Q2 2020 Earnings Call
Good day and welcome to the de scholars and second quarter 2020 earnings Conference call. Please note today's conference is being recorded at this time I would like to turn the conference over to Bill Choi. Please go ahead Sir.
[music] good afternoon, and welcome to the Zieske alert fiscal second quarter 2020, <unk> earnings Conference call.
On the call with me today, RJ, Chowdhry, chairman and CEO and remote Knesset CFO.
By now everyone should have access to our earnings announcement, which can be found on our website in the Investor Relations section. In addition, a supplemental financial schedule is available for download and our yard that see scalar dot com.
Please note unless otherwise noted all numbers, we talk about today other than revenue will be on an adjusted non-GAAP basis, you will find a reconciliation of GAAP to non-GAAP financial measures in our earnings release for historical periods. The gap to the non-GAAP reconciliations can be found in the supplemental financial information referenced a moment ago.
No.
We remind you that we'll be making forward looking statements during today's discussion, including but not limited to the company's anticipated future revenue calculated billings operating performance gross margin operating expenses operating income net income free cash flow dollar base net return.
Great remaining performance obligations income taxes and earnings per share.
These statements and other comments are not guarantees of future performance, but rather are subject to risks and uncertainties some of which are beyond our control.
Our actual results may differ significantly from those projected were suggested in any forward looking statements.
These forward looking statements apply as of today and you should not rely on them as representing our views in the future.
We undertake no obligation to update these statements. After this call for a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition. Please see our filings with the Securities and Exchange Commission as well as in today's earnings release.
Liked inform you that we will be participating in several upcoming investor conferences.
Management will be at Morgan Stanley TMT Conference in San Francisco in March 4th.
The Suntrust Technology Internet and service This conference in New York City on March 11.
And credit Suisse Investor Relations one on one conference in New York City on March 12.
Now I'll turn the call over to Jay.
Thank you Bill and thank you everyone for joining US we delivered solid Q2 results, while making tremendous progress and important areas all for business, particularly with a go to market initiatives.
In Q2, although revenue grew 36% and billings grew 18% year over year, which had a difficult comparison due to a known reckoning hybrid cloud sale to a large public sector customer last year adjusting for this revenue grew 40 you want.
Sent and billings grew 30%.
During the quarter, we significantly expanded our sales leadership team they point, our territory coverage revamped our channel program and a tooled our sales management systems. It is remarkable how much progress we made on I go to market initiatives in a short period.
Tight.
Considering the significant undertakings I'm very pleased with our results you're seeing good momentum in our business and we are increasing our outlook revenue and billings for the full fiscal year Twentytwenty.
On profitability, we delivered 11% known gap operating margins and our free cash flow was negative $2 million, excluding the $15 million a one time cash payment due central all semantic lawsuits free cash flow would have.
In positive $13 million.
While we delivered strong profitability in the quarter.
We are focused on making strategic investments two positions east good or wells for the long term.
What excites me the most is seen <unk> customers leverage our cloud native integrated security platform to accelerate digital transformation journey.
We are holding them do transformed the network and security do fully realized the benefits of clothes and mobility.
Let me highlight a few wins in Q2 that showed the many use cases off our platform and what we believe our our sustainable competitive advantages.
I will start with the new logo, when often national public transportation provider in Europe that needed to modernize its infrastructure and better engage with its passengers the scalability and lost its city offer cloud became a critical enabler off their transformation strategy.
Supporting large scale data center consolidation application migration and natural changes.
These killer is the only solution that could meet the requirements to scale from two gigabit per second internet connectivity today.
Do 100 Gigabits per second in the future, while delivering full SSL inspection and Sandboxing Zito datasets.
We closed the partner with the global system integrator to implement our transformation bundle for 45000 users. This is a great example off the leverage we gained foam working with the system in two bedroom partner that was awarded the overall.
Estimation project.
In our large deals we continue to see increasing adoption Hsas and office the 65 as primary drivers.
In another new customer wins, a fortune 500 and material Sciences company purchased business bundle that includes advanced threat protection SSL inspection and bandwidth controls for 57000 users.
With the client focused strategy the legacy on premise security Gateway became irrelevant we.
We provided protection across over 100 locations and for mobile users improving the security posture and delivering lost the city that's expected awful close surface.
No. Let me give an example, often upsells deals.
Fortune 100 healthcare company that started a large paid pilot off our transformation bundle plus DLP for 10000 users just nine months ago.
Purchase additional seats, along with a new leaders who used to cast be do cover all 65000 employees.
With 120, Hsas and cloud apps already in use did existing appliance centric security approach was failing.
Even with 40 large security appliances in there who primary data centers.
With the upcoming office see 65 deployment, which often doubles internet phone traffic. This customer is implementing local breakouts with Steven secured buys east kit or across 450 locations.
Notably this was our foster cast be Wayne asked a customer wants to an integrated solution Casspi that is integrated with <unk> and that brings together both outgo band and in line has to be capabilities.
Well the first phase adopting a zero trust network access strategy across the company.
They barges EPA like 2500 users do help integrate our recently acquired company and provides secure access to aid that U.S. for their developers.
Well I'm delighted to shoot odd continued momentum with C.P.A., which remains our fastest growing product line.
It is a growing customer interest in zero Trust netbook approach to offer access to applications without granting access to the corporate network.
As an early pineal.
<unk> is a mature rich offering that is deployed and hundreds of enterprises.
Let me highlight a few additional <unk> bins into court.
Two years ago, a global 10, multinational oil and gas customer bought our ziad transformation bundle for 145000 employees.
After ziad delivered excellent user experience water handling a 200% growth India Internet traffic over two years, the customer purchased Zepa bought or 100000 users due to place its legacy VPN and to secure access to.
The commissions in the public cloud.
The p. It represents the next step into customers I T transformation journey towards the cloud plus strategy.
To improve security C.P. able to connect users to applications not the network. This would not be possible with legacy VPN or firewall solutions.
Since starting with Ses killer 40 years ago with professional bundle. This customer has increased the total annual spend would cease good or by over 700%.
Oh, I'm thrilled that more customers purchasing <unk> got to leverage a single platform for secure cloud transformation.
Multinational industrial company porches, <unk> business bundle and <unk> firewall for 60000 users and Zepa, but 40000 users the move to cease killer was driven by one to pursue local breakout from feet data center.
To 750 locations globally.
Is that all 50, 65 rollout overwhelmed the existing security infrastructure to.
To execute faster and many and divestitures.
These killer is the only solution that could meet all duddy quite womens and delivered an excellent user experience due to C. P is zero Trust network access architecture, our ability to support emanate and divestitures is unique and was instrumental to winning the steel.
The customer is leveraging these kid or do provide to secure fast and reliable access for any user from any location on any device at a lower cost of ownership and with greater operational simplicity.
Lastly, I was shoot at another combine z. I NZ peer went.
A fortune 500, and medical testing company with a strategic objective expanding the business in cloud based data analytics needed to transform the network and security for greater agility and I T simplification.
This customer purchased the CIA business bundled and cloud firewall for 25000 users to secure local Internet Breakouts would ask Steve ran for 3600 locations.
While the incumbent Fytwelve vendor offers an integrated as Steve and solution. The customer chose a light branch architecture would cease killer, providing all security in the cloud as advocated by Gartners Sassy model.
The first phase of adopting a zero trust network access strategy across the company.
Customer also purchased Zepa for 8000 users due to place the legacy VPN remote access.
As these do show a cloud first world.
Fires cloud native architecture.
Unlike the traditional security appliances are born in the cloud security platform can scale remember ceased killer stands for zenith off scalability.
You have seen the legacy network security vendors trying to recast themselves as cloud security providers.
This single tenant architecture is not designed for the club.
As I have said before you can't create a Netflix service by stacking thousands of DVD players into cloud.
You can't off putting inline high performance security cloud by spending up a bunch of virtual machines in a public float.
As you May know Gartner published two groundbreaking research reports to respond to customers needs for better advice for security and network transformation.
Well just a few ciota netbook securities in the clock.
Defines the new approach named secure access service edge or sassy.
That's strongly validates zieske, there's platform and vision.
Gartner predicts that most organizations will move the network security to assess the model.
Many vendors are claiming that they are sassy.
But we believe these kids are most comprehensively meet the core architectural principles of sassy, including cloud edge architectural light branch design proxy technology and cloud native multi tenant architecture.
We are sassy since 2008.
The second Gartner report defines Zito Trust network access or ZT, any architecture, which advocates that network security can no longer be done in it probably means less worlds, hence users should not be connected to the net book, but only do specific app.
He kitchens.
This architectural granddaughters traditional network security products like firewalls isn't relevant.
We believe C. P is the best implementation of C.T.N. name.
And we are well position to capitalize on this rapidly growing market opportunity.
We have <unk> 10 year lead on operating <unk> cloud platform at scale processing over 85 billion transactions per day, and providing an unprecedented network effect for better security for our customers.
Let me update you on the status offer new products that we believe will keep us well ahead of the competition.
As we discussed previously.
We have four new product offerings that will be generally available in early fiscal Q4.
These good or B to B and C is going to digital experience or Cdx are two new product lines that are getting great initial feedback from our beta customers. We believe that these product lines will significantly expand our already large market opportunity.
We are engaged with several dozen customers for casspi offering and we have closed a few deals already.
With the outdoor band cast be combined with our existing inline CASB capabilities, we know off for a complete cast be solution.
Our browser isolation offering is already being tested by it doesn't customers.
It is important to point out that these new products I fully integrated with the Ses color platform, which provides a common set of services such as user authentication central logging single policy engine.
Makings East Kid or a compelling and powerful platform for security transformation and vendor consolidation.
We believe these new products will add to our growth in fiscal <unk> 2021, and you don't.
Let's now turn to go to market as I stated during the last earnings call. We are focused on improving our sales execution do take Ses. Good are you own a billion dollars in annual revenue.
I couldn't be happier, having to Ali on board, leading I'd go to market organization.
I'm excited about the key initiatives that Dolly and our sales leadership are putting in place to position us well for a long term growth.
The progress we're making in a short period of time is quite remarkable and in many ways I had my expectations.
We accelerated the majority offer initiatives within the last quarter.
As to be rolled out are they find repeatable and scalable sales process.
Let me highlight the key initiatives.
We implemented our news sales enablement program. This program is having a great impact on the consistency and quality of execution across the entire sales organization.
We expect this to enable our new hires ramped faster.
Quality activity out off the gate.
We implemented new AI based tools and systems to provide visibility into leading indicators such as sales activities and key go to market metrics.
We expanded and deepened our sales leadership structure positioning us to scale, our sales organization going forward.
This included internal promotions to frontline leadership roles.
We rolled out the news sales leadership training program and trained all off our sales leaders in the past 90 days among other things. This training includes how to attract and higher right talent.
We continue to aggressively hide in sales and plan to increase our sales rep headcount by 60% by the end off this fiscal year compared to prior year.
I'm impressed with the quantity of candidates that are attracting and hiding to drive talked on transformational sales.
We evaluated and to find territory coverage that we believe will lead to higher volume and quantity of customer engagements.
Who drive home. These initiatives, we held to midyear sales kickoff earlier this month, one in Europe and one in the U.S. do bring the global sales organization together for training and team building.
While it will take time to realize the full benefits of these changes I'm excited to share that we are starting to see promising leading indicators.
Customer engagements are up significantly boats, and new business meetings and existing customer interactions with more high impact cxo meetings.
And with the introduction of weekly pipeline generation day.
Quality and volume off our pipeline is growing.
To complement our comprehensive platform, we have been integrating our solution, but technology leaders and creating go to market leverage with deeper field engagements with their sales organizations for example.
After recently completing the integration of disease color platform with crowd strike, we're starting to see new opportunities with global 2000 customers are few teams are partnering to sell to new customers and to our respective customer bases.
On Microsoft partnership is growing stronger and creating more tailwinds with the adoption of office. The 65 as your public cloud actually what 80 and as you are Sentinel, we're training Microsoft security professionals that architects on our integrated solution.
Ceased color was also recently recognized has some Microsoft security Twentytwenty partner Award finalist.
Nominated in two categories.
I S VVIP partner off the year and customer impact and we are working closely with both feared and silver Pete do secure that asked event deployments no I'd like to turn over the call. It to remove fought a financial results.
Thank you Jay revenue for the quarter was $101.3 million up 8% sequentially and 36% year over year.
Recall that last year Q2, 19 revenue was aided by $2.3 million and nonrecurring revenue.
A large public sector customer deploying our platform as a private cloud.
Excluding this revenue from last year revenue grew 41% year over year.
From a geographic perspective for the quarter America's represented 51% of revenue.
<unk> was 40%.
Hey, P.J. was 9%.
Turning to calculated billings, which we define as the change in deferred revenue for the quarter plus total revenue recognized in that quarter.
Billings grew 18% year over year to $135.4 million against a difficult comparison.
Recall, we had a large upfront billing of $11 million in Q2 2019 from the large public sector customer.
Excluding the steel or billings grew 30% year over year.
As a reminder, or contract terms are typically one to three years, we primarily invoice our customers when you're in advance.
Remaining performance obligations or ARPU, which represents our total committed noncancelable future revenue was $609 million on January 31st up 32% from one year ago.
The current ARPU is 56% of the total or you are.
Our strong customer retention and the ability to upsell have resulted in a consistently high dollar based net retention rate, which is 116% for the quarter.
This compares to 118% year ago.
On a 20% last quarter.
As we've highlighted this metric will vary quarter to quarter, our increased success only bigger deals starting immediately with our transformation bundle in faster upsells within a year well good for our business can reduce or dollar base net retention rate.
Just calculated on a year over year or basis.
Sitting these factors, we feel that 116% is very strong.
Total gross margin was 82% up one percentage points sequentially and up two percentage points year over year.
We feel that 80% continues to be a good target range in the near term.
As it is important to continue to invest in our platform to drive topline revenue growth.
Turning to operating expenses total operating expenses decreased 1% sequentially increased 44% year over year to $71.9 million, an increased as a percentage revenue to 71% compared to 67% last year.
Sales and marketing increased 1% sequentially and 49% year over year to $49.7 million.
Please keep in mind that in Q1 2020, we had two zenith life user conferences and a global sales kick off that represented $6.5 million and expenses.
The year over year increases due to higher compensation expenses and investments in building or teams and go to market initiatives.
R&D was down 4% sequentially and up 33% year over year $14.2 million.
Sequential decrease is primarily due to higher capitalization of software development costs as a number of our new products continue to progress towards general availability.
On a year over year basis, we continue to invest to enhance our product functionality into innovative new products.
Teenage decreased 5% sequentially increased 36% year over year to $8.1 million.
The sequential decrease was primarily due to lower professional fees and the year over year increase is to support our company growth.
<unk> expenses excludes $16.3 million litigation related expenses, including the 15 million dollar cash settlement for all semantic lawsuits.
Our second quarter operating margin was 11%.
Which compares a 13% same quarter last year.
Net income in the quarter was $12 million or non-GAAP earnings per share of nine cents.
We ended the quarter with $385 million and cash cash equivalents in short term investments.
Free cash flow was negative $2 million in the quarter.
Excluding the $15 million onetime cash payment to settle all semantic losses free cash flow would've been positive $13 million.
Now moving on to guidance as a reminder, these numbers are all non gap, which excludes stock based compensation expenses.
Amortization of acquired intangible assets certain litigation related expenses.
Realty exit costs in any associated tax effects.
For the third quarter, we expect revenue in the range of $105 million to $107 million, reflecting a year over year growth of 30, 335%.
Operating profit in the range of $1 million to $3 million, we plan to increase our sales investments in Q3.
Also please keep in mind that we spent approximately $2 million on the to mid year sales kick off in February.
Income taxes of 950000 in earnings per share of approximately one cents to three cents, assuming 139 million common shares outstanding.
For the full year fiscal 2020, we expect revenue the range of 414 million to 417 million where year over year growth of 30, 730%.
I can lead to billings in the range of $512 million to $517 million, where year over year growth of 30, 133%.
Operating profit in the range of $16 million to $18 million.
In Q4, we expect to host or and you'll see the life conferences in both EMEA and Americas.
We expect the cost of these two events to be in the range of $5 million to $6 million income taxes, the $3.5 million an earnings per share in the range of 14 to 16 cents, assuming approximately 139 million common shares outstanding.
Our guidance reflects our plans to invest aggressively in our business to pursue are significant market opportunity.
We're very pleased with the progress Dollies, making we're confident he's the right person to drive our sales and go to market execution, we're stepping up our sales and marketing investments in order to build the foundation for long term growth.
In addition, we will increase investments in our technology platform and cloud infrastructure.
As you model billings I want to remind you that historically Q2 in Q4 have been are strongest billing quarters with a sequential declines in Q1 in Q3 quarters respectively.
For the year, excluding $11 million of upfront billings in Q2 2019.
Our updated billings guidance for the fiscal year implies 35% to 37% growth.
In terms of free cash flow. Please note that we have additional spend for tenant improvements related to our headquarters move.
Including the settlement of dismantle glosses. These extraordinary items are expected to total approximately $20 million to $25 million in cash payments for the full year.
As a result of these payments, we expect our free cash flow margins in fiscal 2020 to be approximately one point lower compared to our operating profit margins.
Longer term, we would expect free cash flow margins to be higher that are non-GAAP operating margins.
Now I'd like to turn the call back over to Jay.
Thank you it anymore in closing, let me state for key points that make me excited.
One architecture matters sort of cloud security platform that must <unk> in line to inspect all traffic for policy enforcement we.
We believe with the best architecture with over 10 years operational experience do run a massive clogs.
Which is an enormous barrier to entry.
Two.
With multiple tailwinds, such as office, the 65, SAS adoption asked the web and App migration to public clogs, we believe the market is coming to us.
Great.
We are an early innings of the CLO journey, we're disrupting 20 billion dollar Tam would see <unk>.
Recently announced these color b to B and C. D acts, we believe we will expand <unk> addressable market significantly.
For with expanded go to market leadership in place. We're building a sales machine that can deliver world class execution and sustainable long term growth.
We thank you for your interest in Cds killer and look forward to reporting our progress in the future operator.
You May know open the call for questions.
Yes, Sir thank you if he would like to ask your question. Please signaled by pressing star one on your telephone keypad. Please limit all questions to one with one follow up question, if you're using a speaker phone. Please make sure. Your mute function is turned off to a larger signal to reach our equipment again. Please press star one to ask your question.
Well take our first question from Brad Brad Zelnick from Credit Suisse.
Hi, Brad I guess.
Yeah can you guys hear me Hello.
Got it will be Ken.
Yes, that's right.
Thank you very much so Jay you spoke to this you know throughout your prepared remarks, a bit but I'd love. If you can expound on it perhaps a bit more in context of.
The business decelerating and the re acceleration.
Required to achieve your full year guidance, what's driving your confidence at this point and specifically how should we think about the visibility you have into the back half a year.
Right. Thank you.
As we had said before they brought dollar you onboard we knew we needed to do a number of things to further screw it up business to a larger level and some of the main things we have all do you addressed our.
Enabled minto sales teams, we had a small enablement team grown it we have proper training programs refined.
Sales process to make it scalable you put a number of systems in place that give visibility to not only headquarters, but also frontline leaders and be a significantly expanded the sales leadership in the field and created an extra layer that's needed for scanning. So a lot of those things are behind us and Don.
I'd be brought their entire sales organization together.
In two places photo midyear as Carol sales kick off a matter of course on EMEA to really bring it all together.
So those are the things accomplished now the second questions about confidence obviously, we look for what some of the impact saw what's giving us confidence to give you a adopt projections we've done for the second half.
Couple of main thing that fall in that area number. One is we are able to measure our sales engagement engagement with our customers engagement with new business and the tools are put in place for the leadership, you're driving we are seeing oh far better engagement and be used to have the second even more important.
Pipeline generation, because that's a good indicator.
Volume of pipeline to quantify your pipeline is all going up so looking at a pipeline looking at engagements.
That's what's reflected in our visibility and confidence for the second half the business.
Thanks, very much Jay and remodel if I can just follow up with a with a quick one for you.
From a billings duration perspective, and I appreciate the the adjustment on on the year ago comps for the to large deal that you've called out. Both then and now so thank you for that but is there anything as we think about the to the average contract length the mix of duration in this quarter, perhaps sequentially or even.
Year on year, if we exclude that large deal that we should take into account as we appraise your results that that we're looking at Tonight. Thanks.
Yeah. Thank you Brett the win even with the deal that we had the duration came down substantially a year over year. When you take that large deal out of the duration did decrease slightly.
I would say that the average duration is right around 12 months.
Isn't really changed that much or on a year over year werent quarter over quarter basis.
Excellent. Thanks, so much.
Okay. Thank you we'll take our next question from Daniel Bardas with Bank of America.
[laughter] first for Jay I wanted to ask about the SD Lan partners as I'm sure. Some see you guys as a bit of a competitive threat as well as a partner. So has there been any changes in the market, where as Steve Wynn vendors have gotten more aggressive and pushing their own security offerings and then to remains a quick follow up.
I'm pretty notable beat on operating margins. So can you discuss if you guys are behind on hiring and to hit the lower second half operating margins should we attribute this all to higher go to market spending pretty much. Thanks.
Alright.
Thank you first to fall regarding but as Steve and landscape you.
You know all shared with you based on my fuse engagements I'm out to meeting lots and lots of customers largely preventers B C. Most of the enterprise deals, it's VM velocloud, it's Cisco, but kalla and similar peak.
In all of those deals.
We ought to preferred security choice. They don't try to build security in the upper end up branch box. So to speak yes. There are a couple of vendors who are trying to build security and the box.
You know if you look at Gartners sassy paper and if you talk too.
<unk> exports in general they don't believe security can be built in a branch box qt needs to be done in the cloud. So perhaps it is some opportunity for some of these vendors in the mid market where securities not viewed as very critical but when you come to securities have you companies, which is generally larger into.
Prices, we don't really see.
Change in it and have you seen better engagement, but some of the larger partners like VNB had instead of a peak.
And then related to the questions you had for me the beat on margin.
The quarter was related to you know the beat on revenue.
Higher gross margin.
And also lower operating expenses.
And you know primarily related to headcount.
On a go forward basis, you know for the second half or we do expect to step up or go to market the investments.
No one of the things we called out for a couple of things you called out was the to ask it was we had a in February and also the to user conference. We're gonna have in June.
In addition, our expectation and one of the comments, we made was that we'd be at a 60% or some head count growth year over year, but we expect to be there so our plan and expectation.
To be at 60% growth are some cuts kind of growth year over year.
Great. Thank you.
Thank you we'll take our next question from Alex Henderson with Needham and company.
Thank you very much. So I was hoping you could talk a little bit about the slope of the new sales higher and the timing a which those people you know will get up and running as they go through the training process and the like obviously you are accelerating yes.
Hires targeting 60% increase and staffing.
I don't think figure at that rate at this point, so is it going to accelerate into the back half and if that's the case should we not see acceleration of the contribution with a lack of what three months six months help us think through.
Thanks, Alex I'll start and remember you can add more color to it as a part of our plan one of those things be needed for doing this company was to expand our sales leadership at the front line. So that's the first priority <unk> to expand because we knew that if <unk> it'd be hard.
Right leaders in the field they can actually hired a number off a good number or sales. It up so we accelerated sales leadership flooding and actually auto handle what I thought would be.
Knowing that the priority. So yes today, we are behind on the sales plan, who wanted to be but knowing that the leaders on in place knowing that they have been trained on actually hiring and training, we're pretty confident that you've got to our 60% fighting numbers that that was one part of the question and a lot of enablement via doing.
And the systems you putting in place is to make sure does better visibility and and more effective engagement the customers what a better ramp up so things are being done due for wide faster ramp and have better productivity overtime.
Well you want to add to it.
Alex's great question when what what are you know Dolly did in the first half and state pension he significantly or increase the leadership into sales organization that we put in additional level layer you know related with Rvps.
Regional Vice Presidents when you look at the number of Rvps area, the piece and Geo B piece in place. It's in the 80% range and that's in my opinion quite remarkable to be at that point, so 80% off our expanded target [laughter], 80% of our expanded target exactly so the highest probability that you have to higher.
Right or Sams is to have that leadership in place. So the concentration in the first half and particularly in Q2 was to get that leadership level in place in the company. You know that's what gives me confidence also related to when I look at the quality of people who are bringing on board. It is a very high quality group of leaders, but it was.
Well as ours Ams.
When I look it's also the Q2, but we are the highest gross hires for ourselves in Q2 over the last two years now our attrition was high also we called that out on a prior call, saying that we expect attrition to be higher in Q2, which it was we feel that's behind us and on a go forward basis, we feel attrition is going to decrease.
And with respect to step up there are some hires as we go forward and as I mentioned before we're very confident and as our plan to increase at 6% year over year.
I'll add one more point as we are hiding these new reps, we've seen that India first quarter, having better sales engagements because we are measuring those engagements and some of the enablement and some of the.
Tools, they put in place and helping us so I feel very very happy about it.
If I could do a follow up questions. So obviously, you're confident enough to accelerate your spending and the hiring or have you seen any change in the competitive landscape that would impede the progress of this a investment or offset or dilute the benefit.
As we look out any any change in pricing conditions any change in a competitor a capabilities.
Yes. Good question haven't really seen a bunch impact on the competition side in fact, our churn is down a year or here a discount is pretty stable our average pay out all of customers, but greater than 3000 users, which we track is approaching 400 Kay.
And as you know we help customers drive transformation, you try but children <unk> Zero Trust access and once they understand what we do we really news. So I don't what are you bought competition I do want to stay focus on our sales execution I think has to be improve it.
We're going to see better and better results.
Great. Thank you very much.
Thank you well take our next question from Gray Powell would be TRG.
Great. Thanks, maybe a question on your net retention rates. So how should we think about net retention going forward and I mean on the one side.
You have a lot more customers landing the transformational bundle I understand you're you're launching a lot of new products <unk>, just just how should we think about that.
It's a good question you know we've talked about the with more transformation Yep part of <unk>, you know part of our business you know customers by for the entire user base and so it was more transformation that puts pressure on the net retention rates, even though it's good for the company up this does put pressure. In addition, if a customer's pie within the year.
The way we.
Calculate tenant retention rate is they are for that sort of customers a year ago first what that.
Customers have an air are currently so as customers by within the year that also puts pressure.
I'm also basically the mix you know between new and upsell or in the quarter. We saw kind of in the mid range of what we've we've seen in prior quarters, that's 60% or 50% knew a in the quarters basically in the mid range of that prior quarter or net retention rate was 120% we called out that that was.
Basically you know, 50%, new so it's going to vary and we've talked about its a metric you should look at but it's not when do we put a whole lot of importance to.
Got it okay. Thank you very much.
Thank you. Thank you we'll take our next question from Patrick <unk> with our research.
Hi, there. Thank you for taking my question I just a clarification on your point just then on the net retention rate. So what you're saying that this quarter that was 50% revenue contribution from new customers last quarter. It was 40 is it was as that was that right.
It was in the mid range. So is it isn't that right around 55% was supposed to new customers.
And of course in last quarter was 50%.
Got it okay. Okay, so slight slightly higher contribution this quarter from new customers.
That's correct.
Got it and then I can I too I'm, just I'm competitively about the dynamics with net scope I mean is that someone that you see is.
Passive and if not you know.
Well at West East Coast stronger.
I mean, we've seen some the press releases that Don but be hardly see them in the gate 80 out with there seem to be trying to go.
They are kinda casspi side of it as seen them on the cast be side of it.
But with a strong integrated tactful <unk> offering full cast be that consolidates that integrates in line outdoor band. We we're in very strong position. So we don't really see them out in the market.
Especially in the market area it'd be competing.
Excellent. Thank you very much.
Thank you we'll take our next question from Andrew Nowinski with D.A. Davidson.
Great. Thank you good afternoon, guys [noise], maybe just to start with a quick clarification. I know you said you had some attrition in the quarter, which was in line with your expectations. So I I'm just wondering why you decided to <unk>.
Step on the gas on on hiring now versus maybe the start of the fiscal year.
From from its really you know we've we've we've stepped on the gas hiring so as I mentioned, we have the hires highest ours and hiring over the last two years last quarter.
However, having said that related to getting this management layer in place.
The highest probably success that you have in hiring but right our assumes that the other Reits leaders in place so.
As we go forward with his leadership onboard over relatively short period, we expect to increase or some hires as we go forward or or if I may add yes, we have the largest hi, it for sales rep. In Q2, we expect higher number off and hiring in Q3 in Q4, because we have a strong.
Field sales leadership in place.
Okay got it thanks, and then maybe shifting gears a broadcoms semantic has made some analysis they seem to be only focusing on their largest customers. I'm. Just wondering if you have seen any increase in displacements of semantic blue coat. Thanks.
So we have seen a lot of additional interest when large enterprises you know as you know a.
Blue coat has been in enterprise market.
They're used to have a big presents a presence was largely in the appliance space. So yes, a lot of interest and it is helping us it's a good opportunity for us and we plan to take full advantage of it.
Great. Thank you.
Thank you. Our next question comes from Brian Essex with Goldman Sachs.
Hi, good afternoon, and thank you for taking the question Jay I was wondering maybe if you could talk little bit about Cdx and C b to b.
You know how the progress is is I guess going on that on the development front, there and it sounds like maybe you know the GE a date pushed out a quarter anything to be concerned about there or maybe an update and on the progress with the development of those two products.
Yeah. So so first of all the G data those two products.
It hasn't really pushed out we have.
Yes told before that people will be doing beta testing and we will be ready that Q4 time frame. So we on <unk> pretty much on plan.
What we have done what do you kind of pork to you use the field engagement or the customer engagement are those two products as you don't they're not just product features that product lines per se.
So.
Early bit engagement for B to B are very good that's a new market actually if you think about who leads sees b to b market Nobody really does it fit the C.P.A. based architectures zero across its an ideal opportunity for us. So we've seen tremendous interest home <unk> customer base, that's going to be a starting.
But there'll be some demand creation because people don't even know that just kinda thing exists out there.
When it comes to ZT, accede or somebody's east could or digital experience isn't homes off interest and bad for the customers because.
No no if that tools that are designed for user experience from the old will work in the new World Ah you got some very good beta customers going on and in Q4, we plan to start selling both of those products. So we you know with a fairly good sell cycling large enterprises, we don't expect a whole lot of contribution in Q4.
What do we expect it to help us and fiscal 21 and beyond.
Got it maybe just a follow up on on the launches of those products is there any analogy that you can point to maybe learning you know what maybe what you learned with the launches EPA and that now that dollies onboard how you're prepared to manage contribution from those product cycles as we head into 2021.
Yeah, I think if you look at C.P.A. was a foster major product line introduction right in Z. I, if you had many modules.
Josh module to me as a firewall, it's not a product line modules convenience cloud sandbox. So we had done quite well if you'll please with home ZP has come from nothing to a pretty significant kinda contribute contributing factor.
For these products.
We do have been incubation program, so rather than putting Oh, I know overlay full sales team in place. We got an incubating team that's actually working with early stage customers, who learn the sales process and buyers and all those things. So we could do proper training of the life for customers. So we have some good plans in place.
We are comfortable and also we alluded to the fact that our sales process. It's meant for portfolio selling complex sales. So we think we'll be able to handle these product lines you know proper sales process.
Got it that's very helpful. Thank you.
Thank you we'll take our next question comes from Walter Pritchard with Citi.
Hi, Thanks first question just around the 60% growth in our it sounds as you exit the year, how should we think about productivity assumptions and so forth I mean, given that volume a rep growth would seem like you're setting up for billings and revenue to accelerate as you get that capacity onboard, but just want to make sure we're not missing anything in terms.
The other assumptions that may go into that.
No I am I think you're right read on you know you know basically you know with with the added to our sense is coming on board again that adds to our capacity. So it takes about to their own full quota. After 12 months not doesn't mean, all over or Sims or you know and how to play capacity, but that's when their full quota.
So we do expect basically to be positive impact that in fiscal 21, you're not going to see it that much in fiscal 20, [noise], where even pre early fiscal 21, but as leaves our sense is gonna get onboard yeah. We expect to see you know increased productivity because of the quality of the people who were bringing onboard because we enable meant that we're doing because the leader.
Ship.
The increase products that we have the market coming to us.
We do expect increasing sales productivity as they get ramped.
Great and then is it just it relates to the extensive those people in there and what happens before they get productive what can you tell us about the margin impact is a fully we fully see that as we exit this year do you see that take on more of a burden as you go next year, just curious sort of directionally given that large increase in head count.
Yeah, I think you're going to see the bulk of the margin impact. This year. Then you can see you know better margins, we go forward and fiscal 21.
Okay, great. Thanks very much.
<unk>.
Thank you we'll take our next question from Daniel Ives with Wedbush Securities.
[noise] [noise]. Thanks.
Can you just maybe talking some of the larger deals in terms of what Dolly bring in terms of the process, maybe today cultivating some of those deals versus where where maybe six nine months ago. Maybe you can give an example, Jay obviously, you're you're involved in a while others.
So just to clarify that deals that we have been closing forces hole. We are closing I just wanted to clarify religious.
The larger deals in just the process the Dalai brings to the organization versus where you were before you can.
Right I can the biggest thing we've done if you look at the sales process, we figured out the sales process several years ago that it can't be pushed through Fars. It has to be transformational sea level involvement in like so the reason we have seen this growth in the past several years, just because we have been doing the right process.
What we did not have is a proper discipline and structure and enablement to pay for large scale level I had two people in my sales enablement team and I was waiting for new Seattle do coming to put that in place now we've got over 15 people in place and the sales.
So while we knew the process and rightsizing and be affordability find it feel for the kind of enhanced it to make a repeatable, but the biggest team had done spend time to really make sure out people bought enabled property. That's one biggest thing which also includes a proper inspection proper qualifiers.
We use something called three wise you know.
So there's some better selling methodology behind it proper questions proper qualifications and the like and along with that the tools. We have put in place which gives us visibility we are measuring many things from engagement Apple architectural workshop that boats, what they are giving us far better visibility.
The in the quantity or the pipeline, which helps us do better forecasting. So so those are the things that are needed to scale up business and that's what we have been doing and very pleased the progress and that's what the audio has brought to the table.
Thanks.
Thank you well. Thanks next question from that came up the money with you'd be yes.
Good afternoon. Thank you for taking the question.
Great question for you and number of times, you've mentioned that pipeline quality. It seems like <unk> president in terms of both volume and quality and I'm wondering if you can elaborate on what you mean like quality effect size. If a customer is it the size at the engagement [laughter] displacement of what's really appreciate.
My color on that and have a follow up perino.
Yeah. It does the biggest Sparta quantity. We look at is has been SEC inspect we're looking for southern attributes for example, being able to understand all the stakeholders that are involved being able to make sure engagements that happening. So there are several steps involved that help us get more confidence in the pipeline for example.
Having a proper architectural workshops, but the next Brooklyn side and security side is an important piece of it so being able to do all those things and inspect all those things and get visibility. It gives you better understanding of the quantity. So you need both you need to grow lets me the quality and.
We are getting better visibility know, that's what I alluded to did I make sense.
That's helpful and Reno for you as I look at the geographical performance America certainly outperformed.
And I recall that EMEA had some leadership transitions Ah within the region and also looking at E. P chain sequential downtick in not theater.
Hoping pet care Hot happy walk us through kind of dynamics Ax U.S. and this quarter and that's it for me. Thank you.
Great. Thank you for team EMEA grew 39% or a year over year and a the leadership changes that we made a in EMEA.
From my perspective has been outstanding.
You know the growth that were seen in the media the traction it. It's a it's really from my perspective, a great thing to see.
He PJ grew 56% year over year, so <unk> is down well.
I'll comment on America's <unk> Americas grew 32% year over year, but when you adjusted for nonrecurring a onetime revenue last year, a Americas grew 40% year over year.
Thank you we'll take our next question from most of Frenchie with Morgan Stanley.
Great. Thanks for taking my question I wanted to follow up on the discussion on S. C ran for you Jay So we've seen success and it's important that selling kind of integrated assay when I'm security appliance in the branch locations can you guys does colleagues Aston and the branch and be successful Ari.
He becoming increasingly competitive.
Good question you know we have done a few deals we are fortinet SD event devices equity sending traffic to us so typically.
When there's a large enterprise such securities savvy, that's what we engage would we don't see a whole lot of SD van guys doing security. That's why the example, I gave you.
But there may be some low and systems, where the customer is okay with a good enough security that's building nasty rent, but in our enterprise space, We had really seeing somebody that says I'm. Okay with the asked event security. So we end up existing with asked events. So I look at asked events as our partners and French.
And I as I commented earlier in the enterprise space see vendors are taking a big line sure Cisco for younger until their peak and if you look at a magic quadrant leadership from Gartner.
Oh, yeah, but instead of a peak on Gartners magic quadrant. So I look at him as a complimentary friendship <unk>. There's always some overlap from time to time, but I'd be worked closely with them.
Okay that makes sense. Thank you and then I have a follow up fairly mild.
I'm wondering if you can comment on whether you saw any changes in the sale cycles on one hand, it sounds like you continue to sell more transformational deals issue I think probably take a little bit longer to close on the other half. He's made some changes to sales enablement and refining the sales process and so how did that shake out in terms it sounds like [noise].
Yeah. Good question overtime, we expect to see you know shortening of sales sales cycles.
But currently like I'd say, they're about the same you know it's three to six months for smaller accounts larger accounts 612 months, so really not much change.
Okay. Thank you.
Thank you, we'll take our last question from new and Kim with him Rosenblatt Securities.
Thank you so I'm going back to Dan's earlier question on large deals on any specific trends that you're seeing.
Point to improvement in like steel execution for instance.
You know for large deals you sell cycling proving or closure rate improving just trying to better understand what metrics that you were seeing.
Kind of point to improvement in large deals kitchen and real quick also on in terms of sales hiring.
Comfortable with the number of cell folks that you have and the talent that you have today around those like steel like steel opportunities or if there's an area you also need to wrap thanks.
Right. So all I'll take that question.
So large deals you don't we we dominate the large do we do very well actually one of those things I noticed in fact, you may have noticed as you saw as you heard the script.
A number off do you will see PNG I is being bought God in large deals like that.
The story.
Pardon evangelism, we had to do or early on.
Is becoming less all leadership is becoming clearly stronger and stronger and more customers see iOS and Csos are moving from one company into the other company and they're calling us. So I believe on execution and large deals is getting good the other thing thats, how going to help on our execution or large deals.
As large deals have complex out cycle, there are lots of stakeholders and heart enablement process is actually helping us do a better job. So I feel more confident in our ability to handle larger deals now go to related question on reps.
Oh for large versus small I think we are finding across the board you have quite a few very good sales pumps water handling. These large deals we call that major account managers, but we are trying to add at more because there's a big market opportunity and we need to a property cover it.
Thank you. This concludes today's question answer session. At this time I would like to turn the call over to Jay Chaudhry for closing remarks.
Thank you.
Thank you for your continued interest and see scanner hope to see you at the upcoming conferences.
Good bye great. Thank you.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
[noise].