Ladies and gentlemen, thank you for joining today to discuss Okta's Fourth Quarter Fiscal 2018 Conference Call. Today's conference is being recorded. I'd like to turn the call over to Catherine Buan, Vice President of Investor Relations. Ms. Buan, you may begin.

Good afternoon. This is Catherine Buan, VP of Investor Relations at Okta, and thank you for joining us on today's conference call to discuss Okta's fiscal fourth quarter and fiscal year 2018 financial results. With me today on today's call are Todd McKinnon, Okta's Co-Founder and Chief Executive Officer; Bill Losch, the company's Chief Financial Officer; and Frederic Kerrest, the company's Co-Founder and Chief Operating Officer. Statements made on this call include forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 including, but not limited to, statements regarding our financial outlook and market positioning. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management’s beliefs and assumptions only as of the date such statements are made. In addition, during today’s call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior, to measures of financial performance prepared in accordance with GAAP. There are number of limitations related to the use of these non-GAAP financial measures versus their closest GAAP equivalents. For example, other companies may calculate non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release. Further information on these and other factors that could affect the Company’s financial results is included in filings we make with the Securities and Exchange Commission from time to time, including the section titled Risk Factors in the quarterly report Form 10-Q previously filed with the SEC. You can also find more detailed information in our supplemental financial materials, which includes trended financial statements and key metrics posted on our Investor Relations Website. Now, I’d like to turn the call over to Todd McKinnon. Todd?

Thanks, Catherine, and thanks, everyone, for joining us today. This was a record quarter for the company with revenue of $77.8 million, up 59% versus last year, making us one of the fastest-growing SaaS company in the public markets. Subscription revenue grew even faster in the quarter, up 64% year-over-year. In addition, quarterly billings were up 67% year-over-year, while free cash flow margins improved 17 percentage points. Our performance over the fiscal year clearly shows that there is both high growth and increasing leverage in our business. But beyond this, it highlights the importance of our number one core value and that is, love our customers. Our mantra is to focus on our customer success ensuring that they achieve long-term value from their Okta partnership. And as a result, our total customer count in the quarter grew to over 4,350, representing a net add of 400 new customers, our highest net add ever in a single quarter, and customers continue to invest and grow with us. Our net dollar retention rate was 121% for the past 12 months as of January 31. Furthermore, 691 customers now spend over $100,000 on an annual basis with us, an increase of 56% year-over-year, accelerating from 50% year-over-year growth in the previous quarter. Here are some examples of key customer wins in the quarter and why they are investing in Okta for their businesses. First, JetBlue, which flies more than 40 million customers a year on an average of 1,000 daily flights was a new customer win in Q4 and customer identity management. Their targeted customer growth strategy is fueled in part by their award-winning TrueBlue loyalty program and their premium service offering, Mint. JetBlue shows the Okta Identity Cloud to support their migration away from legacy technologies, providing a reliable and secured booking…

Thanks, Todd, and thanks again to everyone for joining us. I’ll first go through our results for the fourth quarter and fiscal year before getting into our outlook. We had a very strong fourth quarter which marked the end of the successful year for Okta. Revenue for the fourth quarter totaled $77.8 million, growing 59% year-over-year. Subscription revenue totaled $72 million in the fourth quarter, an increase of 64% year-over-year and comprised 93% of our total revenue, up from 90% in Q4 last year. Professional service revenue was $5.7 million, an increase of 19% over the same period last year. In terms of geographic breakdown, approximately 85% of our fourth quarter revenue came from the U.S. and 15% came from outside the U.S., compared to 86% and 14%, respectively, in Q4 last year. Our international business continues to grow nicely while we remain in the early stages of capitalizing on our international opportunity. International revenue growth continues to outpace overall revenue growth, and for fiscal year 2018, international revenue grew 85% year-over-year. Moving on to billings. We had another very strong quarter for billings and achieved calculated billings of $104.8 million in the quarter, an increase of 67% over Q4 last year. Strength in billings continues to be driven by momentum with both new and existing customers across enterprise and commercial segments as well as an increase in deal sizes. Also, as we mentioned in the release of our preliminary results on February 21, the growth we saw in billings was partially a result of a few customers with multi year upfront billing. We also look at current billings, which we believe more closely represent the momentum in our business. Current billings grew 60% year-over-year in the fourth quarter. Our consistently strong billings growth has been driven by balanced momentum,…

Thank you. [Operator Instructions] And we'll take our first question from Terry Tillman with SunTrust Robinson Humphrey. Please go ahead.

Hey, good afternoon and congratulations on the quarter and Bill thanks for the detail in the adjustments. I’m sure there was a lot of work. Todd, first question just – first question just, Todd, relates to the Businesses @ Work as a great report, and you have the event around that. And it was just great to see all the different traction. And obviously, you guys are doing extremely well just helping businesses, whether it's commercial or enterprise businesses, deal with cloud proliferation and really making it easier for knowledge workers use these apps in a secure way. But what about other areas such as like Agile development, DevOps or getting into things that are more infrastructure and privilege identity? Where are you in that opportunity? And how interesting of an opportunity is that for you?

Yes. One of the cool things about the Identity Cloud and this, really, this new type of platform we've defined all around identity is that there's a lot of interesting areas around it. So yes, you mentioned a couple of them, DevOps and things like that. But we're really focused on the big main areas that I talked about. One is, as you mentioned, the core employee identity, and then two is really customer identity. If you think about every company thinking about how they can be more of a technology company, build better customer websites, customer mobile apps and identity and connecting to those customers securely is a big part of that. So that's a very exciting area for us. And then we mentioned that the third big priority for us is really continue to expand the Okta Integration Network. So yes, we're – we have a lot of momentum, but we also have a lot of work to do on these big broad markets. And – but we're also opportunistic about other adjacencies as they come up.

Okay, great. And then just a follow-up is on customer identity, which is a big focus. Maybe an update in terms of being able to engage with and interact with developers because they can be important in these design wins that lead to developed apps. And just what have you all – what kind of learnings have you all had in the early quarters of being out there trying to sell customer identity and just how that go-to-market motion would vary versus just selling your traditional products? Thanks.

Yes, sure. Customer identity is very robust and very strong. A couple of the examples I used, I mentioned in my prepared comments about JetBlue was a great customer identity win for us last quarter. That was a new customer, and then the upsell at Farmers Insurance, which was the upsell was really about customer identity as well. So that part of the business is robust, and the potential there is really – the growth there – the growth potential there and the momentum there are big. The – as you mentioned, it does have a new – because we've talked about this on previous calls, it does have a new constituency in there, and that's the engineers and the developers building these solutions at our customers. So different from employee identity, those UIs and those applications are usually prebuilt or SaaS vendors or packaged applications, where customer identity is – involve the engineering team or product team building things. And we've made tons of stride last year about – with our developer-facing offering and reaching out to the developer community and the product and technology that's API enabled and has the best, most modern software development kits for all the languages. And so we're – yes, we're super excited about our progress there, and it's driving some of that success in the customer identity market.

And this is Frederic. Just to add to that, I think since we integrated the Stormpath team into our company about a year ago, we've seen great traction and uptake in everything from our library to the documentation, and I think that's best represented by – we just hosted a couple of weeks ago our first developer conference called Iterate here in San Francisco. We had some great partners from some of the other leading developer-focused software companies that are out there. It was a great first start. I expect we'll do a lot more of that, and those are just some good tangible examples of how we're moving forward there.

Thank you.

And we'll take our next question from Rob Owens with KeyBanc Capital Markets.

This is Mike Casado on for Rob Owens. Given the momentum we've seen with record customer additions in this quarter as well as two consecutive quarters record additions to that large deal cohort, can you comment on the relative contribution of customer additions, large deal equipments, an expansion activity in explaining the quarter's upside?

Yes. We're happy to try to give color on that. I think that the numbers we've talked about, the customer count and the customers paying us over $100,000 ARR, that's kind of what drove the upside, and that's kind of consistent with what we disclosed before. Those metrics describe more new customers, more customers doing bigger deals. And if you look at our strategic focus going forward, these things, customer identity, especially security and this – the neutrality and the heterogeneity represented by the Okta Integration Network, these things apply to customers of all size, but they, I think, apply even more and they're more relevant to the larger customers, which is why that's a big part of our focus going forward. So that's really how I would characterize the upside there.

Yes. Mike, this – so this is Frederic. I'd just add to that, and you actually mentioned in your question, it's not the first time that we're seeing kind of that increased growth and acceleration. It's an ongoing trend. And I think taking a step back, it's just the – a sign of this early but very powerful shift that you're seeing in the enterprise of more and more companies adopting enterprise cloud solutions and the opportunity that we can help them with that adoption.

No. That makes sense. Thanks, Fred. And then as you guys look at scaling the sales organization, at least in the context of the momentum we've seen, can you speak to the internal metrics you're targeting or potential rep productivity floors you may set in planning for incremental hires, whether that's heading into the year or throughout the year?

Yes. The way – we look at that basically and we've managed this for several years now is that we want to grow as fast as possible, but we also want to want to our sales and marketing cost to be paid back. And that's the floor we look at, right, so that payback of sales and marketing investment over time. So it's like grow as fast as you can but make sure that you're not doing it a point where your sales and marketing cost and investment is becoming inefficient. So we're – that's kind of how we manage the business, and that's been consistent for the last four years that we've done that.

That makes sense. Thanks for taking the question, guys.

And we'll take our next question from Sterling Auty with JPMorgan.

Thanks. Hi, guys. Wanted to ask, Todd, you laid out the priorities for 2018. How do we translate or interpret that into what that means for possible new product introductions this year to accomplish those goals?

I think that – well, I can't give everything away because we have Oktane coming up, but I would say, broadly speaking, that the areas I outlined are strategic focus areas, so security, customer identity and the Okta Integration Network. You'll notice that those aren't products, right? Our specific products are things like Single Sign-On, Universal Directory, Lifecycle Management, API Access Management. So those focus areas really those can be – we can do a lot in those focus areas with our current products, and we can also broaden our product portfolio within those focus areas. So we're kind of working hard on both dimensions, and we'll have some updates at Oktane. And we're excited about the next year and the years after that.

Sounds good. And one follow-on. As you look at the strength in the quarter to those product areas, how would you kind of at least rank order qualitatively where you're seeing the biggest pull-through in terms of the choices of customers?

I would – I think that we – in terms of like product mix or customer identity or employee identity, the – as I mentioned to, I think in response to the previous or couple of questions ago, there wasn't anything that was really different materially from previous quarters. It was just bigger companies are buying bigger subscriptions from Okta. The evidence there is that – the number of customers now paying us over $100,000. Customer identity continued to be strong. We gave some really good examples of customer identity wins this quarter: JetBlue, which is a new customer; and also Farmers, which is an upsell. And then we're also adding new customers. So in terms of like hitting on all cylinders, the growth and momentum is powerful.

Good. Thank you.

Thanks, Sterling

And we'll take our next question from Alex Henderson with Needham. Please go ahead.

Thank you very much. I've got a couple questions for you if I could. The first one is I was wondering if you could talk a little bit about the competitive landscape, some of the companies like Centrify or Duo or people like that, that are trying to hone in on your category. Clearly, you guys are outperforming all of them, but any sense of price pressure or alternate price points would be helpful to talk about. And the second question – I was just over at the CyberArk conference, and they highlighted that you guys, in the context of your partnerships and how that can help them get some business, they also mentioned that they had reciprocated the other direction. So the question is relative to your partnership structure, how much of your lead book is a function of you going in, in partnership with other companies that are pulled in on a project and then see that they need a portion of what you're offering and bring you in. How big of a piece is that?

Thanks, Alex. Greatly appreciate. This is Frederic. I'm happy to talk a little bit about that. I'll take your questions in order. So the first one on the competitive side, I think as we've outlined earlier in our prepared remarks and certainly in the – as a follow-on to previous quarters, the market opportunities that we're going after are very large market opportunities, right? So when you think about managing and securing the extended enterprise and then you think about customer identity and access management, there's tens of billions of dollars being spent in these spaces every year. So obviously, when you have these very large market opportunities, there is going to be competition. You mentioned some of them. There's also some of the platform players that are traditionally trying to bundle some of their applications together. So I think that the reason that we're seeing a lot of success and we're very fortunate in the business are a couple of the key characteristics of the Okta Identity Cloud, specifically and in particular, independence, I think, is very important. As we talked about, a lot of these large enterprises that are deploying applications, they're doing it in a best-of-breed world, so they're picking the best collaboration apps, the best enterprise mobility apps, whatever the case may be. And we – obviously, our mission is to enable any organization to use any technology, right? So when you do that, we're not beholden to any product suite, and we can really play that role of swizzling across operating systems, across networks, across devices, across applications. And I think that really has played to our advantage. Specifically when it comes to competition, we have not seen any change in competitive rates. Obviously, we're paranoid folks, right? We're also always watching the survey carefully.…

Could you throw any numbers around the degree to which that's additive in any given period? And if I can follow up with one additional point. SD-WAN and digital transformations are obviously driving a lot of decision-making. How – is there any quantification of how often that's a driver of pulling you into a transaction as a facilitating technology footprint?

Yes. Sure, absolutely. So I don't have any specific numbers on what the CyberArk partnership or other partnership bring us into. In general, as we've talked about before, we have a largely direct go-to-market sales motion today. We do work closely with both technology and distribution partners, the global system integrators. You might have seen KPMG just announce today that they're building a practice around our – cyber practice around Okta, which is great. And you're going to continue to see that as we expand and particularly internationally. But I don't have any specific numbers to give you there. On the latter point, yes, digital transformation always makes me laugh. It might be the most common or overused term these days and kind of seems to mean everything to everyone. Certainly, when you break it down, look, every company has to become more modern when it comes to their existing enterprise infrastructure. You have to provide a better user experience to their employees. They have to make the technology more secure. They have to reduce costs. Those are things that continue to happen. And then on the customer-facing side, every company has to become a technology company to some degree, right? Every company has to improve their customer interactions, their partner and vendor experiences because if they don't, their competitors are going to do that. And so certainly, I mean, those are very broad trends that, I think, again, I personally believe are pretty early in the market. But yes, I mean, the – we're certainly tied into a lot of innovation and a lot of projects that have those terms somewhere baked in there.

Thank you very much.

[Operator Instructions] We'll take our first question from Jonathan Ho with William Blair.

Good afternoon and congratulations on the strong quarter. There's something I'd like to start out with your international business, and just give a sense of how you think about the maturity of some of the markets outside of the U.S. And potentially, how do you expand into those markets or drive faster adoption?

Yes, absolutely. Thanks, Jonathan. This is Frederic again. I think it's early days for our international expansion, but I think the opportunity for growth there obviously is tremendous. If you look at the business opportunity in North America, no surprise, right? Company that was started in North America, there's a lot of existing opportunities here, and we just have to start continuing to penetrate that across all segments. But the international opportunity is a big growth opportunity for us. It's one that we're making very good strides in, in my opinion. This last quarter, overall, was the strongest quarter that the EMEA business, in particular, has ever had with some great new customers joining us in Europe and in segments that are newer to Europe for us, for example, financial services, great new financial services customer that joined us in Europe, and you're going to start to continue – you're going to continue to see that. I think we hired a new GM of Europe. He's been onboard about six months. I think he's doing a great job of getting his feet under him, and I expect to see that continue to progress as we go. I think just trailing on the last questions, one of the ways we're going to continue to do that distribution is not just direct but more and more partners internationally in Europe and particularly Asia Pacific, and those are things that you should expect to hear from us in the quarters and years ahead.

Got it. And then just as a quick follow-up. I think you guys added two factor authentication as one of the base standards in terms of your core product. Can you talk a little bit about the dynamics there and whether there's been any shift in terms of the adoption of multifactor? Has this accelerated things? I just wanted to understand maybe the dynamics around that and potentially the win rates as well.

The – So we did. We added basic multi-factor authentication to our standard Single Sign-On product, and the adoption of that has been fantastic. And I think that product, Single Sign-On, it's the best product in the market by far. It's – the momentum there continues. But also at the same time our Adaptive Multi- Factor Authentication continues to do very, very well. And so the basic components of multifactor in the Single Sign-On product means – the objective there was more companies having better security by default, and that's been accomplished there. And then at the same time, we're driving upsells into our Adaptive Multi-Factor Authentication product, which is – has all of the advanced factors like you can use your phone and do push technology. You can have advanced policies around when the second factor for a certain resource is prompted, et cetera, et cetera. So we've seem to have hit the market there in terms of the momentum and the growth with both the basic product, Single Sign-On, and really, "the upsell product," which is Adaptive Multi-Factor Authentication.

Great. Thank you.

And we’ll take our next question from Gray Powell with Deutsche Bank.

Hi, guys, thanks for taking the questions and congratulations on the report.

Thanks.

Just a couple of quick questions. Is there a way to roughly quantify the mix of your growth that’s coming from the support of on-premise applications versus cloud apps? And then what stage or what inning do you think we’re at with the opportunity to displace legacy on-prem solutions?

It’s a really good question. I don’t have the number in terms of like – I don’t have a number about what growth is being driven from on-prem apps versus cloud apps. I think that I’ll just say that this company was started on a belief that the center of gravity of IT was going to shift to the cloud. But also, we’re pretty pragmatic. We think that they’ll always be on-premise to some degree. So we’ve built a platform that is a cloud-based platform, but it can connect – it’s very powerful and can connect on-premise and cloud. And I think one of the big picture factors that’s driving our success is that the shift to the cloud is happening, right? And it’s accelerating, and that’s why more people are choosing us and more people – more of their workloads are in the cloud and on and on and on. In terms of the – what inning are we in, we joke about it. Like, we say we’re – it’s in the early innings. Like, we think it’s definitely like the first or second innings, but it’s one of those games where it’s like 11 to 9 and both the starting pitchers have been knocked out and it’s been going on for a while. So it’s going to be a long day at the ballpark but fun day, a fun day.

Gray, I would – this is Frederic. I would just add to that, that when it comes to legacy identity providers, some of the traditional on-premise incumbents that you would expect, I would just add a couple things. First of all, it’s a gradual process, right, meaning that you’re going to see this existing IT infrastructure. They don’t throw anything away. What they do is they buy new technology. They try to integrate them. That works very well for us. We work very well in this hybrid environment. And typically, we’ll go into a customer. They’ll have a specific problem that they’re trying to solve. They might have Oracle or IBM running on-premise. They have a specific problem or initiative they’re trying to solve. They’re trying to roll out office 365 or roll out Workday through a wide deployment. We integrate with Oracle and IBM, get them up and running quickly. We get that deployment rolled out to all their employees, and within a quarter or two quarters, we come back to the CIO and talk to him or her and we say, "How was that experience?" They say, "That was great." And then we’ve earned the right to say, "Great." Now let’s talk about your existing Oracle or IBM on-premise infrastructure, and here’s the road map over the next 12 or 24 months for us to turn the lights off on that infrastructure." So this is not a forklift upgrade program. This is not a big bang program. And frankly, I think that’s why you continue to see the very strong net dollar retention rates that we have and the continued expansion in the enterprise.

Got it. That’s really helpful. Thank you.

And we’ll take our next question from Richard Davis with Canaccord.

Hey, thanks. So I guess two quick questions. So one of the things that’s important to developers is strong support of open source systems. Could you kind of talk about, I think it’s your Okta developer experience team, but how they think about and work with that part of the ecosystem in terms of SDKs, working with Android, Java, Angular, et cetera, and stuff like that?

Yes. That’s a big part. I mean, if you’re building something – a lot of developers are choosing open source tools and languages and platforms, and we want to be on all of them. And you’ve seen the announcements over last six months or so broadening our reach into more and more of those environments, those platforms. And think about – think of the developer experiences like mapping the core APIs of the Okta Identity Cloud to those specific languages, right, because every developer wants the native support for what they’re doing in their language. And that’s – we’re busy doing that. You can expect to see more of that over the months and years ahead.

And then just quick follow up. You guys didn’t get hit with the – I guess, it was that SAML authentication bypass vulnerability. Is there – do you have like a workflow? Or what allows you to dodge those bullets? Because those are bad dudes out there trying to mess things up.

Yes. I mean, there’s a couple of things that are really important. One is that security – bugs around security and vulnerabilities in security and problems, it’s inevitable, right? You see what’s happened with things like the chips with Meltdown and Spectre. You’ve seen – over the years, you’ve seen different vulnerabilities and different compromises. I think our big advantage is that similar to how we can effectively scale to thousands of integrations and maintain an enhanced Okta integration at high velocity is that we can do it centrally, right? We can manage and we can maintain the system centrally, and those benefits accrue to all of our customers. And it’s true for – like new features we release, we release a month. There’s no upgrade required, and it’s also true if we have to fix security vulnerabilities, right? We fix them once centrally, and they’re immediately patched everywhere. And it’s a huge advantage to the cloud model. It’s a huge advantage to how we’ve architected our service. And then that’s regardless of the specifics of any one issue. It’s just kind of an architectural superiority of what we’re doing, and it’s kind of – it’s playing out well for us.

Got it. That’s helpful. Thanks.

And we’ll take our last question from Heather Bellini with Goldman Sachs. Please go ahead.

Great. Thank you. Yes. I just had a question. Most of these have been asked already but just one that I still had. You guys talked about, on your roadshow, ACV per large customer. And I know you cited you had 691 customers now that spend over $100,000 and you talked about the growth rate. But can you talk about how the ACV, they’ve been spending, those customers over $100,000 has been trending over the course of the past year? Thank you.

Yes, Heather. So the trend has been very positive from the standpoint that whatever metric you look at externally if you look at those customers but frankly, more importantly, how we look internally. The annual contract value from those customers has been increasing and been increasing on a sequential basis each quarter.

Okay. On the roadshow, you guys also talked about the cohorts, the different cohorts. Do you guys have any updated stats in terms of the cohort numbers that you were discussing back then?

Yes, I mean, I think, the – for those particular cohorts we were talking about on the roadshow and have talked about subsequently, the combination of the strong net retention rates that we’ve been posting in addition to the fact that our gross margin, subscription gross margin, especially, has been growing, those cohorts continue to generate more and more profitability for us. So we feel really good about how that’s been working for us to this point.

Okay. Great, thank you.

And we have one more question. We’ll take our last question from Rob Owens with KeyBanc Capital Markets. Robin…

I think maybe they maybe already asked one. It wasn’t Rob. It was Michael.

Hey guys, sorry about that, it was a mute button. Mike Casado here for Rob Owens.

Hi, Mike.

Hi. Just one for more from me, sort of related to Heather’s question. Recognizing that you guys posted a very healthy retention rate, I still wanted to ask if you’ve seen any changes in the up and cross-sell cadence just given the strength you’ve seen in initial commitments.

Yes. I mean I think that we’ve seen – we continue to see very strong upsell and cross-sell expansion in the business. We have – you point, with the initial commitments the customers are making, we have seen those increase also. But across the board we’ve seen good traction and good positive expansion on both upsell and cross-sell. And I think one important thing to also mention is that, in this past quarter, not only did we have a very strong net retention rate, but our gross retention rate actually ticked up a bit, too.

Fantastic. Thanks, Bill.

And that does conclude our question-and-answer session for today. I’d like to turn the conference back over to Todd for any additional or closing comments.

I’d like to thank – just thank everyone for the support and attention, and we love talking about the story and the business. And we also are very, very focused on the future, and we’re working on building a very important, long-term, large, successful technology company. And while we’ve had some success, we do believe that we’ve only just begun on this journey, and we look forward to the next quarters and years as we – as the story continues to play out and we continue to follow up on that success. Thank you very much.

And once again that concludes today’s presentation. We thank you all for your participation and you may now disconnect.