Fatima Boolani here. I 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 wanna jump right in 'cause I think we have a lot of ground to cover. So just at the highest level, look, you know, wanted to get a sense from you what's the latest on the Okta story. And particularly given the, you know, the wide scope of developments that have transpired-
Mm
... for the business over the past year or so.
Mm.
So just wanted to get level set from there and, you know, kinda unpack.
Yeah, you know, the last time we did earnings, which was last week, I think most of you guys know that, you know, published, you know, 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, yeah, one was growing about 16%, which was customer identity, the other one was growing about 15%. So we've got two 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 workhorse business as well. Wanted to get a sense of what the market dynamics in the workforce are today. You know, bearing in mind that we've kind of been on a little bit of a macroeconomic rollercoaster-
Mm
... especially as it relates to headcounts, and that's, of course, a very headcount-sensitive-
Yes
... part of your business. So, just with respect to, if you can paint a picture of what the demand dynamics have been like and how they have evolved, you know, since and through Covid, and just help flesh out some of those dimensions for us in the workforce pillar of your business.
Yeah, 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 were SSO, or single sign-on, multi-factor, and universal directory, which was 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, in the third pillar. We look at the workforce business as being three pillars.
One is access management, that original SSO, MFA, UD 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 new, kind of like, second-most mature. Over a thousand customers now in governance, and PAM just launched, it 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, you know, we've talked about the macro headwinds that we faced on both sides of the business. One side of the business being workforce, where it's seat-based, right? So it's number of employees or number of partners you have. Customer identity, it's 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 those macro trends.
Brett, you talked about a pretty significant market opportunity on the workforce side. You know, recognize we are in a different macroeconomic backdrop, but when I think about the workforce business, you know, 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?
Yeah, absolutely.
And then, what's sort of constraining your ability, you know, from, exogenous variable standpoint?
Yeah, absolutely. Well, I'll take 'em 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 we're not seeing those at the rate for licenses. Yeah, 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 three 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, you know, a sizeable business, greater than 1,000 customers.
PAM becoming, you know, 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-...
America's SMB business, small and medium-sized businesses, and we've split the field in between people who are hunting for new logos and those who are farming the install 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 can 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 that we're gonna 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 of the 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 build, 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 three areas we can help grow. Even if this macro stays the way it is, we believe we can grow faster in the long term with those three things. It will take some time, but we're optimistic about all three of those pillars.
And Brett, same question, but if you can take a lens from a competition standpoint, right? The competitive dynamics in the marketplace have evolved since you've come onto 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, you know, maybe your win rates and, you know, how your toe-to-toe with someone-
Mm-hmm
... like a Microsoft, for instance, is bearing out, and maybe also a layer around some of the legacy, really old guard incumbents that I think some of us just forget still exist.
Yeah, I would say the competitive environment has remained fairly similar. So if you look at the business, there's two different really sides of the business, like we've talked about. One is workforce, and the main competitor there is Microsoft. You know, it continues to be the same, give it away for free with E5, versus, you know, paying for it with Okta. And, you know, 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 nine 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 that it's easier, faster, higher ROI to buy it from us than to build it yourself, and that's been the market 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 find your 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 kinda hear from your sales organization, why has it actually been maybe a little bit more challenging to dislodge some of these obviously inferior capabilities-
Yeah
... competitors that are, you know, solving 1990s problems from an identity standpoint?
Yeah, it's a good question. I think there's one of the benefits of identity is that once you put it in, it's kinda hard to take out, right? It's, you know, its tentacles go everywhere. In this situation, what 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 three 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 go in 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 gonna 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 higher ROI over the long run.
... 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, you know, ready to come out to market for you to monetize. But we haven't necessarily seen it become visible in some of your forward-leaning metrics. When you think about your RPO, CRPO guidance-
Mm-hmm.
... what do you think it's causing that 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?
You're talking just on the workforce side or just across the board?
Just on the workforce side specifically.
Okay.
Yeah.
Yeah, I mean, it takes time to incubate new products. I mean, it's not like you just turn it on and it goes. You know, 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, you know, two 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 gotta take. 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 three pillars of a, a workforce product. People wanna 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 gam- like, our long-term bet around the workforce, product. And so, yeah, 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, number one, see the value, two, the field's got to be able to sell it. We've got to market it, we've got to show, you know, get those customer advocacy stories out there. And so we're making traction, but, you know, it's gonna take some time. But we are very optimistic about a lot of these new products. I mean, some are really, I mean, not pardon the term, but very cool.
Mm-hmm. Mm-hmm.
There's some really neat stuff-
Yeah
... that can really help our customers, either, you know, make their organizations more efficient or make them more secure, or do both at the same time, which is something we're really trying to accomplish.
And I'm curious, you know, historically, when you introduce Adaptive MFA or, you know, life cycle management-
Mm-hmm
... you know, 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 brace for potential guideposts for, hey, you know, at maturity, governance attach rates could look like XYZ. At maturity or two years from now, PAM attach rates could look like this-
Yeah
... and so on and so forth for IDTP and IDSPM. Can I throw another acronym at you?
Yeah, just keep throwing them in there and just confuse everyone.
It's Alphabet soup.
Yeah, it is. We try to confuse everyone. So in terms of the attach, you know, a lot of these products are designed to work all the way up and down the stack. And when I say up and down the stack, I mean in terms of customer size, 'cause 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. You know, 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 these products are gonna give that, but they, you know, they will create uplift for us in those workforce contract values. 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-
Yeah
... Customer Identity Cloud-
Yeah
... or the artist formerly known as Ciam, right?
Mm-hmm.
How would you characterize the performance in this business relative to some of your initial aspirations, you know, for scaling this? How much would you say macro has been an influencing force on kind of maybe curbing some of your aspirations in seeing the type of growth you wanted to see?
Yeah. 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 and 50% of the business customer identity, with both growing at a healthy rate. As I think everyone has 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 are headed in the right direction. There are two stats that I would say are really positive. One is the participation rate by the field continues to go up in customer identity. So what we do is we track who sells what and by what, and basically, what product.
If you looked back two years ago, Workforce was pretty high, and well, very high, and Customer Identity was pretty far away. Over the last two 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, you know, headed in the right direction, but it's not exactly where we wanna 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 headed 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 two 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 new logo, new logos. If you look at the upsell transactions, if they are adding more products, we know there's a threshold of 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, but 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 right direction and we're really pleased with that, so.
And you know, 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. You know, A, is that accurate? And B, is there an opportunity to continue to build more modular functionality-
Yeah
... so there's conversations with customers around, you can start small, and you can scale to degrees that have nothing to do with MAUs, right? So just more-
Yeah.
So completely kind of untethering and kinda de-risking yourself from constantly being tied and tethered to, like, the seat-based-
Yeah
... modality.
Yeah, 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 that, you've got security center. We now have highly regulated identity, which is, think, you know, something that would be very applicable to financial services, right? And we've got fine-grained authorization. So there are more products that we are adding into the mix. And yes, we do wanna create that glide path, just like Workforce. So yeah, we, 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 gonna keep driving into that opportunity, keep building new products. I mean, another one is, you know, becoming more, you know, increasing our FedRAMP certifications, right? There's a lot of things that we can do to help ourselves in that market, and I'm 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's, it'll be something to see.
Brett, you know, just last one on customer identity. There is sort of a proxy exposure to kind of, you know, consumer trends, right?
Mm-hmm.
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-
Mm-hmm
... 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 re-acceleration? You know, 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, you know, get the CIC business back to 40%, 50%, 60% growth, which is what Auth0-
Yeah
... which was your asset that you acquired, was doing standalone.
Yeah. So it's, I would say there is obviously macro that is impacting, and so that's. 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 customers out there beyond the nineteen thousand three hundred, but there really is a lot of opportunity out there. It's upon us to be able to execute better, 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.
You know, I think the other side of the equation here is, there's been kind of a revamping of the go-to-market organization-
Mm-hmm
... just at a philosophical level, but also, you know, a 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 two years. So can you give us a little bit of a breakdown on, you know, kind of where you were about two years ago? I know you've delivered a tremendous level of improvement and levels of operating efficiencies-
Mm-hmm
... 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 two years, and how much of that has been, you know, much more focused on training and enabling, right? Versus driving more capacity. And this is a really long question, sorry. But you know, 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 know, you haven't really invested in headcount in that area?
Yeah, we're pleased with the quota capacity at this point. Yeah, we still feel like there's productivity gains that we can get out of the field at this point. You know, 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 into these other areas, these three 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 a dollar of booking. And so, we still think that we can do better from here. We feel 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 three 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 right, we talked a lot about macro, and then, you know, you just kinda gave us a really good detail level of insight on, you know, how you're thinking about go-to-market. So bringing that conversation into large deals-
Mm-hmm
... 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? 'Cause macro has been challenging, but large deals and large deal momentum has actually been pretty-
Yeah
... pretty strong and actually pretty resilient, right?
Yeah.
So can you, you know, 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 to maybe what you're seeing in other parts of the market? I think North America Commercial/SMB is a place where you've specifically called out that it's been a little wonky.
Mm-hmm.
So if you can just kind of parse out that dichotomy for us.
Yeah, I think it boils down to really two main factors. One is, you know, 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 one of my executive, I'm an executive sponsor for a handful of accounts, and I was even chatting with this person, Fortune 500 company, and we were talking about, you know, 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, you know, 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 this last quarter, around over 40% of the Global 2K now use us, up from 33% a little less than two years ago. 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 it's 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 workforce... I mean, it is 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, you know, balance sheet and also the fact our products are just directly aimed at, 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 can.
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.
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, you know, 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... And I just, I would say in general, a comment I've said a bunch of times here and a bunch of times on the call last week and in call backs is, people are just more sensitive. 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, oh, 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 you know, probably into, if not through the first half of next year, based on kind of flushing out that, hey, you know, 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 gonna end, and basically current market conditions. So we do believe this kind of economic effect on the business is gonna take some time to flush out, based on what we can see in the quant right now.
I'm gonna jump the gun here, but is that one of the reasons why the view on net retention rates is-
Yeah
... going to remain muted for all of the reasons we discussed-
Yeah
... but also this particular factor, this hangover is gonna last through?
Yeah, that's exactly it. That is the main reason you're gonna have that hangover effect going through the end of the year. It also, we believe, has more of an acute impact on SMB.
Mm-hmm.
Right? So if you looked at the net retention rate, the blended one that all of you see-
Mm.
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-
Mm
... is still kind of at the 20% level. So that's both an opportunity, but I think it also begs the question: What is your vision to drive and potential to drive-
Mm
... more presence and market capture internationally? So what are kinda some of the
Mm
... principal factors that you need to unlock to drive more velocity internationally?
Yeah, I mean, there's combinations. 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, you know, 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 at it, and we look there 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. It's not a big company problem. It's everybody has this problem if you have a tech stack, and so, we're very bullish about the long run in international. Yeah, we've got great leadership outside the U.S., and so it's gonna be exciting to see what they do over the next couple years.
You know, we typically hear that, you know, other geographic theaters tend to be maybe slower on the tech adoption curve. So in some ways, are you, you know, victim to, you know, some of the other geographic regions maybe being generally behind the technology curve, and that since they have not decided to move to cloud en masse yet, you can't get pulled along with that? Is that part of it? I know it's more of a nuanced view.
I, yeah, I think it's a very good question. Frankly, we tend to operate in the cloudy places-
Mm-hmm
... you know, 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. There's all three of these things that we've been talking about, between the three of, you know, NPI, hunter-farmer, and partners, they help us worldwide. They don't just help us in the U.S.
Mm.
It's really there to drive growth across the board.
You know, another lens on the business is just public sector. You know, specifically, that's been a very strong end market for you.
Yeah.
You've really been punching really nicely and strongly there, so the momentum there is good. Just from an execution perspective, what have you done differently there, and with respect to kind of maybe 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-
Yes
... healthcare or other kind of, sectors of the economy? I recognize you don't have a verticalized sales approach necessarily at present.
Yeah.
But yeah, 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?
Yeah. I mean, public sector is, in some ways, no different than the private sector. They have the same technology challenges. They have tech stacks just 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, you know, we're now IL4-
Mm-hmm
... with the ability to operate in IL5 environments.
To the uninitiated, is that DoD business?
Yes, that is DoD business.
So if you tell me, you're gonna have to kill me?
Yes, that's exactly right. It's. And then on the other side, we've got the FedRAMP High in a lot of places. And we still can expand our certifications because not every single product is one of those IL4, IL5, 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. 'Cause they look at it and say, "Oh, wow, you're FedRAMP certified. Okay, great." But that's just the U.S. This is back to your international question.
Mm-hmm.
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 focus. Also, you know, we've really organized around it, and we've got a great team running it. I mean, Katy Mann does a great job 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 the environment. 'Cause it's ... You know, there's a lot of, like, tactical stuff-
Mm-hmm
... you have to do day to day that we don't all talk about. It's hard on the team, and-
Right
... it's a lot of work, and they do a great job of it.
Yeah.
So we should congratulate them on it.
I have to ask you the generative AI question, or they'll throw me out of the software sector.
Yeah, it's cool.
... if I don't.
Yeah, get it. You gotta, you gotta do it. Let's run through it.
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?
Yeah, absolutely. So, we use AI to help our developers write code... so that's definitely helping us.
Have you seen demonstrable productivity gains from that?
Yeah, there's been some. Yeah.
Okay.
Yeah, absolutely. Depending on the function you're in, what I've been told is between 10% and 30%.
Okay.
So it's really, it's been a boost to 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 wanna 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 core 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 be able to deliver to the market continuous authentication, something no one's ever really done before. 'Cause traditionally, what authentication has been is 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, you know, accessing her Citi console on a regular basis. What continuous authentication does is it pulls in a bunch of signal from a bunch of different providers. You could think of the providers around us, CrowdStrike, Palo Alto Networks, Zscaler.
You kind of run down the gamut to make sure, oh, it's still you doing your job.
Mm-hmm.
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... you know, Venezuela or Nigeria? There's something feels weird." It's a very, really 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 it'll cut access to not only you, it'll actually trigger something to the admins to say, "Something seems strange. Should we cut access to everybody?
Mm-hmm.
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.
Mm-hmm.
That's how we're using AI to try to help our customers is really make them more secure, and not just at point of entry, but also post-entry. It's a really interesting product, and I'm excited about it, personally.
Brett, I wanted to, you know, kind of end our conversation in talking to you about resource allocation, capital allocation, and investment priorities in broad strokes. But, specifically, you know, you have delivered herculean improvements, as I mentioned earlier-
Mm
... with your cost structure, your profitability profile, your free cash flow conversion, and your free cash flow generation. So that's fantastic. But, you know, 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-
Mm
... and your sales capacity. And then also specifically, you know, as you kind of work through some of the security incidents from-
Mm
... you know, from the last year, you know, there's been such a concerted focus to make the organization secure by design. That's something that Todd talks about a lot.
Mm.
So when we think about those three 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?
Yeah, we've got a... Oh, yes. We thank you, by the way, for the compliment. I don't get that about the margin too often.
Thanks.
I appreciate it. Yeah, we've made a lot of improvements in how we operate, you know, 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 2025. I'll give you a very good example, which is we have spent a lot of money on security this year while also having very healthy margins.
Mm-hmm.
So we intend to do that in the future. We wanna be able to grow faster. We wanna be able to invest in these things, but also have healthy margins at the same time, and we believe the structure of what we've built over the last couple years has afforded us that opportunity. So look forward to executing against that in the future.
Fantastic.
Yeah.
Well, time flies when you're having fun. Thank you, Brett.
Thank you for having me.
I appreciate it.
Appreciate it.