definitely dive into, you know, Workforce Identity Cloud, Customer-
Mm-hmm
-Identity Cloud later on. But I think just to continue to level set here, we have to talk macro and execution.
Yeah.
So, you know, over the past several quarters, there have been some negative macro impacts on the business. And there have also been some execution challenges.
Mm-hmm.
But more recently, we are starting to see some recovery in that aspect.
Yeah.
So could you just take us through what happened last year?
Yeah.
And sort of what changes were made that we're now seeing bear fruit?
Yeah, absolutely. So execution challenges late, we'll say first half of last year, really were around too much capacity in the system from a go-to-market perspective, so we were having attrition issues. We weren't also clear with our messaging on where to sell each of our customer identity tools at the time. And so the changes that we made late last year, or well, midway through last year, about Q3 of last year, was to slow down hiring, absorb all the capacity we had, clarify the messaging that we had for customer identity. So if you all remember, we acquired Auth0.
We at Okta had had a legacy customer identity product, and making sure that the clarity was that, you know, look, the customer identity product that we sell, it's really the Auth0 product, except for in situations where FedRAMP is needed, which is where the Okta customer identity product comes in. And so just clarifying the message with the field, clarifying the message with our employer or with our partners, our customers really made a big difference.
Yeah.
And so flash forward four quarters later, we've had very healthy attrition in the field. You see two for two quarters this year, Q1 and Q2, with really strong execution. You see it in the results. Obviously, current RPO growth in the quarter for Q2 exceeding our expectations by a significant amount. Revenue exceeding. Margins are exceeding by significant amounts in the first half, leading to raises for both top and bottom line for the full fiscal year. And so, really, we feel like we've executed that execution challenge. We feel like we're doing a lot better. Obviously, we can always be better. I mean, we, you know, we're impatient people. We feel like we could even be better from here, but we feel like those challenges are behind us.
In terms of the macro, that obviously has been a headwind for us. We did see the macro stabilize in the quarter. We saw it through a variety of metrics, but ultimately, we do feel it's still a headwind, but it didn't get worse in Q2. We did expect it to get worse through the balance of the year. We no longer believe that. We do believe for the back half of the year, our macro expectations, that it stabilizes from here. But to be very clear, it is still a headwind to us, still a headwind to growth. But we're pleased with how the team is operating, both on the top line and on the bottom line.
Mm-hmm.
So things are going well so far in the first half of fiscal year 2024.
Okay, great. And I think something that, that could be helpful is, you know, you spoke about you're seeing certain metrics improve-
Mm-hmm.
And that's what's giving you confidence-
Yeah
In a stabilizing macro. Could you talk about what these metrics are?
Yeah. So the big one for me is, if you think about, one of the vectors of growth for us for business over the years, it has been, upsells related to seat count on the workforce side, workforce side, or, expansions on the monthly active user side, on the customer identity side. So for the prior couple of quarters, we had seen a, a headwind in those numbers. You know, specifically people just adding more because they expect to hire more people on the workforce side, or they expect more economic activity in terms of more users on their applications. And so in Q2, we saw that, that trend stabilize. That was the biggest one for us, 'cause you saw, the numbers in terms of, of headwind growing, growing every quarter. And but in Q2, it did stabilize.
So that's, that's a big one for us. The other thing from a contract duration standpoint, we'd seen that be lower and actually be a headwind to contract duration. We actually saw that tick up a little bit in the quarter, and so those are the two main metrics that we've really kind of focused on. I mean, there's other new business versus upsell as well, that stabilized. In other words, the mix of upsell is much higher than the mix has been historically. And so that stabilized in the quarter. So there's a few things in the quarter we just saw that were good signs.
Yeah.
- that things were not getting worse.
Okay.
Let's put it that way.
Yeah.
It's not like it's getting a lot better, but it's just not getting worse from a macro perspective, so we're, we're happy to see that.
I mean, certainly encouraging.
Encouraging, exactly.
Yeah.
As I've said in the past, one quarter doesn't make a trend, so we are still being cautiously optimistic about the back half of the year.
Fair enough. And then, I think maybe just to add some context on this, could we talk about the impacts that you've seen maybe across, workforce and customer or across the different customer segments, whether it's large or small?
Yeah, we've seen it pretty broad-based. Both have been impacted, and specifically on that number I was just talking about with the expansions related to CIC count or MAU, or Monthly Active User count. That has been fairly similar across both sides of the business. In terms of the segmentation, I mean, both have been impacted. I mean, our customer count adds haven't been as big as we've historically seen.
Mm.
Potentially, that means it's a little bit more SMB focused, but I don't think that's the case. I think it's definitely broad-based between enterprise and SMB. In terms of internationally, we haven't seen much of a difference versus U.S.
Mm.
So it really seems across the board from a macro perspective, in the statistics that we can see and the quantitative that we see in the business. The other thing I should have mentioned, actually, in addition to some of the macro stabilization, also on this point of where it is and where it isn't, just talking with our sales teams.
Yeah.
Qualitatively, they're telling us things are stabilizing, and qualitatively, they tell us that it's really broad-based, it's not just-
Mm-hmm.
... you know, in a single location. So we've got the quant to back it up and also the qualitative side-
Okay.
... just chatting with our go-to-market executives.
Okay. It makes sense. And I think, you know, just on that note, in this last quarter, we did see that improvement.
Mm-hmm.
It really was a good quarter for large deals, right?
Mm-hmm.
But I think the question some may have is: Are you viewing this more as a one-time situation, one-time, you know, event of large deals? Or is this a sign that really that execution is going to continue to improve, and we might see more of this going forward?
Yeah, look, we've always been focused on big deals.
Yeah.
I mean, that's something, you know, you, you guys all saw the... If you haven't looked at the, investor presentation that we gave last November at Oktane or Investor Day, you know, we talked about, you know, a third penetrated into Global 2000, 70% into the Fortune 500. So we do look at this business as, through the lens of big deals and big customers.
Mm.
We obviously can access the entire market, given how great our product is. It can access all sizes of companies, all types of companies and organizations out there. So it's something we've been focusing on for years and will continue to focus on. Big deals are lumpy, right?
Yeah.
Like, we had a good big deal quarter. You know, are we gonna expect that every quarter? Absolutely not, because it's the way big deals work. They're big and chunky, and they're very binary. There's, like, you know, nowhere in between. And so, we're pleased with how the quarter went, but we're not expecting it to be every quarter like this. It was one of the best big deal quarters we've ever had in the company's history, and we're pleased with it, but, you know, what have we done lately? We got to go execute in Q3 and Q4. We got big expectations for the back half, and looking forward to executing in this environment.
Okay, fair enough. Fair enough. So, I think another key topic around Okta is just the head of the go-to-market.
Mm-hmm.
Right? There's still a vacancy there. It's been... We're creeping up on a year now since the retirement of Susan St. Ledger-
Mm-hmm
... was announced. So, you know, is there anything you can share in terms of what is keeping the search going? You know, are there certain boxes that are, you know, turning out a bit harder to check?
Yeah, we wanna make sure we get it right, 'cause this is, this is a hire that's not about, you know, next quarter or even FY 2025. It's about the next three to five years.
Mm-hmm.
So we're taking our time, making sure we get it right. It's a very important hire for us as a company. And so we're making progress, and hopefully at some point soon, we have an update. But we're gonna take our time and make our... make the right decision for the long-term move.
Mm.
We are, like I said, working hard at it.
Fair enough.
One of Todd and I's top priorities, so.
Yeah, yeah. And then, I think, also, you know, at the last earnings, we spoke about, Frederic not-
Mm-hmm
... coming back as COO. So, is that now a vacancy? You know, what's happening around that position?
No. Before Freddy left, Freddy, we had moved his, his organizational responsibilities-
Mm.
... into other organizations, before he left for sabbatical.
Okay.
To be clear, and so we've been operating as if Freddy hasn't been here since Freddy-
Okay.
... went on sabbatical. We're gonna miss him. I love Freddy. He's a great person to work with, but I'll still get to work with him-
Mm-hmm.
... on a less regular basis 'cause he is the Vice Chairman of the Board.
Mm-hmm.
He will remain the Vice Chairman of the Board, and so, he will remain very connected to us. In fact, he was giving both Todd and I some constructive criticism-
Mm-hmm.
... as recently as last week on the earnings call. So, he's very dialed in and very interested in making sure that we're successful as an organization.
Mm-hmm.
I'm excited for Freddy in the next stage of his life, but we will not be backfilling the role.
Okay.
We've spread all the organizational responsibility into other staff members across the team.
Okay, perfect. So, you know, we see this execution improving, like we've talked about, but there's still this vacancy, right? In the head of sales.
Mm.
So how do you think about the risk of... You know, when you install new leadership, there's always risk of attrition-
Mm.
... drop in productivity. Are you baking that into, you know, your assumptions and your expectations as well?
We haven't baked anything for the back half of the year because, well, we don't have a new person-
Yeah.
In the seat. And so, when the person does come in, we'll obviously factor all that in. But ultimately, you know, and like you said, any executive change, there's always a potential for change. There's also a potential that nothing changes, right?
Yeah.
And so we'll be ready for both. But ultimately, I think as a company, as Okta, I think you guys have all seen over the years, if we see a problem, we make a change.
Mm-hmm.
We don't need an executive to come tell us that we're having an issue.
Yeah.
We can go and look at the data, and we can see how things are going, and we'll make a change if a change is necessary. If there's no change we need to be made, we won't make a change. So we don't fear change. We've been a company of change since we started this company.
Mm-hmm.
And so, that's what Todd and Freddy really built into the organization is, you know, don't fear change, be agile, be-
Mm-hmm.
... open to doing something different. I mean, frankly, what we, as a company, created was a completely different category that no one believed could be out on its own, and look how far we've gotten.
Mm-hmm.
So I don't think we worry about this, and frankly, we're excited about the opportunity to bring in.
Mm-hmm.
... some new blood. And so I think, yeah, that it would be, it'd be, it'll be good one way or the other.
Yeah. Okay. Okay, and I think maybe just one more just on GTM and sales.
Mm-hmm.
We have to talk about the channel.
Mm-hmm.
You made some recent changes to your channel program-
Mm-hmm.
... revamped it. Could you just talk about what you're doing there-
Yeah.
... and how it's different from what you had before?
If you get nothing out of what I'm about to say, it's adding focus, right?
Mm-hmm.
Adding focus is really what our point was, right? We used to have a lot of channel partners, and we didn't feel like the ROI being so because we were spread so thin was where we wanted it to be. And so we wanted to focus on the partners who were adding a lot of value to our organization and to our customers. And so that's effectively what we did with this new program that we released a few months ago. The other thing I would say, just in terms of partners, is we want to continue to diversify our partner-
Mm-hmm.
... community. You know, historically, we've been very focused on VARs and resellers, and they are, one of the reasons why we're successful. But-
Mm-hmm.
... and we're going to continue to believe in that success. We're going to continue to invest in that area, as well. So think of the cloud marketplaces. Think AWS, you guys heard about them-
Yeah.
... at the Investor Day last November. Clearly, that is a very fast-growing channel for us. That's not just AWS, but just the cloud marketplace is an area we want to continue to dive into.
Mm-hmm.
The other one is GSIs. We've got some system integrators, some regional ones, that are. They've been very successful with us, but we need to get the GSIs involved more, and so we're going to continue to make a focus there and continue to invest there. A perfect example would be around Governance, right?
Mm-hmm.
So our Governance tool is really good, like all of our other tools. It just turns on, it just works. That's why you heard about Ryder, the Global 2000 company that we talked about on the earnings call. They had struggled with a legacy provider. They then had us up and running in a few weeks. And so, one of the things that goes into a Governance tool, our tool does work, but and does work very quickly out of the box, but there's a lot of process work that you want to do up, up above before you do the implementation. So that's an example of an area we want to delve into with the GSIs and see if we can continue to make inroads into the GSI community.
Mm-hmm.
So our partner strategy is not just about doubling down on the areas we've had a lot of success, like the VARs and the resellers, but also trying to diversify our partners' ecosystem.
Mm-hmm.
... so that we can reach our customers and reach our potential customers as easily as possible.
Fair enough. And you know, any details that maybe you're able to share with us in terms of partner channel contribution today, the sort of traction that you're seeing, you know?
Mm-hmm.
... the different geographic regions? Yeah.
Yeah. So the stat we've used before is it's about a third of total revenue comes through the channel.
Mm-hmm.
So, and that continues to be the case today, and we look to expand that. But we want to expand it from an efficiency perspective.
Mm-hmm.
We want to be able to have a high ROI, and so we want to, we'll be thoughtful of where this-
Mm-hmm.
... where the revenue is coming from.
Okay. Got it. So I think let's go into the workforce side first.
Mm-hmm.
You know, this is the more mature part of the business, right?
Mm-hmm.
But still seeing healthy growth. Although, you know, there recently was a deceleration-
Mm-hmm.
... if we just look at the ACV.
Mm-hmm.
Maybe you can give us some context around that. But then on top of that, could you just talk about the opportunity that you see specifically within Workforce and why it's still, there's still significant runway?
Yeah. I mean, it's a big business. It's over $1 billion in ACV, which is much larger than when I started here eight years ago, 8.5 years ago, but it's still a fraction of what it could be. We view the entire workforce TAM to be about $50 billion, and so one versus 50, we still feel like we're very lightly penetrated. We've got a lot of opportunity there. It has been impacted by the macro. Both sides of the business have been impacted by the macro, I would say fairly evenly, just like I was talking about earlier. And so, yeah, there's a lot of opportunity. We're adding Governance, we're going to add PAM. It's going to become a really strong product suite altogether.
It's great as it is today, but we can make it even stronger, not just through adding Governance and PAM, but adding additional functionality into each of the, the kind of pillars, if you will, over time.
Mm-hmm.
So we're excited about Workforce. And it's one of the... It's a workhorse, if you will-
Yeah.
... for us. It's been, it's been a great business, and we're going to continue to invest in it as it is continuing to grow quickly.
Fair enough. I think, you know, just to get a bit more specific here-
Mm-hmm.
... so Single Sign-On and Multi-Factor Authentication, you know, there's a debate today that these use cases are more so commoditized, right? And feel free to disagree with that point of view. But, you know, if that's the case, then... What is the strategy around this? Because those are large parts of your workforce-
Mm-hmm.
business. So what's the strategy around that?
Well, there's a ton of companies out there that still don't even have SSO and MFA, right? So, that's why we continue to add value, not just SSO into those products, but also to add value of having Governance, having Workflows, having Lifecycle Management-
Mm-hmm.
Having PAM. It's to work together, right? If you think about it, you know, Access Management is just one pillar of the three pillars at this point in workforce. And so, I don't, we don't think it's being commoditized, but if it does, there's a ton of value in these other pieces of the pie, if you will.
Mm-hmm.
I mean, look at Governance. For the customers who have it right now, it's a third of their total workforce spend, and it's only been around for a few quarters.
Mm-hmm.
And that's a product that has got a ton of potential, even beyond the current product set. And so, we believe there's a tremendous amount of value, not just in the traditional core set of products, but also in the additions that we're adding here with Governance and PAM-
Mm-hmm.
And how it all works together. Because you can gain value by being an Access Management customer, if you were to add Governance and PAM, and they all can help each other and actually add more and more value to you as an organization.
Mm-hmm.
We're excited about the opportunity and workforce.
Okay. And then you mentioned the different pieces of the pie. So I just want to talk about OIG-
Mm-hmm.
Right? Your IGA product. I think for a couple quarters now, it's surpassed management's expectations, right?
Yes.
So what is really going right, in terms of your execution there and in terms of customer reception?
Yeah, I think it's really the field executing really well, and I think it's also customer demand that's really been asking for it, right?
Mm-hmm.
One of the reasons we're in Governance is we obviously saw an opportunity there, but also a lot of our customers saying, "Hey, it would be really great if, you know, we use you for Access Management, but either we don't have a tool or we have a legacy tool, and we just want it in one place.
Mm-hmm.
And so, it's really the result of the hard work. And yes, it has exceeded our expectations. We didn't expect to have the success in the replacements area-
Mm-hmm.
that we have been having. You heard about Ryder, like I just said, there's some other companies out there that you could, we could reference. But ultimately, we're just having more success in greenfield opportunities and in the replacement opportunity. And as a reminder to everybody, when we went into this market, we thought we were gonna do the same thing as we did in Access Management, which is go work in, you know, SMB to lower enterprise. What we did with the original workforce tool and say... And basically give it to customers that either didn't have the time or the money to go with one of the legacy providers, and that is definitely working, but we're also having success in some of these replacement opportunities.
Mm-hmm.
So, it's. We're just pleased with how things are going, but it's still early innings. It's still a small business.
Mm-hmm.
And we've got a lot of room to run. I think one of the things that does help us also, by the way, in the execution, is around how some of the pieces of Governance are actually some of the products we've been selling for years-
Mm-hmm.
... like workflows, is one of the components of a Governance tool.
Mm-hmm.
And so I think combined with the fact that the team is really doing a great job.
Mm-hmm
... you know, we, we're having some success early, but like I said-
Yeah.
... it's early. We, we still got a long ways to go. Let's not get overly excited too early.
Yeah. Okay, we'll try not to.
Yeah.
So, if we look at PAM, I think the last piece on the workforce here-
Mm-hmm.
... it is GA, you know, in the fiscal fourth quarter, right?
Yep.
But any preliminary thoughts in terms of competitive positioning, pricing versus other PAM products? Because it, it does tend to be a pricier product in the identity space.
Yeah.
Yeah.
So it's gonna. We're gonna run the same play we did in Governance.
Mm-hmm.
So go for the customers that couldn't afford it or didn't have the time to be able to implement some of the legacy providers, so that SMB up to lower enterprise. And, you know, hopefully, it'll go the same way as Governance, where we have a little more success than we thought.
Mm-hmm.
But we're being very prudent with our expectations around-
Yeah.
PAM at this point. And we'll update everybody on terms of pricing and how it's going, you know, like we've done with the one-third concept, you know, one-third of work spend for Governance.
Mm-hmm.
We'll update you guys when we have a large enough end to talk about how things are going.
Okay.
So.
All right. So just switching gears to the customer, Customer Identity Cloud.
Mm-hmm.
I think, could you just lay out the opportunity here? And I think, especially talk about the competitive landscape-
Mm-hmm
... 'cause Microsoft did recently come out with their own, you know, Entra External ID, I think-
Yeah.
Is what they're calling it. Could you just lay out for us what's happening in that space?
Yeah, this is really around securing our customers' identities, right? Think about, you know, you log into an application. In a lot of cases, you're gonna be using our customer identity tool, you just don't know it. And so, yeah, there's a lot of opportunity here. Think about all the applications, think about how many apps you have on your phone right now. We have the potential to be able to secure all those customers' identities. Really, this is a build versus buy market. One of the strengths we have as an organization through the Auth0 acquisition is a very strong developer up motion.
And so we have to convince the developer community to build or to build their applications with our technology in it, not try to build their applications and then build identity on top of that. Building identity is very hard, very costly to maintain, and so we do it every day, and so ultimately, they should be buying it from us.
Mm-hmm.
That's really the whole thing here. We need to be able to convince the market to buy it from us, not build it themselves.
Okay.
And so, there really isn't much competition in this environment. It's really that that's what we have to do, is to convince the market that-
Mm-hmm.
... why are you taking all the time and all your precious developer resources to focus on something that's very hard? You should be focusing on your core business of doing A, B, or C. Let us worry about the-
Mm-hmm.
The hard technological side of things.
Okay. And then maybe to just touch on the broader competitive environment.
Mm-hmm.
We have other identity vendors in this space also, you know, going through this motion of consolidating different-
Mm-hmm.
-subcategories of identity. And then we also, of course, have Microsoft, right?
Mm-hmm.
Could you talk about how the competitive landscape and competitive dynamics have changed over the past couple quarters? And maybe touch on-
Mm-hmm.
You know, whether it's just market noise or if there's some actual tangible dynamics there.
We haven't seen any change in the market envi-
Yeah.
... the competitive environment. It really, it goes back to that key concept of-
Yeah.
... of, you know, buy versus build, we have the best product in the market. It's very developer-friendly. I'll tell you a story, actually, about a year ago, Eugenio Pace, one of the founders of Auth0, who is our president of business operations, had the entire management team build identity into an application.
Mm-hmm.
And some of us can barely turn on our iPhones. And all of us were able to build the identity using Auth0 and using the Customer Identity Cloud into this application in 45 minutes or less.
Mm.
We've made it very user-friendly. We want people to, you know, be able to do it so fast and very easy. They don't even think about it, just, "Okay, I want to build an application, and I want to have identity," it's Okta Customer Identity Cloud.
Mm.
So we want to continue to make inroads there and continue to win that market in that way.
Mm.
It's been very successful for us. You've seen, you know, or we've talked about, you know, these self-service subscriptions that we have.
Mm.
Right? It's either a monthly or a free. You know, I said last November at Investor Day, about 45% of the new logos that came into the door-
Mm.
... on the customer identity side, came via that monthly self-service.
Mm.
Which is basically developers going and trying it on their own, either via a small credit card swipe or just having limited functionality through a free offering. And so, we continue to invest there and continue to have success.
Mm.
Ultimately, we believe that's how we're going to win the market in the long run.
Okay. Okay, that's fair enough. So I, I think I'm obligated to ask about generative AI, even if we talk about it for a few minutes.
Yes!
I think, I think, you know, you've been clear that you're making investments here.
Mm-hmm.
I believe Todd, the CEO, recently spoke about some $40 million going towards AI in your R&D budget. So, what's clear to us is what every vendor is, you know, saying that they're going to do with generative AI or with AI. But maybe what's less clear is, you know, where this differentiation comes from and where it starts to happen.
Mm-hmm.
Could you talk about, you know, why your roadmap in AI is different or better than some of your peers?
Yeah, I mean, we've been using machine learning in the product for a long time. So to be able to make access decisions, we've got a huge, data repository that effectively helps us make decisions-
Mm-hmm.
... based on if, you know, where you're sitting. You know, is that your picture that just came up when, you know, you did your iPhone? So we've been using, we've been using machine learning or AI for a long time. For us, we look at it as a, an opportunity where identity becomes more and more important. Because if you think about it, AI brings more connections, more identities out there. And so we believe, ultimately, that just rises the importance of identity, which-
Mm.
... it's already a very strategic area for many companies, and so it just will become more and more important over time. And so that's how we look at the AI, kind of, like, opportunity. It helps us from a revenue perspective. We will be releasing some new products at Oktane, so everybody should tune in to Oktane in early October. I don't want to steal the thunder of the team, but there should be some very interesting stuff coming out around AI for our product set as well-
Mm-hmm.
... in addition to what we've been already doing for years.
Okay. And then maybe flowing from that into, you know, you're making these investments in AI.
Mm.
You're making these investments, you know, across IGA, PAM, all these new areas you're going into.
Mm-hmm.
What are the profitability levers that you have at your disposal, so that we can keep seeing those margin improvements?
Mm-hmm.
... but then making sure that we're not sacrificing on any growth opportunities?
Yeah, we've made some significant margin improvements-
Mm.
... this year, obviously, with the guidance, 15% free cash flow margin this year, which would be about 12 points of improvement. That thanks, that's thanks in large part to a lot of the efforts we've been-- we started, actually, in FY 2023.
Mm.
So one of the things that we do as an organization is, we look at the business through the lens of the rule of 40. So balancing revenue growth and free cash flow margin is something we've been doing for as long as I've been here, eight-plus years.
Mm.
And we'll continue to do so into the future. And so when we saw that revenue growth would be a little bit lower in FY 2024, we already started making decisions in FY 2023 to improve those margins. So things like rationalizing real estate, things like slowing down hiring, things like-
Mm..
... cost rationalization, like, software. You know, looking at our software stack and saying, "Hey, can we be more efficient with that?" And so-
Mm-hmm
... that helped us into FY 2024. The other thing that we did at the same time, while we were doing that, was actually setting up low-cost regions.
Okay.
So, we've opened India earlier in the year, we opened Poland earlier this year. We already had a presence in the Philippines. Because the vast majority of our employees sat in high-cost regions, and so we need to internationally diversify better in terms of high-cost versus low-cost regions. And so, we started setting that up. That's part... You know, that's helping us a little bit in 2024, but we believe that can help us in 2025 and beyond.
Mm-hmm.
So we do believe there's a lot of opportunity to continue to drive margins, but we also don't want to do it at the expense of growing the top line.
Mm-hmm.
So it's balancing the two between balancing growth and profitability. You know, something we've been talking about, which is profitable growth across the organization. It's really resonating with the team.
Mm-hmm.
So when they see an opportunity to grow us faster, can they do it in a profitable manner? Is there a way to save margin or save costs, so you can improve margins, or is there a way to grow the top line as well?
Mm-hmm.
We're really excited about the progress on the margins, but our intent is to continually profitably grow this company.
Okay.
So.
Okay. Got it. We are about 10 minutes out, so I just want to poll the audience, see if there's anyone that has a question for Brett. Okay. Great. So I think I want to touch on sales productivity-
Yeah.
... and sales capacity as well, just along the same line of these investments you're making-
Yeah.
... and the several products you're going into. So what does your sales productivity look like today? Obviously, it has improved, but then how are you thinking about the room for improvement in that area?
Yeah, it's improved. Is it exactly where we would like it to be? No. We would love it to be higher, right? We know there's a macro effect on there.
Mm.
Right? We know that that's a challenge, especially on the new business side, like we've talked about-
Mm.
... over the last couple of quarters. But even without that, we always think we can be better, right? That's why we continue to, to enable the field. That's why we continue to release new products. We can always be better as an organization, and I think, we're gonna continue to strive to do better. But, we're, we're obviously- Well, it's one of the key metrics we look at as an organization-
Yeah.
And, you know, helps us determine, you know, do we wanna add more capacity in, what do we wanna do in terms of future planning? And so-
Mm-hmm.
We're trending in a good direction, but we've got a big second half in front of us.
Mm-hmm.
And wanna see how things go.
Yeah.
... for the balance of the year.
Okay. And maybe specifically when we think about the fact that you're going into PAM, you've just gotten into IGA, right?
Mm-hmm.
There's stuff happening on the customer side. Should we think of Okta needing to build, you know, significantly more capacity in order to handle and to market all these, you know, new ventures? Or, you know, is the capacity level currently sufficient to deal with all of this?
I can answer that question better in two quarters. I think it's.
Okay.
We're excited where things are today. We're excited with the trend of productivity and where things are going. But the second half is a big, big half for us.
Mm-hmm.
It's seasonally, it'll be, it's bigger than our first half. And so, you know, there's been good traction with Governance. PAM won't really make a difference-
Mm.
In the second half, 'cause it'll come out toward the end of the year, so it won't make a material difference. But, you know-
Mm-hmm.
... over the years, we expect it to be material, just like Governance will be material over the years. But we are looking to the second half to see how things are going-
Mm.
... and make a decision based upon that.
Okay. What about, you know, if we try to think about how long it can take a sales rep to get ramped on IGA?
Mm-hmm.
... and be perfect at selling IGA, and the same, maybe not perfect.
Yeah, the same.
As possible.
That's quite the task right there.
Yeah, and the same for PAM. Just trying to get at, you know, what sort of lag might there be in terms of getting your sales organization ready to push out these products? Because in the meantime, you know, other companies are also trying to-
Mm-hmm.
... make their headway in these, in these areas.
It'll take time. I don't have an exact number for you.
Yeah.
I mean, it's, I mean, look, we still need to get better at customer identity selling.
Mm-hmm.
Right? Like, we're good at Workforce Access Management. We're getting better at customer identity. That trend of deal participation across the field in terms of the customer identity side is getting better and better.
Mm.
Governance is a good tangential sale, 'cause, you know, like I said, Workflows is a core component of the product. But it, you know, it takes time, right? I mean-
Mm
... you gotta, as a rep, you gotta be enabled on it, but then you have to go and get some at bats, right? I mean, you gotta, you gotta see what works, what doesn't work, what pipeline looks good versus what pipeline looks good, but maybe isn't as good.
Mm.
You get, you know, basically prosecuting that pipe and getting it through the funnel. So it's, it'll take some time for each one of these to kind of take hold inside the field. We've had some early wins, and I think that's always helpful.
Yeah.
Right? 'Cause you look around as a rep, and you, you know, you wanna see the fastest way to your quota, right? That's the, that's what all reps think about. What's the fastest way to my quota? They're gonna do that. But if, so if they see, reps getting big checks-
Mm.
... because of A product or B product, they're gonna go talk to that rep and be like: "Hey, what'd you do there? How can I learn from you? What did you..." And so it's good when, 'cause good to talk about these big deals, not just for all of us as investors, but also for our field to hear about some of these bigger deals, so they can go and know who to go talk to and say, "Oh, that rep has that account. They made that much money on that deal. Okay, so what did you do? How did you look for it?
Mm-hmm.
I think it does take time for us to mature as a field when new products come out. That's just part of any new product introduction.
Yeah.
It's harder than it.
Yeah
... it seems.
Yeah.
But it's, over the long run, it's a great investment of our time-
Mm.
... and money, because ultimately, becoming a multi-product company will only add value to this organization.
Okay, fair enough. I think just, another one on the financial model here.
Mm-hmm.
You know, we've seen this pipeline be more weighted towards upsell, like you said.
Yeah, yeah.
Customer growth, you know, in terms of just net new customers, has been a bit lighter, right?
Mm-hmm.
Then in the past quarters. So it creates a scenario where there's a little bit less opportunity for expansion down the road. So could you talk about, you know, how you're thinking of navigating this and maybe, you know, bringing NRR back to the 120%+ level? Yeah.
Yeah, well, it is... Yes, the net retention has been impacted by last year's,
Mm-hmm
... 23 adds. And we do expect net retention, so we're all on the same page, to tick down through the balance of FY 2024. That's not because gross retention is going anywhere. Gross retention will remain stable in that mid-90% range, but it is that upsell rate, and that upsell rate is directly related to the macro impact. So MAU upsells or seat upsells on the workforce side, we do believe we're continuing to be impacted by the workforce-
Mm-hmm.
... or by the, macro side of the house. So it is workforce and both customer identity that will be impacted-
Mm.
... by that macro impact. In terms of, you know, future beyond that, I don't have—we haven't planned it out yet, but that's, that's kinda how we're thinking about net retention. In terms of your customer account question, yes, we're continuing to focus on new business. It is something that we're really spending some time on, but there's only so much we can do around the macro side of the house.
Mm-hmm.
You know, we obviously want to add as many new customers as possible, and we'll continue to work to do so over the balance of the second half.
Mm-hmm. Okay, just, one last time. Yeah, sure.
On the IGA side-
Mm-hmm.
... what are you seeing on the ASP growth focusing? How should we look at it?
Yeah, so right now, of the customers that we have that have the Governance tool, it's about a third of their workforce total. So whereas if they're spending $100 in workforce, they're spending $33 on the Governance tool. Any problem?
Okay.
Now, to be clear, that's not the entire. We've got 18,400 customers. It's, it's a much, much smaller number than that.
Okay.
But it's a good start. It's been holding in that range since we released it. Kind of around that range, you know, kind of bounces around quarter to quarter, but it's in that range, which is good. So-
Great. Yeah?
Oh, hey, Brett. On your track, I see your RGU currently. Is there anything, from a sales effective perspective that you could call out? Maybe changes in-
It's fine.
Maybe just changes in sales center, so..., [audio distortion]
Mm-hmm.
[audio distortion]
No, there's no changes in terms of... Your question was around Governance, and do we—are we coaching the field any differently? No, we—a dollar of bookings is a dollar of quota retirement in our comp plans. So we don't incent differently for products, we don't incent differently for, you know, upsell versus new business. It's, we believe a dollar is a dollar, 'cause what we want to incent for the field is to do the right thing for the customer. Because the right thing for the customer means that they get good value, long-term value, and that's why you see these gross retention rates in the mid-90s.
We believe in, you know, loving our customers is one of our company values, and so, that's why we do the comp plans the way we do, to try to drive as much value for the customers. In the long run, we feel that we're gonna be better off, and the customers will be better off as a result.
Just to sneak one in, here at the last second, I think I wanted to talk about the public sector.
Sure.
In the past couple of months, past couple of quarters, you've really gotten, you know, the necessary authorizations to start-
Yeah.
... both public sector and the military. So, what is the opportunity you see here? And I'm just curious on the competitive landscape within public sector-
Mm-hmm.
... and maybe how that differs from, you know, just the general identity competitive landscape.
Yeah, we've really focused on public sector. It's been one of the fastest growing areas in the company, and we're really pleased with it. Yeah, the certifications you're talking about is we've gotten FedRAMP High, we've got IL4, and we actually can address some IL5 use cases.
Mm-hmm.
We do believe that's been a tailwind to our growth. It is still a small part of our business, but it is growing quickly.
Mm-hmm.
And that's not just for federal, to be clear. It's also, like, state and local, and-
Mm-hmm.
... educational organizations. That's growing really well as well. I think the FedRAMP starts helping those-
Yeah.
... those situations. But yeah, we're very pleased with how things are going. The competitor environment is no different than the rest of the competitor environment.
Mm-hmm.
So, yeah, there's no real change there, but it's... Yeah, it's an area that we're really focused on.
Mm-hmm.
And if you remember, that was one of our strategic initiatives last year.
Yeah.
You can see it's bearing fruit for us, not just last year, but even into this year as well. We look-
Okay.
... we look forward to the opportunity there.
Okay. Well, perfect. Thank you so much, Brett, for your time.
Mm-hmm.
Thanks, guys, for joining us, and please enjoy the rest of the conference.
All right, thanks.
Yeah.