Okta Inc - Ordinary Shares - Class A

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Okta CFO tells Capital market Laboratories "the world is going to change as far as work goes, with remote becoming the norm"





Date Published:
Author: Tiernan Ray

 

Preface
Okta’s CFO, Bill Losch, sat down to talk with Capital Market Labs, the first time we have spoken with Losch. In the Q&A, he focused in ways in which remote work is destined to be the new normal, and how that fact will produce continued demand for Okta’s software.

Losch’s view of the world of work is that it isn’t going back to the way it was, not entirely.

“Those companies are going to be working remotely to some extent, we think, post-COVID, meaning, we think the world is going to change as far as work goes,” said Losch.

Even before the pandemic, Okta was implementing an organization that Losch refers to as “dynamic work.”

Dynamic work is the premise that “employees could be located anywhere, could have the flexibility of whether they work remotely, work in an office.”

That flexibility has a number of benefits contends Losch, including being able to hire wherever. “Finding talent where talent is, as opposed to hiring talent around where we had hubs or offices,” as Losch put it.

The result for Okta of more and more companies spreading out is that identity should become the ultimate security tool because the workplace is no longer inside the firewall.

“You’re allowing your employees to basically access applications that are not contained within your firewall, you’re allowing them to do it with devices that you don’t own anymore,” said Losch. “The reality is that that perimeter of security has had to center around identity.”

To recap, Okta Q2 revenue rose 43%, year over year, to $200.5 million, yielding EPS of 7 cents. That was ahead of the consensus for $186 million and a net loss of 2 cents per share.

For this quarter, the company forecast revenue of $202 million to $203 million, and a net loss of a penny to two cents per share. That’s also ahead of consensus for $196 million and negative five cents per share.

For the full year, the company raised its outlook from a prior range for revenue of $770 million to $780 million to a new range of $800 million to $803 million.

One-on-One with the CFO and CML Pro

Capital Market Labs: It’s a pleasure meeting you, Bill. We usually start by throwing it open to the individual in a kind-of broad way: What things do you think are most important for investors to take away from the results and outlook?

Bill Losch: I think that the primary thing to take away is that what we saw happen during the course of the pandemic is that the real market tailwinds that have been driving our success, from the beginning, really, but certainly recently, of companies accelerating their cloud adoption; companies realizing that in their interactions with their customers they need to be more online and more digital; and then kind-of encompassing all of that, the fact that they need to do all those things securely, has really driven our business.

And what’s happened during the COVID is really the impacts of companies having to work remotely; companies having to figure out how to be productive and continue to be productive in that environment; and also, companies now having to even do more, so to speak, with working online or interacting online with their customers.

That has all, if anything, we think, accelerated, and we think actually is an accelerant that will continue even post-pandemic, and really strengthen those market tailwinds for us.

And that’s really what both drove the performance in the quarter, and also, we think, is exciting for us as far as the future.

CML: It doesn’t sound like there was anything from a billings or bookings perspective that was a downside despite people suddenly running around like crazy.

It sounds like you just kept rolling. Were there are any issues of people asking for terms of payment to be amended or backing out of closings or extended signings, any of those kinds of things?

BL: We did see a bit of that. I think especially in those companies that are in the more vulnerable type industries.

I know certainly going into the quarter we had anticipated that there would be more of those types of headwinds to the business than there actually were.

Those companies that are having budget challenges or, frankly, just challenges in general, did have an impact.

But that concentration for us of those type of industries is really fairly small, it’s double digit, like, eleven percent [of revenue].

So, it didn’t have as big of an impact as I think it probably had on some other companies.

CML: I assume you’re talking about travel and leisure, for example?

BL: Travel and leisure, bricks and mortar retail, you know, I would say, restaurants, those type of businesses.

Basically, in general, businesses where people gather, I think were the more impacted. But like I said, a fairly small percentage of our overall customers.

CML: Was that by design, Bill, from the beginning? Before the pandemic, had you decided to be strategic in how you pursued go-to-market with industries?

BL: I mean, we have been strategic with our go-to-market, but I wouldn’t say that we’ve been selective of industries, per se, because I think when you think about what we do, and the fact that we enable companies to really be able to use very secure and scalable, best-of-breed technologies, that has started to be every industry, frankly, to some extent.

Basically, every company has to be, to some degree, a technology company.

And so, our focus has been addressing that for all industries.

It’s just we’re not concentrated in any one industry in general because we’ve done, I think, a good job of diversifying ourselves.

Again, because really every industry, every company needs to think about that and move in that direction, toward more of a cloud technology so that they can access best-of-breed applications to make themselves more productive.

CML: What would you say is unique about your approach, or how do you like to think about the most important aspects of how you do your job, relative to your peers in the industry?

Just looking at software, a software CFO’s role, for example, or a tech CFO?

BL: From my perspective, there are a number of things that we think about, or I think about.

Certainly, we talk a lot about the fact that we’re in a very beneficial position from the standpoint that there are two very large addressable markets that we can tap into.

We call them the workforce side and the customer identity side, which we think of as two markets, the workforce being selling to companies for their workforce, and then the customer identity, as I said earlier, is really helping customers with their customers.

And I think that that gives us a lot of opportunity and a lot of potential. And thinking about how we capitalize on that, and, obviously, capitalize on it both in the long term, but also in the short term, is a lot of what we focus on.

And I think that we also have the advantage from the standpoint of how we think about how we work.

And what I mean by that is, we are in a world right now that obviously more companies are being forced to work remotely, a better way of doing it.

And we believe that that is accelerating a move toward using the cloud. Those companies are going to be working remotely to some extent, we think, post-COVID, meaning, we think the world is going to change as far as work goes.

And one of the things that we did was really driven, not entirely by me, but certainly by my team, is this concept of what we call dynamic work, which we actually started moving toward even pre-COVID.

And the notion being that we wanted to give a framework for our employees to have a lot more flexibility when it came to where they worked and how they work.

So, this notion of, you know, building again the technology which we inherently have because of Okta and some of the other technologies we use.

But also working toward a much more flexible, focused, purposeful framework as far as employees could be located anywhere, could have the flexibility of whether they work remotely, work in an office.

And the reason we were really driving toward that is because we think it provided us a real advantage in finding talent where talent is, as opposed to, you know, hiring talent around where we had hubs or offices.

And I think that’s been beneficial for a number of reasons.

I think it’s given us a lot of opportunity to hire great people at different locations. It’s given that flexibility, as I said, for employees which, I think, really makes them feel more productive.

But it also put us in a really good position — obviously, no one anticipated this was going to happen — but it put us in a good position from that standpoint.

And also, because we’re a thought leader, or one of the thought leaders regarding this, it’s helped us help our customers think about how they want to work remotely and how they may want to do that strategically in conjunction with talking to them about using Okta to help with the technologies to do that.

So, I think that is a more recent example of something that we’ve really been a real driver.

CML: And you, individually, in the CFO role, is there something else that’s a dimension of how you approach this job? Some CFOs are all about, I hold the purse strings! Some CFOs are, I tell you where our budget goes or I push back when there’s unreasonable requests for budget, or I think about capital returns and what does the Street want.

Are any of those kinds of things suited more to your temperament or your style of work?

BL: Yeah, ultimately the way I look at it, or the way I try to manage the role, is from the standpoint of how should we allocate the resources that we have to get the best return that we can.

And that’s really how we think about it.

As we think about the big addressable markets we have, what is the best way for us to capitalize on those markets, utilize what we feel is the competitive advantage we have, the fact that we’re the leader in the identity space? And how do we maximize that?

And then, based on that, help the business think about, and to some degree, as necessary, enforce through dollar allocation, how we’re going to prioritize our investments in innovation, go-to-market, all the areas of the business. That’s really how I think about it.

I think it’s probably evolved. I’ve been with the company about seven and a half years.

When I first got here and we were a hundred and fifty people, whatever it was, there probably was a little bit more of the clenched fist.

But I think as the teams evolved, as we’ve become more of a strategic part of what other companies need in developing their cloud technology stack, my role’s also evolved.

The way I’m approaching it now, the effect will be from an investor, that you’re going to get the right focus, and have the best potential for a maximum return to the investor.

So, I think that’s the right way to approach it.

CML: For folks who may not be as familiar with your quarterly returns, what are the most important metrics to judge the business by?

Some companies focus on annualized recurring revenue, some companies focus on billings. Some focus on remaining performance obligation, R P O.

In the age of cloud, there’s so many of these, right?

And then the analysts have their favorite that may not be your favorite. What would you like people to focus on of any metrics that you think are meaningful?

BL: One of the things that we have always focused on, first of all, is what is that top-line leading indicator of the business.

Because it’s a SaaS business, so obviously, revenues are important.

But revenues in a SaaS business are a trailing indicator of success.

What’s evolved for us, as with others over the last year or two, is the concept of the RPO, the remaining performance obligation, as you said, which you know, said in a non-accountant way, is basically your backlog.

And I do think that for our business, which is a business where we’re in multi-year contracts, it’s a good indicator of the fact that we’re getting larger and larger enterprise customers, and longer and longer terms with those customers, it’s I think the best indicator from a forward-looking standpoint of the business.

I think the other things that are important, the other metrics that have been important from the beginning, are certainly customer count, but specifically for us we look at also the customers that are greater than $100,000 in annualized recurring revenue.

And that’s always been an indicator of what we consider to be more of our enterprise part of our business versus the small- and medium-sized business.

And so, the growth and strength there has been an important metric.

And then last but certainly not least, I would say the net retention rate.

Because we’ve been able to demonstrate with our business that there’s a very strong land-and-expand motion there.

We have a lot of customers, but we also have a lot of expansion opportunity.

Our net retention rate last quarter was one hundred-and-twenty-one percent. And it’s been pretty strong from the beginning, I think.

So, I would say those are the three key metrics besides the obvious, revenues. Those are the key metrics.

CML: You guys have had an outstanding, very stable rate of US top-line surprises. Is there any secret to your success in that regard?

Quarter after quarter, relative to Street expectations, it’s been very, very balanced and reliable.

BL: I mean, I think that we have been able to really do a fairly good job of forecasting the business from the standpoint of understanding what the pipeline is telling us, what our ability to close is.

We’re always and continue to be cautiously optimistic when we think about our business, and that has served us well.

We always want to make sure that we’re weighing not just the opportunities but the potential risks in the business in how we think about our guidance.

And I think we’ve done a good job with that.

And you know the reality is just for the reasons I said earlier, with the way those tailwinds have pushed us forward, a lot of the things we’ve done successfully, operationally.

And the fact that we, I think, have really focused historically on customer success and the fact that more and more companies are realizing how essential identity is in their move to the cloud.

I think that’s the reason we’ve continued to be able to beat our forecasting.

CML: Be essential is a good general approach to business. Cybersecurity has grown to mean so many things from firewalls to endpoint, identity, and Okta’s Zero Trust, to now, edge security, not just for content but for applications.

How does Okta’s position here with Zero Trust leave room — does it leave room for Okta to expand its offerings?

BL: When we think about Zero Trust, the reality is that the Zero Trust framework has been more recently in the last few years defined as what we’ve believed for a while, which is that in a world where you’re moving everything to the cloud, you’re allowing your employees to basically access applications that are not contained within your firewall, you’re allowing them to do it with devices that you don’t own anymore.

The reality is that that perimeter of security has had to center around identity.

Like, who is it, who are you, are you who you say you are, and should you have access to what you’re trying to have access to?
As a result, that is fundamentally what we believe is the essential component that we play in a Zero Trust framework.

And when you think about what we also do, which is, we have this separate identity platform that all of these other technologies are integrated into.

So, these endpoint security technologies, other types of security technologies and applications, we’re really that kind of control plane to pull that together, use that data and those data signals within our platform to really help our customers with security policies, with the ability to have things that we call threat insights, those kind of things.

So, we’re at the center of that.

And I think, the question about where does that evolve, I think where that evolves is, as we’ve built this platform and these integrated technologies, that attracts more customers, that attracts more users, that attracts more of these technologies wanting to integrate with us.

So, it just kind-of continues to build those network effects that we have, and that investors like to call the flywheel.

And I think that’s really what we see with those capabilities.

CML: I appreciate that. This one’s kind of about edge versus core cloud. As we move away from it’s all in the central facility cloud architecture to something more distributed that has edge components to it, building out the edge, does that have any particular impact on Okta’s business?

BL: One of the things that we’ve done from the beginning is making sure that we’ve built the platform and enabled the platform to connect to technologies, and do it in a way where more and more companies, developers of technologies, can customize on us.

And by doing that, and having more of that flexibility, it kind-of gives us that ability to flex as technology flexes.

Because I think if you go back in time 10 years ago, when Todd and Freddy had this concept of identity, a lot of people were like, that seems like a very narrow niche.

What they understood, and Todd, you know, really built the platform that we have, is this concept that, no, it’s going to become a bigger and bigger essential element or linchpin of what the technology stacks are going to evolve to.

And so, we’ve always built it in that way so that we would be able to take opportunistically the changes in technology.

I think this would be no different.

CML: It sounds like you have a pretty solid grounding, too, in the technology. Do you have an engineering background?

BL: I don’t. Actually, one of the things I realized when I started working, certainly for Okta, but even previously in tech companies, is that as the CFO, you get a lot more credit if you actually know — you know, no engineer is going to admit that you actually know what you’re talking about!

But at least you don’t sound like a complete fool!

CML: It’s funny how that’s true for reporters, too.

BL: And I think that’s important from the standpoint, to your point earlier, when we think about allocation of resources and stuff, you know, obviously, I’m not going to understand it to the depth and breadth of a real technology expert, but at least having some sense of it, I think, helps in trying to help them assess what those priorities should be.

CML: You’re a fast study. I appreciate that. It’s our position at Capital Market Labs that digital transformation will have a permanent impact on the way technology is used and deployed, which I think you spoke to earlier. I think you’re in agreement with that.

And then the question is, given that, how does the security landscape look different in five years than it does today?

BL: I think this is where you’re going to probably see the limitations of my technological expertise!

But I do think looking at it from a business or layman’s terms, so to speak, that where it’s evolving is it’s going to continue, we believe, to still center around the identity of the user.

And what I mean by that is that more and more of the security is this balance that’s essential of, obviously, you ultimately want things to be secure, but at the same time you want to make sure that it’s done in a way that continues to allow folks to get their jobs done or to be as productive as possible.

So, you don’t want it to turn into this kind of a lockdown situation.
Nor do you want it to be open-ended.

And as more technology evolves, whether it’s user to user, or user to application, or application to application or machine to machine — all those kind of things, that balance needs to be struck.

And, I think, ultimately, the best way to strike that balance will continue to be through ultimately understanding the identity of the user and whether they can be authenticated to be who they say they are or what they say they are.

And is it — can they have the access that they say they need, and do it in a way that continues to be very scalable and enabling?

And I think that’s, again, I think, why we feel very good about our opportunity is because I think we’ve positioned ourselves that wherever that technology evolves to, we’re going to be in a very strong position.

CML: Before we close out here any thoughts about how your — you’ve been here 7 1/2 years. How has your investor base changed? Has the profile changed in terms of who you talk to? Do you notice, quarter to quarter?

BL: No, it really hasn’t, overall.

I think that we’ve been fortunate, and you know with the fact that we have a lot of fundamental long-term holders investing in the business that you know have been there for a long time.

So that mix has not significantly changed.

I think that you know we feel like we’ve got a pretty diversified base.

The thing that maybe has evolved a little bit over time as we’ve become bigger, frankly, is, I think, within different holders or some of the bigger funds where initially the PMs were not just software and technology, but very cloud software technology focused, or security focused, we still have a lot of that, but we’ve been able to broaden out to more generalists because I think people are understanding the more general, again, fundamental nature of what we do.

So, I think that’s probably evolved but I would say that’s probably the big change over time.

CML: That makes sense. Exit question: the stock’s up 81%. Is it still a good buy?

BL: Well, you know, obviously, we think about that.

We don’t want to comment on the stock.

Of course, I think it’s a good buy.

But I think fundamentally, what we focus on is our customers, first and foremost.

That’s always been a big focus for us. We talked about dynamic work, about making our employees as productive as possible.

And we also continue to focus on innovation. And I think if we do all three of those things and continue to do those things, the results and therefore the stock price will follow.

CML: Excellent. Thank you so much for your time, Bill, we appreciate it.

 

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