Okta Q3 2025 Earnings Call Summary and Insights

Okta (OKTA 1.06%)
Q3 2025 Earnings Call
Dec 03, 2024, 5:00 p.m. ET

Key Highlights of the Earnings Call:

• Prepared Remarks from Leadership
• Engaging Questions and Answers Session
• Profiles of Call Participants

Prepared Remarks from Leadership:

David Gennarelli — Senior Vice President, Investor Relations

Welcome, everyone, to Okta’s third-quarter earnings webcast for fiscal year 2025. I’m Dave Gennarelli, senior vice president of investor relations at Okta. Joining me today are Todd McKinnon, our dynamic chief executive officer and co-founder, and Brett Tighe, our insightful chief financial officer. We appreciate your participation in today’s meeting.

Shortly after the earnings press release was distributed, we also made supplemental commentary available on our Investor Relations website. This additional information includes essential insights such as customer feedback, product updates, and a comprehensive review of our financial performance. By sharing this content in advance, we aim to enhance your understanding of our results before we delve into the specifics during this call. Please note that the meeting will include forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which encompass our financial forecasts and market strategies.

We acknowledge that forward-looking statements are subject to a variety of risks and uncertainties that could result in actual outcomes differing materially. These statements reflect our management’s beliefs and assumptions as of their date. For more information on factors affecting our financial results, please refer to our SEC filings, specifically the risk factors section in our previously filed Form 10-Q. Additionally, we will discuss non-GAAP financial measures during today’s call.

While we may not explicitly state it during our discussion, please understand that all references to profitability are in reference to non-GAAP measures. These non-GAAP financial metrics are supplementary to GAAP measures and do not serve as replacements or superior alternatives. A reconciliation of GAAP and non-GAAP financial metrics, along with a discussion of the limitations of using non-GAAP measures, is available in our earnings release. For further details, you can access our supplemental financial materials, which include trending financial statements and key metrics posted on our investor relations website.

Throughout today’s discussion, we will reference various numerical changes reflecting our financial performance. Unless otherwise specified, these references will be year-over-year comparisons. Now, I would like to hand over the meeting to Todd McKinnon. Todd?

Todd McKinnon — Co-Founder and Chief Executive Officer

Thank you, Dave, and thank you all for joining us this afternoon. Our solid Q3 performance was marked by notable strength among large customers, coupled with robust profitability and cash flow, driven by our ongoing efficiency initiatives. Although the macroeconomic environment has been stable, we are encouraged by several positive indicators observed in Q3. I will highlight some of these points and then share additional insights from the quarter before turning it over to Brett.

As I previously mentioned, one of our key priorities is to deepen our relationships within our partner ecosystem. We are seeing promising progress, with all of our top 10 deals in Q3 being partner-involved. These substantial deals, each exceeding $1 million in annual contract value, collectively accounted for around $20 million in ACV, underscoring the significant value of investing in our partner ecosystem.

Furthermore, the public sector continues to demonstrate strong performance. In fact, half of the top 10 deals I just mentioned were within the U.S. federal vertical. We have made significant strides in expanding our presence in the public sector and believe that we have ample growth potential ahead of us.

Our largest customers represent a vital area of strength for us. The cohort of customers with over $1 million in ACV continues to be our fastest-growing segment, now accounting for approximately $1 billion in ACV overall. We were particularly pleased with the upsell and cross-sell activities during Q3.

Specifically, we have seen strong growth in workforce customers purchasing additional workforce products, as well as workforce customers opting for customer identity solutions. Okta’s expanded product portfolio enables us to provide our clients with industry-leading identity solutions, helping them operate more efficiently and securely. The threat landscape has never been more aggressive, with organizations constantly under attack, and identity has emerged as a primary attack vector.

Okta’s technology is crucial in helping organizations prevent and mitigate these attacks. We are advancing our vision of empowering everyone to safely use any technology by expanding our unparalleled portfolio of identity solutions through innovative product development. We are also intensifying our investments in the Okta Secure Identity Commitment, which resonates strongly with potential and existing customers. We recently showcased this innovation at Oktane, our largest annual customer and partner event.

The energy at the event was exceptional, with in-person attendance increasing by over 25% compared to last year, resulting in a pipeline valued in the hundreds of millions. Attendees learned about the future of identity security and how Okta is proactively addressing the evolving threat landscape. We highlighted more than 30 products, features, and capabilities across our workforce and customer identity clouds, which will enhance our customers’ security and enable them to deliver exceptional customer experiences, all while reigniting our growth through a focused strategy. It is also gratifying to receive validation from third-party sources regarding our strategy and vision.

Okta has been recognized as a leader in the 2024 Gartner Magic Quadrant for Access Management for the eighth consecutive year, achieving the highest and furthest overall position for our execution capability and completeness of vision. We are optimistic about the future direction of our business. One area of excitement is our go-to-market specialization.

In Q1 of this year, we introduced a specialization layer within our go-to-market team, implementing a hunter-farmer model for the Americas’ SMB market. As we prepare for FY ’26, we are planning further specialization in our global go-to-market strategy to better align with the distinct identity buying centers of IT security and developers. This approach will enable us to adapt to evolving market demands, reignite growth, and create mutually beneficial outcomes for both our customers and Okta, ultimately driving superior business results. In conclusion, we remain highly focused on our key priorities of security, growth, and scalability.

Identity is synonymous with security, and we are taking the necessary steps to bolster our position as a leader in the identity market while prioritizing investments for growth and driving efficiencies in cash flow. Now, I will hand it over to Brett to provide financial commentary and discuss our long-term profitable growth positioning.

Brett Tighe — Chief Financial Officer

Thank you, Todd, and thank you, everyone, for joining us today. We are continuing to build on the efficiency initiatives we have implemented over the past two years. Our Q3 financial performance showcased sustained strong cash flow and operational profitability, including GAAP profitability. I would like to note that, similar to the prior three quarters, our analysis of key metrics did not reveal a quantifiable impact from the October 2023 security incident on our Q3 results.

While the impact may not be quantifiable, it likely had some degree of effect. Our view of the macro environment remains consistent with what we have experienced over the past few quarters. Organizations are scrutinizing budgets and rationalizing software spending, resulting in conservative assumptions regarding seats in our workforce identity business and MAUs in our customer identity business. These conservative assumptions have exerted pressure on our net retention rate over the past several quarters, even as gross retention has remained strong.

To partially counteract the seat and MAU headwinds, we have been successful in selling additional products to both new and existing customers. Our relentless focus on innovation has resonated with our clients, as approximately 15% of Q3 bookings originated from new products. Okta Identity Governance continues to account for approximately one-third of the contract value when sold within a workforce deal. In addition to OIG, we are also successfully selling new products such as Okta Privileged Access, Device Access, Fine-Grained Authorization, Identity Threat Protection, and Identity Security Posture Management.

Our data indicates that customers adopting more products experience the highest retention rates, which excites us for the long-term contributions to the business. Now, let’s discuss our outlook for Q4 and FY ’25. As always, we adopt a prudent approach to forward guidance, factoring in a macro environment consistent with our experiences in Q3.

We are no longer incorporating additional conservatism into our outlook related to the potential impacts from last year’s security incident. For the fourth quarter of FY ’25, we anticipate total revenue growth of 10% to 11%, current RPO growth of 9%, a non-GAAP operating margin of 23%, and a free cash flow margin of approximately 32%. We are raising our full-year FY ’25 outlook across the board. We now expect total revenue growth of 15%, a non-GAAP operating margin of 22%, and a free cash flow margin of approximately 25%.

While we are still in the early stages of financial planning, we want to provide a preliminary outlook for FY ’26. We are releasing this preliminary outlook ahead of closing our largest quarter of the year and will provide formal FY ’26 guidance on our next earnings call, which will incorporate our actual Q4 performance. We remain committed to profitable growth while prudently considering a macro environment consistent with what we have experienced over the past few quarters.

Accordingly, we expect a non-GAAP operating margin of at least 22% and target a free cash flow margin of at least 24%. From a revenue perspective, we estimate total revenue to range from $2.77 billion to $2.78 billion, equating to approximately 7% growth. We believe these figures are achievable while maintaining a conservative outlook.

To summarize, we are pleased with the progress we have made in driving operational efficiencies. Over the past two years, we have demonstrated exceptional leverage in our business model, and we remain focused on delivering profitable growth for the years ahead. With that, I will now turn it back to Dave for the Q&A session. Dave?

David Gennarelli — Senior Vice President, Investor Relations

Thank you, Brett. We have several questions lined up already. We will address them in the order received. If you have follow-up questions, please return to the queue, limiting yourself to one question.

Let’s kick things off with John DiFucci at Guggenheim. John?

John Difucci — Analyst

Thanks, Dave. My question relates to something Brett just mentioned. Brett, you indicated that you are no longer incorporating additional conservatism in the guidance due to the incident from last October. That makes sense to me.

However, regarding your guidance for next year, I’d like to understand if we should consider it as initial guidance, similar to the approach you took in the previous years. I’m trying to wrap my head around how we should evaluate your guidance in the context of past experiences.

Todd McKinnon — Co-Founder and Chief Executive Officer

Before you respond, Brett, I want to provide some high-level context. Q3 was a solid quarter for us. As we approach Q4 and consider the next fiscal year, Brett can delve into the specifics of our guidance. However, I believe we are striking a balance between optimism regarding our future, fueled by new product momentum and large customer growth, while also ensuring we maintain prudent guidance.

It’s always a balancing act, but I don’t want the guidance question to overshadow the positive momentum we see in our business.

John Difucci — Analyst

Thank you, Todd. I appreciate that context. I wanted to recognize that your team did an outstanding job this quarter. It wasn’t just solid; it was excellent, and your entire team should be proud.

Todd McKinnon — Co-Founder and Chief Executive Officer

Thank you! It’s just one step in the right direction, but there’s still much work to be done.

Brett Tighe — Chief Financial Officer

Regarding your question, John, about guidance, if we reflect on last year, we faced the aftermath of the security incident, which impacted our guidance. We previously projected a 10% growth rate for FY ’25. Now, we believe FY ’25 will achieve 15% growth.

You can observe the delta between the two figures. However, I don’t anticipate seeing a similar level of delta in the future, as we are no longer factoring in the security incident. It was a significant unknown previously.

John Difucci — Analyst

Understood. I appreciate that context. Looking back at two years prior, you exceeded your original guidance by over 5 percentage points, which helps shape my perspective.

Brett Tighe — Chief Financial Officer

True, but it’s worth noting that we were a smaller company back then, experiencing faster growth.

John Difucci — Analyst

That’s a valid point.

Todd McKinnon — Co-Founder and Chief Executive Officer

It’s important to highlight that Q4 holds greater significance now than it did five years ago, making our guidance for Q1 particularly illustrative.

John Difucci — Analyst

Thank you for the insights.

David Gennarelli — Senior Vice President, Investor Relations

Next, we’ll hear from Eric Heath at KeyBanc.

Eric Heath — Analyst

Thank you, Dave, and congratulations on the quarter, Brett and Todd. Todd, we’ve been hearing from some of your GSI partners about RFPs for consolidated identity platform offerings. Are you seeing this trend in your pipeline or perhaps hearing more about it in customer discussions?

Todd McKinnon — Co-Founder and Chief Executive Officer

We have indeed made significant progress with GSIs in the past year, and I’m excited about it. Identity transformation is often complex, requiring comprehensive changes. This complexity has both advantages and challenges.

While it can delay deal closures and upselling efforts, once we establish a committed customer base and a reliable cohort of systems integrators, it leads to long-term value for both the customer and the partner.

For example, we recently secured a substantial win with one of North America’s largest technology companies, resulting in a nearly $5 million ARR deal. This deal represents just the first phase of a multi-part initiative to overhaul their identity management across the organization, driven by a zero-trust transformation.

Even the biggest technology firms are still early in their zero-trust journey, and we collaborated with a major SI to scope and execute this deal, with more exciting projects lined up for the future.

This trend is reflected in several deals from the quarter, and as I highlighted in my remarks, all top 10 deals involved partner participation. We are successfully building our ecosystem and establishing trust with partners, particularly global SIs, who recognize the limited options available among scalable identity providers. They see our distinct value proposition and are aligning with us, which will benefit everyone involved.

Brett Tighe — Chief Financial Officer

Additionally, it’s noteworthy that the top 10 deals Todd mentioned involved a diverse range of partners, including GSIs, ISVs, marketplaces, and traditional VARs. This diversity reinforces our commitment to investing across these sectors, as we continue to experience success in Q3.

David Gennarelli — Senior Vice President, Investor Relations

Great. Now, let’s hear from Gray Powell at BTIG.

Gray Powell — Analyst

Thank you very much. Before I ask my question, I want to commend you on the 10 minutes of prepared remarks.

I must say, Brett, your section might have been shorter than DiFucci’s question, so kudos for keeping it concise.

Todd McKinnon — Co-Founder and Chief Executive Officer

We appreciate that, Gray. We do our best.

Gray Powell — Analyst

Thank you. My question pertains to the current earnings season, which has been somewhat uneven across our security coverage. It’s refreshing to see your numbers improving. Can you elaborate on the standout factors this quarter compared to Q2? What changes contributed to this improvement, and how sustainable do you believe this performance will be moving forward?

Todd McKinnon — Co-Founder and Chief Executive Officer

Our execution in Q3 was markedly stronger than in Q2, with a notable increase in deal closures. While Q2 was adequate, Q3 showcased impressive results. This pattern suggests that our year could be more back-end loaded than initially anticipated, which is not uncommon for our company.

It seems that we have a robust pipeline, and it is crucial for us to execute effectively. Our team is aligned and motivated, understanding the importance of this task, and we are prepared to make it happen. We have several factors to build upon, including large deals and new product offerings.

Fifteen percent of Q3 bookings came from new products, which is a positive indicator. While we wish this percentage were higher, we see substantial potential in these new offerings. Governance now represents approximately one-third of the value of deals sold, and we’re witnessing momentum in Okta Privileged Access as well. For instance, we secured a significant win with a U.S. division of an Asian bank, which opted for our entire suite of access management, governance, and privileged access, driven by their transition to a zero-trust architecture.

For this particular bank, compliance was another key driver, necessitating regulatory adherence around applications and servers, which our privileged access solution effectively addressed. We are seeing new products and large deals consistently coming through, along with strong partner involvement.

However, we believe we can achieve even faster growth. As we discussed, our goal for the upcoming year is to reaccelerate growth.

We are pleased with our progress, yet we remain focused on our growth objectives, and our team is energized to pursue these opportunities.

Gray Powell — Analyst

Thank you.

Brett Tighe — Chief Financial Officer

I would like to add a couple of points, Gray, regarding our overall performance. Our contract duration remains robust, as evidenced by the total RPO growth, which has outpaced current RPO growth by six points. Additionally, we had a strong finish with the U.S. federal sector as their fiscal year concluded, contributing significantly to our top 10 deals, showcasing the ongoing success we’ve experienced in the public sector.

Gray Powell — Analyst

Thank you for the insights.

David Gennarelli — Senior Vice President, Investor Relations

Next, we will hear from Gabriela Borges at Goldman.

Gabriela Borges — Analyst

Good afternoon. Thank you for taking my question, and congratulations on a strong quarter. Todd and Brett, I’d like to follow up on the 15% of bookings attributed to emerging products. Could you remind us how this figure compares historically?

Brett, you mentioned the impact of net retention rates. There are two dynamics at play: pressure on MAUs and seat counts, as well as the support from cross-selling initiatives. Can you provide insight into when you expect the emerging product growth to offset the headwinds in MAUs and seat counts? In essence, when might we see net retention stabilize?

Todd McKinnon — Co-Founder and Chief Executive Officer

Regarding the new product mix, while I don’t have the exact figures, I believe this percentage is higher than in previous periods. The two standout products contributing to this growth are Identity Governance and Privileged Access. Identity Threat Protection also plays a significant role, especially among security-focused customers. Its advanced monitoring features allow for continuous oversight of security risks throughout sessions, which is increasingly valuable.

On the customer identity side, we have seen positive results from Fine-Grained Authorization, as well as offerings tailored for highly regulated environments. The diverse contributions from these emerging products are promising, indicating that our growth potential extends beyond the current 15% figure.

Brett Tighe — Chief Financial Officer

To add to that, the percentage is indeed up year-over-year because last year primarily saw governance solutions. Now, we have multiple products that are gaining traction, leading to a more favorable outlook. Regarding net retention rates, as discussed previously, they are influenced by license counts and MAUs, which remain subject to macroeconomic conditions.

As we look