Q2 2023 Okta Inc Earnings Call
Chief Security Officer in order to elevate the strategic importance of customer identity, we need to improve our relationship with the other members in the C suite, including the Chief Digital Officer, Chief Technology Officer, and Chief product Officer, who are more heavily influenced by developers and their organization.
Reaching developers and selling to this audience is often zero strength.
The more buyers, we can effectively reach the more identity use cases, okta can help them solve becoming the vendor of choice for more identity use cases across the C suite results and okta, becoming a strategic vendor for the CEO and entire organization. These changes stem from our learnings over the past two quarters ultimately.
This allows us to deliver more customer value and is a big step towards our vision of okta as a primary cloud we are in the process of communicating more of the specific details directly with our customers now and over the coming weeks based on early feedback from some of our largest customers. They are excited about how this plan fits into their long term technology strategy.
Turning back to our Q2 results, we added 600, new customers in the quarter, bringing our total customer base to 16400 representing growth of 26%.
We continue to see growth with large customers for both workforce and customer identity.
And we are proud to work with some of the most important brands in the world such as NTT data Siemens and NASDAQ.
In Q2, we added 220 customers with $100000 plus ACD, which is our second highest new quarterly ads for this cohort our total base of $100000 plus ACB customers now stands at over 3500 and grew 35%.
Cohorts for even larger customers that have an <unk> of $250000 $500000 and $1 million plus dollars. All grew north of 40% in fact, we had a record quarter for new $1 million ACB customers in Q2.
This base of large customers represents roughly 80% of total ACB.
Here are just a few notable examples of customer wins in Q2, which come from a wide range of industries.
All events health, formerly known as anthem, a fortune 50 health insurance provider was a substantial workforce and customer identity win next the state of Maryland was an outstanding new workforce, when Maryland is focused on building resilience and decreasing risk as threat actors increase attacks on state and local governments the state's legacy identity.
Agent tool was burdensome and lack the functionality to support the evolving needs of the state.
This initial deployment will enhance security and provide the foundation for a statewide identity strategy Okta lifecycle management and workflows will also enable the state to be more productive by automating the onboarding and off boarding of users.
A great upsell in the quarter was with the U S Department of Homeland security. The DHS expanded its use of Okta work force to support the department's modernization and mission initiatives Okta will be used to build a modern identity solution for the department and help standardized off indication against all shared applications and services. Additionally.
Okta adaptive MFA will be used to build the department cyber posture and support its zero Trust architecture.
I'm sure you noticed that a couple of the customer callouts, where government organizations. They were just two of many government wins in Upsells, we had in the quarter one of our primary focus areas. This year is to increase our presence in the federal vertical to date, we've experienced significant growth rates in the federal vertical as well as state and local we've built solid momentum.
I'm going into what is typically the biggest quarter of the year for our federal business.
Two important upcoming federal business milestones to note are fed ramp high authorization and the launch of the Okta military Claude both of which we anticipate achieving by the end of this year.
We're also very excited about the recent north American launch of Okta identity governance. This is a significant step forward as we deliver a unified and comprehensive identity platform and further off disposition as a strategic partner for businesses across the globe.
Our approach to this was to rethink the way it governance was traditionally done and build a product on okta principles of cloud native technology that is easy to use this means delivering a product that drives better security and compliance outcomes is easy to deploy and maintain for OTT teams and as simple for employees to use this resulted in a mall.
Modern unified I, a M governance solutions focused on improving an organization's security posture okta identity governance is already off to a great start with dozens of customers a great. Early win was with kindred. The managed services business spun out of IBM tendril expanded with at Okta identity governance this quarter to secure access to their application.
To mitigate modern security risks and improve resource efficiency. It was just a couple of quarters ago that Kendra became a workforce and customer identity customer.
We're now looking forward to the global launch later this year.
We'll talk more about our products and product roadmap at octane 'twenty, two which we're hosting in person in San Francisco. This coming November this is octane 10th anniversary and it will be better than ever. We will also be hosting an investor day is a hybrid of that in conjunction with octane. So we hope to see you there in person or virtually.
And finally I want to acknowledge a few updates to our executive leadership team and board first after 13, plus intense years building okta together my cofounder and partner Freddie cost is going to be taking a much deserved 12 months operating sabbatical beginning November one to spend time with his family recharge as batteries and think about what's next for okta.
Fred he will be staying close to the company as executive Vice Chairman and board member during his sabbatical.
I also want to thank Dia Jolly, our chief product officer for her contributions to okta over the last four years Dia is an exceptional product leader and I couldnt be more excited to see her pursue her passion.
As an entrepreneur and builder we appreciate her staying on as an advisor through early next year as we simplify and align our product teams with the new go to market strategy.
Going forward, we're splitting the role so you Hany O pace will lead product development for the customer identity cloud and shock, Nick and Andy our CTO will be the interim lead for workforce identity cloud products.
And lastly, I'd like to welcome Emily Choi Coinbase, as President and COO, who recently joined our board of directors over the last decade, Emily help scale coinbase and Linkedin into two highly influential technology companies. She brings a wealth of experience working with technology entrepreneurs and we look forward to bringing her perspective to okta as board.
We have incredibly strong teams and leaders across the company, who continue to deliver for customers and I am committed to investing in their strength and productivity for our long term success to wrap things up I want to thank the entire acre team for their hard work. The sales integration challenges, we've encountered lay squarely on my shoulders and I recognize.
We have more work to do to regain our momentum we've taken some decisive actions that we believe will get us back on track I'm more energized than ever and confident that the steps. We are taking will yield improved results.
Identity is a critical component of every company's zero Trust security digital transformation and adoption of cloud. These three mega trends continue to support our view that identity is a strategic priority for organizations of all sizes. We remain focused on the massive $80 billion market opportunity in front of US Okta is critical.
Infrastructure for over 16000 organizations around the globe.
Every organization needs identity, and okta as the recognized market leader that is best positioned to capture this opportunity.
Now here's Brett to walk you through more of the Q2 financial details and outlook for the rest of FY 'twenty three things.
Thanks, Todd and thank you everyone for joining us today I'll start with some of the results for the second quarter and then provide our business outlook keep in mind that we are now past the one year anniversary of the zero acquisition and clearly year over year comparisons are now on a like for like basis, let's take a closer look at our Q2 results and then I'll go over the outlook for the second half of the fiscal year.
Total revenue growth for the second quarter was 43% drew.
Driven by a 44% increase in subscription revenue subscription revenue represented 96% of our total revenue.
International revenue grew 52% and represented 22% of total revenue with this level of international exposure, we had minor FX headwinds, but it's an area we're closely monitoring.
Looking at the ACB split between workforce identity and customer identity.
Workhorse ACD grew 36% and represented 63% of total HCV customer.
Customer identity, ACD grew 47% and represented 37% of total HCV, we're pleased with the durable growth of the workforce business, especially at its current scale.
Well the customer identity business continues to outpace the overall business the.
The growth was impacted by the sales integration challenges that Tod outlined.
RVO or backlog, which for US is contracted subscription revenue both billed and Unbilled that has not yet been recognized grew 25% to $2 79 billion in.
Impacting total RPM growth is the general shortening of term lengths of recently signed contracts. In addition to our increase in public sector contracts, which generally have a one year term loan.
Average term length remains just under three years.
<unk>, which represents subscription revenue, we expect to recognize over the next 12 months grew 36% to $1 5 billion.
The growth in current RVO is driven by strength across new and existing customers.
We view current <unk> is the better metric to assess our quarterly performance relative to calculated billings, which as we've noted can be noisy due to fluctuation.
In invoice timing and duration.
Billings in current calculated billings grew 36%.
Turning to retention our dollar based net retention rate for the trailing 12 month period remains strong at 122%.
This was driven by the strong upsell motion, we are seeing with our existing customers as they expand on both products and users as always the net retention rate may fluctuate from quarter to quarter as the mix of new business renewals and Upsells fluctuates.
Consistent with prior quarters gross retention rates remained very healthy and reflect the value of our products to our customers before turning to expense items and profitability I will point out that I'll be discussing non-GAAP results going forward.
Looking at operating expenses.
Operating expenses for the quarter were lower than expected primarily related to lower than anticipated head count additions.
Operating loss was $15 million and much better than we expected primarily due to the combination of revenue over performance and lower than expected operating expenses.
Total head count increased 38% and is nearly 5800.
Moving to cash flow free cash flow was negative $24 million, we anticipate Q2 free cash flow being the seasonal low point for free cash flow this year.
We ended the second quarter with a strong balance sheet and anchored by nearly $2 $5 billion in cash cash equivalents and short term investments.
Now, let's get into our outlook.
We're factoring in our Q2 performance sales integration challenges heightened sales and attrition and an evolving economic environment to help contextualize. This over half of the outlook of headwind relates to our sales integration challenges are secondary portion of the reduction relates to the heightened attrition, which resulted in a lower than expected capacity build.
As we move through the year and finally, a smaller portion of the additional conservatism related to the macro environment.
We are also improving our profitability outlook for the second half of the year.
The spend reductions will be achieved by reducing our hiring plans rationalizing our facilities footprint and applying greater overall financial discipline.
We believe these steps will improve our operating margins inability to attain our free cash flow targets for the year for.
For the third quarter of FY 'twenty, three we expect total revenue of $463 million to $465 million.
Representing growth of 32% to 33%, we expect current RVO, a 1.5 dollars 4 billion to $1 55 billion.
Representing growth of 30% to 31% non-GAAP operating loss of $37 million to $36 million and non-GAAP net loss per share of <unk> 25 to 24.
Assuming weighted average shares outstanding of approximately $158 million.
For FY 'twenty three we are raising our revenue outlook by approximately $5 million at the high end to $1 812 billion to $1 820 billion Rep.
Representing growth of 39% to 40%.
We are raising our profitability outlook by approximately $57 million.
We now expect non-GAAP operating loss of $110 million to $105 million and non-GAAP net loss per share of <unk> 73 to 70.
Assuming weighted average shares outstanding of approximately $157 million.
Lastly, I want to provide a few comments to help with modeling okta.
As I've mentioned in past quarters, we look at growth and profitability through the rule of 40 months. Despite the downward pressures on the top line, we are making adjustments to our original spend assumptions and are committed to staying over 40 for the fiscal year. This includes a free cash flow margin in the low single digits for FY 'twenty three.
We expect to return to positive free cash flow in the third quarter and expect Q4 to be our seasonally strongest quarter for free cash flow next to help with your transition to modeling on current IPO. We will continue providing a full year billings outlook for FY 'twenty three before discontinuing any reference to billings in FY 'twenty four we are lowering our <unk>.
Calculated billings outlook for the year by approximately $140 million due to the outlook headwinds outlined earlier.
We now expect calculated billings for FY 'twenty three to be approximately $2 4 billion to $2 5 billion representing.
Representing growth of 27% when viewed on a like for like basis were 19% on an as reported basis.
Given our near term outlook, coupled with the uncertainties of the evolving macro environment. We are reevaluating our FY 'twenty six targets at this time, having said that we will continue to balance growth and profitability and we look forward to updating you on our long term outlook on the Q3 earnings call.
To wrap things up we're confident we have the right action plans in place to build on our progress and expand on our market leadership position I'll turn it back to Dave for Q&A Dave.
Thanks, Brett I see that there is quite a few hands raised already and I will take them in that order.
In the interest of time, please limit yourself to one question. So that we can get to everybody and you are certainly welcome to queue back up with additional questions after that.
So with that I will start with Eric Eric.
Ricky that Keybank Eric.
Alright, Thanks, Dave and thanks for taking the question so.
Friday I appreciate the detail on higher Reorienting, the product portfolio, but I wanted to drill in on how you are changing the kind of sales.
<unk> that's already takes some time all of them.
And then also just any additional color you can provide on maybe how your reorienting some of the sales comp structures going forward.
Yeah for sure. Thanks for the question I think there's.
In terms of I'll start first with sales organization.
The big change on the sales organization was at the beginning of this fiscal year, So sub one and Thats, where we took the after zero sales team that sold as an independent group all through last year for the first three quarters of the App.
After the acquisition and we combine them together with the okta sales team and so the idea there is that hundreds and hundreds of okta reps. So the whole portfolio octopus through and then the op, but the odds zero reps that came over so the okta portfolio and also our portfolio. So that that was a really significant.
Step in the integration in terms of one thing I would clarify is that Freddie doesn't manage the sales team that's under Susan St Ledger, and Steve Rowland our CRO.
It is pretty is very involved in talking to customers and so forth and we can talk about that separately, but the sales integration organizationally was a combination of the teams.
Earlier this year I think the the headwinds are really about how do you take those hundreds and hundreds of reps and make them productive selling both customer identity cloud and workforce identity card and there is a couple of things that go into that the first thing is that we really have to reach.
A new buyer for okta, which is oxygen traditionally it was about <unk> and <unk>, but for customer identity to be successful we have to reach VP of technology Cto's all of the called the Chief marketing officers Chief digital officers the whole suite of C suite executives that will if we win them all.
We have an identity platform for all of those use cases, we can better achieve our goal of being the primary cloud and a primary piece of their strategic landscape going forward. So.
That's the high level of motivation for doing the acquisition and if you take it back to the tactics combining the sales teams together, reaching those buyers were we're super bullish and confident on our long term strategic implication of providing this unified identity platform for all of these buyers in all of these use cases and.
We are bold and big on that but I think frankly on the tactics, we're iterating and making sure that as we make mistakes or have to do things more optimally. We course correct. So I think one. Good example of this is really simplifying the way we enable those sellers and the product portfolio, we offer that.
They offer to the customers, we're making it more simple its like Theres, a customer identity cloud and that's all zero and Theres, a workforce identity cloud, which is both for employees and for your extended workforce partners and suppliers and things that are kind of workforce like and those are the platforms and the product suites. Your go to market with and so for these hundreds and hundreds of sellers, it's going to be much easier to.
Enable them and train them and have them bring this vision and this product portfolio to market.
Thanks Pat.
Next let's go to Alex Henderson Needham.
Great. Thank you very much.
I have been focused on understanding the recent news flow that's come out in October since the.
The half that was announced.
And.
Particularly the scatter swine in the Okta plus.
Program that she loves her name.
Excuse me actually love the names, yes, they're awesome Ryan and then there is an additional one that came out recently talking about.
The SMS cloning mechanics.
The opportunity for people to use those to penetrate.
Better permissions into the cloud.
And upgrade their permission.
That obviously happened after the end of the quarter when it apparently attack 140, plus <unk> customers can you. Please address.
That piece of the puzzle because its little transparent to us when we see all of that I had a conversation with a bar. This morning, <unk> already seen some pushback from customers on as a result of that in terms of closing deals as we speak yes, Alex I want to make sure I understand you said October is that you.
It's called Octopussy, Yeah, Okay, sorry, you didn't mean the month of October yes, yes.
Yes.
The issue the issue Youre talking about is there was actually a recent occurrence of.
It's something that happens all the time, which is there are these phishing attacks going on all the time.
And the bad guys the threat actors they try to use the most commonly used identity system and that's so they often target us because we have so many customers that use okta. They try to have effect at the site and get users into the trick users and they're putting their credentials in this exciting and they can break it in that way.
And we have entire teams that their job is to monitor the dark web and infrastructure providers to take down These stakes sites and notify customers. The engineering, we're talking about it's the octopus and us the squatter the Lance water yeah.
Swine Scott Squadder are the that's the same issue that sustainment threat threat actor and the unique one of the unique and this was the targeted 130 okta customers. The unique thing about this one is not that they targeted doctor customers, but that for a few customers that actually worked and they got in and so the reason why is because.
They had some innovative approach on their attack, where how they fished for not only the password, but also the onetime code and some other less secure like SMS tokens less secure ways to authenticate into okta.
It usually doesn't work, but this was a novel approach. So it worked on a few.
A few customers. So the takeaway for us is that we need to make so the vision here and what customers need to do is we need to move to having no passwords.
And so it's not fishable and our platform can get them there, but it's very configurable now and you can configure it in multiple scenarios based on which resource you're protecting or which have.
How risk averse you are from these kind of attacks and you can go all the way from just the password, which is very sociable all the way up to impossible to fish no login page no password you have to be on your work machine Thats Cryptographically verified and its not fishable. So I think the problem is that some of these customers were in a situation that they had a resource that was sensitive.
And they were using this approach that turned out to be not as secure as it should so the task for US is first openness and transparency, we are being very aggressive about communicating what happened I don't know if you saw that we have a blog post on this that water swine that kind of outlined everything that happened and we share that with customers and then also we need.
To do a better job I think helping them understand exactly.
The configuration of the product and what the risk versus their configuration of the risk of the risk appetite on the resource they are protecting and help the whole industry along with our customers move up toward this unofficial configuration, which is no password no login page. So is there no impact.
Your results in August as a result of that high visibility event.
Well definitely well there first of all in Q2. It was after Q2. So there is quite clearly in the current quarter, but all of our conversations with customers has been.
Very confident in our ability to protect them and configure the product in a way that's effective and we're being a good partner to them to understand how to defend these things on mass because this is happening all the time to customers. They know that all of their infrastructure is being attacked and having partners that can help them ratchet up their defenses.
All the way towards this unfavorable configuration is something they are very comfortable with great. Thank you very much further clarity yeah, hopefully that helps I know, it's a lot of detail.
And let's go to Gregg Moskowitz Mizuho.
Okay. Thank you very much for taking the question so.
Without a doubt.
Hi to that very strong solution for developers.
This refined go to market is.
As we noted a different design than what was initially articulated.
Following the announcement of the acquisition about 18 months ago, and so some may wonder.
First step towards Deemphasizing, Oxford core science solution. So can you tell us why that is not the case and then secondly, given the big convergence that is happening in identity and access across work force and Siam will this have any bearing in European you on your ability to sell joins workforce and Siam deals going forward.
Yes, I think it's Super Super Insightful question, and I think I would.
I think the way to describe this as a clarification.
And our simplification explain a little bit more of it I mean.
If you think about the Siam the Siam market customer in any market. It's it's first of all it's a new category and its emerging and we are extremely bullish long term on how big and impactful. This could be every digital interaction with every person on the planet with every organization is in some format the customer identity and so it's in <unk>.
<unk> market and.
And you have to as much as you participate in the market you have to try to drive it forward. So as we make clarifications and as we adapt our strategy. We're adapting to this market that's evolving but we're also defining the market. So it's really exciting. So if you think about the market. It's I think about it as a spectrum. So.
On one end of the spectrum is your pure new new App, it's b to C. I'm sorry, it's.
Yes, it's a consumer app directly to the consumer think about worthy Parker, there's a development team it's driving revenue at the whole business is probably online it has to be super flexible Super extensive extensible and to do the identity for that in the multi factor and the password list and the all the capabilities that's wanting to the spectrum that's real.
At zero as bread and butter.
Other end of the spectrum is really very similar to workforce. It's think about it like it's your giving access to partners or maybe a mix of partners or customers to your incidence of email or two year instance of sales force to your SaaS up off its off the off the shelf, that's really where.
<unk> was and it wasn't there wasn't a bright line in that spectrum, where on the left side. It was all at the same and on the right side. It's all a zero they were kind of blended along those perspective that spectrum. So on the on one side was very clearly out there on the other side was very clearly okta, because you got to the middle of it was more mixed.
That's one of the two companies before the acquisition there was some overlap, but 65, 70% of the market was not overlap it was okta or it was zero.
So what we're doing now what we're really saying is that the majority of the okta Siam use cases that we're really extended workforce, we're being really clear about that and now the the okta science platform is focused on extended workforce and we're saying the cereal platform is the same platform.
So it's there's probably some in the middle where youre shifting one from the other but it's really a clarification in terms of Theres no bunch.
A bunch of sales reps aren't going to spend time interpreting we're in the middle of the spectrum. There we've taken that mentally clarified it and said this is Sam this is workforce.
Hundreds of hundreds of reps go get to market.
And if I can just add to that a couple of examples might help Chris of all you got to remember the historical context here. Historically, we started at the start of the workforce focused business, we added customer identity and access management and you see a lot of those examples of people using okta customer identity access management is that extended workforce.
That Todd was just talking about for example, flex the giant contract manufacturer they use okta customer identity access management to manage the distributors that they have on their supply chain. It's a limited number they know exactly who they are it works a lot more like an extended workforce. If you think about what we're trying to do here with the customer identity.
Out in the workforce that any cloud it's about simplification, it's about making it easier for customers to understand where they should go who they should talk to you as well as for our sales force to communicate that and so we're that's really that's the driving force.
Finally, what I would say is we are a good example, so far to your question about how it can work cross selling we are a good example, so far already of okta and at zero working very well together just over the last couple of quarters, we've talked about some of them on this earnings call fifth third bank Eventbrite Dick's Sporting goods News Corp, plenty of organizations that see the value of okta.
Workforce and want to also buy at zero and then finally, we have a very good example, just this quarter of the Alto partners, which is a big spin out of Pwc is their global mobility services provider. They actually bought its a new workforce customer and a new Bureau customer conveniently. They also about Iga, which we're happy to talk about and Thats the boring their modernization.
<unk> efforts and secure access across the entire organization.
But you make it.
Another good point was that we it's very important it's very important part of our strategy that to this when we solve the use cases for all the members of the C suite from security.
Chief Digital Chief marketing and Chief product Chief Technology, when we solve all of those the goal of that is to appeal across the whole enterprise to the CEO to the board we are the strategic identity platform.
So you are right, we have to be able to integrate those all of the products and all of the platforms. So that when the CEO or another top leader looks at it they rationally makes sense together and so over time, you will see that happen across all the products not just the obvious ones like <unk>.
Work force and Iga, which we had the jab and we're excited about but at zero and five other products, we build over the next.
A couple of years.
Thanks, guys appreciate it.
And let's go to Andy Nowinski at Wells Fargo.
Okay. Thank you.
I guess I just had a quick clarification first.
Did you say you are reevaluating that fiscal 'twenty six targets for taking that $4 billion revenue target off the table for now until it.
Until you reevaluate it and then my question was we're getting a lot of questions from investors as to what actually triggered the need for these go to market refinements sensitive.
Over the last call. It 12 months, whether it was the elevated attrition that prompted you to make these changes are the recent macro changes that we're seeing with the extended deal cycles, just kind of curious as to if you can point your finger at why.
<unk> yeah.
Yeah. It's a great question on the first part of your question. So the $4 billion FY 'twenty six targets.
If we're going to achieve that when we're going to achieve that we have to have a successful customer identity cloud and so as we reevaluate in the short term how to keep that momentum going.
I think it's prudent to make sure that we reevaluate that target given these short term changes that that we're optimizing for the customer and any clock and then.
We're committed to coming back to everyone on the next earnings call with a very detailed refined.
Version of that of those commitments and that target setting is very important.
So that's the first thing and then on the second thing that the key.
The sequence of events here, I think which is important for everyone to understand is that the the.
Sales integrate the sales teams were integrated this year. So its really six months of information and learnings that we have to iterate on this thing.
It's not it's not the whole last year off zero ran as a separate sales team and they had a great year. So we know there's markets that we know we can grow. This thing. It's just about the integration of the sales teams and what that drove in terms of attrition and some of the things we've talked about in terms of optimizing how we get that back on track to achieve.
This strategic imperative, which is we have to be the winner and the opportunity is tremendous in this long term customer at any market.
Thanks Scott.
Yeah, Let's go to Adam Tindle Raymond James.
Okay. Thank you.
I just wanted to maybe start Todd if we could maybe revisit some of the industrial logic for the <unk> acquisition that the idea was some synergies the businesses better together, but now we're separating them I guess the question would be what would you have done differently in that assessment, because I know future M&A, you've talked about being a potential catalyst for the company. So what did we learn and secondly.
What we'll do in his new role to re energize the more stand alone zero Siam business. Thanks.
And what did you mean by industrials I didn't I didn't fall apart I want to make sure I understand your question.
The industrial logic behind acquiring of neuro was partly octane euro our better together, yes I understand.
Yeah.
So I don't I think that.
We're not so first of all the.
Idea for the acquisition was that the high level idea was that customer identity is a massive opportunity.
Every digital interaction with every person to every company and every product is going to be digital and in some sense customer identity is at the core of all of that so that's a massive opportunity and secondly.
We are building the primary cloud your identity, so our future and our success and our vision of freeing everyone to safely use any technology, it's predicated on creating a world where identity is one of the most strategic platforms accompany box every organization every size and if you.
I want to be one of the most strategic platform that every company buys you have to cover all the use cases, there's no scenario, where I go talk to the CIO or the CEO or board of a major healthcare chain like I did this morning, and I would say on the workforce vendor for them on the identity vendor for your workforce. It has to be for your workforce and your customers.
And your extended workforce and everything in between so the rationale for the acquisition was this big new category of identity and very clear difference in the lower level buyer, it's not a CIO or <unk>. Many times many times, it's a V.
VP of technology, it's a CTO, it's a VP of digital as Chief Digital Officer.
Getting into those buyers and more importantly, having the product in the developer experience that organizations under those leaders would would adapt adopt and there'll be an uptake there and they would be built into their solutions that was very important. So that's the high level of strategic rationale for this now you fast forward in the first.
And the first nine months of the integration, which was last year. The deal closed in May of last year. So in the first nine months we <unk>.
Integrated some of the back office and office systems like the HR system, and so forth, but largely the product team and the sales team.
<unk> alone and they had an awesome year and so this year. The next step forward as like let's take the hundreds and hundreds of okta sellers and puts us off zero product in their bag and how and have been scaled back that growth.
So that was a big coming together of the two companies so.
As we've gone through that process in the first six months, we've learned a lot in the first one of the big things. We learned is that is that the market in terms of talking to customers and pipeline and so forth. The market is very very large. We've also learned is that there was too much complexity in trying to parse apart the different use cases, and we needed to simplify that.
<unk> to say for for if you're building a consumer app or you're building a BTB SaaS up it's in the customer identity cloud and the buyer is the one of these people I'm talking about the VP of technology. The CTO, the Chief Digital officer, and Thats All zero, if it's a workforce off if the buyers the CSO or the CIO and it's really for.
Not just your employees, but your partners your suppliers and things that act like an extended workforce that okta workforce products and what we used to call <unk> Thats workforce very clean very simple go. So I wouldn't say, we're separating where we've got a combined sales team and we have a clear message now.
And we're kind of after the races. There. So hopefully that gives you some context.
Next let's go to <unk> Kidron at Oppenheimer. Thanks, Dave.
Maybe just a follow up on that.
It seems like you're just going to have to maintain two parallel sales forces in the same time, so I guess I'm trying to figure out your priorities as you think about an extra three years. It looks like the synergies that you were hoping to get by bringing the two organizations to get our cannot be fully realized given that cap to create this new alloy.
From a sales.
Sales motion standpoint, and I'll hop R&D R&D is still separate but.
Now you have a difficult question I'm trying to figure out trade offs.
Profitability is much more important than the vessels today than it was couple of years ago.
So how do I think about the trade offs as you look at them from a growth or a profitability standpoint.
You're going to have to sacrifice profitability to maintain these two organizations running at the same time to some degree.
Does that mean, you are taking away from workforce in order to enable more of the.
After zero side of the business in order to drive profitability to where you want to add I think.
It took longer to get to that profitability breakeven. It's a really it's a really good question and one thing I want to correct you on though is that.
I should be more clear, it's my fault there.
Theres one sales force.
And a big part of the synergy is one salesforce so reaching this massive market for customer identity. In this massive market for workforce identity. We believe that the sales motion is cover all the use cases on all these buyers and sell at a higher level. So that the CEO of <unk> to the board.
Do these.
Vendors that the fit of these deals that really pathetic strategic vendor.
So it's one sales team that's doing that and so the strategy of the deal and the synergy of the deal.
<unk> is is predicated on making this one sales team successful. So we're not splitting anything we're we're clarifying the product positioning and messaging. So theres one scaled global salesforce can be as efficient as we think they can.
So that doesn't mean that your question is very your question about profitability and trade offs is very very good and I would say that we.
We're always balancing how we can grow efficiently to attack this market and balance off when we're going to grow when you're going to generate cash and making sure. We're operating in an efficient level and I think that's why you see us always referenced back to this rule of 40, we are not just going to burn cash no matter how fast we think we can grow we're going to.
Balanced out and be above can be above the rule of 40 and the last thing on R&D.
Definitely and we've talked about this a lot on these calls so hopefully this is well understood I talked about the spectrum. So the off zero product was really good at this pure <unk> use case <unk> SaaS ops auto Siam product was very good at this really extended workforce.
And there is a spectrum in between it wasn't like it was a completely different thing.
Functionality, a functionality to be Theres, a lot of functionality that was overlapping along the spectrum. So I think right now there is some R&D duplication in terms of the two teams, but over time, you'll see that be rationalized youll see the the common services I'm talking multiple years out you'll see the common services be pulled together and.
More and more efficiency from the R&D side being being.
Produced by this but I want to be really clear the efficiency and the synergy right. Now is that we're really focused on is this go to market scale and.
The synergy of the two go to market teams being combined as of the first of this year.
And I'd add to that I mean, you can see us already doing what you are talking about balancing growth and margin right I mean, our growth expectations for the year have moderated a little bit and if you look at operating loss will improve by $57 million.
This year and then if you think about going forward in the long range framework, we're going to continue to do that balance of growth and profitability and we fully expect to expand margins.
The coming years.
Just following up on that can you tell us from an attrition standpoint.
Where it was a more pronounced avianca side R&D office Euroscience, yes, that's a really good question, we've talked about nutrition, thanks for bringing that up so I think that first of all attrition across the all of Okta is too high I believe it's traditionally been.
And around 15%.
Been a little bit over 'twenty, and we want to really bring that back down to the <unk>.
Many years, we had before COVID-19 of 15% and we could all argue and discuss about is the great resignation, how real is it and how realistic is we think we can go back to our pre COVID-19 attrition numbers I talked to my CEO peers, all the time and Theres mixed opinions on that.
But overall, we're very focused on team strength team stability, making sure. We do all the things. We think we can do and we know we can do to.
Build a super strong team and culture and get that attrition number down across the board. So on the go to market side I think that you saw more pronounced attrition in the former <unk> team and some of this is expected.
You are working for US zero this pre IPO company.
Smaller your territory is probably eight states.
And now you're working for Okta and your expected as of the first of this year you are being asked to sell to these multiple buyers with multiple products in your and your number of states, where your territory really got smaller because we have this much more scaled out sales team I could see why some of them decided to go maybe work for a smaller company and so forth.
Overall in the OXXO sales team I think one of the one of the if I had to do over again, one of the things I would do differently as we had a super Super aggressive hiring plan coming into this year and we were we were really trying to cover all of the market and make sure. We had every nook and cranny in terms of growth opportunity covered and that in retrospect was a mistake we should have been.
More from the beginning had a had a more of a moderate moderated growth plan to make sure that we can achieve that at the level. We wanted to so that's one thing I would do differently.
But we're starting to see a lot of these.
These trends reverse already which is great. We've talked about a lot of things we're doing.
I'm sure those are having some effect, although some of them are recent but just in terms of the industry I think a lot of.
Small companies, especially the prospects don't look as good the valuations aren't as high as the money is not flowing there as much as it was I've already seen a few go to market folks that left for smaller companies and they've come back in the grass wasn't always greener. So I think anyway. That's some more color on that hopefully that's helpful. But it is it is very important too.
For us to really make this great because if you look at our past success. It's all been because of this really solid team is fired up and working toward a common goal and I think we can do a little bit better getting back to that.
I might add to that in the sense of looking at the attrition, we're not just sitting on our hands. Obviously a lot of things we've talked about today I'm trying to address the problem, including looking at the compensation structure.
And making some improvements there so.
We're definitely identifying these problems and coming up with solutions and implementing them rather quickly like Todd said, we can remain nimble on these types of items that anytime I would just add one more thing which is we are attracting a lot of really good talent. Both in terms of reps and managers. So I think one of the big things is we're losing some of the ramp because there were ramped reps too.
My left and there are new great reps coming but they have to ramp and I think that's part of the bill that Brett referenced in his prepared comments just in terms of getting that quota capacity back up but we are hiring a lot of really good folks again.
Folks who are carrying bags, but also multi level managers all the way up to the top of the organization. So yes, which also makes it simpler you can make it for them to ramp the leverage and the payoff of that is huge.
Yes. Thank you I appreciate the color sure.
Alright, let's go to Keith Bachman of BMO.
Good afternoon, and thank you for taking the question Todd I wanted to come back to you.
And ask a broad question on you Didnt mentioned competition as one of the factors, perhaps influencing the change in guide.
And I want to try to understand your broader comments, there and I'll break it into two pieces a.
On the workforce side, we had the opportunity to turn gardeners identity conference last week and that was certainly a lot of discussion from both presenters and attendees that Microsoft getting.
Much more competitive here, whether it's causing okta to change prices or actually losing share.
So I wanted to get your response to that and then be another comment was.
On the Iga and Pam side, while they are in different stages development. The feedback was that both novartis solution in Iga and Pam would be quote unquote light relative to the competition and so I just wanted to get your broader perspective on what role competition played in the guide down and specifically you could talk about.
<unk>.
The workforce side in particular against Microsoft and then kind of an update on Iga and Pam. Thank you.
So I can talk.
Im happy to talk about the competitive environment it.
It is very important and but I will say it had nothing to do with the guidance.
No.
I think that's important because the competitive environment and I mentioned this before first of all we spent a lot of this call talking about this strategic market of customer identity, and it's very very important market for us.
Not not because workforces going away are drying up not at all I mean.
The workforce business the ACB is growing 36%.
So workforce is very important to us.
Remember the strategy has reached these buyers BD identity platform Forever enterprises in the World do you one of the most strategic vendors for every company.
And you have to you have to win both of these markets you have to weigh in workforce and customer identity. So it's incredibly important that competitive dynamic is different though I mean, the really the customer and Danny market is potentially massive but it's it's also build versus buy it's like carving out the right amount of solution versus customize ability and.
That's that's very different than the workforce market, which is there is any IDC or any of these companies Theres 10 billion plus dollar spent in a category every year of all kinds of stuff, it's highly fragmented and so the competitive environment is very different every every workforce deal theres, some kind of evaluation of vendors in.
The competitive environment, there is very consistent with what we've seen over the last probably 10 years, maybe thats exaggerate maybe eight years I think when Microsoft did enter the market in 2014 that was different.
And ironically it it really validated the whole category for us it was like cloud.
Security identity in the cloud we went from being only really early adopters, that's kind of a crazy idea to now it's totally validated and what we've seen since then and this again is mostly on the workforce side.
I don't mean that when I talk about the competitive environment. We are obsessed over this and we study it and we are competitive teams and we're demonstrating value to customers and we're very good at selling against competition I don't mean to trivialize it but the reality is is that you could simplify the following ways.
It's basically is the identity system cloud or as a software.
And the market is choosing cloud.
The vendors that were software companies that are trying to do some cloud that are evolving old architectures and a new it's it's almost like we don't see them because the buyer knows what they want before they come to the market there like dwindling suffer or Doyle and cloud and they come to the come to the cloud and we do well so that's and that's where the market's going we're on the right side of history there.
That's one competitive dynamic on the workforce side. The other competitive dynamic is in Microsoft is the Best example of this is not over time, we believe identity as a strategic that every company is going to have some format of their own identity platform. It's so strategic and so vital but the competition there is like.
Do customers want to get identity from an application or from another service or platform or do they want an independent and neutral thing. This conversation I was having with this the global head of our technology for a massive healthcare chain I was talking to this person about it and it was yes of course, Microsoft is offering stuff in.
Amazon has some stuff in but the reality is.
They need flexibility and choice to know that whatever technology. They want to adapt they have 2000 applications. So it's not just E mail and collaboration they have 2000 applications that need to be wired into this IDP. They needed to have their directories integrated has to work across multiple devices not just windows, not just windows and Mac not just windows.
Mac iOS and Android has to work across all of the myriad medical devices. They have so that neutrality and so the world is deciding do they want an independent and neutral identity platform that will support their technology needs wherever they want to do or do they want to be kind of hamstrung with within a larger platform a bigger ecosystem that's going to.
Where their choice and frankly, I'm not saying, we never lose to Microsoft right. My point is that it's it's kind of like the people that don't see it as a strategic aren't going to spend a lot of money on it and see it as like something the CFO decides on in.
Good enough is good enough they choose Microsoft and they've been choosing Microsoft for eight years. So there's Microsoft spends a lot of people to Gartner and makes a lot of <unk>.
Announcements and they are aggressive and I understand why they're aggressive this is an important market and by the way. The reason it's important to them is because they know this too.
That if they are successful they're going to lock people in and they're going to limit choice and that's why they're doing it.
And that's why it's important for us to really espouse. This world where no you have choice identity is one of your primary cause. It is one of the most strategic things you do you need a vendor that covers all your use cases, you need everyone on your suite on your C suite to be bought into these use cases and from digital officer, and marketing officer, and technical officer and CIO and.
And we're going to build that vendor and that's how we win long term and.
How about the IGN Pam any comments.
Yes, I think so.
Thanks for reminding me I got all relevant there.
No.
So I remember the reason I'm I shouldn't I don't mean to ask the question I remember when we started after the first thing we heard was it's too late it is lightweight.
Not a real identity platform.
Two simple, it's just single sign on and so when I hear people say that the Iga Iga light.
That's great because that means it's working that means it's so simple that employees can do these access requests and improve these things just in their chat. They don't have to go to some legacy tool. It means that the integrations are a snap it comes pre integrated with thousands of apps. So.
I think there's I think youre going to I think the industry is going to see that first of all Iga is much bigger than we think it is because the solutions have been constraining.
As of the pie, it's kind of like everyone said that.
<unk> market was.
Very small in service now started but a better product made the market bigger I think you'll see a similar thing here, Okay, Alright, I will cede the floor. Thanks Todd.
Okay, we're going to try to do at least 10 minutes of overtime here, So let's get to Jonathan Ho at William Blair.
Hi, Good afternoon, I, just wanted to maybe get a little bit more detail in terms of the reduction in outlook and how much of that.
Came from each of the three main factors that you outlined and also how quickly you think it will take part in the market motion improvements to have an impact. Thank you.
I can do it got so a little over half was the sales integration issues second biggest was really the attrition issue we've talked about in the <unk>.
Yield and then pretty small is actually the macro piece of it I mean, we've seen some headwinds in the macro.
But but it hasnt been nearly the size of the other two.
So and then in terms of how long is it going to take.
To address these two issues obviously.
Implemented plans on on really I mean, the sales integration issues and the attrition issues already but it's not a one and done for example, with the enablement that we've been talking about and making sure you don't go to the right buyer, Here's where you sell this product.
That is obviously something we're focusing on now, but it's not something we're going to be done with by the end of Q3, Greg This is Ed.
Our long term plan that we have to continue to run because as you heard Tom talk about science is this massive market and we have to ingredient in the way we operate today, so I would say.
We're going to take.
Take a wait and see approach and obviously CV death.
Fruits of our labor over the next 3456 months.
Evaluate how we're doing it right I mean, you can see the first couple of quarters, we were evaluating how we're doing within the fiscal year realized that there were some things that we need to adjust and we're going to do the same thing. So we're confident in the solutions, we have but we're going to make adjustments as we see fit.
I want to like when I hear the conversation I think it's important to think about like the philosophy, our philosophy in my leadership philosophy, and what we're trying to do here. So there we're trying to build something massive and we see a huge opportunity and we want to we want to build this iconic category defying comes.
Any that last for decades, and we could as a company they're easier paths we could.
Not be borne not make this big acquisition not stretch ourselves not push ourselves, but that's not how we're going to work we're going to be bold, we're going to think big we're going to think for the long term and Thats why you see this outlining of this very we want to build this primary cloud for every organization in the world that addresses all of these are data use cases.
<unk> entered this level, that's how we're going to free them to safely using technology, and that's big and bold and so we're very stubborn and long term oriented on that vision that is not changing on the tactics and how we how we prosecute these things and how we integrate sales teams and how we tweak the messaging and how we iterate how we.
Rollout Iga and how we make customers successful we will be more.
Reactive on that we're not going to be stubborn about that stuff. If we do something that's not working we're not going to stick our head in the sand for months and months and months and quarters and quarters and say well hopefully it works, we're going to make it work, we're going to fix it and so I think youre seeing a good balance.
You know I mentioned that this is on my shoulders, and some of the things I wish would've gone differently, but let me be clear I'm very happy and proud that we have this bold long term vision and then almost more importantly that were being realists about what's working and what's not and aggressively changing it and I'm very very confident that over time, that's the best way to operate in.
That's going to lead to our massive long term success.
Thank you.
Okay, we'll go to John <unk> Guggenheim.
Alright, guys.
Hey, guys.
Figure out how to turn off mute sorry about that.
So listen guys.
It's really interesting in the quarter you had a record number of million dollar deals.
You saw a really big uptick in accounts receivables, which makes you sort of think is backend loaded but that makes sense right. Because large deals are usually backend loaded youre also seeing some macro influence, but I think this all kind of begs the question in your.
Your guidance says a little bit about it but can you just specifically talk about your pipeline and in the context of all of that.
Yes, I can take that question so Fred.
Friday I'm sure you can add on here like look pipeline is continuing to grow.
And obviously, it's an area. We're working on we're always continually working on pipeline, but I think one thing and you've heard a little bit about it already on this call from Todd.
As you know the pipeline is mainly made up of how we used to operate right. So it's really more workforce oriented or extended workforce oriented theres, obviously, a lot of theres, some austere assignment or the new customer due to the cloud, but really as we continue to enable the field and we continue to make inroads into clarifying the grand guidance.
We think that pipeline there is a lot of opportunity out there in front of us and so that's what gives us a lot of optimism about the future over the next coming quarters and years is we've got to be able to get into that that other buyers.
Kind of like.
And their purview router in their area and so that's something we are obviously working on new for US talk a lot about today and specifically on pipeline for customer identity cloud the developer motion helps a lot.
<unk> customer identity deals that at zero closes.
They are big and they need a sales team, but they always start from a developer trial or self service.
I think on the overtime.
The broader hundreds and hundreds of okta sellers will get more and more effective at taking these C deals in these self service trials and really turning them into massive enterprise deals.
So is it safe to say or conclude that pipeline.
Pipeline for the the Siam business anyway, it's still you're still figuring that out which makes sense I think it's I think we're figuring out how to especially on the true BDC developer influenced that's still part of the overall integration, we're still figuring that out I think the traditional CIO CSO Sam when you look.
At pipeline sizes.
As we've expected in the past that's progressing otherwise, it's just that new that new muscle is not.
We're not where we will be eventually on that.
Got it thanks, John pipeline continues to grow that's not a specific problem I think it's how we go about prosecuting it making it really simple for both our sales force as well as customers and Thats why we are trying to make some of these changes the pipeline itself is not the problem.
Great. Thanks, guys.
Okay next up Trevor Walton JMP great.
Great. Thanks, Dave Thanks for taking my questions, Amy jump ball for either Brian or Todd.
Your your comments throughout have kind of touched on that someone's just ask you about all of them are directly you mentioned.
Longer sales cycles scrutiny around budgets et cetera.
That's been a common theme throughout China security names et cetera.
Kind of second quarter wondering if you had any data.
Just given the fact that there are two different buying centers around the workforce.
Im piece, if you had any way to kind of bifurcate is that happening more kind of along that it ops security realm with workforce versus felt like those are not so much seen that type of the lab side or it's more broad based.
Just additional color there.
It's more broad based but I think.
One thing that we have seen a little bit earlier fruit driver is is really EMEA was the first signs of the macro kind of headwind. So that's probably the best cut of data I can give you.
Great. Thanks.
Next up Rob Owens with Piper.
Hi, Thanks for taking my question.
Cool.
Can you hear me Alright, just said hi.
Oh, Hi, sorry, maybe touch a little bit on public sector, you mentioned some wins there obviously heading the federal third quarter months of exposure here, what's what's the thought process and then bigger picture what fed can mean for you guys with some of the larger scale programs that they're running.
Well I'm happy to talk about that we had a number of priorities that we're focused on coming into the year customer identity, obviously being the primary one which we've talked about extensively on this phone call. We wanted to make sure that we continue to grow the international business and the third one obviously with the federal market. It is a very big opportunity as you highlighted we bought.
A couple of good examples of both state and at the federal level, we've been investing a lot as a company not just in terms of the sales force, making sure we have the right relationships and distribution and we had a very good event out there in June that was very well attended in D. C. But also in the infrastructure Todd talked about briefly in his prepared remarks, we've been doing a lot of things.
To go from federal moderate up et cetera in a pie on the DSD side, having IL forthcoming allows us to have an okta military cloud.
That business has done very well it did very well in Q1 very well in Q2, and obviously as you highlighted September is the end of the federal year. So we think theres a lot of opportunity there something we have invested in we have a great leader and we think it is going to continue to bear fruit in the times ahead, obviously, even with some of the questions that we've had on today's call. Some of the threats that are out there the threat actors.
The evolving dynamics of the landscape. That's obviously some of the government needs to pay very close attention to and they are turning more and more to cloud and that's going to be a big opportunity for us.
I think I might add too Rob is actually second quarter in a row of public sector has been the fastest growing segment for us so as you're here you're trying to say you know obviously is a focus of ours and we're really pleased with the progress. Thus far obviously, we've got a lot of work to do but.
We're seeing the fruits of our labor there.
Alright, Thank you guys.
Go to Matt Hedberg of RBC.
Hi, guys. Thanks for thanks for the time.
Brett maybe just to put a finer point on the headwinds I appreciate the $140 million headwind to full year billings.
Can you give us any insight of sort of what your internal sort of what the shortfall was for Q2 versus your internal billings plan and maybe walk us through how the quarter played out there just sort of happened mid quarter.
The last couple weeks of the quarter, which is just a little bit more sense of the kind of the timeline of the quarter.
Yeah, I would say.
From a I think the biggest takeaway for you guys is actually something somebody said earlier is the linearity of the quarter, if not a little more backend loaded and I think that's a result of some of the things we've been talking about.
The integration issues also the attrition issues and then frankly the macro because we are starting to see the macro toward the end of the quarter. It wasn't like we saw the macro and in May right.
Really kind of more.
Toward the end of the quarter when we started to see that those sales cycles elongate and then also youre starting to hear at the end of the quarter like how budgets are getting a little bit tighter so from an overall billings and just bookings perspective.
The quarter was a little bit more backend loaded and that's why you see that a balance like Oh.
Somebody with Samsung.
Okay next up Peter Reid of Bernstein.
Thank you.
I really appreciate your conversation around the churn of the challenges on the sales and marketing staff.
They actually turned the light also on research and development.
Sequentially quarter over quarter from just a spend basis, it's come down, 7%, which would suggest perhaps some attrition going on there and I think given that.
Now the tight market for talent and everybody trying to hold on to people how should we take a look at that signal because I assume that you werent like desiring to get a whole bunch of efficiency out of out of your R&D side as opposed to you about some of the great stuff Youre doing on G&A and then certainly you want to get some efficiency on.
Sales and marketing.
Is there something to read into that and how should we think about that going forward and the impact of that on product.
Product and where you are trying to go to yes, it's really a question the attrition in R&D has actually been one of the stronger areas.
So it's not it's not an attrition thing.
Brett you can comment, but I would probably ask about like is there some comparisons that from the acquisition that are.
Taking the numbers hard to follow I don't know I think there is a little bit of the acquisition in there.
Also we do have some kickoff kickoff activities in Q1 as well.
I don't think I would read too much into anything with what Youre, saying about people are trading out of R&D like Tom said that is actually one of the lowest attrition areas. We haven't yet been organization and frankly, we've been doing a lot of great hiring here as well yeah I I. Just this is really important so both strategically and just.
Tactically the both of these.
The workforce cloud in customer Unicorn.
Both have a lot of really exciting things coming up we talked about identity governance, we talked about.
Tangentially, we've talked about some of the really cool stuff, we have coming out with the mix even further strengthens the robustness against phishing and gives them more flexibility for companies to defend themselves on the customer at any cloud side, they're doing a lot of amazing stuff around integrations with the ecosystem of applications that customers.
Need there and so we're having a lot of good momentum and good success there and in addition to that we're over we're going to layer over time. This all of these capabilities that are going to make that CEO that wants to pick that strategic vendor and spend hundreds of millions of dollars on a strategic vendor eventually they're going to it's going to be key.
Clear that whether it's customer identity cloud our workforce identity cloud that we all work together and it's the best for them, it's neutral and independent and frees them up to pursue their technology strategy and we're going to win at that.
Alright, so what im hearing it wasn't a talent attrition thing this wasn't rec synergies on other costs in R&D that you are able to get out of the integration, we shouldnt read into it anything around talent I think that's right now correct.
Okay, we're going to take our final question from Josh telling that Wolf.
Hey, guys. Thanks for squeezing me in just a quick one for Brett.
Given all the challenges that you guys mentioned what gives you the confidence that you are not about to take numbers down again in the back half of the year.
Look we've baked everything that we know at this point right. We've taken into account from regardless of what number youre looking at its current RPI revenue billings, we baked into those headwinds that we've talked about today, whether it be the sales integration.
As we've talked about the attrition or even the macro so we do feel confident in the guidance and taking a similar approach and being very prudent about that like we have in the past.
Alright, Thanks, Brett.
Well talking about before you go we might lay out that will be attending two conferences. This quarter. The city Tech Global Conference in New York on September eight and Goldman Tech Conference in San Francisco on September 12, and as Todd mentioned, we're going to be hosting our investor day at octane 'twenty two on November 9th So that's it for today, if you have any follow up.
Questions you can E mail us at Investor at <unk> Dot com. Thanks.
So everyone. Thank you thanks, everyone.
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