Okta, Inc. (NASDAQ:OKTA) 24th Annual Needham Growth Conference January 12, 2022 2:00 PM ET
Company Participants
Eugenio Pace – Co-founder and CEO of Okta
Conference Call Participants
Alex Henderson – Managing Director Security, Data Networking and Optical Research
Alex Henderson
Well, thanks, Nate. So my name is Alex Henderson. I’m the security analyst at Needham. It’s a distinct pleasure to have Eugenio Pace, who is the CEO of AuthO as well as now an Okta employee and to talk about Okta and AuthO. For reference to people who are in the audience, if you want to ask a question, please do. There’s a dialogue box. You can type it in and relay it to Eugenio. We prefer interactive. The more comes from the audience; the better makes my day a lot easier if I’m not making up questions as we go.
So first off, welcome Eugenio.
Eugenio Pace
Thank you. Great to be here. Thank you, Alex.
Question-and-Answer Session
Q – Alex Henderson
So May 3rd, big day?
Eugenio Pace
Yes.
Alex Henderson
That’s when you guys close the deal. How’s it been to be an employee of Okta instead of the CEO of Zero?
Eugenio Pace
Well, it’s been quite a ride, I look back it’s yeah, a few months, but it feels like a much longer, it’s been so intense. I think the intensity of the transaction, the intensity of the business we are in, which is just not slowed down at all, thankful, the intensity of the world that we live in at the moment, which is, these screens and people all over the world and I think all of that the year has like gone in seconds on one hand, but it feels like it’s been like much longer, frankly.
Alex Henderson
So AuthO has been reported somewhat separately from Okta for the last couple of quarters. My understanding is you’ve got one more quarter of that format before you guys really talk about it as an integrated company. How has the integration gone given we’ve only got one more quarter of separate financials being reported.
Eugenio Pace
Yeah. So, we can look at integration in multiple aspects. So the first one is we decided to integrate our G&A capabilities earlier on and that went well. So people finance, legal teams, facilities, workplace, now we have collectively like 14 offices all over the world that has gone — it’s a pretty advanced state and hasn’t gone well, and it has served as well as well.
Alex Henderson
It’s always been a very distributed company, right. That was one of the advantages of the AuthOarchitecture before you came into Okta.
Eugenio Pace
Indeed. Yeah. So really, no, the two components of that is by virtue of being like a very heavily distributed company, clearly that put us in an advantage when the world hits COVID-19, but we were already practicing like being on a screen and communicating synchronously. So it was good practice. It wasn’t — it was tough anyway, like everybody else, but it found us well prepared to that.
But one of the side effects of that was also running a global company early on. So one of the things that we are complimentary with Okta is that our composition of the business, it’s much more heavily distributed in the world, not just the workforce. 50% of our business was outside the US before the transaction and so it continues to be the case just for Zero, which tells us a little bit of the global nature of the problem that we are solving right and the fact that it’s not exclusive it to American markets.
Alex Henderson
So clearly part of the question is related to what degree you have distinctively different products within the consumer portion of the Okta product line and obviously you were heavily skewed towards the customer oriented side. So actually with over a hundred people signed in not surprisingly, we’ve already got a couple of questions coming in.
The first one is what level of confidence that Okta will be able to maintain the product roadmaps for both Okta Core and the AuthO given that the two segments serve distinctive buyers and use cases and what is the risk that one set of customers ultimately gets prioritized over the other? Thanks for the question. Guys.
Eugenio Pace
Yeah. Great question. Great question. So we came together with a hypothesis that we were different. There were products where like, yeah, there were some touching points, but they were different, but of course that was well informed, but we didn’t know in detail.
Alex Henderson
Let’s stop for a second just for people who might not be as familiar. What’s the differentiation between the employee piece and the customer facing piece?
Eugenio Pace
So I’m assuming that everybody knows what we do, right? We are in identity in access management, which is logging in. Logging if you wake up in the morning and you enter user name and password website, solving that problem, that’s what we do.
So this two big markets here, there’s what we call workforce and security, when the person entering the username and a amount password normally, it’s an employee of an organization. So if you’re — I’m an employee of Okta, I log in the morning in my machine, I don’t use a password thankfully and I log into my me email into Zoom, into Salesforce etcetera. So single sign on across a broad range of apps, but as an employee, that’s the core used case for Okta. That’s where the company was born, where the company evolved and grew over a lot of all these years.
Alex Henderson
And that was two thirds of their revenue before the acquisition.
Eugenio Pace
Yes, that buyer is primarily an IT buyer. So it’s the CIO of a company. It’s the CISO of a company. It’s making sure that employees are logging into what they should be logging in and not to some other thing and when somebody is not an employee anymore, that they don’t have access to anything that shouldn’t have access to. That’s the workforce used case and you’re right. That’s roughly, give or take two thirds of or a bigger chunk of the Okta business.
Alex Henderson
Oh, it was about, I think it was 70% of Okta before the acquisition is it’s sounds about two thirds now, is that right?
Eugenio Pace
No, no. I don’t want to use that number. Yeah. I think you’re right. That’s the…
Alex Henderson
But you guys report it still. So it is public.
Eugenio Pace
So the second market is what we call CIAM and it stands for Customer Identity and Access Management. That’s when the user that is entering credentials or logging in into a system is not your employee, but it’s an external entity. It’s your customer typically. So that’s why it’s called CIAM. It’s somebody that it’s not your employee.
Now, on that one, which is, they — Okta had a business before the acquisition, we will come back to that in a minute, but that was 95% of AuthO business. give or take. So the vast majority of the — of our — of the customers that we had in AuthO were customers that were building applications for their customs. But the key word there is building because we actually did not create AuthO with that use case in mind. We created that AuthO with the developer in mind.
So with the thinking about builders of applications, it just happens that there’s a very high correlation between developers and CIAM. So the vast majority of the developers in the world are building apps for others, not for employees. There’s some, but in volume, in importance, in size, it’s about the applications that you’re building for others. And that market, that segment it’s further divided into three categories.
So if you look at CIAM, there is actually three different types of used cases. There’s consumer apps. So B2C used case, if you’re a user of let’s say Dow Jones or Wall Street Journal or the Economies, any like media and you are an individual logging in into those sites. If you are — if you like to meditate and you use Headspace, you’re as a user, if you are buying tickets for planes or buying tickets for a train. So you’re a consumer facing app. Mobile website, that’s that category, that’s a big, important segment for AuthO.
The second category is what we call B2B SaaS. So if you’re building applications whose users are not individuals are employees of somebody else. So if you’re Zoom, if you are, Atlassian, if you are any software company, any software company that is selling to the enterprise, that’s the second strongest used case for AuthO.
Those two are the two sub segments in CIAM that we are going to lead on with of AuthO moving forward and what we are doing. There’s our third sub segment, which we call it external collaboration, which in retrospect, it’s technically CIAM because it’s not necessarily your own employees, but if you think about like the manufacturing company with big supply chain used cases or vendors, contractors like extended workforce used cases, that’s where we are going to lead with Okta, CIAM. it’s for that specific used case, which based on what I describing, hopefully the audience will understand. It’s really like an extension of workforce. We are an extension, probably more on the customer side.
Alex Henderson
So, so going back to the point of the question that was asked now that we’ve put some context in front of it to what extent do you see risk that core Okta used cases will — use serve resources and that the CIAM piece would be less so.
Eugenio Pace
Well given the size of the opportunity and given the growth rates and the ability — how much progress we have done in both markets, frankly, and how much we can grow; I would be really, really surprised to see like one win on the other because it’s two big markets on their own. And now, with AuthO, we have the capacity to deliver on that and I think the proof is in the results.
Whenever a company is acquired, there’s always a question of what’s going to happen with the platform and it’s going to be replaced or decommissioned or based on what I described before, hopefully, all of you understand that we actually need both platforms to serve this big, big market. CIAM is $30 billion estimated and workforce is another $30 billion. So each one is massive and even if you look at a combined companies today, it’s a single digit penetration into those two markets.
And it’s not that it’s a problem that it’s going to go away or becoming irrelevant, or the conditions of the world have changed so that there’s not a pain anymore on the opposite. If anything, the last two years have been have accelerated the momentum for us. And I look at two data points in the last nine months of being together.
One is the vote of our customers and our customers vote with the wallets. It’s like a very skiing, the game both, and our business has not decelerated. AuthO itself has not decelerated. Okta has not decelerated. In fact, it has been beneficial for AuthO because now we are a public company, not on our own, but we are a public company by association with Okta. We are Okta, and now we are reaching customers and in the past, perhaps we’re somewhat concerned and say, well, you’re not big enough. This is a big, big problem. I’m betting on you for a big aspect of my business. So now they perceive as lower risk. Sure bets, more secure.
And the second is the market the kind of like the industry community, vouch of and vote of confidence. This is the first year where we AuthO got named as a leader in Gartner’s magic quadrant and it’s not the first year for Okta for sure. But now, Okta has two dots in the magic quadrant, one is AuthO and the other one is Okta. So…
Alex Henderson
I can believe, you just set me up for that. I was about to put it up. So I’m actually disappointed to see AuthO is as low as it is represented there because frankly in the CIAM space you are way ahead of everybody else. I think they’re comparing you to the entire identity management space, as opposed to the CIAM space. If you’re just to CIAM space, you’d be above Okta and above everybody else. So clearly Okta and AuthO combined are really powerhouse players.
Eugenio Pace
Yeah. So no, to the previous question, will we compete for resources and we want to be priorities of the other. I think we recognize these two markets as so big markets with so much more to grow that is really is not the market that will constrain our growth. It’s not demand or lack of demand that will constrain our growth. It’s just our ability to continue to innovate and our ability to scale our go to market teams to reach, expand globally, reach new markets and just reach more customers.
Alex Henderson
So, one of the elements of this story is that you actually are a much higher growth rate and the CIAM space is a higher growth rate category. You’re actually accelerating the growth of Okta net, net. If I look at the most recent print that you guys had the combined company, even after adjusting for the reported print or the aggregation of the company really producing spectacular numbers.
The idea that Okta was slowing before, certainly wasn’t evidenced in the 39% growth rate of core Okta and 43% RPO growth and 47% calculated billing and similarly AuthO posted what 63% growth in ACV. So those numbers suggest that there was a considerable amount of flywheel benefit to this, those faster the growth for both companies standalone than not — no merger or not organic in those numbers. Those are excellent numbers.
Eugenio Pace
Yes.
Alex Henderson
So one of the things about AuthO that I love is the coder centric capabilities and we have long felt that that was something that Okta core needed to build out. As we look at the world and I think that I like to use the comment from the CEO of Cloudflare, those who get the coders win, you guys have really bring a lot in. How deep is your penetration of the coding community, how many people are programming, utilizing micro-services based on AuthO’s technologies.
Eugenio Pace
So today it’s roughly — its 150,000 active developers in the world that are using — the actively using AuthO. That’s still — it’s like a big number on its own, but it’s still small compared to drawing the analogy of the TAM and our business. Same thing for the total addressable audience in our case, which is, depending on who you read is between 20 million and 30 million and this includes, of course, all kinds of developers, not necessarily what we will call, like professional developers, like developers are coming all different flavors.
So we still need to do a lot of work despite the fact that have, I think we have done a pretty good job in creating a, a brand that is recognized in the segment and it’s funny to see sometimes developers using interchangeably, our name and the name of the standard, which is Auth [ph]. So they say, yeah, I am using the standard AuthO as if it was the — like the standard, which is awesome. We are great to see, but we still need to do more work in recent.
Alex Henderson
So how rapidly are you adding coders to the base?
Eugenio Pace
Well, we will — our plan is to add like another hundred thousand in the next — in the next year or so, and continue to grow at the same rate,
Alex Henderson
That’s an impressive target. As the coders look at utilizing the product, obviously there are a lot of different features and capabilities. Are you seeing a broadening of the various elements that you can offer the coder to develop the product with that is expanding the revenue generated on a per coder basis?
Eugenio Pace
Yes. One for sure, there’s more things we can do. One within the realm of authentication for, because there’s always something new, there’s biometrics, there’s the attack protection. There’s a thing that we can tie to the core transaction of knowing if a user is a legitimate user or not. There’s also evolution in a types of apps, right? So the way apps are being built, there’s some new framework every day.
There’s, new stacks that are being developed and optimized for mobile experiences for devices too. Pretty much everything nowadays has a computer in it. And everything with a computer, has potentially a user, even your fridge as a computer. And I need to know that it’s you or not somebody else. So that’s an expansion in its own, but we are also expanding in other capabilities.
So, just before the end of the calendar year, we announced the developer preview of Fine-grained authorization. That’s a service that VB [ph] receives in early access, which solves the problem, not of, whether you are or not, who you say you are, but solves another big problem; which is the, once you are, who you say you are.
What is it that you can do? And then there’s an explosion of complexity there, because it goes into the details of the app, right? So if you think about like Google apps, I am talking Google docs; so can I view this document? Can I read this document? Can I share this document? Can I delete this document? Can I move this document? This folder? Can I have access to all documents in this particular folder? Who can I share these documents to?
Those are all questions that are all related to access control, but it’s not the Course-Grained access control. It’s are you in, or are you out? Are you anonymous? Or you are — or are you authenticated? This is like, this is specific document. Can you access? Can you join this zoom call in this specific time of the day for this particular conference? Who can do that? Who cannot do it? So we delivered a — we are shipping a service that provides the building block for answering those Fine-grained questions and we are obviously very excited on it.
Alex Henderson
So, when I think about Okta, as a Company and as a stock, I think to some extent, people became how to say it, almost bored with it. I mean, it seems that probably not the best term to describe it, but they understood that identity was important. They understood that Okta was the kingpin. They understood that the Company was dominant. And there really wasn’t a lot of challenge to that viewpoint. And that over time, the Company started to mature a little bit, and their growth rate started to decelerate towards that kind of 30% growth rate.
Now with Auth0 in there and with the shift in emphasis, broadly towards a more distributed workforce, it seems like the growth is re-accelerated and you’re producing growth rate that are well above that 30% threshold.
But the street doesn’t seem to be as enamored with it anymore. But I think that to some extent it’s a misread because identity is the core to anything in the cloud and zero trust as we move more and more towards a Cloud Direct model; clearly is the core of any security platform. So how are we taking advantage of those aspects to put sizzle back into the story and to articulate how big a deal that is?
Eugenio Pace
Well, completely agree with you in terms of the, how important this is. Whether I don’t think it wrong, like the judgment on whether it’s boring or — there are things that are boring for some people who are like the passion of others, and it just happens. This is our passion. This is certainly my passion. And everybody in Okta is a hundred percent dedicated to specific problem, and in the big scheme of things in the world, it’s a, it’s one of the many, many other challenges that the world faces.
And yes, there’s an argument to be made, who cares, it’s boring. But this is what we do. This is our passion. We are not bored by it. In fact, we are really, really — if anything, I mentioned to some other people before, I want to be part of the Company that killed the password, in the world. So we don’t have to deal with passwords anymore in our lives. They’ve been in our lives too long already. And I don’t know you, but I don’t like, I don’t enjoy having a hundred passwords for different things. And the future is here not evenly distributed. So we have all the components to do this and to secure it.
Alex Henderson
That’s more than just getting rid of passwords though. It’s providing a true understanding of who the person is. It’s understanding the risk profile of that character, it’s applications, because applications need to be authenticated as well. How do we think about that broader theme in the context of a Cloud Direct World that is tying users directly into applications and across way end?
Eugenio Pace
I see identity and perhaps people were not seeing this in this way, but when you think about like, what are the fundamental building blocks of applications, there’s compute, there’s storage and persistence, where you store inform. And then there’s a mechanism of communication is sending information in and out and there is identity and security. You cannot like…
Alex Henderson
Yep, one of the basic building blocks of the internet.
Eugenio Pace
The basic building blocks of the internet, so that’s why, like with all due respect on what other companies do, like look at great developer companies do, like Stride and Twilio, which we modeled Auth0 after them. So, but not every application necessarily needs to take payments with a credit card, right? And not every application sends SMS. A lot of them do of course, but every application on every level of maturity, every Company needs us, this like a true horizontal universal ubiquitous requirement. And so this, that piece, the piece of universality, and then this, the clearly the world will rely more and more on technology, not less on technology, for all aspects of our lives. And so we are going to need more applications, not less applications.
Alex Henderson
As I understand it, the number of applications are growing at about a 30% clip on a base around $750 million. Would you — do those numbers jive with your view of the world?
Eugenio Pace
I, look, in all there’s two sides of that. It’s the applications that were built. And we do a lot of business in modernization use cases, which is, what your journal it’s a customer of ours, and clearly it existed before Auth0 existed. And so we help them modernize, their user experience and their authentication posture with our system. So brownfield for us is a very important component of all.
Alex Henderson
You’re the guys that can blame for not letting me through their walled garden net. Huh?
Eugenio Pace
Yes, indeed and many others too. I suffer that too. But and in some cases, I am not happy.
Alex Henderson
So it’s an interesting point because the there’s a perception that if it’s a legacy application that it’s monolithic and monolithic applications inherently are going to be displaced by Modern applications. Where in fact, I think most monolithic legacy applications are becoming Microservice elemented. So they take the kernel and they take a lot of the stuff around it, and they turn those into microservices; so that you end up with a hybrid, partially legacy, partially microservice. And that allows you to start to transition into the more modern world.
Eugenio Pace
Very, very few organizations can afford the Greenfield scenario, only startups, in, or clearly startups are those who can say, okay, we’ll start with a blank slate. Here’s a white canvas. We don’t have to worry about legacy or this thing that we inherited from a previous acquisition or from a merger, or like this thing that somebody wrote 20 years ago, that still works, but nobody maintains, or nobody knows how to touch it. Very few can do that.
The vast manager of the world it’s already using something. And that’s important. I can tell you how we build Auth0 precisely to make that transition easier. We design Auth0 with that in mind, out of necessity, frankly, because, clearly the, for a startup to, to expect people, to like throw away everything they have, where they invested millions of dollars and thousands of man-hours of brain power and bring this shiny new thing, it’s completely realistic. And so, Brownfield exists.
Alex Henderson
So, let’s come back to the market for a second, because I want to make sure of that we keep this kind of punchy to what investors really care about. And it seems to me that adding a hundred thousand developers, or, annually would certainly drive some pretty robust growth. But on top of that I would think that there’s a very significant broadening of the need for microservice based consumer oriented environments given the work from home, given the COVID environment, has this caused an acceleration and explosion of, of interest in your technology?
Eugenio Pace
Absolutely. Absolutely, there’s a…
Alex Henderson
I have a quick answer. Let’s move to the next question. Not just…
Eugenio Pace
Yeah. No, it’s I mean, it’s a fact of life. We were seeing it, but, it’s what it’s already well known that, COVID, working from home, remote, but even in less well known aspects like of self-care and consumer apps that are directed to health and mental health and other things.
Alex Henderson
So this brings up an interesting question that investors are very concerned about, which is if you’re a COVID beneficiary, does that create a situation where you have the — the big boom, and then the bust on the backside of it, because now people are going back to work.
Now they’re going out to dinner and they’re not doing as much from home and they’re not as software and remote oriented anymore. I don’t think that’s the case here, but, DocuSign didn’t argue that it was the case before, and they had a big correction, any risk to your business, decelerating because of people go back to work and COVID goes away?
Eugenio Pace
Well, if you, the reason I don’t think so. It’s because there were things that are were already happening before COVID like remote work was, maybe something that some companies were more comfortable experimenting with. We were one of them. So we were a Company with that embraced that model.
Alex Henderson
Me too. I moved out of New York city in 19.
Eugenio Pace
Yeah. And, if now I could tell you, well, I was such a visionary, but, in our case was out of necessity. Right, because, it was difficult to compete for talent in Seattle or in San Francisco. And we say, Hey, let’s, talent is everywhere just, and we have the technology…
Alex Henderson
That actually brings me to an interesting question. One of the question we’re trying to get to ask every Company we talked to is what’s going on with the turnover rate? Not so much against 2020, but rather the, this period of regret, the great resignation. Are we seeing turnover accelerate versus where you were in say 2019?
Eugenio Pace
The number are higher than in 2019. I don’t recall exactly, but they’re not as low as we were in 2019. However, we, remain like an attractive play, attractive destination. Yes. And that’s our intent, we look at the business, this business, certainly I look at this business, but I, I share this view with other leaders in the Company. And, it’s a long journey, long-term growth, and please where people can grow. And there’s so much to build. And so many things to do’s many subsidiaries to open that there’s plenty of opportunities for talent, but yeah, it is.
Alex Henderson
What about on the wage inflation side? Are you seeing a meaningful pickup and the cost of per employee, particularly in the software…
Eugenio Pace
Competition there an increased competition, there’s inflation, as you probably know. And so there’s a — there’s not just the wages inflation, there’s inflation in the nation, but there’s all, there’s increased competition all over the world. So, some companies adopted remote as a mechanism for tapping into talent, lower cost, which is somewhat disappearing over time, because, the fact that you live in a city that it’s a, where things are less expensive, it doesn’t matter, people can hire you anyway. And so the, the advantage that we have, we have done that for, we, we do this with a conscious effort, with deliberate effort and
Alex Henderson
We know you’ve got a long history of experience with it. So, you know how to do it, right?
Eugenio Pace
Yes. And it’s one of those things that it’s very obvious and sounds like…
Alex Henderson
Oh, so we’re kind of running out of time here, Eugenio. Unfortunately I could go on for hours with you. And I would love to do that with a beer sometime, but we’ve got three minutes left. Can you give us the three key points that you want investors to take away? We’ve got over a hundred people zoomed in here listening. so what are the three key things that you want them to walk away with out of this meeting and in general on Okta?
Eugenio Pace
Well the first thing I wanted to do is to highlight is the opportunity for us. And so, I mentioned $30 billion, $30 billion, that’s $60 billion on combined workforce assigned, combined to companies today with single digits into that, tapping into that opportunity. There’s no other Company in the planet with the platform brief, the vision and the execution history of ours, no combined history.
So we believe, we are really, really well positioned to tap into the opportunity. And it’s not an opportunity that’s going to go away anytime soon. And this is not to take into account further adjacencies into each of these two worlds. Like I haven’t really talked too much about governance or privilege access, which are adjacencies to workforce, or, I mentioned Fine-Grained authorization, even like the more Avant-Garde use cases like being able to leverage more like, the crypto technologies for authentication purposes, which is a good proof of concept that we shipped. Also, so…
Alex Henderson
New many scale high, large scale up adjacencies,
Eugenio Pace
Many, many points not to mention that the, the entire, yeah. [indiscernible] was a globally, heavily global Company, but Okta was more U.S-centric and now wants to expand there. So, yet another dimension of expansion and growth. So, like I like a Frederic Kerrest, Okta’s co-founder phrase, is this, “The future is bright”. It’s certainly right for us, for sure.
Alex Henderson
That’s a good summary. I would add to that point, which is the valuation has come down a lot. If you look at the valuation of Okta it’s down in the 14 to 15 times EBIDTA sales on 23 numbers, that’s a valuation that us SaaS subscription companies were posting five and six years ago, which were growing in the 20% to 30% range.
This is a Company that’s growing well in excess of 30% combined and selling at a, I think a very discounted evaluation and with plenty of opportunity to drive margin expansion from here and, and get leverage. So investors should be taking a hard look at the Okta here and, Eugenio, I really appreciate you coming in and doing a call with us and for the triple digit clients that zoomed in.
And thanks for joining us and Nate, Thank you so much for hosting the webcast.
Unidentified Analyst
Thank you for having me.
Question-and-Answer Session
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