Okta, Inc. Q3 FY2025 earnings call

• Deepening the partner ecosystem is a key priority, with all top 10 Q3 deals involving partners, totaling ~$20 million in ACV. - Public sector remains a strength, with significant progress and runway ahead. - Largest customers continue to be a growth driver, with the $1 million plus ACV cohort growing fastest and now at ~$1 billion in ACV. - Upsell and cross-sell activity in Q3 was strong, with new products resonating with customers. - Okta's Secure Identity Commitment is advancing, showcased at Octane event with in-person attendance up over 25% vs last year. - Recognized as a leader in the 2024 Gartner Magic Quadrant for Access Management for the eighth consecutive year. - Planning for further go-to-market specialization in FY26 to align with distinct identity buying centers. - Hyper-focused on security, growth, and scale, with identity as a core focus for security and growth.

The transcript doesn't provide detailed absolute revenue figures per product segment, but highlights strong performance with large customers, where the cohort of $1 million plus ACV customers now represents approximately $1 billion in ACV. The public sector is an area of strength, with half of the top 10 deals in Q3 in the U.S. Federal Vertical. New products contributed approximately 15% of Q3 bookings, with Okta Identity Governance representing a significant portion of workforce deal contract value.

• Q4 FY25: Expect total revenue growth 10%-11%, current RPO growth 9%, non-GAAP operating margin 23%, and free cash flow margin ~32%. - FY25: Raised outlook to total revenue growth 15%, non-GAAP operating margin 22%, and free cash flow margin ~25%. - FY26 preliminary: Estimates total revenue $2.77 billion to $2.78 billion (~7% growth), non-GAAP operating margin at least 22%, and free cash flow margin at least 24%.

• Macro environment with organizations scrutinizing budgets and rationalizing software spend, affecting seat and MAU assumptions. - Vendor lock-in risks due to competitors bundling security services, potentially limiting customer choice. - Impact of security incidents (though Q3 not quantifiably affected) and their potential future impact. - Uncertainty around budget reallocations and adversary changes, especially in the federal vertical post-elections.

Q: John DiFucci asked about guidance and the removal of additional conservatism due to the security incident.

A: Todd McKinnon and Brett Tighe discussed that the security incident last year was a large unknown, and now with no quantifiable impact in Q3, guidance is more balanced, noting natural maturation of the business and not expecting previous large delta in growth.

Q: Eric Heath inquired about GSI partners and RFPs for consolidated identity platform.

A: Todd McKinnon said significant progress with GSIs, with large deals involving partners, and examples like a large technology company in North America with a multiphase $5 million ARR deal driven by Zero Trust.

Q: Gray Powell asked about Q3 vs Q2 performance and sustainability.

A: Todd McKinnon and Brett Tighe mentioned strong execution, new products contributing 15% of bookings, healthy contract duration, and success in public sector end of fiscal year.

Q: Gabriela Borges asked about new products' impact on net retention rate.

A: Todd McKinnon and Brett Tighe discussed new products like governance and privileged access gaining traction, but net retention still affected by macro factors like license counts and older customer cohorts, with Q4 expected to tick down but gross retention healthy.

Q: Hamza Fodderwala asked about SEC investigation on Microsoft bundling and vendor lock-in.

A: Todd McKinnon said customers should avoid lock-in for security and flexibility, as compromised identity is a major breach cause, and Okta's independent neutral platform is beneficial.

Q: Matt Hedberg circled back on governance and competitive landscape.

A: Todd McKinnon said governance solutions are rare in non-legacy areas, Okta's product is quick to implement with fast time to value, and the market is like the early days of Salesforce where simple yet effective solutions win.

Q: Josh Tilton asked about seat and MAU pressures and visibility.

A: Brett Tighe said all factors are accounted for in guidance, with macro environment and older customer cohorts affecting, but all factors captured in current outlook.

Q: Jonathan Ho asked about go-to-market specialization.

A: Todd McKinnon and Brett Tighe explained specialization to align with identity buying centers, improving productivity and growth potential, with dedicated reps for different product areas.

Q: Joe Gallo asked about Customer Identity performance and channel maturity.

A: Todd McKinnon said Customer Identity is a solid over $1 billion business, driven by customer experience, and potential for growth with focus on developer persona.

Q: Mike Cikos asked about specialization in public sector.

A: Todd McKinnon said public sector is a big data set with long-term focus, and specialization in go-to-market has positive data points, balancing transition costs with growth benefits.

Q: Madeline Brooks asked about core market growth and share loss.

A: Todd McKinnon and Brett Tighe discussed focus on security improvements, product innovation, and go-to-market specialization to gain share, with identity as a critical security and growth area.

Q: Shrenik Kothari asked about federal vertical and post-election budget shifts.

A: Todd McKinnon said federal vertical has strong momentum with deals in DoD and healthcare, driven by focus on cyber and modernizing legacy tech.

Q: Rudy Kessinger asked about conservatism in guidance post-security incident.

A: Brett Tighe said conservatism is factored in but not at previous large levels, with natural maturation of the business affecting growth expectations.

Q: Saket Kalia asked about new logo business.

A: Brett Tighe said new logo numbers need improvement, working on hunter-farmer model, but seeing opportunity in upsells and large customers.

Q: Patrick Colville asked about profitability and hiring.

A: Brett Tighe said focusing on growth while maintaining guidance, investing in opportunities like security and product innovation, and comfortable with current guidance.

Q: Rob Owens asked about new customer switching and hunter-farmer model.

A: Todd McKinnon said customer count shows SMB market, but identity is hard to change, with partners and customers understanding the value of Okta's neutral platform.

Q: Peter Levine asked about monetization of AI-related identities.

A: Todd McKinnon discussed Auth for Gen AI and machine authentication, with potential for monetization through per machine active charges.

Q: Trevor Walsh asked about privileged access competitive landscape.

A: Todd McKinnon said Okta's approach is to focus on new use cases and cloud migration, with advantage in starting from existing customer base and modern capabilities.

Q: Brian Essex asked about new products' contribution from new vs existing customers.

A: Todd McKinnon said majority was upsells with some new logos, like a large technology company with a new $5 million deal.

Q: Adam Borg asked about packaging and pricing of new products.

A: Todd McKinnon said considering more simplified pricing and a la carte models to make it easier for customers to consume new solutions.

Q: Fatima Boolani asked about international business.

A: Todd McKinnon said macro environment tougher in Europe, but significant growth opportunity, with focus on partner channels.

Q: Peter Weed asked about NRR headwind timeline.

A: Brett Tighe said headwind will lessen gradually over 12-18 months, with more clarity on FY26 NRR after finalizing financial plan post-Q4.