Welcome to a new episode of Opening Bid. I'm Yahoo Finance executive editor Brian Sozzi. Like I always say, this is the podcast that will make you a better investor and a better leader. And we have a first today — this is the first time we have an earnings exclusive on Opening Bid. Excited to talk to Okta co-founder and CEO Todd McKinnon. Todd, good to see you. We were joking off camera, I know you're a CrossFitter, we should be out there doing wall balls together. I don't know why we're talking about earnings. Yeah, it's like earnings or wall balls, pick whichever you prefer. They're both brutal — well, not in your case, I should say, because you're out here with an earnings beat. My earnings are better than wall balls. Your earnings are better than wall balls. So earnings upside, revenue upside. I mean, take us through what drove some of these numbers.
Well, I think big picture, identity and security are very important for companies in every industry, governments across the world, and it's reflected in our earnings and our performance in Q4. We're very excited about the numbers, about the growth, about the profitability, and more importantly about what it means for next year and beyond. We're in a big industry, it's growing fast, and we're a key player in that industry providing a lot of value to a lot of customers, and we couldn't be more happy.
Customers that come to you wanting to do business, what are they asking you for right now?
Well, I think the main thing is they want to be more secure and they want to innovate, and they want to do that at the same time that they can move their businesses forward. That's the whole point of this. It's all about what their strategy is — whether they're trying to expand their customer base, whether they're trying to make their employees more productive, whether they're trying to use systems in the agentic AI revolution. They're all trying to be more productive for their strategies. But to do that, they have to get their infrastructure in order, they have to make sure the right people have access to the right systems, the right machines have access to the right applications, and you have to do that with a foundation of identity. That's what we bring to them: a whole platform of products that can rationalize their identity across their entire ecosystem and make it secure, easy to manage, and easy to get onto business.
I've talked to so many people this year about AI agents. Everybody AI agents, everything's AI agents. What are these going to do to the insides of companies? I was talking to a big prospect a few weeks ago, and these folks in IT and security — they are in the same conversations and the same conferences, everyone's talking about AI. And he was reflecting a story to me where he said they looked around the room to each other and said, 'You know, all this stuff is not going to work unless we can get our identity squared away.' And the reason what he meant was that all these AI agents want to do work on behalf of users, they want to supplement users, they want to do all the rote tasks and then maybe have a real person step in for the critical steps in the process. The only way you're going to bring that together is if you have a good organization of who should access what, how your systems are accessed, and which machines and devices can access these things for all these use cases. So identity is an enabling layer for this agentic revolution, and that's what we can bring to customers across the board.
It seems easy, and I know it's not, but to launch AI agents inside of companies — it's really picking up steam. How less secure are companies right now as these agents start to permeate the insides of very big companies?
Well, if you think about it, we've come a long way in the last 10 years on security and authentication for people. So when you go to work, you can touch your fingerprint or use your face ID to log into all of your applications. I know you can because I know Yahoo uses Okta. It's true, I just signed in this morning. Yes, and so now what did that replace? Instead of you having to do that manually, 10 years ago you may have had a bunch of passwords written on your monitor — not you, because you're sophisticated, but a lot of users may have had a bunch of passwords on sticky notes. But now we're at the equivalent for AI agents. People are implementing agents and they have a bunch of passwords hardcoded in the app, in the agent, and that's a security breach waiting to happen. If that machine gets compromised, if that process gets compromised, those passwords will be out there in the wild and attackers can use them to log into the services the agent was supposed to be logging into on your behalf. It's not good. So what we're doing is bringing a standard way to do that — a standard security mechanism equivalent to using your fingerprint and face ID at work for the agent. The agent can log in with a secure token to all the applications it accesses, authorized for the right agent, not the wrong one. And in that workflow, when you have to step out and get a human approval, we can do that human-in-the-loop authentication step with our system. That's what customers need to automate this and make it secure. It's very exciting, but like a lot of technology revolutions, the initial excitement happens and then everyone has to figure out how to make it work from a pragmatic level. We're helping them do that.
Very important point there, Todd. I am in fact sophisticated, so I thank you for noticing. You know, I picked up recently a 15-inch Amazon Echo Show, and I did this in advance of Alexa Plus. I went to the Amazon event, I saw all these weird and cool things it's doing. But as I was setting up this Echo Show at my home in my kitchen, I thought, 'My life is going to be less secure.' It has my head, it has my face, I'm giving information. Is that just the reality I need to live with? Things are just going to be less secure in my personal life?
I don't think so. I don't think we should just live with that reality. I think what we have to do is take these powerful new use cases — whether it's your Echo doing tasks on your behalf, or an agent at work helping you out, doing research for your podcast or broadcast, or any kind of customer support agent working with agents — we can make these things secure. We can have this awesome new capability, these powerful new assisted workflows, and we can make them secure. But it has to come with a solid foundation of identity. All the services that Amazon Echo is going to log into on your behalf have to have the right standards and product protocols to know it's you and know it's your Amazon Echo and not someone else's. They have to be able to grant that system access to the right data, not overly grant access to anyone. We can help that happen, and that's what the industry is doing. That's why I'm so excited about it.
Full and fair disclosure, Todd — it took me about 15 minutes to get off of one of the early setup screens. I kept freezing on English. I'm like, this is just embarrassing. I am sophisticated, why can't I get this damn thing to work? I got it to work, but it's fascinating. Let's go back to your earnings. One number that stood out to me outside the revenue beat: subscription backlog $4.21 billion, up 25%, growing faster than your revenue. What are some of the new innovations that are part of that backlog?
Well, listen, first of all, this is a blowout quarter. The number you're talking about — the RPO, the total backlog — reflects a couple of things. One, it reflects big deals in the quarter. The number of million-dollar-plus ACV customers grew 22% year over year. But it's also a testament to the duration of the contracts they're signing. Contract duration in terms of the total length of the contract — not only the first year but the out years — is bigger than it's ever been. That's really exciting. The reason is because they understand that Okta is a foundational player in their environment. They know that to make things secure, push their businesses forward, and do it in a reasonable and manageable way, they have to commit to a broad range of our products. By the way, our new product bookings in the quarter were 20% of the total, the highest it's ever been. So all these new products we've introduced are 20% of total, which is very exciting. They're going to sign for a bunch of products and for a long time because they recognize we're the partner that can get them there, wherever they're trying to go.
I remember talking to you a couple years ago and margins were under pressure. But I look at this quarter: operating margins 25% versus 21% a year ago. Looks like you're guiding for margins to be up this year versus last. What is driving those margins higher?
Well, I think there's scale in the business. Revenue is over $2.6 billion now, so we're by far the largest company in our industry — which is the independent, neutral identity management platform — and it's not even close. You have to add up a couple of the trailing players to even get close to our revenue. So there's scale with our business model. Also, in our industry, we're the only pure SaaS company. A lot of the companies in our industry are software companies transitioning from on-premise models to ARR models, and their metrics are a little bit confusing. Our metrics are very simple. We have a SaaS business that's growing, producing strong margins, improving margins as you mentioned, and there's scale in the business. We've managed the company very efficiently, so we're growing and increasing margins. It's really starting to pay off all of our hard work.
The full-year outlook, sales up 9% to 10%. Is there anything in the first quarter that you're seeing that would give you pause from a macroeconomic standpoint?
The macroeconomy is consistent with what we've seen the last several quarters, frankly the last couple of years. What we're seeing in the year ahead is there's lots of potential out there. We're being prudent in our guidance and making sure as we manage the year that we execute our plans. We're investing for growth, making sure our go-to-market organization is optimized to sell our broad array of products. We're excited about the year and look forward to delivering several solid quarters this year and many years into the future.
You have a ton of cash — well over $2 billion — and you have been no stranger to making deals. Is there an opportunity to consolidate your market?
We also generated over $700 million of cash last year, so it's not just the cash balance but the cash generation that we're very excited about. The thing about our market, Brian, is that a lot of the players are legacy software companies; they were born a long time ago before the cloud, before SaaS. We have a view that identity and security should be modern, cloud-delivered, and integrated to everything. So when we look at deals, we're open to exploring deals, but we want modern architectures. We want to buy things that are the future, not the past. A lot of our acquisitions have tended to be small tuck-in technology acquisitions, but we're looking at everything. We're open to aggressively pursue this market. We want to be the one-stop shop for identity, which means having the leading product in every identity use case — workforce identity, customer identity, privilege access, governance. We have a very strong start in those markets. So we're open to doing whatever we have to do to be the winner. But our path so far has been a lot of organic innovation with some small tuck-ins here and there.
