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Motley Fool Live: Okta COO Frederic Kerrest Interview

By Motley Fool Staff - Updated Apr 15, 2020 at 1:30PM

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We dive deep into Okta -- with the company's chief operating officer!

In its short life as a publicly traded company, Okta (OKTA 3.53%) is already up over 400%.

As we've become increasingly reliant on software and cloud solutions, the company has thrived, helping businesses easily manage access and authorization for their employees.

The tailwinds pushing this business are only getting stronger, and in this Motley Fool Live segment, Okta chief operating officer Frederic Kerrest joins Motley Fool CEO Tom Gardner and senior analyst Bill Mann to talk about about where the company might be going next.

A full transcript follows the video.

Tom Gardner: I think maybe one way to start this, Frederic and Bill, is with the screenshot.

Frederic Kerrest: Oh boy.

Gardner: The snapshot in time, the first time that we all spoke together, January of 2019. And we have the interview and we have the transcript here, and I'll post that in the chat so all of our members can refer to it afterwards, if they'd like to and we'll try not to repeat any questions--

Bill Mann: That's right. They can tell us afterwards if you did better or worse this time.

Kerrest: I was going to say, how did I do? They'll get there.

Gardner: There are so many things, of course, we can do with screen share that we won't do, because there were so many interesting things to talk about. But you know the many photos.

Kerrest: Oh wow. This is great.

Gardner: We can search back to see what we can find, but we won't do that.

Kerrest: I bet you can find some pictures where my hair is bigger than this, but it's going to be hard, because I haven't got a haircut in a while, it's really getting tough over here.

Mann: Same is true with Tom.

Gardner: Yeah, there's one thing you'll never be able to find of me -- that.

Kerrest: Nice to see you guys. Thank you very much for having me, I appreciate it as always.

Mann: Yeah. Good to see you again.

Kerrest: Likewise.

Gardner: I think it would be nice to start, actually, even before talking about Okta: Just what's the operating situation like for you as a company, the total number of employees, everyone working remotely. What's the biggest challenge? What is emerging for you and what are you all learning through this?

Kerrest: Yeah, sure, absolutely. Happy to talk about those things. So I think the first thing is just for your listeners or viewers, I'll just give some basic stats on the company just to update everyone on where we are. So we started the company just over 11 years ago. It was me and another guy, Todd McKinnon, we still work together after 11-plus years. I've spent more time with him than I have with my wife. So I know all of his little pet peeves. Today, the company's got about 2,400 employees, about 8,000 enterprise customers. We've been public for three years on the Nasdaq, that's 12 quarters. Not that I'm counting, but if I were, it would be 12 quarters. And I think it's about a $600 million revenue run-rate business growing in the high-40 percentage[s].

So look, if you'd given me all those stats when we started the company 10, 11 years ago, I would have taken them in a heartbeat, based on where I am sitting today and what I think is ahead. Obviously the COVID crisis not withstanding, I think the opportunity is great the next three, five, 10 years, and I'm excited to talk with you guys about it today.

Specifically to your question, we are operating all remotely. That's not a huge change for us, right? We are fortunate we don't have any warehouses, we don't have any factories, we're a people business. We have about a third of the Okta employee base [that] works from home 100% of the time. So field account executives, or sales engineers, professional services around the world. We do have some large offices, our headquarters are in San Francisco and San Jose in California.

Big offices in large metropolitans, Seattle, Chicago, D.C., London, Paris, Munich, Sydney. Those are obviously all currently closed. So we are working 100% from home remotely today. We're fortunate, we're a company that's grown up, like I said, over the last 11 years, so it's all very modern infrastructure stack.

So working from home, working remotely, working in airplanes, working in hotels, which are things we used to do all the time, was pretty seamless for us. So certainly I do miss going to the water cooler and seeing everyone else, and it's a little more challenging spending all that time with my children, who are at home since school is work from home, school from home. But, so far so good. The priority has been since day one around health and safety of our employees, of our employees, families of the community, of our customers, of our partners.

And then after that, just focused on customers and helping customers in whatever they need. I talk to large organizations' CxOs every single day about where they are. Some of them are in good situations, some of them are in less good situations. Just seeing what we can do to help out there.

Mann: So Frederic, I'm pretty good at math, and so if I go backwards 11 years: You are founding your company, you're at Salesforce (CRM 0.55%). In 2008 and 2009 when you were talking about this, which was really the last real financial crisis, obviously very different from today. It was a real leap of faith, I think, for you all to go out during that time. Are there some things that you feel like you got right from the outset by virtue of being forged in steel, so to speak?

Kerrest: Yeah, so a couple of things there. The first one is, if you look back historically over the last 20, 30 years, large technology companies have successfully been founded oftentimes in these moments of crises. So whether it's a Google [Alphabet] (GOOG 0.22%) (GOOGL 0.14%), that happened on the previous one. You look at our whole generation of cloud technology, infrastructure companies that were built in 2009, 2010, why is that?

Well, first of all, when you're building a company like ours, its infrastructure, its identity, its security, it takes a couple of years just to get the core of the platform up and running. So there's nothing going on in those first couple of years other than building the software, trying to put the first team together, spending a lot of time with potential customers -- or not even customers, you don't have any customers. But just talking to people about what kinds of problems you would help them solve.

And so by the time you've actually built up that first base of product and feel like you're good enough to get out there and get going, people are actually starting to buy again. So I wouldn't be surprised if we see that happen again this time around. I think entrepreneurs are a very resilient bunch. Certainly, I think there's a lot more focus put by venture capitalists on the types of businesses that they're going to fund, without a doubt, in the coming times here.

But I think for those who really find the right product market fit or opportunities, you're going to see a whole new host of companies that are built that way. Now for us, we also kind of lucked [out] on the timing, right? Because if you just look at the data on what's happened in enterprise IT spend over the last 10 years, yeah, you would say, "Well, you guys are geniuses." It's not like I could have foretold that in my crystal ball when we were building the company in 2009, right? Software as a service, cloud security was a very small business. We kind of took this leap of faith that it was going to go to where was going to go. I could've never hoped for these kinds of results. So we've been very fortunate that way.

Gardner: So we've got our members out with us, and they know that they can ask questions in the Q&A tab on the bottom of the screen, we'll take those throughout. I won't be asking you the first one, is Okta a buy at this price. Although I do --

Kerrest: I believe that as a section 16 officer of a public company, even in an open window, I'm not allowed to comment on those ones. But I do appreciate the question, though.

Gardner: So do we. So can you just describe, define for somebody who's now encountering Okta for the first time, what is the Okta Identity Cloud? What does that mean?

Kerrest: Yeah, absolutely. So as you mentioned, Bill, my co founder and I were at prior to starting Okta. I started there 18 years ago and Todd started the year after. He was responsible for a lot of the engineering and product and ran all the infrastructure for the company. I built a number of businesses over the years and we took the company public. We had a lot of success, but obviously we drank a lot of Kool-Aid about the value of cloud software. And for companies in general, how instead of buying and managing and maintaining and upgrading software, it's just not a sustainable competitive advantage. Today, how well you run your email exchange server. If you're a large company, that doesn't mean you're going to do better than the next guy when it comes to actual business. So certainly we drank a lot of Kool-Aid sitting at Salesforce.

We're also both enterprise software geeks and we've been in the business forever. I started getting a computer software degree many, many years ago and running enterprise software. And we said to ourselves, well, at the time Salesforce was the biggest provider of software as a service, their revenues were south of $1 billion. And all of the cloud enterprise software was less than $10 billion. So you got to rewind the clock, go back in the history machine. But we said, well, if it's a much better way to deliver solutions like CRM [customer relationship management], like SFA [sales force automation], like we are starting to get things around HR [human resources] and other things. Basically all these contact services, things that are not core to your business. I'm not saying Goldman Sachs is putting their proprietary trading platform in the public cloud tomorrow, but certainly all these front-office and back-office systems that you need to run, but they're not sustainable competitive differentiators.

For these really to go into the mainstream, we knew there had to be a new level of integration, a new layer that came along to hook and tie all these things in together. And we knew that we had to be independent and neutral because we wanted to tie in Salesforce, but also Microsoft (MSFT -0.52%). And you're going to be using Google and also AWS [Amazon Web Services] and you're going to be using Workday (WDAY 3.59%) and also Service Now (NOW 0.95%), and Palo Alto Networks (PANW 0.97%) and all these other kinds of technologies where they had to work very well together. And so that was kind of the thesis behind the company.

What we do today, very practically, is we help with two main things. We help in what we call workforce identity management, which is for employees, contractors, consultants. If you're a new employee, you come to the company, a very easy way for you to access all of your applications, whether they're cloud, whether they're on premise. It's a very simple dashboard. It's a very easy way to go. Could be two-factor authentication, which is a one-time SMS [text] on your smartphone so that you get that quick code to put in.

So the idea is to improve the end-user experience while also enhancing security, something that's never been done. In the past it was always like you jacked one up, the other one went down, or you flipped them around, but you can never get them both right. So we like to think, because of course we're perfect, that we got them both right and that you can do both things. What does that mean for IT? It means there's one central place they can manage all these things. So if I work for you, you let me go. There's one place you can take away access to all these publicly available internet services, so I can't go home and log into Salesforce and take the forecast across the street to the other guy. So that's the first business, workforce NA management.

It's at scale, it's in large deployments, large insurance companies, large parts of the government, Fortune 500 companies are deploying it to their employees and their contractors and their partners. It's on any device, since it's on the web, it's on any device, of course. The second part of the business is customer identity management. So if you fly on JetBlue (JBLU 0.23%), you have a TrueBlue number, or if you go to, you're one of 60 million consumers every year who logs in to watch their baseball games. Or you have one of the 27 different properties at Albertsons, the retail chain that you go and shop at. We run the identity infrastructure for all of those. So that when you go to Albertsons, if you have three different parts of the Albertsons business that you actually buy from, you actually have one username, one password, one number, make it very easy for you.

And on the backend, Albertsons can actually track Tom and say, "Oh, Tom shops at these three places, let's make it really easy for him to shop at this fourth one. Let's give him a bunch of coupons and things like that." So those are the parts of the business. Some of them in a lot of cases, very transparent, people don't even know that they're using the Okta service. Millions, tens of millions of users authenticating every day on the service now. So it's really starting to become a big part of the economy as we're out there, and we're fortunate, things have gone well.

Gardner: Oh, go ahead Bill.

Mann: No, I was just going to ask. So you all came out of Salesforce. I know Zuora (ZUO 1.99%) also came out of Salesforce, Hearsay Social. Is there something special about the culture at Salesforce at that time, that really had developers coming up with businesses that they rolled out that became their own multimillion-dollar and billion-dollar businesses in their own right?

Kerrest: Yeah, absolutely. There's other Veeva (VEEV 0.81%) software, obviously Peter Gassner was there with us, so there's a number of them.

Mann: Yeah, I was coming to take it the other one, but that's it. Yeah.

Kerrest: I'm sure we can come up with a list. Look, I don't know what it was like to be in the times before that at PayPal (PYPL 1.50%). They always talk about the PayPal mafia, and how Elon Musk and all these other guys and they created all these businesses and they went on to do all these things.

I don't think there ever was kind of an analogy in enterprise software. If there has been one, I think Salesforce has been pretty good. Now why is that? Well, first of all, it was a new way of doing business, over the internet. Now you're doing that at enterprise grade, so if you look at a lot of those companies, it's how they interact with enterprises over the internet, No. 1. No. 2, it was a kind of go-get-them attitude. I think Marc Benioff was a phenomenal leader just in terms of inspiring people, of helping you believe that you could do, not that you couldn't do.

And I think that's obviously generated significant results for Salesforce for their employees, for their shareholders. But also it kind of gave you that momentum in that vision. For example, it wouldn't have been as clear to Todd and [me] that the problem that we're now solving at Okta was a thing until Salesforce started having some of that success. And the way we thought about it is we talked to a bunch of Salesforce customers, [who] were like, hey SFA, CRM, it's awesome; now I want to think about buying a couple of these other cloud services. And that's when we got the idea of: "Hey, hang on, there might be a way to actually do this more broadly." Same with Veeva, if you look at what they do, they took it, CRM, super-valuable for a specific large industry that has its own needs and they took that to market Zuora, well, Bill --

Gardner: By the way, Frederic, I'm just going to interrupt you right now in the middle of this great answer to guess the environment you're in, because right now you have a bug crawling up your shirt toward you.

Kerrest: Oh do I? Oh, I do.

Gardner: Keep going. I was 97% with you in the answer and [crosstalk].

Kerrest: That's what happens when you open the window, it gets warm. I had to put on a blazer just for you guys. So you got me Tom, no I was saying -- Veeva. So if you think about Peter Gassner, what he did, he saw that opportunity to take that into a whole new industry, and to focus and specialize on what they were doing there. And so I think it's just one of those things where that ethos of how you build --

Oh, I'm sorry. We were talking about Zuora and its founder Tien Tzuo. Well, I actually work very closely with Tien when I was at Salesforce, still a very good friend of mine. And his experience was actually trying to build the billing system for Salesforce. And he's like, "Man, this subscription service, it needs a whole new billing mechanism. You can't customize the Oracle (ORCL -0.80%) thing to run this." And that's how he got started and with the success that obviously he's had. So I think that's where you're starting to see some of these momentums. I'd love it if one day we were the equivalent, all the success that PayPal mafia had. We're trying, we're working on it.

Gardner: Now, I know you went to MIT Sloan School of [Management], so we got a question from Al that I'll merge with another question, and we'll give you two business-school terms for you to tell us how these concepts are relevant to Okta.

Kerrest: I hope I didn't skip class that day. We'll see, all right.

Gardner: I think you got this one, but let's see. How would you define the network effects and the moats of Okta?

Kerrest: Yeah, I skipped those classes. I'm just kidding. All right. Well first of all, I think I'll take them in reverse order.

I think the biggest thing around the moat is independence and neutrality, right? So if you roll back the clock 15 years ago, enterprises or the government were, they worked with one specific stack. You were an Oracle shop or an IBM (IBM 0.09%) shop or a Microsoft (MSFT -0.52%) shop or an SAP shop, and you bought all your stuff from them. And what's happened obviously with the proliferation of mobile operating systems, and obviously now the cloud infrastructure, is proliferation of enterprise technologies. If you look at the Okta integration network, our central catalog, it has over 6,500 different pieces of technology. So it's got your Veeva, and it's got your Salesforce, it's different pieces of technology. So it's got your VBA and it's got your Salesforce, it's got your WorkDay (WDAY 3.59%). Also, has your Palo Alto Networks, also has your VPN [virtual private network], also has by the way, RSA [a cryptosystem].

So we have our own two-factor, but we also connect to, I think, 17 different two-factor authentication systems out there. Because we have one and we think it works pretty well, but we're all about independence and neutrality and helping our customers use whatever technology is best for them. We don't have an agenda that we're pushing. And I think that is a big thing that really resonates with CxOs, because if you look at some of the other providers, Microsoft in particular, right? They have a whole suite that they're trying to push of their own applications, whereas we're really trying to say, hey, you can bring the Office 365 thing in.

By the way, we're the best integration for Office 365, but we're also the best for AWS and for GCP. And so as you want to use all the -- and as you know, because you talk to all these executives at large companies, I was watching the one with the CEO of Whole Foods. They're looking at multicloud infrastructure. They don't want to get locked in. So they're going to do the AWS thing, plus the Google thing, plus the Microsoft thing, and they need it to all work together, and same with the app layer. So that's the first thing around the moat, because I think that that is a significant competitive differentiator. Everyone else has an agenda. We don't have one. We're here to make sure that you're successful with whatever technology that you're using.

And that ties into the network effects, because we have more customers, 8,000 enterprises and government agencies who are using the service now at scale. As they start to use more and more of it, think about if you're the next software-as-a-service [SaaS] vendor who comes up, and you go and you try and talk to, I don't know, let's pick one -- Zurich Insurance. And you say, hey Zurich, I want to sell you a piece of software. And Zurich says, that's great. We use Okta. You have to pre-integrate it to Okta. So they go out and they call us, and we've got a bunch of APIs [application programming interfaces] and make it very easy for them. If you're that small company, you don't have a ton of resources. You're not going to connect to Okta and the second-best player, and the third-best player, and the fourth-best player.

So instantly now that guy or that gal is tying their company into Okta, which means the next company who shows up and says, "Oh, I want to use that piece of software": Boom. It's tied in, and that's the kind of network effect you get around the companies. There's a lot of other things that build out of that. The biggest one I would point to is data. Right? Now we can see and we help our customers. One of the big things they love is we can just help them for a lot of attacks, DDoS [distributed denial-of-service] or other negative...When people are trying to do things to a bunch of systems, we can obviously see the data from 8,000 different companies. So if there's one bad actor over here, we can instantly protect 7,900 other companies over here.

And so from all that data, we can not only see nefarious various actors, but we can also start to do some really cool things around the devices, so that you can start to really get a lot of telemetry off this thing and start to see intelligently how you can tie into different devices, how you can start to make authentication easier. Maybe if I know that Bill logs in from the same place at the same time on the same device every day on the same network, maybe on Friday if he wants to go check his calendar, he doesn't have to put in a password because he's done biometrics. And those are the kinds of things; we're just trying to make it more secure and easier for everyone to do their jobs or go about their lives or whatever the case is.

Gardner: This is a silly question, which is not unusual for me, but why does Okta have 8,000 customers today instead of 800 or 80,000? Why have you gotten to 8,000? What type of customers are buying that has you at that size? And obviously you want more customers and you want more usage of more of the tools and innovations that you create, so why are we at 8,000 today at Okta?

Kerrest: Yeah, that's a good question. We should be at more, I agree. So how we've gotten there is we're an enterprise-focused company, so we work with a lot of large organizations. We work with medium businesses, we work with small businesses. These problems that we're helping companies solve, of hybrid IT infrastructure, of customer identity and access management, of digital transformation of security. These are going to be challenges, or what we call opportunities, for organizations of every size around the world over time. So 8,000 should go to 80,000 and beyond without a doubt. And that's why specifically I start by saying I'm so excited about the opportunity ahead. I think we've done great, but it's now that I'm looking at it and I'm like, it's kind of a small business compared to where it could go, and I think that's what's exciting.

Now how we get to 8,000 is: It's just a collection of the enterprises we work with, the government agencies. We look at the Fortune [500], we look at [the] Global 2000, we look at the mid-market segments, we look at state and federal and local, we look at it internationally. Here's some of the data around the company. First of all, 85% revenue from North America, which means 15% from the rest of the world. Obviously, a huge opportunity to grow there. We look at the Global 2000, we have about 20% of the Global 2000 [that] are customers of ours of any size and scale at this point. First of all, that 20%, they could consume a lot more Okta services today. And second of all, there's an 80% to go. Third of all, if you think about the experience, one that I'm very excited about in particular is digital identity for consumers, for you and I.

Think about the opportunity there of what just happened in Wisconsin, or what might happen throughout the rest of North America. Obviously with a big election looming in November, it's going to be challenging, but over the coming years we have to get to a place where you and I can just go online and we can vote online. I just did this Census 2020, and it was great. It was a great experience online. Why we can't expand that out, it's going to take time. I understand people are nervous, they're nervous about fraud, they're nervous about paper, they're nervous about going in public, they're nervous about...But these are the types of opportunities that over time, we have to get right for identity on the internet. Today, we're an enterprise-focused company, but our vision is over the next 10, 20 years, we have to make the identity just much easier to consume for enterprises and consumers on the internet. And I think that's a huge opportunity for us. So yeah, that 8,000 number needs to go up. I agree with [that].

Mann: And when you think about the single point of failure for any security situation, it is always the individual. So leaving the individual off the table for you, in some ways, creates different vulnerabilities for whatever systems you all are working with.

Kerrest: Yeah, that's totally right. I mean, if you look at these...It's not like when you get one of these unfortunate articles that are on the top of The Wall Street Journal, you open it, it's above the fold: So-and-so just got breached. It's not like hackers cracked AES (256-bit) encryption.

Mann: Right.

Kerrest: What happened is one of the system administrators was using a weak password on some basic travel website [crosstalk] --

Mann: Password one.

Kerrest: Website got compromised. They reused the password and got into a bunch of administrative credentials, and then bingo, they were in. Now that's not what happens all the time. But that's actually what happens [the] majority of the time. So you're totally right. And that's why just basic password hygiene is just something that I cannot emphasize enough to all of your listeners. Just do the basic things. Don't reuse passwords, use complex ones, use passphrases, just all those little tips and tricks, and then multifactor authentication. I mean, multifactor authentication should be everywhere. It should be seamless. It's a very, very easy thing for people to do, and it really gets rid of all of these types of problems.

Gardner: For somebody who has no idea what multifactor authentication means...

Kerrest: Yup. So "multi," obviously more than one, factors for authentication. Very simple. When you go to the ATM machine, you have two factors. You have your card and you have your PIN [personal identification number]. So it's usually something you know and something you have. So in this case it's like when you go to your bank website, something you know, your bank password, and something you have, your telephone where it sends you an SMS with six digits. That's a version of multifactor authentication.

Gardner: We're going to do something unique and innovative in a few minutes, but right now we're going to take on a different innovation, and that is just to rapid-fire ask you some of the questions in the queue from our members.

Kerrest: Hit me.

Gardner: So a security breach, Neo asks, at Okta, could be a disastrous existential threat. How do you prevent that?

Kerrest: Yeah, absolutely. Obviously we're in the security business, something we focus on all the time. We do everything from -- obviously we have a chief security officer, he's got a whole team. Those teams do everything from white-box and black-box penetration testing to how we do secure development of the software to ensuring that we're testing that all the time. We're working closely with our customers to test that. Large government agencies. So absolutely. It's something that is part and parcel of everything we do. Huge focus for the company and yeah, without a doubt. So far so good, but we're always very vigilant about that. Something that keeps us all up at night. We're paranoid people, for sure.

Mann: Frederic wants to know, if you use passwords for everything, how can you remember any of them? Can Okta help individuals?

Kerrest: Yes, absolutely. So there's a lot of things that we can do. We're obviously born and bred as an enterprise software company. We focus on helping businesses. It's kind of in our DNA. It's what Todd and I and the rest of the management leadership team grew up doing. So we're very good at that motion. We get this question a lot. It's something we're thinking about. We don't have any solutions today, but we are keeping that in mind of how we can help consumers. It's a completely different ballgame. There's very few companies that actually get enterprise and consumer right at the same time. So we're trying to... Even organizations much larger than ours, who have many more resources. So we like to think that we're running the company as responsible, mature adults. Obviously the results are good, free cash flow operating profitably, or operating and free cash flow positive now. So those are the things that we think about how we can still grow, but how we can manage it carefully. So we are always looking at innovation, but we're going to be agile as we get into that.

Gardner: John and Alberto and a few others are asking about competition. So I'll ask an unfair question. You can just dodge it. How would you rank the competitors of Okta?

Kerrest: Is that what dodging it looks like on Zoom (ZM 1.62%)? Well, I mean it's, it's actually pretty straightforward. So in the workforce identity and access management stuff, so the employees and contractors and consultants' side of the world, which by the way we think is about a $30 billion a year total addressable market. The main competitor there is Microsoft. They're the legacy incumbent. They came up with Active Directory. They think of it as their birthright to do all these things. But as we've discussed, they don't have the independence, they don't have the neutrality, and they're not focused on it. Right? Their No. 1 business is Office 365, and moving that franchise to the cloud. And if they get that right, that's great.

Azure Active Directory is kind of an offshoot on the side, that they don't really have resource and focus on and all those kinds of things. And if you're a small business, sometimes it seems to plug in pretty well, but as soon as it gets complicated environments, we do very, very well there. On the customer identity management side, it's actually very different. It's a build versus buy story, because look, we've all had logins to for 20 years. So putting up a simple page with a username and a password is not that complicated. But now when you talk about, hey, I might want to have a second factor and email address, second email address, I might want to verify, or I might want to register a phone to do one-time SMS, or I have to think about security in a different way, and I have to be agile.

And by the way, there's a shortage of hundreds of thousands of developers in the world today, and that number is growing. It's not getting smaller. So if you think about these large organizations in traditional industries, they might have all the best intentions in the world, but they have to move fast, and they've got to move fast to digitize their customer experience, and they have to do it at the same time when they have less and less developer resources. It's just an accelerant for people thinking more and more about customer identity and access management. And that's the big competition we see, is just people trying to build it themselves.

Mann: Hey, if I can -- [crosstalk]

Gardner: Oh, go ahead, Bill.

Mann: Flip this question on its head a little bit. And you mentioned earlier, I think it was 15% of your business is now outside of North America. What are they doing? I mean, what kind of security competition do you see there, or is it an entirely different culture or setup?

Kerrest: Yeah. It's very similar. I mean, the dynamics largely are the same. It's just a question of adoption of cloud services, adoption of hybrid infrastructure, movement to the cloud, enterprises being more comfortable with it, government agencies. They typically lag North America by 12, 24, 36 months. We saw it at CRM. You see it in other large organizations as large software, as service companies as they move abroad. Now we do have to do better than 15%; it is a big focus of ours and something we're putting a lot of effort and energy into. Just the last, I think two years, we've opened up Paris, we've opened up Munich, we're expanding in Australia. So we're growing all of those regions. But yeah, we have to just do more there. There's no reason it shouldn't be 20 or more percent.

Gardner: If we had music and sound effects right now, we would create a dramatic moment, and the dramatic moment would be a new breakthrough innovation in our conversation together. And that is, we'll go with the screen share.

Kerrest: Okay.

Gardner: We're going to head out into the middle of the 10-K --

Kerrest: Okay.

Gardner: -- of Okta, and we're going to ask you some questions.

Kerrest: Oh, man.

Gardner: Obviously not looking for any forward-looking comments.

Kerrest: Now we'll really see what classes I skipped when I went to business school. I'm sure my accounting professors are watching and they're like, God, I knew he was never -- [crosstalk]

Gardner: We got him, we got him.

Kerrest: Entrepreneurs, what do they know?

Gardner: It's incredible -- [crosstalk]

Mann: And we were sent a diploma.

Kerrest: You know who's actually watching this, is my dad. He's a six-time public company CFO [chief financial officer] and without a doubt, you know he's going to call me later today, and be like, I was watching you, and you are doing this and I want to tell you, what is the definition of the [inaudible]?

Gardner: I have no idea what payables are.

Kerrest: Thanks, guys.

Gardner: Well, great. And we want to definitely open up the Q&A for your dad to enter any question about anything --

Kerrest: Sure.

Gardner: -- professional or personal that he would like to add.

Mann: That's right.

Gardner: So really this is just teach us, to guide us a little bit in how to think about this. So the business has $586 million in sales, which has grown 40% over the last year. But in the previous year, it grew 56%. So explain that, or share with us if somebody thinks, oh, these growth rates are decelerating, we're probably only two or three years away from this being a 15% top-line growth company.

Kerrest: Yeah. Well, so there's a lot of things in there. So first of all, we think there's an opportunity to grow the company at north of 30% for each of the five years. We're two years into it. So going into fiscal year [20]24, we've made that very clear. We've talked to Wall Street about it. There is no reason we can't do that. So north of 15%, all of our internal metrics indicate we'll be north of 30% for each of the years too: No. 1. No. 2, as I said, we want to grow it as responsible, mature adults. I could grow that number through the roof, but I'd obviously increase costs considerably too.

Kerrest: Something that's not in this that you won't find in the filings, but I know that you guys are much smarter than just looking at 10-Ks: the Rule of 40, which is one of the rules that's kind of used unofficially on Wall Street, both buy-side and sell-side, but obviously also specifically in our industry. And it's kind of, you add growth rate plus free cash flow margin, and you want to be north of 40%. And so what that means is you can kind of grow. Sorry, were you going to say something, Tom?

Gardner: Oh, no. Please finish. I apologize.

Kerrest: Okay. So what that means is you're going to have that growth rate, but you don't want to do it at such a rate that it's really costing you free cash flow margin. And if you can stay above the Rule of 40, you're in pretty good shape. It turns out we've actually been above the Rule of 50 for quite some time now. And if we really wanted to grow the company and the only goal was to grow 50% this year, we could do it. I would just spend a lot more money doing it.

Also, we said that we'd be cash flow positive, free cash flow positive last year, which we were, as well as operating-costs positive last year, which we were as well as operating cash flow positive, and we're going to continue to do that. So what you're seeing is this growth and almost $600 million of revenue; it's not a tiny business anymore. So we're starting to do it at some modicum of scale. We're still growing the company at 40%; we're above that Rule of 50. We're kicking off cash. And again, we're playing the long game. I mean, I think these markets that we're in, there's tens of billions of dollars of addressable market. So we're trying to figure out how do we grow, while also kind of keeping those good confines around what we're doing.

Mann: Frederic, maybe just staying on the same page: I mean obviously software-level gross margins, 65%-70%, what goes --

Kerrest: Close to 80[%]. But who's counting? Who's counting, Bill -- I know you're good at math. I'm just saying who's counting?

Mann: All I got was how long ago 11 years was. That's where I stopped math. So what goes into the cost of revenue for subscriptions, for you, and then for the average software-as-a-service company?

Kerrest: Well, there's a bunch of stuff in this service itself. So just running the service. Obviously we have all sorts of bills around data centers, around ensuring that you've got the redundancy. We have data centers in North America. We also host a bunch of cells in Europe so that folks who want to be GDPR-compliant [with the European General Data Protection Regulation] or are afraid of the NSA [U.S. National Security Agency], they can just keep their data in Europe. We're now opening up a data center in Asia Pacific, same idea, so that people can have that data residency close to them. That goes into it.

Kerrest: Customer support goes into it. Obviously, ensuring those customers are up and running and successful. Customer success goes into it, which is just ensuring their implementations go out properly. And then I'd have to look at exactly what percentage is sales, you have the sales and marketing as a separate line. So there's some sliver, because in sales and marketing is customer support is customer success. I'd have to break that out and look at it in more detail.

Mann: We got all day, man. Let's go.

Kerrest: Those are the big buckets. [crosstalk] -- much more straightforward. That's easy. The research and the development.

Gardner: Yes. I love that. I'd love to hear a little bit about that. If you could be our business-school professor on R&D in just see that it's a 50%-plus increase in R&D spend [in] 2020 versus 2019. How has an outside investor like, let's imagine this is not Okta, let's just hypothetically take these numbers somewhere else. How would you be evaluating the growth rate in R&D spend, as an outsider of the company?

Kerrest: Yeah, so there's a couple of things there. First of all, it's like where is this company in its growth maturity, right? So if you are in a very mature market as an incumbent, I don't know, you could take in Oracle. If we pulled up Oracle's 10-K and you think about the database businesses that they're in, these are probably pretty stable, mature markets. The margins are lower, but they also have to do less R&D, because they've got the monopoly, or not monopoly according to the government, but they have these large positions where they're basically just doing some feature tweaking here and there, but it's not the real growth in innovation.

We actually have an innovation as one of our five core values as a company. So we are always listening to customers. We're listening to what they say. But I was on, actually, the Zoom this morning with one of our customers at a Fortune 100 company, CIO [the chief information officer]. And the CIO is saying, "Hey," you know, he's a new CIO, but he's used us in the past, but he's new to this organization. He's saying, "Hey, I know we're using Okta, but we're using it in a bunch of ways that it feels like those are just the ways that we do business. I want to think about not having the software drive my business, because these business processes were built into how the software works. I want to do it the other way around. I want the innovation that's coming out of a place like Okta to help me drive my business forward."

So the first thing is like: How much are we investing? If you just look at product releases, major products released every year. So last year we released two big ones. Okta Access Gateway, which is this hybrid gateway so that large organizations can use their on-prem[ises] infrastructure with the cloud; Advanced Server Access, which is a new way of accessing servers.

If you look at Oktane20 Live, our customer conference from 10 days ago, we just had major releases of this service again: the Okta Identity Engine, so that people can start using components; Okta Devices, so that you're starting to have a lot of information here; Workflows, so they can build end-to-end processes.

So you're just kind of looking at in this line, what are they doing that's new? Are there big markets they can go after? And frankly, if you look at where we are: Look, I think we've done a great job, but there's a lot of adjacencies around where we are, where first of all we can do a lot more with the software. And just in the core markets we're in, there's a lot more we can do, but there's also a lot of adjacencies next to core authentication and identity management where our customers are saying, "Hey, it would be great if you offer this or you offered that. I'd love to buy it from one vendor."

So those kinds of development opportunities are ones that as an investor I would look at and say "What are they doing in innovation?" And that ties into R&D. And then at the same time we live in a world of comparables, so comps.

So you can also look at other fast-growing technology companies and say: What percentage of their spend goes into R&D? What goes into SG&A [selling, general and administrative expenses], what goes into sales and marketing? And those are things that we look at as well, obviously, to make sure that we're not doing things that are completely out of line. Because we do have a bunch of public market comps and we can see, "Hey, I want to be like a ServiceNow"; "I want to be like a Workday"; "... like a Salesforce."

How are they doing it? And where were they at our stage? Because obviously those are $3 billion revenue companies now. When they were just south of a billion but growing fast, what did that look like?

So we take all that into account, and then finally like our business is different than everyone else's, right? It's an infrastructure business. It has different properties around renewals, around cross-sell, around upsell, around net dollar-based retention. I think about how many new accounts do we give an account executive versus how much more revenue can he get out of the existing base. Your number of 8,000, well, it could be a lot bigger. But I'm also trying to balance making sure my customers are buying more from me. So all those things go into these numbers.

Mann: Hmm. We're getting a lot of nice comments. T Vance: "This is awesome." Thanks, guys. Fish on Full: "Hey, great questions. I'm actually learning something. Imagine that."

Kerrest: Is my dad there? Look for my dad. Jacques Kerrest. Is he there?

Mann: He's very disappointed in you. I just read it.

Gardner: We need validation that you're there, sir. We need validation that you're there. [crosstalk]

Mann: So, looking at your -- obviously the sales and marketing is a huge percentage of your revenues, of your current revenues. But obviously when you think about any kind of business, you don't want sales and marketing to be a one-to-one. Right? Like you want, you want those revenues to be coming out for -- for years.

Kerrest: Yeah, that's right.

Mann: I mean how do you view, do you have key performance indicators for the force multiplication of those sales and marketing dollars?

Kerrest: Yeah, so absolutely. We had very simple ones when we were younger as a company, which is something I always talk to other enterprise entrepreneurs about. It's like the KISS principle applies here, right? It's like you can get really -- which is "keep it simple". You can get deep into LTV (long-term value) to CAC (customer acquisition costs) ratios. But they're all different for different kinds of businesses.

We used to say it very simply, which was: Hey, we're trying to get for every dollar of revenue we sign multiyear contracts. So our customers, when they sign up today, they sign up for north of two years, three years in large enterprise. Now they're asking us for five-year contracts. And half of that is, internally, they want to make a point to their company. It's a Fortune 100, Fortune -- they want to make the point: "Hey, you guys and gals should all get on board with this, because this thing is here to stay. We signed a five-year deal. It's not like it's one year and you can kind of ignore it and it's going to go away."

Okay. So we would look at these contracts, we'd say, well they're longer than two years. So as long as every dollar that we spend pays us back within a year, a year and a half of that payback, we're going to make money.

And that was like a very simple governor that we looked at when we thought about how fast you grow sales, what their quotas look like, what their ramp[-up] times look like. Now obviously we're in the subscription business, so if I do the right thing by my customers, they're going to be with us for the long term. There's a metric that we published that we've published every quarter since we went public, called dollar-based net retention. And so basically it says, for every dollar that I have to renew, how much are they renewing?

And what it says is our number varies between 115% and 120%. It goes up, it goes down a point or two points. People are always like, "Why did you go down a point?" I'm like, "I don't know. We signed a brand-new big customer." So I'm like, "So do you want me to like optimize on the dollar-based net retention number and have that go up by not signing the big customers?" Like it doesn't make...anyway, so 115%-120% means that on average, every customer is going to be paying us more than a dollar next year, compared to the dollar they're paying us this year. And if you look at that plus multiyear contracts, [it] means that we can look at the lifetime of these contracts and this is a number that pays itself back. We are very careful around things like MROI, marketing return on investment.

So for every dollar that I put out there of different kinds, there's digital marketing. When I put an ad on the website, when you're going to go to [] later today, you're going to see an Okta ad. That's something we paid for. We do billboards, we do press, we do all these kinds of things. We do events, that are obviously curtailed a little bit right now. Those are all different kinds of paybacks. So we kind of look at that average payback, and then obviously the big cost there is account executives, but I always like to say I'm always happy to pay account executives a lot of money. Because if I'm paying them a lot of money, it means they're selling a lot of software, which is a good thing for the business.

Gardner: Three more financial questions, so you can take as much time or as little time as you want to on these. Now this one comes from Rodney, and I would say Rodney's out there representing a lot of investors that are encountering companies like this for the first time. And they're looking down at this statement and they're saying, "What do you mean you're profitable? What do you mean you're cash flow positive? I mean your net loss for the year is $208 million. When I go down to the cash flow statement I'm looking, and I'm seeing a $208 million burn in that income, and then I can add in the stock-based compensation; it's there."

But like to me, Rodney's asking, and other investors looking at SaaS companies like this are saying: this is not a profitable company. Does this business model even work? What is happening, and why would I even think about investing in a company like this?

Mann: Rodney is wondering --

Gardner: Yeah, go ahead, Bill.

Mann: I was going to say, Rodney was wondering if your dad told you what the parentheses mean.

Kerrest: I think they mean multiply by 10, right? That must be my French schooling. There you go. They didn't invent Excel. That's what you get.

So yeah, absolutely. So, the first thing is, but there's a very simple thing that we could do tomorrow, which is we could stop growing, stop getting any net new customers and just focus on our existing customers, get rid of all of our sales folks and just have customer support and engineering, and just build new features that we would upsell into those 8,000 who could buy a lot more software from us. We would turn a profit very, very quickly. Okay. So the first thing is you can manage this kind of business that way because it's subscription revenue. It's not lumpy sales. What did I sell this quarter? That's the only thing that mattered. It's like I'm building on this layer cake of the cohorts.

Okay, so that's one thing just to keep in mind for these kinds of subscription businesses. The second one is: The market is tens of billions of dollars. So we are clearly investing in the opportunity ahead around how we're going to access that market. We think there's an opportunity to build a very large independent company here today, and as we look at what those operating losses are, you could dig into that. That's because we're investing in the sales folks who are today, let's say they close $100 a customer today. We're going to pay them for the $100 customer. But actually the way subscription revenue works is, if they close it on the last day of the year, we're actually going to recognize nothing, because you recognize it ratably by the day. So actually that revenue starts playing out next year. And if you start doing this at scale, the numbers get bigger and bigger.

There is a big part about stock-based comp, which is why they talk about GAAP [generally accepted accounting principles] and non-GAAP, as you highlighted. One big way that we pay a lot of our employees is with stock options. We want everyone to be an owner in the company. We want everyone to kind of be pulling from the same point. I have common-stock ops, I have common stock and common stock options just like everyone else does, obviously since we're a public company. So those are some of the things that go into it.

Yeah. But I understand there's -- if you look over time, you get to this point where you cross that number, because the graph starts going this way. Good examples are much more mature companies than ours. Companies like Salesforce; I think Workday and ServiceNow (NOW 0.95%) are still in this negative zone, but they're getting closer and closer to zero. And then they start spitting off a lot of cash and earnings per share, and yeah.

Mann: So --

Gardner: Go ahead, Bill.

Mann: Go ahead, Tom.

Gardner: Oh, I was going to say the last question that I have then is about the balance sheet, and explaining the convertible. And so, let's just bring it up here; sorry, everyone. So we can see that the company has about $1.4 billion in cash and short-term investments.

Kerrest: Yeah.

Gardner: Right there, those two. And then we come down to the 2025 convertible senior notes. So, first question would be, wow, I mean you have $1.4 billion. Why have taken on a convertible? Why did you need that capital? And explain the dynamics of the convertible, of a convertible generally, and then any specifics about yours?

Kerrest: Yeah, great question. Very interesting, actually. I learned a lot through the process. We've actually gone through two convertibles. So the first kind of convertible was about $300 million of convertible debt. And I'll explain all these terms that we did in February of 2018. So about a year after we went public, we were in public in April of 2017. February of 2018 we did a convertible debt of $300 million. And then in September of 2019, so just this September that just passed, we did a billion-dollar convertible debt note.

So first of all, what are these things? Well, these things are, we're borrowing money, and we're borrowing money from Wall Street investors. Folks who are long only. Sometimes they have a -- well actually, in this case, they all have a debt desks where they actually, they want to loan you money. So it's a loan like any other, so we could pay interest. It's convertible, it's convertible to stock. So I can explain that, and I'll explain that in just a second. But basically we borrowed this money, we borrowed it at very, very good rates. In fact, the one that we did in September, was at an eighth of a percentage, if I'm not mistaken, because there's not that many places to put money. We think we can put money to work. People want to lend us the money, first of all.

Second of all, it's convertible, which means that if the stock rises past a certain point in the next five years -- convertible, I think it was a five-year convertible note, wasn't it? Yeah. Because that's the 2023, and the other one's 2025 -- five-year convertible note, if the stock rises past that point, they can convert their loan into stock. Because ultimately, what they're trying to do is they want to get access to more stock, right? They have a lot of cash, and they want to find ways that they can purchase more stock, other than just on the open markets.

Now it has to get up to a certain point. We actually bought, which often happens, a collar, so insurance, so that if it really gets very high, we don't get massive costs and massive dilution, the way it works. But we're starting to get pretty detailed. It's basically Wall Street investors that are loaning you money because they think you can do really good things with that money, and they want to participate in upside when the stock goes above a certain point. They can convert that into actual stock certificates in your company. Now --

Gardner: Thus we come to the end of the review of the financial statements real-time with the chief operating officer and vice chairman, executive vice chairman, but you were --

Kerrest: Wait, can I tell you why I did it? That's the most important part.

Mann: Yes. Tom, come on!

Kerrest: We did it because we think there's a lot of opportunity, and certainly it's a good thing to bolster the balance sheet. I think, as you said, we had about $300 million, $400 million dollars of cash on the balance sheet before that. Certainly we are an organic development company; as we saw as we went through the research and development line, we're spending a lot on making sure that we continue to build the platform. That we're hiring people. That we're developing software, that we're doing all the innovation. At the same time, if there are opportunities to find specific pieces of technology that we can buy and put into our software, we want to make sure we can do that.

So, one reason just is to have a lot of cash on the balance sheet. The second one is it just gives us flexibility if you want to grow a little bit faster, or if you're in times like these where you want to be agile and you're not quite sure what's going to happen in the economic environment for a quarter, two quarters, three quarters. You just want to make sure that you have a bolstered balance sheet and you're in good cash position, so.

Gardner: Thank you.

Mann: I have a little bit of a left turn, Frederic. Little bit of a left turn.

Kerrest: Yeah.

Mann: I want to know about your podcast.

Kerrest: Yes.

Mann: "Zero to IPO."

Kerrest: Yes.

Mann: So you were just, when we talked to you last --

Kerrest: I'm an accidental podcaster, yes.

Mann: Yeah. When we talked to you last time, you were just getting ready to start it, and I love it.

Kerrest: Thank you.

Mann: What are some of the things that you have learned from it? You've had amazing guests on, and I mean not just necessarily from a profile perspective, but you've had incredibly interesting entrepreneurs come through. What are some of the main things that you are learning from them that you are reapplying to your work at Okta?

Kerrest: Yeah. Man, there's a lot of layers in that. I love the question, Bill.

So first thing is -- "Zero to IPO" -- I started getting a lot of, when we were fortunate, when Okta went public, we were helped a lot by entrepreneurs who were ahead of us in the journey as we built Okta. So I wanted to make sure I was giving back.

I'm on the executive advisory board of the MIT Entrepreneurship Center, so I want to make sure that we're helping entrepreneurs. I started getting the same question over and over as entrepreneurs would come ask me, and so finally I said, "Hey, you know what? Maybe I should just write a number of articles about this." Then people said, "Well, will you interview some folks?" So, I became an accidental podcaster.

We did season one last year. We actually just kicked off season two with Eric Yuan from Zoom a couple weeks ago. Season two is going to be rolling out through April, May, and June. So there's more coming there.

The idea is just to help everyone else debunk the myth of what happens in building these companies, and it feels like a lot of the information -- first of all, I understand why, but the media tends to hype up massive success stories like Elon Musk or Jeff Bezos. Or the ones that are complete failures, we don't have to go through the names, but where they lose hundreds of millions of dollars, and there's fraud, and all these other kinds of things. I understand why; they're trying to sell views. But what happens to 99% of the people right in the middle, no one ever talks about. It's just day-to-day hard work, going to work, trying to get all these things going.

Some of my favorite podcast episodes were when you hear from these people like Carl Eschenbach, the famous guy who built VMware (VMW -0.13%) from 200 people to 20,000, who's known as being a go-to-market magician. He tells you the story of when in 2004, before they even had iPhones or anything, he's sitting there with his rep trying to close one big deal at a big pharmaceutical company, and he has to just sit there all day and he can't get the deal done. He's like, "The rep's starting to cry; I've got to go back to my wife." You're like, "What do you mean? This is the legend." So, what we just wanted to translate to everyone -- what I took back too, Bill, which is a little bit comforting -- is that it's hard for everyone all the time. Anyone who thinks that you can just read the press and it's up and to the right, and everyone is a hero, you're just being misled.

So, half of the thing was the folks who came on, and it was Patty McCord who built the culture deck at Netflix (NFLX 4.38%) or Ben Horowitz talking about how he's trying to go public with three weeks of cash left, or Andre Iguodala talking about how he practices for hitting the big shot...because once in a while, you're going to have that big shot. You've got to hit the big shot. It's true for me now. Right when we go into earnings, that morning when we're about to get on the earnings call, Todd and I look at each other with Bill, our CFO, and our head of IR [investor relations] and we say, "This is a big shot. You've got to hit the big shots. You've got to get locked in. You've got to get focused in." So there's a ton of things that I'm always learning from these people, but I'm hoping that it's giving a little bit of solace, frankly, to all the other entrepreneurs out there.

That's why season two is a little bit different. We bring in a public company founder-CEO like Eric Yuan, and we brought in an aspiring entrepreneur who's earlier in the stage -- in this case Rachel Tipograph of MikMak, so that she's in it and she can ask Eric and me a bunch of questions, and we can help so that it's more interactive.

I'm just trying to help. I think entrepreneurship is great. It's not a perfect equalizer, but it's a lot better than going and working at large companies. You have a lot of people who have the opportunity to start new companies in all sorts of different industries, and especially in today's, it's the driver of the economy. So the more that we can simplify and debunk the myth of entrepreneurship and just share it, I think it behooves us all to do that.

Gardner: Reminds me a little bit --

Mann: Well, I --

Gardner: Go ahead, Bill.

Mann: No, I was just going to say that I adore the podcast and fitting that with how I built this, you're just getting a view, not even just into how it's done, but what these entrepreneurs are thinking about and going through, I think is so valuable for us as practitioners on the investing side.

Kerrest: Yeah. [crosstalk] -- for the comments, I appreciate it.

Gardner: Yes. A little bit about the book, The Hard Thing About Hard Things. Kind of reminds me of that wonderful book.

Kerrest: Yes.

Gardner: So now what we're going to do in the remaining four minutes is something insane.

Kerrest: Great. Uh-oh.

Gardner: You have 10 seconds to answer each question, and you can pass if it's just not in the zone for you. So, here we go.

Kerrest: I have a hard time passing on anything, Tom. All right, let's go.

Gardner: Okay, good. We'll start it with not a question: Charles saying, all caps, "Fantastic interview." Then Wayne comes in and says: "What's the strike price on the convert?"

Kerrest: I believe it's, let's see, it was $127. Up 47%, so it's $179. Something like that.

Gardner: Okay, awesome. Mark says: "$1.3 billion in converts plus options to employees. Sounds like a lot of dilution."

Kerrest: We're building for the long run. We think there's an opportunity to build a very large independent company addressing some very big markets, and quarter to quarter, we're going to do right by the Street, but we have a long-term plan and we're going to stick to it.

Mann: Daryl Block wants to know, what public SaaS companies do you admire [as] businesses?

Kerrest: I think ServiceNow. Salesforce obviously. I was there early on, I knew a lot of the people. I still know a lot of the people who run it. It's amazing what they've done at scale. I think it's, what, somewhere around $15 billion dollars in revenue, growing at the pace they're growing? It's really remarkable. And then ServiceNow I'm a huge fan of Fred Luddy, the founder; Frank Slootman who's the CEO, took it public; Dave Schneider who's the CRO [chief revenue officer] there today. I mean, they put out these slides when they go through public earnings that I'm always telling my team: "Look at these slides. These slides are all about platform and customer success." I just love the business.

Gardner: What about Zoom? What about Shopify (SHOP -1.84%)?

Kerrest: Zoom is a very good technology. We've all started using it. We use it extensively at Okta. Good partner of ours. I think Eric Yuan is a great entrepreneur. I think his story is a great success story.

I'm not as familiar with Shopify; obviously in the name itself, e-commerce is going to be a huge thing. Everyone is going to adopt more and more of it. It seems like they're doing very well, but I don't know that much about that stock.

Gardner: Alpana wants to know, what's the total addressable market for Okta?

Kerrest: Currently we calculate it at about $55 billion, which is $30 billion for the workforce identity management, and $25 billion for the customer identity and access management.

Gardner: What's the concentration of revenue with big customers? How much percentage of total revenue comes from your top 10?

Kerrest: From the top 10, I'd have to say certainly less than 10[%], probably 5%.

Gardner: Mm-hmm (affirmative), great. Which matters more to you, customer retention or dollar-based retention? If one could do better than the other, which would you go for in the next two years?

Kerrest: I think probably dollar-based retention, because there is going to be a lot of fluctuation in the customer base. Some businesses are just going to be in a lot of trouble. I think that there's going to be a lot of flux and a lot of shakeout in a lot of small businesses, unfortunately, which just don't have the scale and don't have the efficiencies. Net dollar-based retention really means that we're making the customers who have the ability to really employ and leverage the platform as successful as possible.

Gardner: Bill, you got anyone there, or you feel good?

Mann: Oh, no, no, I'm loaded for bear. I just didn't know if we were coming up on time.

Gardner: [crosstalk] We've got a total of about 78 seconds.

Mann: Very good. So, how are your partnerships with SailPoint (SAIL -0.24%) and CyberArk (CYBR 1.29%) working?

Kerrest: Partnerships are going very well. So, SailPoint focuses on something called IGA [identity governance and administration], governance and attestation. CyberArk focuses on something called privileged access management, or PAM. Both very close to authentication. We have great integrations with them. They work very well in large organizations, a lot of success.

Gardner: Frederic: "It's a pleasure to hear the story of Okta directly from the co-founder of the business here. Okta is a super-cool company with impressive track record."

Kerrest: Thank you.

Gardner: "I'm a very happy investor. Thank you for that. Can you please comment on the impact of blockchain on the future of your company?"

Kerrest: Yeah. I think that there's a lot of different things that might happen in identity. I think blockchain is one that could go very well. So, blockchain allows these blocks that are chained together, and it's immutable data. So when I put it, other people can check it and see how it works. It's a great use case for identity. It's being used already in Canada, it's being used in Ohio, it's being used in a bunch of the Nordic countries. So I think it could have a lot of applicability in identity, but the technology is not just cutting-edge, it's bleeding-edge. So we have to make blockchain much more usable by not only consumers, but even people who are going to implement it. I think it's got some ways to go.

Gardner: Bill, should we be respectful to everyone's time and Frederic's, or should you ask one more question?

Kerrest: Ask one more. Come on. I love it.

Mann: When we talked last year, the Europeans had just come out with GDPR, and I have no idea what those letters stand for, but it is internet security. It's privacy, and you thought it was going to transform part of your business potentially. Are you seeing anything from that yet?

Kerrest: Look. So, that is all about ensuring that organizations and people can maintain their own privacy and integrity of their own data. You've now seen in California, we have CCPA [the California Consumer Privacy Act]. You're starting to see it state by state. We're actually working with the federal government at Okta to try and encourage them to come out with a federal standard. I think it's only natural. I think individuals should own the privacy and control of their own data. We've been GDPR-compliant for years, CCPA, all the rest of it. There's a lot of things that I think we can do, but yeah, I think it's incumbent upon all of us to ensure that individuals have control of their own data and that privacy, so.

Mann: Fantastic. I'm going to close with this and then kick it over to Tom. Anonymous says: "This interview is an instant classic."

Kerrest: Awesome, thank you.

Mann: Well done.

Kerrest: Appreciate it.

Gardner: A few more wonderful comments for you to hear, Frederic as we go: "This has been incredibly educational, thank you," says Stephen Rencher. "Frederic is always right," says Steven Zamichow. So, you might want to connect with Steven out there. You've got a permanent advocate in all aspects of your life.

Kerrest: That's actually my dad who came on as a different name, is what happened.

Gardner: Hey listen, I wish my dad shouted, "Tom is always right."

Thank you for this interview, and I think you'll like this: Herman Patel says, "Thank you for this interview with the Okta CEO. It is fantastic."

Kerrest: I'll take it.

Mann: You did it.

Gardner: A lot more kind comments, this, and thank you all for everyone out there. "Love the interview," says Theo, and Frederic, we loved you as well. Thank you so much.

Kerrest: Thanks a lot for your time. I love the show, guys. We'll talk to you soon.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Microsoft, Netflix, Okta, Palo Alto Networks, PayPal Holdings,, Shopify, Veeva Systems, Workday, Zoom Video Communications, and Zuora. The Motley Fool owns shares of ServiceNow, Inc. The Motley Fool recommends CyberArk Software, JetBlue Airways, Nasdaq, SailPoint Technologies, and VMware and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short May 2020 $120 calls on Zoom Video Communications, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Okta Stock Quote
$108.16 (3.53%) $3.69
The Goldman Sachs Group, Inc. Stock Quote
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$336.79 (0.63%) $2.12
International Business Machines Corporation Stock Quote
International Business Machines Corporation
$132.60 (0.09%) $0.12
Oracle Corporation Stock Quote
Oracle Corporation
$76.73 (-0.80%) $0.62
Microsoft Corporation Stock Quote
Microsoft Corporation
$281.45 (-0.52%) $-1.46
Alphabet Inc. Stock Quote
Alphabet Inc.
$117.64 (0.14%) $0.17
Salesforce, Inc. Stock Quote
Salesforce, Inc.
$191.21 (0.55%) $1.04
Netflix, Inc. Stock Quote
Netflix, Inc.
$236.72 (4.38%) $9.94, Inc. Stock Quote, Inc.
$139.88 (-0.65%) $0.92
JetBlue Airways Corporation Stock Quote
JetBlue Airways Corporation
$8.70 (0.23%) $0.02
VMware, Inc. Stock Quote
VMware, Inc.
$117.10 (-0.13%) $0.15
Workday, Inc. Stock Quote
Workday, Inc.
$167.52 (3.59%) $5.81
Nasdaq, Inc. Stock Quote
Nasdaq, Inc.
$182.73 (0.36%) $0.66
ServiceNow Stock Quote
$499.54 (0.95%) $4.69
SAP Stock Quote
$94.82 (0.28%) $0.26
Palo Alto Networks, Inc. Stock Quote
Palo Alto Networks, Inc.
$506.25 (0.97%) $4.88
Veeva Systems Inc. Stock Quote
Veeva Systems Inc.
$229.15 (0.81%) $1.85
Alphabet Inc. Stock Quote
Alphabet Inc.
$118.48 (0.22%) $0.26
CyberArk Software Ltd. Stock Quote
CyberArk Software Ltd.
$138.20 (1.29%) $1.76
Shopify Inc. Stock Quote
Shopify Inc.
$40.06 (-1.84%) $0.75
PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
$96.75 (1.50%) $1.43
Sailpoint Technologies Stock Quote
Sailpoint Technologies
$64.33 (-0.24%) $0.15
Zuora Stock Quote
$9.46 (1.99%) $0.18
Zoom Video Communications Stock Quote
Zoom Video Communications
$115.70 (1.62%) $1.85

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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