Okta, Inc. (OKTA) Q3 2026 Earnings Call Transcript

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Overview

The earnings call indicates strong financial health with a positive outlook on revenue growth, operating margin, and cash flow. The Q&A section reveals optimism about AI capabilities and strategic partnerships, although lacking specific future guidance. The company's effective sales realignment and diversified product portfolio mitigate potential headwinds. Overall, the positive financial metrics and strategic initiatives suggest a likely stock price increase.

Key Financial Performance

Revenue Growth For the fourth quarter of FY '26, total revenue growth is expected to be 10% year-over-year. For the full year FY '26, total revenue growth is expected to be 11% year-over-year. The growth is attributed to the adoption of new products and customer interest in Okta's AI security solutions.

Non-GAAP Operating Margin For Q4 FY '26, the non-GAAP operating margin is expected to be 25%, and for the full year FY '26, it is expected to be 26%. This improvement is due to disciplined investments in sales productivity, product innovation, and leveraging channel partners.

Free Cash Flow Margin For Q4 FY '26, the free cash flow margin is expected to be approximately 31%, and for the full year FY '26, it is expected to be approximately 29%. This reflects strong cash flow performance and a healthy balance sheet.

Cash and Investments At the end of Q3 FY '26, Okta had nearly $2.5 billion in cash, cash equivalents, and short-term investments. This strong cash position is supported by disciplined financial management and robust cash flow generation.

Convertible Notes In September, the 2025 convertible notes reached maturity, and the remaining principal amount of $510 million was settled in cash. This reflects Okta's strong liquidity position and ability to manage its capital structure effectively.

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Operating Highlights

Okta Identity Governance: A new product contributing to results by solving complex identity challenges and reducing complexity for customers.

Okta Privileged Access: Part of the new product portfolio aimed at improving security posture.

Identity Security Posture Management: Helps customers improve security and reduce complexity.

Identity Threat Protection with Okta AI: Focuses on securing AI agents and nonhuman identities.

Okta Device Access and Fine Grained Authorization: Enhances security and simplifies customer operations.

Auth0 for AI agents: Launched to help customers build and manage secure AI agents, APIs, and users.

AI Security Market: Okta is positioning itself as a leader in securing AI agents, a new and growing market segment.

Public Sector Expansion: Continued strength in the public sector, including U.S. government agencies and state/local agencies.

Sales Productivity: Improved through go-to-market specialization and strong AE tenure.

Cash Flow and Balance Sheet: Ended Q3 with $2.5 billion in cash and strong free cash flow margins.

Go-to-Market Specialization: Focused on improving sales productivity and expanding sales capacity.

AI Agent Security: Strategic focus on securing AI agents as a growth catalyst.

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Risk or Challenges

AI Security Vulnerabilities: AI agents, if not properly secured, pose significant risks of identity-based attacks, potentially undoing years of security improvements for organizations.

Regulatory Compliance Challenges: Organizations deploying AI agents, especially in sensitive industries like financial services, face critical challenges in meeting regulatory compliance requirements.

Sales Productivity Risks: While sales productivity has improved, maintaining this trend is crucial for long-term growth, and any disruptions could impact financial performance.

Market Conditions: The company is taking a prudent approach to forward guidance due to current market conditions, indicating potential uncertainties in revenue growth.

Convertible Notes Maturity: The settlement of $510 million in convertible notes in cash could impact the company's liquidity and financial flexibility.

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Guidance & Outlook

Q4 FY '26 Revenue Growth: Expected total revenue growth of 10%.

Q4 FY '26 Current RPO Growth: Expected current RPO growth of 9%.

Q4 FY '26 Non-GAAP Operating Margin: Expected non-GAAP operating margin of 25%.

Q4 FY '26 Free Cash Flow Margin: Expected free cash flow margin of approximately 31%.

FY '26 Total Revenue Growth: Raised outlook to 11% total revenue growth.

FY '26 Non-GAAP Operating Margin: Raised outlook to 26% non-GAAP operating margin.

FY '26 Free Cash Flow Margin: Raised outlook to approximately 29% free cash flow margin.

FY '27 Guidance: Will be issued on Q4 earnings call, providing a more informed view of FY '27.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:What gets customers over the hump and convinces them to consolidate IAM, governance, PAM, customer identity, and other components to Okta?

A:Customers are driven by technological changes such as cloud transformation, AI adoption, and modernizing apps and security stacks. Okta's platform simplifies identity management, reduces fragility, and enhances security by consolidating multiple products into a single pane of glass. Partners also play a significant role in Okta's success.

Q:Can Okta's AI capabilities be deployed by non-Okta customers, and what is the dollar potential for AI elevating customer bills?

A:Okta's AI capabilities can be deployed by non-Okta customers. The potential for AI to elevate customer bills is significant, as AI adoption is a major focus for enterprises. Okta's AI solutions help manage access for AI agents, ensuring security and proper permissions. The TAM for AI-related identity management could surpass the $50 billion workforce identity and $30 billion customer identity markets.

Q:Can Okta's go-to-market strategy for AI involve partnerships with agent companies to bundle identity security?

A:Yes, Okta is working on setting industry standards like Cross App Access to integrate identity security with agent platforms. This approach ensures agents built with Okta's technology are discoverable and manageable by any company.

Q:Why didn't Okta provide an early look at next year's guidance, and what is the outlook for the next year?

A:Okta refrained from providing early guidance due to the significant impact of Q4 on next year's results. The company is optimistic about business momentum, productivity improvements, and the potential of new products like Governance and AI security. Okta plans to add sales capacity and focus on accelerating growth in the medium term.

Q:How is Okta addressing the opportunity in agentic commerce and customer identity?

A:Okta's Auth0 for AI agents simplifies agent integration with backend systems and provides fine-grained authorization. The Okta platform helps discover and manage agents, ensuring security and proper access. Okta's solutions address both B2C and enterprise use cases, enabling seamless workflows and improving ROI for customers.

Q:What is the status of Okta's sales realignment efforts and its impact on net retention?

A:Okta's sales realignment has been effective, with improved productivity, low attrition, and high tenure among sales reps. The specialization strategy has enhanced focus on buyer personas and product innovation. Net retention remains at 106%, supported by strong gross retention and upsell opportunities.

Q:What are the puts and takes in Okta's Q4 guidance, and is the guidance framework consistent with historical practices?

A:Okta's Q4 guidance is based on market conditions and internal expectations, with a focus on executing its seasonally largest quarter. The guidance framework remains consistent with historical practices, aiming for accuracy and helpfulness.

Q:Are buyers consolidating AI governance around a single vendor, and what is the typical conversion timeline for AI-related deals?

A:Buyers are considering consolidating AI governance to reduce costs and improve functionality. Okta's solutions enable comprehensive application integration and support the agentic future. Conversion timelines for AI-related deals vary, but Okta's flexibility and focus on defining the market position it well.

Q:What is the impact of seat count reductions on Okta's business, and how does the company offset potential headwinds?

A:Okta has not observed material headwinds from seat count reductions. The company is confident in its diversified product portfolio, including customer identity and agentic identity solutions, to offset any potential impacts. The shift in the industry is seen as a net upside for Okta.

Q:What is the traction for Okta's Auth0 and workforce solutions for managing agents, and which represents a larger opportunity?

A:Both Auth0 and workforce solutions are gaining traction, with Auth0 appealing to developers and workforce solutions targeting IT and security buyers. The opportunities are significant for both, and Okta is iterating quickly to define and capture the market.

Q:Review of Unclear Management Responses

A:Management avoided providing specific guidance for next year, citing the significant impact of Q4 and the need for conservatism. They also refrained from giving exact numbers for sales capacity additions and net retention recovery beyond Q4, focusing instead on general optimism and business momentum.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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