Okta, Inc. Class A Common Stock 2027 Q2 Earnings Call

Hi, everyone. Welcome to Okta's second quarter of fiscal 2027 earnings webcast. I'm Dave Gennarelli, Senior Vice President of Investor Relations at Okta. Presenting in today's meet will be Todd McKinnon, our Chief Executive Officer and Co-founder, and Brett Tighe, our Chief Financial Officer. Eric Kelleher, our President and Chief Operating Officer, will join the Q&A portion of the meeting. At around the same time that the earnings press release hit the wire, we posted supplemental commentary to the IR website. Today's meeting will 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 and uncertainties that may cause our actual results, performance, or achievements to be materially different from those expressed or implied by the forward-looking statements.

Forward-looking statements represent our management's beliefs and assumptions only as of the date made. Information on factors that could affect our financial results is included in our filings with the SEC from time to time, including the section titled Risk Factors in our previously filed Form 10-K. In addition, during today's meeting, we will discuss non-GAAP financial measures. Though we may not state it explicitly during the meeting, all references to profitability are non-GAAP. 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. A reconciliation between GAAP and non-GAAP financial measures and a discussion of the limitations of using non-GAAP measures versus their closest GAAP equivalents are available in our earnings release.

You can also find more detailed information in our supplemental financial materials, which include trended financial statements and key metrics posted on our investor relations website. In today's meeting, we will quote a number of numeric or growth changes as we discuss our financial performance, and unless otherwise noted, each such reference represents a year-over-year comparison. I'd like to turn the meeting over to Todd McKinnon.

Todd? Thanks, Dave, and thank you everyone for joining us this afternoon.

Our Q2 financial performance was driven by broad-based strength across our core workforce identity and customer identity platforms. Particular areas of strength were once again with large enterprises, partner engagement, and contribution from our newer products. This afternoon I'll walk through the strength of our core business, the momentum of our portfolio of new products, and our investments in product innovation and breadth. Finally, with AI security remaining top of mind for our customers, I'll share the advancements we're making with AI product development and early customer wins. We were pleased to see an acceleration in annual contract value growth for both workforce identity and customer identity, driven by strong execution and sales productivity. Additionally, the emerging use of AI by organizations and threat actors alike has further elevated the role identity plays within a company's security posture.

Organizations are accelerating their infrastructure modernization timelines to address this heightened threat environment. We are seeing conversations that begin with securing AI broaden into identity modernization initiatives. Our portfolio of new products are an important and fast-growing component of our solution set. in Q2, new products represented approximately 30% of bookings. Okta Identity Governance was once again the leading contributor. On average, the ACV uplift when any of the new products are included in a deal is about 40%. Product innovation is a primary investment area aimed at accelerating top-line growth. Those efforts have already resulted in faster product velocity, including advancements in our AI products and in the public sector. We are excited about the launch of Agent Gateway, which enforces policy at runtime and delivers vendor-neutral protection across platforms and clouds, including Cloud Code, Cursor, GitHub Copilot, Salesforce Agentforce, and any agent pointed at an MCP endpoint.

The public sector has been one of our best performing verticals over the past few years. We look to build on this momentum with the general availability of Okta for AI Agents Core. With this new SKU, Okta became the first independent neutral identity platform to bring AI agent governance to highly regulated environments, including FedRAMP and HIPAA. We are also unlocking more U.S. federal opportunities with the recently earned Impact Level 5, or IL5, the highest level unclassified cloud authorization for the U.S. Department of Defense. Achieving IL5 authorization is a critical milestone as defense organizations aim to meet the DoD's 2027 Zero Trust mandate. In addition to our organic product innovation, we have a successful track record with our tuck-in acquisition strategy, which helps accelerate our product roadmap.

We just completed the acquisition of Spera, a cloud-native identity security platform that detects and mitigates threats across human, non-human, and agentic identities in multi-cloud environments. Spera will be integrated into a unified security offering with our existing Identity Threat Protection and Identity Security Posture Management solutions. The combination strengthens Okta's AI security offerings with enhanced visibility into autonomous agent behaviors and additional runtime controls to ensure secure agentic activity in real time. While there has been a lot of talk by other companies about identity security for AI, Okta has generally available products that are already delivering real value for our customers. Okta's proven leadership and identity uniquely positions us to secure the AI era. Identity is the primary control plane for securing AI, and customers are extending the trusted foundation they already rely on with Okta's neutral, modern, enterprise-grade identity platform to now cover agents.

We continue to build on three unique advantages to help our customers navigate this shift: distribution, product breadth, and neutrality. While adoption remains in its early stages, momentum is growing, and those advantages are translating into customer demand reflected in the dozens of AI deals we won in Q2. Our product breadth was a key driver in securing a multimillion dollar Okta for AI Agents deal with a Fortune 50 healthcare company. AI was spreading across their organization, and they could not tell where their agents were, what those agents were connected to, and what they could do. Okta will give them a single control plane to discover, secure, and govern those agents, helping them meet strict HIPAA compliance requirements. Okta will manage their entire identity fabric, including agent governance, Privileged Access Management, and identity security, helping to ensure every human, non-human, and agent identity is managed.

Our distribution advantage comes from the reach and trust we've built as the identity system of record for more than 20,000 customers. We saw it at work with a global business management consulting firm that was racing to put its own AI agents into production. After considering an in-house build, the firm chose Okta for AI Agents for its single control plane for human and non-human identities, faster deployment, and lower cost of ownership. Okta will carry the agents' identities through every handoff, binding the agents to the original employee's delegation with a verifiable record that can satisfy client and regulator requirements. Our neutrality was critical to an Okta for AI Agents deal with one of the world's largest asset managers, where AI was rolling out faster than their security team could govern.

Thousands of agents from multiple vendors were running in production, creating risks the organization couldn't consistently see or control. Only Okta's independent and neutral platform could cover their heterogeneous environment, from employees and devices to AI agents without vendor lock-in. Okta will provide visibility across all agents and enforce least privileged access so every agent gets only what it needs. The common theme across these three wins and the other AI deals we've closed is that customers want to move quickly without compromising on security and control. Okta for AI Agents lets them do both by helping them discover, govern, and protect every agent. More broadly, the fragmentation of the AI landscape creates significant opportunities for Okta. As enterprises deploy agents across models, clouds, applications, and infrastructure, they need a neutral identity layer that can secure it all.

That's why we partner with industry leaders, including Anthropic, which this quarter named Okta the first identity provider supporting enterprise-managed auth for MCP connectors. Now generally available, enterprise-managed auth enables IT teams to centrally authorize and govern how Claude connects to enterprise applications. We also recently expanded our work with AWS, Cisco, OpenAI, Databricks, and Snowflake, alongside more than 25 new Cross App Access integrations, providing a standardized way to govern how AI agents connect to a growing ecosystem of enterprise applications and resources. In just a few weeks, we'll talk more about AI security and product innovation at Oktane, our annual customer conference. We'll bring the market's leading minds together to lay out the industry blueprint, open standards, and new innovations required for building the secure agentic enterprise. In addition to the keynotes and product demos, we will host a Q&A for analysts and investors.

Come join us in Las Vegas or join us online for the AI security event of the year. To wrap things up, we're pleased with the strength and durability of our core workforce and customer identity businesses, and we're enthusiastic about the early success we're having with our AI products as customers recognize our advantage as the leading neutral modern identity platform. It was a strong start to the first half of FY 2027, and we look to build on our momentum as we move through this year and beyond. I want to thank the entire Okta team and our loyal customers and partners who put their trust in us every day. Now, here's Brett to cover the financial commentary.

Thanks, Todd, and thank you, everyone, for joining us today. Our strong Q2 financials build on the momentum we've generated over the past several quarters. We continue to focus on operational efficiencies throughout the organization while driving top-line growth by investing in product innovation, go-to-market, and our partner ecosystem. As a result, we experienced acceleration in many of our top-line metrics while also maintaining very healthy profit and free cash flow margins. I'll provide insights into our Q2 performance and then move into our outlook for Q3 and FY 2027. Q2 was a record bookings quarter for a non-Q4, driven by strong pipeline conversion and deal expansions. We continue to see productivity gains within our go-to-market organization, aided by our stable sales force that has low attrition and high AE tenure rates. Strength with large enterprise customers was punctuated by over 20% growth in $1 million-plus ACV customers.