Good day, and welcome to the Okta Second Quarter Fiscal Year 2019 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Catherine Buan, VP of Investor Relations. Please go ahead.

Good afternoon. And thank you for joining us on today's conference call to discuss Okta's Fiscal Second Quarter 2019 Financial Results. My name is Catherine Buan, VP of Investor Relations at Okta. 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, our market positioning and benefits that maybe derived from our recent acquisition. 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 Annual Report on 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 Web site. Now, I’d like to turn the call over to Todd McKinnon. Todd?

Thanks, Catherine. And thanks, everyone, for joining us today. Our second fiscal quarter was another record quarter for Okta with total revenue growing 57% and calculated billings growing 53% year-over-year. We continue to invest across our business while improving our bottom line. Operating margin improved over 300 basis points, while free cash flow margin improved more than 500 basis points year-over-year. We also had a record quarter in terms of customer growth, especially and customers with over $100,000 of ARR, which grew 55% year-over-year. We had a number of customer up-sells and new wins in the quarter of which I'll highlight a few. First, an existing Okta customer at 21st Century Fox is using Okta as a key part of its Zero Trust architecture to manage access for more than 30,000 employees and thousands of partners globally. This quarter, the Company added API access management to streamline authorization and further strength in the Company's security posture. A new customer win in the quarter was Meraki, a leader in networking solutions and a division of Cisco. Meraki was specifically looking for a lifecycle management solution for its 1,500 employees and they chose Okta after evaluating other options. The Okta Integration Network was a strong selling point of Meraki as they needed to connect custom applications to other existing cloud applications. Meraki selected Okta SSO universal directory, multifactor authentication and lifecycle management to stay on IT cost, improve productivity and increase overall security. NTT Data services, a top 10 global IT services provider, was another new customer win in the quarter. They selected Okta to rework their identity platform as their existing solution couldn't scale quickly to keep pace with their growth, particularly in M&A scenarios and for supporting their remote workforce. NTT selected Okta for SSO universal directory, lifecycle management and…

Thanks Todd. And thanks again to everyone for joining us. I'll first go through our results for the second quarter of fiscal year 2019 before getting into our outlook. We had another strong quarter with revenue totaling $94.6 million, growing 57% year-over-year. Subscription revenue totaled to $87.9 million in second quarter, an increase of 59% year-over-year and comprised 93% of our total revenue, up slightly from 92% in Q2 last year. Professional services revenue was $6.7 million, an increase of 36% over the same period last year. Geographically, U.S. represented approximately 84% of our second quarter revenue compared to 85% in Q2 last year. Approximately 60% of our second quarter revenue came from outside of the U.S., which represents growth of 63% over the same period last year. We continue to view our international business as another long-term growth driver. Moving on to billings. Calculated billings for the second quarter totaled $109.4 million, an increase of 53% over Q2 last year. We are very pleased with our calculated billings growth and the underlying demand that continues to drive our business. Contributing to our high billings growth rate was better than expected bookings in the quarter, the beneficial timing of certain invoices and a few customers with multiyear upfront billings. Current calculated billings growth for the quarter was 50% year-over-year. Our strong billings growth has also benefited from momentum within our customer base and from new customer additions. The total number of customers at the end of the quarter came in at over 5,150. And we saw our customers with ARR greater than $100,000 grow to $837, up 55% year-over-year, which was an acceleration from Q1. We saw broad additions across our customer base and had record net new total customers and customers with ARR greater than $100,000, up $450 and…

Thank you [Operator Instructions]. Our first question will come from Rob Owens with KeyBanc Capital Markets.

If I look at customer count and growth there, or customer count over 100,000 ACV, it seems like it's inflecting here. And I'm curious, are you seeing this as a function of better sales force productivity, the market just opening up a little bit at this point? I mean, given where you are in the life cycle, it's surprising to see a modest inflection and growth to the positive here. Or are you seeing more partner-lead types of opportunities that are helping?

Rob, I think its couple things. I think the biggest opportunity for us has been over the last five years has been, we've talked about these big tailwinds that are behind us, move to the cloud, the prevalence on everyone's mind about security, every company trying to become more of a digital business. So those are big macro tailwinds. And I think the biggest opportunity for us has been getting that message out there that identity is really important to facilitate all of those transitions and to make those -- to take advantage of all those transitions. But I think what's happening is that that message is getting out there. So everyone knows they got to go to the cloud, everyone knows they have to be secure and transform their businesses to digital. But they're starting to realize more and more that identity is a key of that and that obviously is very, very good for us and I think that's really what's driving that.

And then I guess relative to the October quarter guidance, I'm curious what would cause the sequential flatness that you're guiding for at this point; given A, you've never seen it historically; and given B, just the customer velocity that you're seeing overall. Why would you see more of a sequential uptick for October as compared to July? Thanks.

Rob, so we've obviously been very pleased with the growth we've had. It's been very strong. As Todd said, it's really because the market is -- just a big opportunity for us. The forecast guide that we gave is growth of 43% to 45% year-over-year. So we feel like that's a very strong guide. But that said, as you know most of our business, going forward, is coming from large enterprise customers. And as you know, those deals can have longer sales cycles, sometimes be a bit choppier. So we're being prudent with our forecasting. So that said, we feel there's a lot of opportunity and feel very positive about the business going forward.

Our next question will come from Terry Tillman with SunTrust Robinson Humphrey.

I guess, the first question is just related to pricing and packaging. You can see where you guys added to SKUs from some of your products like SSO, you've got an adaptive version or a higher price point version, and a couple of the other products, I think including MFA. It looks like you've got additional SKUs now that are higher price point SKUs and also just other products that now there's a clear and transparent pricing model for it. So I'm just curious what changes or impact you're seeing from some of these additional price points? And then I have a follow-up question. Thank you.

So I think that as you mentioned, I think that it's important understand that the platform is adopted by modules or by products and it's also adopted by users. So you can start with customers as customer identity as your users or you can start with employees, you can add the other type of user. You can start with one product for customers and add multiple products for customers, or start with one product for employees and add more products there. We've over the -- we've had a pretty consistent history of innovation in terms of building new capabilities into the platform and then providing those customers as separately price products or modules. And what that does is it gives the customers a lot of flexibility on the various use cases they want to start with and show success and then build from that success. I talked earlier in my comments about customer driven, customers success driven culture, that hand-in-hand with that you have to have this flexible platform that lets customers incrementally adopt and get value as they adopt it. So what's happening more and more is really full-fledged multi-product and multi-used case adoption, which is driving some of our numbers. So hopefully, that gives a better perspective on what's going on there.

And I guess my follow-up question just relates to, at Oktane, I was really intrigued around threat insights and talking with customers and prospects. There seems to be a lot of interest in that. Threat insights, maybe you could talk about where you are versus a couple of months of move from Oktane and really just your story around analytics? Because of all of this usage, it seems like you are going to have a lot of power to really bring this analytics and credit inside to bear. So how are you going monetize it and what impact that's having in the business in general? Thank you.

Yes, I think it's one of the -- what we could value we can deliver to customers based on the data that the service generates is, I think this is underappreciated about the potential value we could deliver there. So we're really excited about that. We talked about threat insights this is a new capability, we talked about at Oktane. And we're really excited about how that's going. It's in early beta release we’re proving it out with a couple of customers. And basically what it does is it gives customers broad-based insight into all the threats that are emerging across the entire platform and help them to take proactive security measures in the face of those threats for their own organization. So it's really taking this data and then making the service more valuable, because of its broad swath of data we have for each individual customer. So we're working hard on threat insights and of course we're thinking about what are the logical ways to expand that and make it broader and make it more impactful, just in terms of innovation and specific innovation with -- that takes that data underlying the service and exposes that to customers in a way that's helpful for them.

Next we'll take a question from Alex Henderson with Needham and Company.

This is Dan Park on for Alex, thanks for taking my question. So I guess I know you noted that there was some strong progress with up-sell in the quarter. I was just wondering if you could provide some additional color around what solutions were driving the upside.

I think as you noted, we're continuing to see not only strong growth in net new customer additions by adding 450 for the quarter, but also we continued with a very strong dollar-based net retention rate of 121%. I think what you're seeing is that as organization starts to find that the Okta service and platform can be deployed quickly to solve specific use cases, they get comfortable at what we're doing and they start to see a lot of other opportunities where they can expand their usage. So again whether they start with a workforce opportunity and then move to customer identity management, or whether they start with a specific issue that they're looking to solve and then they expand to other products, there is a lot of continued vectors of expansion in the service. And we're fortunate that our customers are finding lot of value with what we're doing for them.

And I would just add, the customer identity part of the product suite is its newer so we introduce that second to the employee identity. And as a result, it was earlier in the life cycle in terms of maturity, and that's really matured over last several quarters. So what you see is more and more companies starting with customer identity and then adding the employee identity later. So if you look at -- we talked about the large asset management new win in the customer that started as a customer identity deal. So that's happening more and more. And then also with that maturity, the add-on sales that maybe companies that started with employee identity but the add-on sale for customer identity is bigger, because that product line is more mature now. So those are couple trends I would highlight.

Our next question will come from Sterling Auty with JPMorgan.

Just want to maybe expand upon the answer that you just gave. So Todd, in your prepared remarks, you talked about your keys to success, expansion was one of those keys. And what I'm wondering is, how much of that expansion that you're seeing is what you just answered, which is the additional use cases and additional users versus expansion through selling additional products into those existing customers?

I don't know the exact breakout of that. I know that to the extent of major shifts, the newer products like multifactor authentication, adaptive multifactor, advanced SSO, those are early in their life cycle and they're growing fast. So every quarter, they make more contribution. And then the dynamic I just mentioned in terms of customer identity is definitely true. The product is maturing the build versus buy decision in the marketplace is becoming more well known to be something you could buy. So you're seeing more deal start with that and then bigger expansions because of that. So that's an important dynamic there.

And what I would add on that, Sterling, don’t get me wrong. We're very excited about those dynamics and the expansion within customers. But again, it's very early for the business these are very, very big markets and there's a lot of opportunities with both net new customers, as well as as we get into more and more of the large enterprise. They have more and more opportunities where they can leverage this service. If you think about large organizations, like Allergan where they have many, many different patient, and doctor, and clinician forward facing Web sites, there's a lot of different ways that we can help them in what they're trying to do.

And then just as a follow-up, I believe at Oktane, you mentioned that you had a number of partnership announcements. I think VMware was one of the elements that you were talking about. I'm just curious I know it's still early days. But what conversations are you getting from customers around that endeavor?

Yes, we're very excited about the partnership with VMware. We had a good presence with them at their VM World a couple weeks ago. And we thought that the opportunity to expand with both net new customers and joint customers, all these customers are thinking about a best of breed world where to very heterogeneous environment. They're trying to manage a lot of infrastructure and devices, some of which are company-owned, some of which are brought by employees. They're trying to leverage the best technology out there. And what you see is a very strong demand for joint products like what we have with VMware. So its early days for the partnership, as you mentioned, since Oktane was only a couple months ago. But I'm very excited about that and I think there's huge opportunity ahead.

[Operator Instructions] Next we'll go to Heather Bellini with Goldman Sachs.

I just was wondering, Todd, maybe this is for you. Just how do you think the contribution of the dollar-based net expansion has changed over the years? And I guess what I'm trying to think about is, is there a way to characterize how much of that is coming from new seats, how that might have changed over the last few years versus the addition of the new products that you've been successful with? And then I have a follow-up.

Heather, I don’t know the exact number and even if I did know, but we haven't broken it out so I probably couldn’t say it. But I do know that what I talked about, what I mentioned for the previous couple of answers is, we were seeing progress in the newer products like multi factor authentication, advanced SSO and so forth, smaller basis that are newer but we've seen -- we're happy with the progress there. And this dynamic on customer identity is real. Although, I don't have the exact numbers, I do know that product as the product has matured we're leading more deals with it than we were when it was not as mature. And it's also continues to be bigger contribution to overall expansion. And that's important because that's a big area for us. If you look over the last couple of years, we did an acquisition to help bolster this, the Stormpath acquisition. We're working on this a lot. We think it's a very important trend and we're happy to see progress there. Although, by no means, are we done there that market has I think a long, long way to run and so we're just in the early stages with that.

And I guess just a follow-up on what you just said. Are those, when you are adding things like MFA, for example, are people have been taking on bigger seat deployments right away than maybe the initial sale would have been on identity management, maybe the last time they signed on? Is there any way to think about how fast the people are taking a bite out of that -- how big the bite of the Apple is when they start adding these new product versus their initial sale?

So I think that it's -- a typical pattern is start with SSO for every employee and then add customer identity, which depending on the company, could be bigger to much bigger than the employee deal. Outside it's true for every company, because some companies have small number of customers relative to large employee basis. But generally speaking, the customer identity investment for certain companies could be bigger. And then you could add something like a multifactor to the employee population that's usually done for the entire employee population and has an extra module just like the original SSO deal with the entire population. So we get above from that.

And then just my follow-up for Bill was going to be of the net increase, the 90 customer net increase and customers with ACV over 100,000. How many of those came from new logos?

A majority of those came from new logos, Heather, but there was -- so that's very positive. So we're still seeing a lot of incremental billings and the majority of our incremental billings are coming from new logos. But the point we've been making earlier about the expansion opportunities we have once we have a customer in place with the 121% net retention rate demonstrating that, we see a lot of value obviously once the customer is there but are still getting a lot of upside, so to speak, from new customers and new customers are paying us a lot of money.

Our next question will come from Gray Powell from Deutsche Bank.

Just a couple of questions, and I want to follow-up on customer identity. I know you guys -- I know you just hit on this. But can you just help us think through the size of customer identity. Like, if a customer spending $100,000 per year on the employee facing products and then they purchase Okta for the external use case. What's the typical spend? And then did you say anything on just the mix of new business that came in from the external use case?

So when we think about customer identity, it's a pretty new market. Traditionally, it's been a build market so it's one where organizations would just set up the infrastructure themselves. They are now more and more realizing with things like scale, with things like security, the importance of performance for these large customer facing systems that it becomes a by decision and that's where we're getting involved. That's why we're -- when we talk about it being an early market but growing fast, that's the dynamic we're referring to. I think what's interesting to think about is the market for custom-developed applications by companies in the world is huge it's tens and tens of billions of dollars. And all of these applications need to use identity. So if you think about organizations who want to take Twilio off the shelf to use them for SMS communication and they want to take Stripe Okta off the shelf to use it for payment, we want to make it very easy for them to take identity off the shelf with Okta and put it right into their application. And you're seeing that with every organizations got to do more when it comes to B2B, when it comes to business to consumer, when it comes to as we talked about patients and customers, and all different use cases. And every organization has to look at this. It's hard to figure out exactly how that works and how customers think about it, but you can see that across the organizations there's a lot of opportunities for those. As Todd said, even small organizations could have large customer bases. And so even with small companies, you'll see deals into the six and seven figures when it comes to the external customer identity management. In terms of thinking about how that market is going to evolve, look, it's early but it's big and it's growing and we think it's going to be a very interesting market in the years ahead.

Just one more quick one. So it sounds like Adaptive in the phase seeing pretty strong demand. How do you think the acquisition of Duo by Cisco impacts the competitive environment there, if at all?

I think it's interesting transaction for a couple of perspectives. First of all, I think that lot of people don't realize this. But Duo is actually a really good partner of us. We have a lot of joint customers and our integration between Duo multifactor authentication and the Okta Identity Cloud is really robust and delivers value to customers. And I think that partnering with Cisco more broadly and Duo as part of Cisco is going to be great and we're very optimistic about that. We do compete. We have our own multifactor product that competes with Duo. And I think that for many, many customers as well, our complete solution in terms of MFA and identity is what they want. So we sell it to them. And we're confident that where we compete, we'll continue to do very well, even if it's part of a different parent umbrella organization. I do -- one thing when I look at it from a macro perspective when we started Okta, it was people thought cloud security and doing identity in the cloud was a very, very forward leaning thing to do. And I think it's interesting that you look at one of the old guard of technology in Cisco and someone that's really known for on premise of networks and so forth is really leaning in, in terms of getting on board with the cloud identity and cloud security. I think it's pretty exciting for where we are and the leadership we've shown to the market and where we could go from here.

Our next question will come from Shaul Eyal with Oppenheimer.

Europe, also a great acceleration, what's driving that. Is it just the overall demand, is it country specific the evolved relation and/or GDPR, or is it all of the above?

I think it’s primarily being driven by the market and the demand in the market. We're seeing as you saw growth of 63% year-over-year, so it's even growing faster than what is a very, very, very healthy growth in the U.S. So a lot of it is being driven and most of it I think is by the demand in the market. And obviously, we're investing now to realize that demand and capitalize on that.

And I think going back and building a little bit on the prior question on Duo and Cisco, and Todd you addressed your current partnership with Duo. What can you tell us about some of the other partnerships with some of the other identity related players, whether it's CyberArk, whether it's SailPoint. How is that coming along?

So we have a -- as you mentioned there are other very strong partners of ours out there that we do a lot with in identity. And if you think about the Okta Integration Network as a core piece of the platform that we built, it's what allows our customers to derive a lot of value out of not only Okta but the end-to-end use cases that we help them to solve. We have very good partnerships, as you mentioned with providers like SailPoint, like CyberArk, and many others. In fact, I don't know if anyone noticed yesterday, Proofpoint put out a press release about a very tight integration that we have now with them to both prevent phishing attacks for employees but also help remediate those attacks very quickly. That's just a great example of more and more technology partners finding great ways to integrate with our platform and our products to provide better solutions for both joint as well as perspective customers.

Our next question will come from Jonathan Ho with William Blair.

Just wanted to start out with ScaleFT, I just wanted to better understand the opportunity set that you see here, and maybe your thinking around timing for more adoption of, I guess the Zero Trust approach?

We're really excited about ScaleFT, relatively small primarily R&D company that we bought. And they had a product that -- their product is something called server access management, which essentially helps you give secure auditable access from server admin in the cloud environments. And we're excited about this for couple of reasons. One is that we think providing secure access for server admin is potentially a fruitful area for us. But also to do that from a technological perspective, you have to be very good at knowing exactly what's happening on the device, and doing continuous authentication of all the requests so that you can tightly control in a very flexible way what -- who has access to what server resources. And we're excited about taking those pieces of the technology and then broadening those out using that technology and applying them to the broader Identity Cloud so that we can control -- we can provide that super flexible, very controlled access to any cloud resource from anyone. So really democratizing that access and that’s this concept of Zero Trust where you don't trust -- the concept of trying to trust the network perimeter is outdated. Things are coming from so many different places and so many different networks and you're going to so many different resources, many of which aren't even your data center. You can't trust the network perimeter, you have to have -- you basically have to trust identity and you have to trust your identity system knows the person, device and the resource and makes the right security access decisions in a flexible way. And that's really democratizing this concept. And that's what we're excited about doing with some of the underpinning technology with ScaleFT.

And then the relative to the incremental investments that you talked about making in the second half. Where do you see the most opportunity? Is this increasing the number of people in the sales force, is this investing in product? Just want to get a sense for where those dollars are going?

We're investing across the business. There's a lot of opportunity, obviously, in R&D and in engineering. And we're going to continue to be aggressive in these markets. They're big markets and we're early. So we're going to continue to make sure that we have the best technology out there and that our technology helps our customers be successful. We're going to continue with our customer driven strategy. So you're going to see us continue to invest in customer success and in all those groups. Of course there is a big opportunity ahead of us, both in the workforce and customer identity parts of the business. So you're going to see us continue to build out that sales force. In particular, international, which we touched on briefly, both in the prepared remarks as well as in the Q&A, is a big opportunity for us. We're really excited about the momentum and we think that we can do a lot. And it's best of breed world and it's something we're excited to move forward with so basically, across the entire business.

And that does conclude our question-and-answer session today. And at this time, I'd like to turn the call back over to Todd McKinnon for closing remarks.

So thanks everyone for joining us. We're really excited about the business and the future ahead of us. We're also -- we're having our Investor Day on October 9th in San Francisco. Hopefully, you can all make it. We're going to talk a lot about the future and some of the product stuff we've been working on and the go-to-market organization, our investments there and a lot of these questions we've talked about here on the call, we'll go into more detail and give you more color on our thinking around some of these important long-term issues that are going to lead to our durable growth over the many years ahead. So thanks again, and appreciate your time. And look forward to seeing you on October 9th.

That concludes our conference for today. Thank you for your participation.