Okta, Inc. (NASDAQ:OKTA) KeyBanc 2023 Rising Expertise Summit March 8, 2023 ET
Firm Members
Brett Tighe – CFO
Convention Name Members
Eric Heath – KeyBanc Capital Markets
Unidentified Firm Consultant
Nice. Let’s get began.
Eric Heath
I am Eric Heath of the enterprise software program staff right here at KeyBanc. Pleasure to have Brett Tighe right here with us with Okta and we even have Dave Gennarelli from IR right here as nicely.
Query-and-Reply Session
Q – Eric Heath
So Brett, let’s simply leap proper into it. Perhaps get the macro query out of the best way. So speak about out of your strains what you noticed within the macro, how issues type of transpired from 3Q to 4Q and perhaps into the early components of 1Q right here?
Brett Tighe
Yeah. There may be — when it comes to what we noticed in Q3 and This fall, really related indicators of macro degradation. So one of many issues that I feel a number of you’ve got heard me speak about is admittedly this new enterprise versus upsell combine and simply being rather more weighted towards upsells, in each the pipeline construct and in addition the gross sales within the quarters that — at Q3 and This fall.
In order that’s one main impression that we’re seeing. I imply it simply is smart, proper? Individuals purchase from distributors they belief and know and have lengthy relationship with. You possibly can see that in our gross retention charges. You possibly can see in our web retention charges, our clients have a tendency to essentially get pleasure from working with us. In order that’s one factor.
The opposite aspect is round contract period. We noticed a little bit of a contraction in contract period within the quarter in This fall particularly. And we imagine that is instantly associated to corporations simply being a bit bit extra considerate with their long-term contracts and ensuring they’re considerate about it as we go into this time of uncertainty, proper?
After which the third part is, these are the quantitative issues that we will monitor are like — two issues that we will monitor within the stats that the best way we run our gross sales operations. The third is admittedly type of qualitative, which is round simply speaking with our gross sales leaders after which speaking with their clients, speaking about budgets being a bit bit smaller than they’ve or initiatives should be delayed for funds causes. So these are the three fundamental areas that we have seen it actually from a macro perspective.
Eric Heath
Yeah. So the marginal change was the contract period you noticed in?
Brett Tighe
Yeah. That was actually the marginal change. Yeah. That may be the primary change. Yeah. Simply type of — you possibly can see within the again half, we undoubtedly really feel like we’re seeing it someplace.
Eric Heath
Yeah. So I wished to speak huge image with you for a second and discuss concerning the long-term alternative. Apart from the — perhaps inner challenges at the start of the 12 months and there is a more durable macro that’s occurring in the meanwhile. However is there something that is modified structurally in your view within the market from a 12 months in the past after we have been speaking about this being a 35% progress alternative over a multiyear time horizon, I do know there’s some modifications that had occur, however something simply available in the market that’s maybe totally different than a 12 months in the past when it comes to the chance you see long run?
Brett Tighe
No. I imply aside from the macro we simply talked about, clearly, that is going to place a headwind on issues. We take a look at that $80 billion TAM that we talked about earlier than and we nonetheless imagine in that. So I imagine there’s a big alternative on the market, cannot say come what may 35% or what the appropriate quantity is sooner or later. However finally, that $80 billion is on the market. And admittedly, we’re making higher penetration of that even simply in This fall. I imply a few of that $80 billion are associated to Okta identification governance, proper? I feel a number of us — a number of you guys heard about us discuss concerning the success within the quarter, and that is a portion of it, however we need to proceed to penetrate that $80 billion as a result of, clearly, there is a huge alternative on the market.
Eric Heath
Yeah. So let’s break down that chance a bit bit. Let’s begin on the SIEM aspect. It is the newer aspect, if you’ll, and extra attention-grabbing with the all three acquisition. So I feel there’s a number of issues that a number of us on this room in all probability get enthusiastic about that chance. It is one, it is probably bigger than workforce. It is much less aggressive with Microsoft. Arguably, it is extra greenfield and also you’re extracting low degree improvement work, which I feel is at all times one thing we’re searching for to do is make builders extra productive. So speak about the way you see that chance for your corporation? After which secondly, I’d additionally perhaps problem you a bit bit when it comes to why have not we seen SIEM type of take off sooner so far?
Brett Tighe
Yeah. Look, we’re enthusiastic about either side of our enterprise, workforce identification and buyer identification. I do know a number of the folks speak about buyer identification as a result of it is the newer factor. It is a bit sexier such as you stated, you get enthusiastic about it. We get a number of questions on, we’re enthusiastic about either side of the home. As a result of they each have a considerable amount of alternative. Like I stated, $80 billion, our income information is $2.17 billion on the prime finish of the vary. So we have a number of room to run on either side of the home. So I need to be very clear about that. We’re investing in either side as a result of there’s that giant alternative in each.
However when it comes to buyer identification cloud, there’s a number of alternative there. I imply, there’s a number of thrilling issues happening there. I imply after we take into consideration Buyer Identification Cloud, we take into consideration actually two fundamental used circumstances. I need to ensure we’re all clear on this. One is B2C and the opposite SaaS purposes, proper? And B2C, the instance is, go to any web site that you’ve got in your telephone proper now or in your purposes in your telephone, we must always be capable to be on the entrance finish of that. When it comes to SaaS purposes, I am fairly positive you guys all know what SaaS purposes are, proper? We wish to have the ability to safe all of the SaaS purposes identities as nicely. So there’s a number of thrilling issues on the market.
Why can we not go sooner? Why have not we gone as quick as we want as a result of it’s we might have preferred to have gone sooner in FY ’23. We have now among the challenges that we have already talked about round gross sales rep attrition. Readability of message available in the market with our clients, our companions and albeit, our personal area, however we really feel like we have made a number of modifications over the past six months to have the ability to tackle these issues. And finally, tackle the market as quick as we probably can.
Eric Heath
Yeah. Do you see any form of catalyst that basically type of velocity the adoption of SIEM to business options as a result of clearly there are a number of in-housing doing your self initiatives that persons are doing. Is there something that catalyzes the SIEM promotion?
Brett Tighe
Yeah. I feel there’s just a few issues that we see. One is modernization efforts, proper? So you’ll be able to think about going into the uncertainty of the macroeconomic scenario that we’ve got sooner or later. You are not going to need to spend a bunch of developer time on non-core actions, proper? You need to have an environment friendly developer movement since you need to be specializing in that core enterprise that you simply run. And so we will present that by clearly promoting you or buyer identification options. In order that’s one factor for us.
I feel additionally making a greater expertise for patrons, proper? If you concentrate on — whenever you go to, to illustrate, any B2C utility and also you get requested a bunch of questions earlier than you buy it as a result of persons are making an attempt to — the distributors making an attempt to establish you and do a number of issues within the background. Like that is a foul expertise, proper? We wish to have the ability to create a seamless however safe identification answer and — for our clients’ clients, proper? As a result of it is a horrible expertise whenever you undergo these and it slows down shopping for, proper? And whenever you’re speaking a few potential downturn within the macroeconomic scenario or the macro economic system, you need to ensure income is as straightforward to get to as attainable. These are the 2 issues, effectivity and actually making a top quality expertise for our clients’ clients.
Eric Heath
Yeah. So let’s shift over to Workforce. And I feel it has been surprisingly resilient or stunning to some, perhaps much less so to you if that Workforce has been capable of keep this excessive progress for fairly some time. You simply stated 30% ACV progress this quarter and remains to be a powerful quantity. What retains Workforce a excessive progress enterprise going ahead? The place are you under-penetrated? What are among the alternatives that stay so that you can hold this a high-growth engine?
Brett Tighe
There’s — I imply, there is a ton of alternative on the market in Workforce, proper? It has been a funds line merchandise for a very long time. So for our area, they know what to go after. They know what to search for. It’s extremely templatized. And there is simply a number of — there’s a number of alternative on the market. There was an IDC report that we quoted in our Investor Day again in November speaking about how, for the primary time, cloud simply surpassed on-prem when it comes to identification implementations. And so meaning there’s nonetheless a number of greenfield on the market. There’s nonetheless a number of — I would not say greenfield. So there’s a number of alternative to interchange the older legacy applied sciences. That is why I simply stated what I stated about Workforce remains to be very thrilling to us as a result of we do see that as an enormous alternative for progress sooner or later.
Eric Heath
Yeah. How vital is IGA and PAM to that Workforce?
Brett Tighe
Yeah. It is undoubtedly — I imply, there’s a purpose why we’re growing these merchandise and have had some superb success on the Okta identification governance answer simply in a few quarters of promoting it. Clearly, PAM popping out. EA this 12 months, first half of this 12 months, we expect that when you mix these basic entry administration plus these couple of merchandise, we will have a extremely stable answer for identification for lots of several types of clients. That is what’s attention-grabbing about identification, proper? We have all talked about previously. It isn’t a small firm concern. It isn’t a big firm concern. It isn’t U.S. versus worldwide. It isn’t a phase or a kind of business or something alongside these strains, everyone has this downside and in order that’s why we’re excited concerning the alternative.
Eric Heath
Yeah. So on [indiscernible] let’s speak about that. I feel you guys expressed some pleasure the final name that you simply guys are seeing success there. Two issues, so what are the low-hanging fruit alternatives that you simply see in IGA? I perceive you are not making an attempt to enter the old-fashioned, IGA, the place you are going to on-prem like deep into the stack, if you’ll. So what are the alternatives that you are going after within the IGA?
Brett Tighe
Yeah. We’re designing Okta identification governance proper now for one thing we did with entry administration with the Workforce, the standard Workforce product, which is go after that small and medium dimension us that would or the standard options on the market, proper? So there’s a complete swath of shoppers, tens of hundreds of shoppers on the market that need a answer for this, however could not both afford it or couldn’t take the time to implement it. Clearly, should you take a look at our implementations, we do ship time to worth in a short time.
You possibly can see that within the skilled providers as a proportion of income. It does not take that a lot to activate Okta and make it very profitable, proper? We have — final quarter, I feel it was not 3% proper of whole. And so, we have a extremely nice product, and we intend to do the identical factor with Okta identification governance, proper? And so yeah, it isn’t going to be go after the sale factors of the world. We have got — granted, we have had some nice success prime to backside when it comes to segments.
Small clients even as much as the most important clients, you heard the opposite day round NOV otherwise you’ve heard about Kindra previously. However finally, we need to go after the small and medium-sized companies that have not been in a position for the answer previously or take the time. So we’re excited concerning the alternative, particularly given how a lot success that we have had within the first couple of quarters.
Eric Heath
Proper. So with these enterprise clients, are they utilizing you in a name it a phase of the place are they utilizing it only for SaaS purposes or cloud environments? How they’re…
Brett Tighe
It is actually cloud setting, proper? I imply we do have Okta Entry Gateway, however that is actually extra about transferring workflows to the cloud slightly than being a real on-prem answer. And so — sure, we’re — it is actually — whenever you see these enterprise and strategic clients, it is extra round cloud ahead organizations slightly than the on-prem focus.
Eric Heath
Is sensible. So let’s discuss concerning the go-to-market aspect a bit bit. Simply speak about the best way issues developed in fiscal ’23 and among the actions you’ve got taken to appropriate among the execution challenges and among the proof factors you are seeing to allow us to to precise to us that you simply’re seeing both stabilization or enchancment on the go-to-market aspect?
Brett Tighe
Yeah. Finally, the challenges we had in ’23 stemmed from all of the success that we had in ’22, really. So if we glance — if we flash again if we take a look at This fall of FY ’22, after we’re occupied with planning, we’re occupied with what number of reps so as to add in, what can we need to do with the sphere. We regarded on the productiveness on the time, there have been two totally different fields. There was a zero area and there was an Okta area.
And we regarded on the productiveness of each and so they have been doing very nicely. And so we thought one of the best factor when it comes to effectivity and operational cadence over time can be to deliver them collectively and in addition add a bunch of reps into the sphere as a result of we checked out this productiveness and stated, nicely, the chance is admittedly fairly nice at this level. And so let’s go forward and stand on the fuel for progress.
And so that you get into Q1, and so you’ve got now mixed fields, you’ve got had the standard account changeovers, like we do each fiscal 12 months, we added a bunch of reps and what finally ended up occurring is we overcut on the territories. We made them too small. The quotas turned very difficult to get house on. We additionally didn’t do our greatest work when it comes to clarifying the message when it comes to the place do you promote Okta, the place do you promote zero. So we made it complicated for our staff.
We might complicated for the companions and be complicated for the — for present and potential clients. All that slams collectively to have a area that appears at their quantity and says, I am unsure I could make it. I’ll go forward and go away and attempt to go elsewhere. And so that’s historically not in the best way of Okta has been a spot the place you come and thrive, you make some huge cash and also you ship a number of worth to your clients.
And so we had extra attrition in Q1, Q2 than we might have preferred, traditionally excessive — attrition in Q1 and Q2. And so the issues that we have executed is we clearly slowed down hiring throughout the center of final 12 months, you heard me speak about that a few quarters in the past. We applied some system options. We additionally clarified the message and simply stated simplification. That is the place you promote a buyer identification cloud, that is B2C web sites and SaaS purposes.
After which Okta SIEM is bought actually solely in [indiscernible] options in that scenario. And so clarified the message, slowed down the hiring, made it simpler to get to your quota. We did do some compensation issues to make sure issues obtained a bit bit higher. Attrition within the again half of the 12 months and Q3 really was the bottom it had been, I feel, in two years. This fall was one other robust end result.
Finally, the proof will probably be within the pudding within the subsequent couple of quarters as a result of now we’re going by way of the Q1 changeover. Persons are attending to reassign their accounts. Comp, quota, all that good things, territories are being assigned. However the factor is, we’ve got: one, from a compensation perspective, we imagine we’ve got a really stable compensation program mixed with the quota and the dimensions of the territories as a result of we did not actually add any bid within the final half of the 12 months.
So we now have these territories which might be steady. The accounts even have not likely modified that many arms. In different phrases, usually, we might have a number of altering one. There is not as a lot change in Q1 this 12 months. And so we really feel between the compensation, the dimensions of the shut, the dimensions of the territory, the shortage of change within the accounts. We predict that we have executed all the things we will at this level to proceed to have this good pattern on attrition.
However like I stated, it is actually — the subsequent couple of quarters will show out whether or not or not we’re profitable. We have to clearly, regulate this and making inroads. Now what I’ll say is qualitatively from what I heard at gross sales kickoff, folks have been excited and able to go and excited concerning the patches and so they see a path their quantity. In order that’s a superb first sign. However clearly, the proof will probably be within the numbers within the subsequent couple of quarters, Eric.
Eric Heath
Yeah. So perhaps to summarize, so you are feeling good within the modifications you made. Do you are feeling like a number of these modifications are behind us, and now it is extra simply minor tweaks, and we’re executed making any significant modifications at this level?
Brett Tighe
At this level, that’s our perception. However clearly, if one thing goes flawed us or one thing goes very well on us, we will modify and alter as we see match.
Eric Heath
Okay. I’ll cease right here and simply see if there’s any questions earlier than I hold going. All proper. So let’s speak about — I need to discuss concerning the channel a bit bit when it comes to the way you’re reorienting or evolving your channel program, if you’ll. So cloud market is changing into an even bigger alternative. The GSI is changing into an even bigger alternative. And I feel you talked concerning the GSIs extra so on the SIEM aspect. So one, simply discuss concerning the channel technique broadly. And secondarily, like how the — what the position the GSI goes to play in? Are they going to — is SIEM one thing that will get them extra and extra engaged with them?
Brett Tighe
Yeah. So we’ll begin with the technique, which is — so traditionally, we talked about round 30%-ish of our income has come by way of one variation of the channel, whether or not or not it’s VARs or marketplaces or GSIs in whole. Traditionally, that has been very weighted in the direction of the VARs. That is the place we have had an amazing quantity of success, and we proceed to have a number of success with the VAR channel. We wish to have the ability to increase our method right here to essentially to diversify our method, which is — we have had a number of success with the VARs. We need to proceed happening that path.
But additionally the GSIs, clearly, are crucial. We have traditionally had a problem getting the GSIs and SIs concerned as a result of what I simply stated round our skilled providers as a proportion of income is pretty small as a result of Okta, you flip it on, it really works, proper? That is a fantastic product, nevertheless it’s really a bit little bit of a headwind with these system integrators as a result of they need to have the ability to construct huge practices. They need to have the ability to drive a number of income when it comes to their very own group off of implementations.
To your level round SIEM, sure, we do imagine SIEM is a part of the digital transformation or modernization efforts. And so finally, we expect that these alternatives will appeal to the SIs and GSIs. We have got to do some work there. We have got to have the ability to proceed to enhance these relationships and present the worth to those SIs and GSIs, however finally, we imagine that is a path for progress for us.
After which the third one, such as you stated, you heard, you guys hopefully all went to Investor Day or a minimum of had an opportunity to take heed to it. AWS is there in marketplaces are clearly on the rise, proper? And AWS is a giant companion of ours. A variety of our product is run on AWS. And so we are the premier cloud supplier. They have hundreds of reps promoting on our behalf.
And so we’re excited concerning the market is as a result of lots of people need to go purchase thorough the best way these market design their EDPs or their buying agreements with their clients, it makes a number of sense to purchase out of those marketplaces. And in order that’s a 3rd vector for us when it comes to progress sooner or later. So it is finally about diversifying our companion channel and increasing our attain over time.
Eric Heath
Nice. So let’s discuss concerning the steerage a bit bit. I imply, you rightly laid out, I would say, a cautious fiscal ’24 steerage on the 3Q name. You exceeded your 4Q expectations. You noticed some stabilization enchancment on the go-to-market aspect, in order that undoubtedly helped. And you then undoubtedly gave us some higher margins. So I feel I undoubtedly respect that. So discuss concerning the method to steerage, I suppose, on this most up-to-date quarter.
I imply, you exceeded on 4Q, you stored the identical progress outlook of that 16% to 17% income progress, however like I stated, margin upside. So are you taking some additional conservatism on the highest line given the upkeep of the income progress or among the cost-saving initiatives that you simply’re placing in, are they probably coming to the expense of some prime line. Stroll us by way of that?
Brett Tighe
Yeah. So from a prime line perspective, we did elevate it by $25 million. So yeah, the expansion is roughly the identical, however clearly, we elevated it by $25 million to the highest finish of the vary. We’re simply being considerate about all of the challenges on the market right now, proper? I imply one, we’re very early within the 12 months, so there is no purpose to get in entrance of our skis. However the issues we’re taking into thoughts is admittedly the macro headwinds that we have talked about. Clearly, we’re in the course of a go-to-market management transition.
After which the 2 gadgets we talked about right now and actually over the past couple of quarters round gross sales rep attrition and buyer identification cloud efficiency, proper? These issues, we’re not anticipating to get higher on that attrition issue. We’re being considerate about that being very prudent. In order that’s the place we’re occupied with from a income perspective.
When it comes to margin, the best way we’re occupied with margin can be a reflection of how we take a look at the enterprise usually, balancing progress and profitability over the past a number of years. And so, we’re doing what we have executed endlessly. So progress has slowed down. We noticed it slowing down in FY ’23, proper? And so that you heard me speak about Q2 earnings, Q3 earnings and clearly, the final earnings round slowing down hiring, rationalizing actual property, principally creating a price envelope that will increase margins fairly considerably as a result of we noticed that progress happening a bit bit.
And so we’re doing — we’re simply doing what we have executed endlessly, which is balancing progress in margins. And so we will proceed to do this, not simply in ’24, however in ’25 and past. And so — yeah, I do not assume we’re over rotating to our margins or underneath rotating in the direction of progress. We’re making an attempt to do what we have executed earlier than is steadiness the 2 and guarantee that we’re healthily rising the highest line and doing it in a worthwhile approach.
Eric Heath
Yeah. That is nice. I imply if we do see some upside on prime line, if execution improves and macro stays comparatively stable. Ought to we anticipate to see type of that prime line movement by way of to the underside line or would you reinvest a few of that upside or do you concentrate on that?
Brett Tighe
It actually will depend on the alternatives, proper? And one of many issues that we’re actually specializing in this 12 months is ROI is clearly one thing we centered on for some time, however we need to elevate the extent and ensure, hey, it is a actually robust chance of return. Additionally, time line of return is there as nicely. So if we see alternatives that we will make investments and get a superb return off of and it is going to make a distinction both rising the enterprise, we’re really increasing margins as a result of there’s each of them, proper? You can do each kinds of investments. And so we’ll take them one after the other and ensure we’re doing the appropriate factor, not only for the ends in ’24, however finally ’25 and past.
Eric Heath
Yeah. A few minutes I believed to survey this — sure, one within the again.
Unidentified Participant
Yeah. Are you able to discuss a bit bit extra about [indiscernible] product you shared, like what ought to we anticipate as an working characteristic parity with the opposite giant scale working [indiscernible].
Brett Tighe
Yeah. So to be clear, we will be early entry within the first half of this 12 months. However when it comes to product providing proper now, we have Superior Server Entry, proper? We have got Linux bins, Home windows bins. We’ll increase to different use circumstances inside server entry as nicely. However we’ll come out with — I do not assume we will attempt to compete with CyberArk to reply your query instantly as a result of I feel that is in all probability what you are asking me, which is, we’re not going to attempt to go compete with CyberArk, proper. We will give you clearly a lighter model, they have been growing that product for years, proper.
And so we will do what we have executed with the opposite areas of our enterprise round entry administration on the workforce aspect or IGA simply heard me speak about it. We need to tackle small and medium sized enterprise use circumstances first. and ultimately work our approach into that enterprise and strategic phase, however it’s not our intention to go, hey, we will do a bunch of CyberArk rip-outs. That they have been growing merchandise for years. We’re not going to have the ability to have a cyber compete on day one, we will need to be considerate about that and attempt to ship worth to the shoppers who’re asking us for this in our personal buyer base at this level.
Eric Heath
Anything? Proper. Perhaps simply to squeeze one final one in right here. I imply you probably did have a notable buyer instance within the quarter with Open AI, I feel — it wasn’t a buyer win, however a buyer growth within the quarter. I imply I feel the info means that it is a 100 million MAU firm. You guys in all probability know higher, however does this make it your largest SIEM buyer? And I imply, are you dealing with all that capability by way of all three (ph)?
Brett Tighe
Yeah. We do not have an issue with the capability. It’s — we’ve got tons of enormous clients with [indiscernible]. So that is one other good win for us. We’re enthusiastic about it for quite a lot of causes. I imply everybody appears to deliver it up as a result of it is an thrilling expertise. However finally, it simply signifies how superb that enterprise mannequin might be as a result of they began out paying us $20 a month with a bank card swipe and now you’ll be able to see the large scale that it is at. And in order that’s one of many issues actually enthusiastic about buyer knowledge cloud. We clearly have a fantastic product. We have now a fantastic developer movement. We have now a fantastic developer model with zero merchandise. And so we’re enthusiastic about successful extra open AIs sooner or later.
Eric Heath
Yeah. That is nice. I’ll go away it there. Thanks very a lot, Brett.
Brett Tighe
Thanks, Eric.
