Okta, Inc. (OKTA) Earnings Call Transcript

Welcome back to the software conference. It's Brent Thill. Really happy to have with us Frederic Kerrest, Executive Vice Chairman and COO, Co-Founder of Okta.

Big opportunity, amazing run. Maybe we'll just kick off just starting about the story. You're rapidly approaching $1 billion in revenue, growing 35-plus percent a year, nearly 9,000 customers. What is the secret sauce? What has caused this type of explosion? Walk us through it.

Yes. Absolutely. Happy to do that. Thanks a lot for having me, Brent. I really appreciate it. Really excited to be here today, and I've really enjoyed the conference so far this morning. I know we have some exciting sessions this afternoon. So as you mentioned, we've been fortunate, business has been good. We are in our 12th year business now. So certainly, we've come a long way since we started. My Co-founder and I still run the company. We've gone from 2 to about 2,500 employees, about 9,000 enterprise customers. We just had a $200 million quarter last quarter, and it's growing nicely, as you said. So the main thing things that we're helping -- and so by the way, if you give me all those stats as an entrepreneur when we started, I would have gladly taken those in a heartbeat. I would have signed up for that twice. But the funny thing is that now, based on where I am and what I see, I think the next 3, 5 -- we've been public 14 quarters, not that I'm counting. But if I were, it'd be 14 quarters. That's all gone very well. But based on where we are today and what I see going forward, I think the next 3, 5, 10 years are going to be way more exciting, way more interesting. I think we're finally starting to get to a size and a scale where we can do things, and these markets are really big. So what's driving the business are 3 things in particular. I think the first one is just adoption of hybrid cloud technology. People always ask me, "How is that possible? How are we still in the early innings of cloud?" The reality of it is, most of software is still purchased on-premises. And most of enterprise IT is still hardware and services. So there's a long way to go to make it a software-only and a cloud-only world. And I think the opportunity to help large organizations and, frankly, organizations of all sizes to adopt modern cloud technology, that's been a huge driver to our business. The second one is digital transformation, which is probably one of the most overused terms in technology over the last few years. But very simply, just look at what's happened in e-commerce over the last 6 months, we've basically seen a doubling of the e-commerce as a percentage of commerce ratio since January alone of this year, and those numbers are not going backwards. So as everyone has to find better ways to interact with their customers, partners, vendors, suppliers, they need better websites, better mobile apps, and obviously, identity becomes a key part of all that. Who are your customers? How are they interacting with you? All those kinds of things. And then finally, digital security, right? As everything moves online, as more and more people are focused on software, you certainly don't want to be on the front page of the Wall Street Journal for all the wrong reasons. And the acceleration in people working from home, phishing attacks, multi-factor authentication, those are all big drivers to our business as well.

It's great. Thanks for the overview. Maybe just talk about the current environment and what's happened. Obviously, you saw -- I think most of the companies saw the air brakes come on in COVID. We figured it out. And what are you seeing now coming out of this? How are customers behaving, bringing kind of post this period?

Yes. Well, it's unfortunate, obviously, to be in a global pandemic. And it's even more disheartening or awkward to say that you're doing well in this global pandemic. But certainly, I think that the things that we focus on, in particular, our focus on customer success, has worked out really well for our customers and certainly for the business. When this all happened, starting in March and April, we really took a step back in the business quickly and said, "Hey, we need to focus on a couple of things." First of all, the health of our employees and our families and our customers and all these kinds of things. Second of all, just customer success, just doing whatever we needed to make -- get customers up and running and successful. We rolled out an emergency remote work program, which was Okta free for 6 months for applications for single sign-on, just so people could start using the service. And then finally, just making sure that we saw a massive increase in usage across things like multi-factor authentication. So just making sure that the service was up and available and reliable and performing and all those kinds of things. And that all went really well. I think what we've seen really is what's happened over the last 6 months has really been a huge accelerant in some of those mega trends that I talked about earlier. Certainly, I think people are not looking to buy more on-premises software. I think they understand that enterprise cloud is a good way to go. Once people focused on -- if you're the Fortune 500 -- CIO of a Fortune 500 company, first thing you did in March or April was be like, "Okay. How am I going to get all my employees at home up and running securely safely access all their applications?" After you did all that, you kind of took a breath and said, "Great. What's going to happen next is this customer situation. I got to make sure we can interact with all of our customers, digital supply chains, all these kinds of things." So then we really saw a ramp-up in customer identity and access management, which has really gone well. I think the pipeline for the second half of the year is looking very strong and going into next year. I think people realize that this is a big opportunity, too, right? Once you kind of got everything settled down, it's a big opportunity to move your company forward to think about if you were going to take a big step digitally, you can now do that. You have not only the wherewithal to do that, but you have the time. You certainly have the budget if you go ask your Board for it. And you underpin that with enhanced security across the board. I think those are things that people are all focused on. And then frankly, we saw deployments accelerate, right? So FedEx has been a good customer of ours for coming up on a year now. I've worked very closely with them. They signed a 5-year agreement last fall. A typical organization like FedEx, hundreds of thousands of employees. They've been around a long time, a lot of logistics, a lot of on-prem, a lot of different constituents. It usually takes a couple of quarters to roll the service out. I talked to the CISO, Gene Sun in, I think, early February. He's like, "Frederic, we're on track. We'll do like an April, May rollout. No problem." And then I talked to them in like mid-March and he's like, "I got an update for you. We need to go live with 85,000 employees and 250 apps this weekend." And we got that done, which is great. It's a great testament to the service and also to all the prep that FedEx had done. But I think that's the kind of thing where -- and by the way, he was super excited about that, and it's a great proof point for us. I'm happy to point other customers to that and say, "Why don't you talk to Gene about it." But I think that's the kind of innovation you're seeing where people are saying, "Okay. I've done all the prep. Now I got to get that going." And we saw a lot of that in the business, and I expect to see that going forward as well.

$0 to $25 billion in market cap. That -- I mean it's an incredible...

Is that what it is? I don't look at the stock. I can't look at the stock. I'm long in the stock. I got to stay that way.

$25 billion cap roughly. So when you think about kind of the success that the company has had, there's always this worry about, okay, the next leg is. And you just said, "Hey, look, I'm more excited about what's going forward than what we just created."

Absolutely.

But what -- that motivation, what are the motivating factors? What's ahead that's so exciting that maybe we can't see in Wall Street, but you're seeing on Main Street when you talk to your clients?

Yes. Well, absolutely. So I mean the first one is, let's just take the macro, macro view, which is just look at the size of these markets. So somehow, there is $30 billion a year spent on legacy identity and access management for the workforce alone. So that's people still spending money on Oracle, on IBM, on CAA, on RSA, those 2-factor tokens that everyone carries around their -- on those -- on the key chain. So I mean that's still a huge business, and I'll talk to you a little bit about how we work with customers on that and what the prospects are. But I mean that alone, just eating that business up over the next 5, 10 years, that's going to be a huge opportunity for us and one that we're really starting to see play out. And then on the customer identity access management side, look, when we went public and wrote the S-1 registration document 3.5 years ago now, we had basically a TAM of $18 billion, which was all workforce. Customer identity management has traditionally been a build your own, all this kind of thing. That's now looks like north of $20 billion of market as well. So instantly, we've got $50 billion here of market that's being spent every year on legacy software, on build-your-own infrastructure, and that is growing very fast. And that's why I say, "Great. I'm very happy about the results, but now we look like a small business compared to what we could potentially be." So if you break that down, you look at the workforce side of life. One of the great things, and you see it in the metric, right? We've had 115% to 120% dollar-based net retention for as many quarters as I can remember. It's actually been over 120% last couple of quarters because, especially in this pandemic, right, I think what you're seeing is large enterprise are just continuing to buy from vendors where they're very comfortable with. And obviously, Okta is one of those benefiting from that. But when I go out and I talk to a FedEx or a John Deere or one of these larger organizations, I'm not going in with some story about a forklift upgrade of their entire Oracle and IBM stack, and they're not going to see any value for the next 3 years. I go in and I say, "Hey, Brent. Nice to see you. Look, leave all that IBM stuff running. It's legacy, but it's plugged into a bunch of on-prem stuff. Talk to me about your 3 biggest opportunities right now." And you'll say, "Oh, I'm looking to roll out Office 365 to 100,000 employees around the world." or "I'm looking to roll out a Workday at scale." or "Hey, guess what, I got to launch a new mobile app and website for all the millennials because instantly all my business has gone online." And I said, "Great. That's something we can help you with." And so we work on that opportunity with you, 3, 6, 9 months, come back to you say, "How is that?" And a lot of times people say, "That was a great experience." And that gives us the right, now you've got to know us, our company, our products, our platform, kind of how it all works. And that's given me the right to come back to you and say, "Great. Now, Brent, let's look at that old IBM Tivoli, TIM and TAM stuff you have. And let's map out the 24-month road map to take that stuff and just eliminate it." And that's how you're going slowly start to see that business, and that's just going to roll for a year -- for quarters and years ahead. There's a huge amount of that legacy workforce infrastructure that we're really going to be able to help people with. And what we do today is identity. As you can imagine, there's adjacencies, there's PAM, there's identity. There's all sorts of stuff that's going to naturally shift to the cloud. And as it does, I think we'll be very well positioned there. On the customer identity management side, I think what people don't realize and why this has kind of come out of nowhere is the competition is build-your-own. And look, you and I have had log-ins to amazon.com for 20 years. Having a user name and a password doesn't seem that complicated, but it started to get more complicated, right? You need to have 2-factor authentication. You want to stamp the machine to make sure that the right person is coming from the right place. You want to make sure that the password reset flows are going to multiple different e-mail addresses in the right way. And all these kinds of things get pretty complicated, number one. Number two, shortage of over 200,000 developers in North America alone today, and our universities are only printing 30,000 a year. So if there was no software growth going forward, which, of course, we all know there's going to be a lot of it. But assuming there was 0 growth, 7 years just to catch up. What does that mean? That means if you're a Fortune 500 company operating in the Midwest, you have a shortage of developers. I don't care how awesome you are. The best developers, Okta gets them. Google gets them. Facebook get them. John Deere and FedEx, they're doing their best, but they're not going to get as many developers as they need. So they've got really limited precious resources. Now if you're John Deere, what's your business? Technology has taken over everything. You got to put more GPS in the tractors. You got to get them to go straight. You got to get them to work perfectly. You want to make it easier for customers to buy them. So just putting the technology in your own products is what's going to be the most valuable thing for you to do with your developers, not running an exchange server, not running an identity management server and certainly not setting up new websites for customers. And so as people are getting more used to, "Okay. I can take payments off the shelf with stripe and put them in my app. I can take messaging off-the-shelf with Twilio and put it in my app." We want them to think, "Oh, I can take identity off the shelf and just put it in my app and make it much easier." And a lot of people need payments, a lot of people in the messaging. Everyone needs identity. I mean identity is inside every single application that we use as consumers or in the enterprise, and I think that's the big opportunity for us in the times ahead. Look, it's already -- customer identity and access management is about 1/4 of our business, up from 0, 3 or 4 years ago, and it's growing north of 70% year-over-year. So workforce identity management is going to be slow and steady and continue to go. And there's a long, long runway for us there, and I think it's going to do very well. But customer identity and access management is going to be a big opportunity, too. We're investing heavily into it. We just hired a great leader to run it. We're really doubling down. I think it's going to be very, very interesting and exciting to see how it goes in the times ahead.

Yes. Just on customer identity, when you think about the awareness build of where you're at with this, just give us a sense. I mean it seems like it's super early innings, but like you said, it's more roll your own. So this just seems ripe when we look at everything that we're buying online, all the systems I engage with, like they don't know who I am.

That's exactly right. So we have certainly -- like we have plenty of very good examples of early adopters like we run JetBlue, TrueBlue system. We run mlb.com for the 60-plus million fans who log in to stream content every year. You can kind of go down the list. But it also starts to get pretty interesting. You think about our organization like Albertsons, big customer of ours, they own 27 brands, right? Vons, Safeway, all these different brands. Now you might have different numbers -- affinity numbers at Safeways than you do at Vons, and you might use it at checkout. You might use it a gas station, but like you don't remember all your points. So you're like, "I just want one central number across all these different properties." And on the back end, they want even more because they don't know that Brent at Safeway is the same Brent at Vons. And so they want to be able to upsell you cross-sell you, give you promotions when you go into the different stores. It seem like they should all be figured out, but these are very basic opportunities that everyone is going to have to deal with, and I think it gives us a big opportunity there.

And when you think of the pricing mechanism for customer identity, how do -- how are you pricing this out? What are you seeing in terms of economic value back to you for the solution?

Yes. Absolutely. So workforce identity management is per user, per year. Your ENGIE, formerly GDF SUEZ, you have 120,000, 150,000 seats wall-to-wall of our different products, Universal Directory, single sign-on, multi-year contracts, all annual cash upfront, all these kinds of things. On the customer identity and access management side, we really want to align our success with customer success. So we don't charge you to load the database. So MLB doesn't pay for the 60 million consumers they put in there. They pay for monthly active users. So at opening day, they're going to have maybe a burst of a few million or something, and then they're going to have hundreds of thousands that log in every day throughout the course of the summer. And that's -- so our incentives are very much aligned with theirs. And as they are more successful, we get more successful, too.

And you mentioned you hired a new go-to-market leader there. Can you just double-click on that and kind of the go-to-market motion for customer identity and what you're doing?

Yes. Absolutely. Well, we actually -- we hired a new leader overall for customer identity and access management. Because if you think about the natural motion of the company, we started as a workforce identity management company, right? I mean 10 years ago, there was no customer identity and access management. And it's also kind of where we came from, right? My Co-Founder and I were at Salesforce early on. We saw this problem from the employee side. So we really -- there's so much natural momentum inside the company. We see this big customer identity and access management opportunity, we want to make sure we're taking advantage of it. So we're really bolstering up the leadership to focus on driving customer identity and access management. We have an overall GM of it. We're hiring a lot more leadership when it comes to engineering, development, sales as well. So we're really good at selling up high. We're also trying to build up that developer motion. We bought an organization called Stormpath. It has been a very good addition to Okta right when we went public 3 years ago, one of the best identities for bottoms-up developer motion libraries, sample code, relationships, all these kinds of things. So our DevEx motion is really starting to go, and I expect to see a lot of progress in the next 6 to 12 months. And as people are out there and they're Googling and they're trying to find what the right information is to try and sample all these things, we want to make it super easy to try Okta. So developer.okta.com is totally redone. It's really starting to take a front-and-center place in what we're trying to do is a go-to-market motion, and I'm very optimistic about what's going to happen here in the quarters and years ahead.

It doesn't feel like this is like a sugar rush, where everyone went back and kind of didn't do anything else. Suddenly, we snap back. It feels like this has got durable recurring visibility. This isn't like a flash in the pan, to your point, like this is -- these are very durable trends that are going to last for quite some time.