Q2 2021 Zscaler Inc Earnings Call
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Good day, ladies and gentlemen, and thank you for standing by welcome to the Zee scalar second quarter 2021 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session. We need to press Star then one on your telephone keypad as a reminder, this conference call.
Is being recorded if you require assistance. Please press Star then zero at this time I would like to turn the call over to Mr. Bill Choi Senior Vice President Investor Relations and strategic finance.
Good afternoon, everyone and welcome to the Zee scalar fiscal second quarter 2021 earnings conference call on the call with me today are Jay Chaudhry, Chairman and CEO and remote connects our CFO. Please note that we have posted our earnings release and a supplemental financial schedule to our Investor Relations website.
Unless otherwise noted all numbers, we talk about today will be on an adjusted non-GAAP basis, you'll find the reconciliation of GAAP to the non-GAAP financial measures in our earnings release I'd like to remind you that today's discussion will contain forward looking statements, 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 based net retention rate future hiring decisions 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 uncertainty some of which are beyond our control, including but not limited to the duration and impact of COVID-19 on our business.
Global economy, and the respective businesses of our customers vendors and partners.
Adoption of our offerings and our expectations regarding the development on the markets in which we compete.
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. Please see our filings with the SEC as well as in today's earnings release, we will upload a copy of today's prepared remarks to our Investor Relations website, when we move to the Q&A segment of the call I.
I would also like to inform you that management will be presenting at the following upcoming virtual events.
JMP Securities Technology Conference on March 1st.
Morgan Stanley TMT conference on March 2nd.
Truest Securities Tech Conference on March 9th.
These presentations will be webcast and the link will be available on our Investor Relations website, now I'll turn the call over to Jay.
Thank you Bill we are very pleased with our strong performance in Q2, which showed accelerating growth at scale and rapid innovation on SEDAR Cross platform.
We drove 55% growth in revenue and 71% growth in billings, while also generating growth in operating profit and free cash flow.
Optimized go to market engine is driving significant velocity, Inc.
<unk>, a strong pace of new customer additions.
During the quarter, we achieved a milestone on over 5000 customers, including over 500 of the global 2000.
Our strategic decision on last year, the increase on investments across all areas, particularly the expansion of our go to market and R&D teams is yielding strong results.
We drove increased wanes.
Enterprise segment as we begin to pursue smaller enterprises with 2000 to 6000 employees.
We are helping our customers to securely accelerated digital transformation journey, which.
Which remains good call priority.
On Zero Trust exchange.
These killer and provides secure any to any connectivity for users applications workloads, and Iot and Ot systems, regardless of their location.
The reset of solar wind and security incident as part of the Alexandria need for true Zero Trust platform like Zscaler.
During such sophisticated attacks on.
Proxy based on protection would prevent loss of sensitive data.
And on application level segmentation eliminates backhaul fact movement.
We provide users access to applications not the next one.
It is fundamentally different from firewalls and legacy network security architecture.
The CIO level awareness engagement and inbound requests for our purpose Bill Zero Trust platform have significantly increased and we are viewed as a foundational application network and security transformation.
I'm proud of all of our speed of innovation, which is accelerating.
And further expanding our substantial technology lead.
There are four pillars on SEDAR Trust exchange.
V I, a GPA and gtx per user protection on experience.
C C P workload protection.
Last quarter, we launched our fourth pillar Collins, he's going to cloud protection or DCP.
Ex games on SEDAR Trust exchange from users to workloads and has an expanding portfolio of products, including.
C S P M to ensure proper communication and compliance.
Workload communication to secure App to App.
<unk> cloud to cloud secured communication.
And what node segmentation, who achieve app segmentation without legacy network segmentation.
In our latest major on the cloud upgrade we added over 100, new product enhancements on.
For the past 12 months.
Significantly increased the number of solutions delivered through our platform, including six kind of browser isolation outdoor band capacity.
He is going to be to be at.
And she's going to digital experience or C D ex.
On this integration is making on cloud platform wider and deeper.
For enterprises, who want network and security modernization. We believe we are the only zero trust multi tenant platform.
It needs.
The vendors have tried and failed to build a high performance highly reliable proxy.
Wired for popcorn cyber security protection and data on loss prevention.
As a true sassy framework, we have deployed it across 150 data centers enforcing policy at the edge instead of a limited number on public cloud locations.
Every day.
Ross is seeing more than 150 billion transactions, while preventing up to 7 billion security incidents and policy violation.
We are operating at a massive scale and doing so with environmental sustainability in mind.
On platform users over 75% renewable energy today with a call to use over 90%.
I would like to thank on engineering team, but on an exceptional job in expanding our platform and keeping zscaler at the forefront of innovation.
Now on to the cost per well.
Data has been accelerated market shift towards what form anywhere which is the walls zscaler was beautiful.
And upsell weighted a fortune 500 chemical company debt was using C. On.
But a subset of its workforce.
Foundry to zero trust and issue by purchasing CIA transformation V. P. N V D ex all 45000 employees.
In addition, the board two of our recently announced DCP solutions. They purchased workload communications to secure server traffic out to the Internet from 200 plans.
And what Claude segmentation on 7000 servers to secure east west traffic in the public cloud and data center.
I'm excited to see wins like this where the customer is buying all four pillars of the Zee scalar platform.
In a new logo win a new global 2000 customer in the high Tech industry purchased all three pillars on user protection service.
They purchased CIA transformation Z P. A N C D. Ex all 10000 employees to move away from network Security Zero Trust architecture.
This customer has standardized on next Gen firewall and VPN.
Which left gaps in security leading to a ransomware attack.
In spite of an E L. A license from the firewall vendor put them to SSL inspection at scale.
Sales see scanner is a purpose built proxy architecture.
Smoking on inspect encrypted traffic without impacting user experience, leading to better security and reduced business risks.
<unk> and other new logo win a customer in the transportation services industry.
Three of our four pillars, CIA VP and GDS for the 7500 employees.
With a cloud and mobile first strategy.
James on best in class, DLP, and cash B to protect sensitive information from leaking no matter.
I used it is.
<unk> purchased to pinpoint and resolve performance issues in real time by monitoring each store experience goal of every user and application regardless of location.
We have seen a strong customer interest on our new pillars, CTX and GCB.
With 200 customers to date have purchased <unk> ex <unk>.
<unk> is also off to a great start with.
With a few dozen deals closed in Q2 and create excitement on.
On CCP workload communication.
Moving on to <unk> on.
Customers view <unk> as the foundation for the architectural shift to zero trust access or private applications.
CPA as the clear market leader with pull on maturity and scalability supporting millions of daily active users and nearly 40% of our global 2000 customers.
Good day.
<unk> delivering over 10 million unique application segments without operational overhead of traditional network segmentation.
Let me highlight several <unk> deals in the quarter.
That has been the CIA customer.
Purchased CPA for all 100000 employees and 10003rd party to be partners.
Based on customer wanted to eliminate the security risk of VPN, which provides unfettered access to network resources.
CPA that presents a next step and zero trust adoption for the I T transformation journey.
In an upsell deal a global 2000 bank with headquarters in EMEA.
Project with CIA in CPA for 10000 employees in July to expand their work from home capacity as a result of a pandemic.
Within six months after initial purchase.
Our customer Garner G I N Z P. Eight for the remaining 30000 employees and cash be all 40000 employees.
In addition, a per.
Chest CPA to enable 3003rd party b to be partners.
Let me highlight on <unk>, new logo win in the federal space.
On research organization mandated advising federal agencies on cyber security purchased on Gia transformation bundle and VP and all 10000 employees after evaluating various zero trust architectures.
This customer concluded that if a user connects to the network with the VPN that is not zero trust.
Based on this criteria.
<unk> firewall and VPN providers were disqualified.
An important concentration on our selection was Z peers position at the first and only cloud security service with fed ramp certification on zero Trust remote access.
With the highest levels of factor <unk> certifications, but both Ci and CPA.
We are very well positioned to serve the federal government.
Lastly, I would like to share and other new customer win that highlights our continued see on it.
On a success with large enterprises that are embracing.
Embracing direct to cloud architecture, and migrating away from the complex legacy on premise appliances.
A fortune 100 professional services customer purchased on CIA transformation bundle plus cash be advanced DLP AMC SPM from office 365 to put back 125000 employees across 150 countries as.
They embraced work from anywhere.
These killer eliminated the need for 30 different gateways and consolidated six different legacy products, while meeting our customers' environmental goals or view on ESG program.
With sensitive customer data at risk security once a major requirement.
And the customer only considered solutions.
A proxy architecture.
Let me conclude with some thoughts on our vision and strategy.
And at an analyst day in January we laid out on audacious goal of serving 200 million users and $100 million workloads on on Zero Trust on exchange.
To achieve that our entire organization is focused on attracting and developing talent and creating a culture of excellence.
Our commitment to culture stocks at the pump with on executive team and create an environment, where on a global and diverse workforce and global excellence.
On customer succeed.
We are scaling on World Class Engineering organization, which continues to rapidly deliver new products and features to our customers.
On the go to market front as we have demonstrated over the last 12 months, we have built a sophisticated sales machine to sell value and deliver measurable outcomes at the <unk> level.
We're continuing to scale our sales organization.
As we on a destination for top talent.
Our marketing organization augmenting talent in all critical areas, while specializing campaigns by persona on Ams segment to better address our significant opportunities.
We are focused on driving broader adoption of our four pillars.
We'll continue to expand on ecosystem of technology partners and value base channel partners, who are contributing to sales velocity and expanding our reach.
I believe we are.
On the right track to capture a material share of the $72 billion serviceable market that we outlined on on analyst day.
We are also seeing opportunities in bringing zero trust to Iot and Ot systems and are excited about five G.
Pushes computing further to the edge and opens up additional opportunities for scalar.
We are excited about our future.
Now I'd like to turn on the call to remove for our financial results.
Thank you Jay as Jay mentioned, we are pleased with the results for the second quarter of 2021 revenue for the quarter was $157 million up 10% sequentially and 55% year over year.
Z P. A product revenue was 14% of total revenue from.
From a geographic perspective, we had broad strength across our three major regions.
Americas represented 51% of revenue EMEA.
EMEA was 38%.
P J was 11%.
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 71% year over year to $232 million.
With billing duration around the midpoint of our 10 to 14 month range.
As a reminder, our contract terms are typically one to three years, we primarily invoice our customers one year in advance.
Remaining performance obligations or our P O, which represents our total committed noncancelable future revenue exceeded $1 billion during the quarter and ended at $1.0 billion to $5 billion as of January 31.
<unk> grew 68% from one year ago.
The current <unk> is 53% of the total IPO.
Our strong customer retention and ability to upsell have resulted in a consistently high dollar based net retention rate was 127% compared to 122% last quarter and 160% a year ago.
As we've highlighted this metric will vary quarter to quarter.
Well good for our business, our increased success selling bigger transformation bundles.
Selling both CIA in CPA from the start.
And faster Upsells within a year can produce our dollar based net retention rate in the future.
These factors, we feel 127% is outstanding.
Total gross margin of 81% was flat quarter over quarter and declined one percentage point year over year.
But exceeded our expectations.
Year on year decline was primarily driven by a higher mix of newly introduced products.
I would like to remind investors.
All of our emerging products, which include CTX workload segmentation and C. S. P M Bill.
<unk> will initially have lower gross margins on our core products.
As a result, we expect gross margins to be approximately 80% for the full year in fiscal 2021.
Turning to operating expenses, our total operating expenses increased 18% sequentially and 60% year over year.
$112 $9 million.
Operating expenses as a percentage of revenue increased by two percentage points from 70% a year ago to 72% in the quarter.
Sales and marketing expense increased 19% sequentially and 57% year over year to $76 $5 billion per year.
Year over year increase was due to higher compensation expenses and investments in building our teams and go to market initiatives offset by lower teenie with our employees working from home.
Have been very successful on hiring and Onboarding remotely.
And we are accelerating our sales and marketing hiring throughout the second half of the fiscal year.
R&D expenses increased 15% sequentially and 71% year over year to $24 million.
The increase is primarily due to continued investments in our engineering teams.
G&A expenses increased 14% sequentially and 57% year over year to $12 $5 million.
The growth in G&A includes investments in building our teams compensation related expenses and professional fees.
Our second quarter operating margin was 9% compared to 12% in the same quarter last year.
Net income in the quarter was $14 million per non-GAAP earnings per share of <unk> 10.
We ended the quarter with over $1 4 billion on cash cash equivalents and short term investments free.
Free cash flow was positive $18 million in the quarter, which compares to negative $2 million during the same quarter last year.
The strength in free cash flow was driven by strong receivable collections.
Now moving onto guidance.
As a reminder, these numbers are all non-GAAP, which excludes stock based compensation expenses related to payroll taxes amortization.
Amortization of debt discount.
Amortization of intangible assets facility exit cost and any associated tax effects.
For the third quarter of fiscal 2021, we expect revenue in the range of $162 million to $164 million.
Collecting a year over year growth of 47% to 48%.
Operating profit of $11 million to $12 million.
Other income of $300000 net.
Net of interest payments on our senior convertible notes.
Income taxes of $1 5 billion and earnings per.
Per share of approximately seven cents.
Assuming approximately 146 million common shares outstanding.
Due to better than expected first half performance and our strong pipeline, we've increased our full year fiscal 'twenty 'twenty, one guidance for revenue calculated billings and operating profit.
For fiscal 2021, we now expect revenue in the range of $634 million to $638 million per year over year growth of 47% to 48%.
Calculated billings in the range of $820 million to $825 million per year over year growth of 49 to 50 per cent.
Operating profit in the range of $59 million to $61 million.
Other income of $2 4 million income.
Income taxes of $5 $3 million.
On an earnings per share in the range of 39% to 40.
Assuming approximately 145 to 146 million common shares outstanding.
For your modeling, we would like to remind investors that Q2, and Q4 have been historically, our strongest billing quarters with declines in Q1, and Q3 quarters respectively.
The average sequential decline in billings trained fiscal third quarters for the last five years was approximately 20%.
We continue to see the market coming to us.
We remain committed to investing aggressively in our company behind the growth on our business.
We have a highly efficient business model and are making investments across the organization today in order to capitalize on the large opportunity ahead of us.
While we will balance growth and profitability growth will continue to take priority considering our strong business momentum.
Operator, you May now open the call for questions.
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Our first question or comment comes from the line of Brad Zelnick from Credit Suisse. Your line is open.
Well. Thank you so much and congratulations guys on all the success really phenomenal results.
I wanted to ask you a high level question around the impact that the sunburst breach is having on the industry and your analyst day. In January you had mentioned that the impact is likely to be larger than the target breach was in 2013.
And if you can maybe parse out for us how the event has impacted your pipeline across your strategic accounts, maybe all the way down to smaller commercial accounts and how if at all you've changed the way you approach initial conversations with new prospects.
Yeah.
Thank you Brad.
As we discussed during our analyst day.
We are having increased conversations with our customers pass on those prospects.
We had sun burst related I'd be non recently and had over 800 customers attended.
This week on.
Asked to talk to on board of directors of a pharma company and the primary topic laws.
Things against sophisticated threats like sunburst.
So all of this is making cyber a bigger priority debt. It has been it's a bigger priority for Cio's Aspen as a board.
So what is that causing it is increasing engagements I'm not sure I can quantify the impact on the pipeline.
We're seeing that the customers who are already educated on zero trust quite a bit on making implementation on SEDAR trust a bigger priority than <unk>.
Number one question ends up being if people get compromised how did make sure that the backfill movement doesn't happen.
And so on is simple don't connect people to your next book don't build a moat that firewall and VPN do zero Trust implementation, where you connect users to applications not just the next one.
Thank you so much Jay congrats.
Thank you.
Our next question or comment comes from the line of Mike Walkley from Canaccord Genuity. Your line is open.
Okay.
Hey, guys good evening.
Andrew on for Mike Pence, because of my question.
So I know I'm over the past quarter or so <unk> been working on are really improving your sales.
Sales motion into your SMB and smaller enterprise earlier.
Just provide some color on some of the investments, we're making and.
I guess, where do you expect to be moving forward.
I will start and Remo can add on.
We talked about on expansion towards the anchor price segment that'd be defined as between two talked on and 6000 employees in our company.
As you know we have done extremely well in the higher end and large enterprises on the last several years.
So in this segment.
The progress made head off on expectations are.
Our growth was faster in this segment.
It did come from a smaller base.
Having said that on large enterprise segment is driving the overall strength of our business. We are doing three specific things to go on business. In this enterprise segment, one adding more sales reps more sales teams and we've done a lot of good progress in the past two quarters.
And we'll do more in coming quarters, secondly, adding and expanding channel partners, who cover on the segment.
Third we are attracting on marketing programs to support this segment as well so in summary, it's a good opportunity to expand this segment and we're doing well we are pleased with our performance.
Yeah, just as a quick follow on.
We've put together.
And initiated a summit program a few quarters ago.
And that is doing well and so.
Percentage of our revenue.
Ours did pick up slightly in the quarter our bars.
As a percentage of our revenues in the quarter was about.
Just above 50%.
Whereas the quarter before it was the high forties, so as Jay talked about the segments that we sell into commercial asleep less than 2000 employees enterprise to the 6000 large enterprise six to 40000.
A major set of 40000 so the.
<unk> program, we're expecting to have positive results for us.
In the lower part of the market.
Great. Thanks for the color.
Thank you. Our next question or comment comes from the line of Alex Henderson from Needham Your line is open.
Thank you very much on course.
You talked to one of the architectural issues that are I think is.
Fairly interesting differentiator, which is the argument that you guys have built a network based on.
Per user policy implementation versus other architectures from some of your income.
I Wanna be competitors that are unable to differentiate the traffic flows on a per user basis or the policy implementations on a per user basis can you talk about the delta between what Youre doing and how that shows up in alternatives.
Oh competitors other networks.
Yeah. The fundamental difference is being a pass through on net folks security architecture when traffic is volume over the network.
On a traditional device like a firewall on just trying to scan what kind of application is gasoline and trying to stop it or not.
Without proxy architecture Promenade every connection inspect and decide to connect to a particular user. So we have policies that on power user by design. There's no in fact, our user coming from company, a or company B company see each looks like an untrusted user why.
In the traditional way down on kind of batch based policies.
And resolved pace.
Our architecture gives us two big benefits one on.
See if we can do far better inspection had a high scale high performance, including SSL. Two it allows us to do zero Trust, where you don't connect people doing net for you connect to a specific application and zero Trust is probably the biggest thing to help you.
Minimize the damage of lateral movement, if something gets infected.
Thank you.
Okay.
Thank you. Our next question or comment comes from the line of Andrew but Wenski from D. A Davidson your line is open.
Great Thanks, and congrats on a great quarter.
So I just wanted to follow up on Brad's earlier question regarding solar winds you know it sounds like that's creating more pipeline but.
But not necessarily contributing to revenue yet, but your billings growth has is the strongest that we've seen in over two years. So I'm wondering if you could just comment on what the key drivers are that are contributing to that inflection in your billings growth are now since solar winds you know it doesn't look like it's really had much of an impact yet.
Julie.
And all of these sessions and a slight to pinpoint to a particular event that may cost something.
But it was viewed as maybe that potentially if this is being viewed as a catalyst as we have said before the overall cash let's say is that everyone is driving towards digital transformation COVID-19 may be helping at solar gains maybe helping it.
Customers.
They they believe that they need to accelerate their transformation and we on the one that enabled that transformation.
If you do with your transformation, but on something like six Kinner your risk goes up significantly so where it is at a growth coming from.
Which has been on workforce, yes, nobody got over 25% global 2000 companies, but we have 75% more to go it is generating pretty good sales C. P. A which was a balance to be young product two or three years ago noise actually contributing significantly.
About 40% of our global 2000 customers already have on CPA. So these two on the biggest contributors.
On billings growth and then the new pillows C. D. Ex is picking up quite well and also is that new.
Colorado, followed protection I think I'm very pleased that our customers are buying more and more.
Bundles to guidance.
<unk> talked about C. I V P. A N Z ex being brought together by our customers during our in.
On my prepared remarks, so across the board, we're seeing strength from product side of it across Geos, we're seeing strength.
Bill you want to add to my comments I think you know Jay is absolutely right. If you take a look at the breadth of our platform.
Before were user centric.
Basically we're also cloud protection.
So workload protection.
So the breadth of the platform is resonating with our customers.
In addition, when we.
We talked at the analyst day for companies of 5000 employees on the user side. We would expect you know we're seeing rfps.
$145 range.
You know I can say that in the quarter.
Deals with customers at the 5000.
Employee range.
In that range of $145.
No.
What's happening basically is that there's a huge need in the market.
Legacy architecture is not the answer.
And so with Zee scalar with the breadth of the platform is increasing platform that we've created and will continue to create.
He is really.
Perfectly.
Go forward into this market.
Great. Thank you guys so much.
Thank you. Our next question or comment comes from the line of Eric Super Super Jure from JMP Securities. Your line is open.
Yeah. Thanks for taking the question.
They are given what you were saying earlier about proxy versus firewall can you comment on how.
How difficult it is to augment firewall architectures with with proxy capabilities, because I think one of your.
Editors is talking about introducing that kind of capability to their there are solutions.
Well, what should I say imitation is the best form of flattery.
Okay.
Having said that.
I would say that.
There's something called native architecture, a pumper.
I'll talk protection, there's something called bolt on.
On.
Building proxy is hard because you terminate you inspect when you reconnect compare that to a pass through firewall you don't stop anything you let her to go if you've got something that's great and if you don't you don't.
Many vendors have tried and failed to build a high performance proxy.
Because it's hard to only two vendors in the past 20 years have successfully penetrated on enterprises for zero for use on security Blue coat for on Prem Mcdonald's for the club.
So I think am I surprised that people try to get by without a proxy and finally, the customers said no no no. Other change it I think delivering this thing will be tricky seen many companies do it happened to vendors, who have been saying that they had a proxy for 60 70 years I'd rather not name.
Then I still haven't seen them on the market.
So.
We keep on.
We're not sitting still we keep on advancing the most functionality you add browser isolation do pass to content inspection to DLP and all the proxy has to do more and more work and still deliver throughput and still do track inspection.
So we welcome the competition.
Pleased with our performance that kind of lead we have over traditional legacy vendors.
Very good thank you.
Thank you. Our next question or comment comes from the line of Sterling Auty from J P. Morgan Your line is open.
Yeah. Thanks, Hi, guys. So Palo Alto networks on their earnings call pointed out the success that they've had with Prisma access and given the commentary about the success that you're seeing in the enterprise I'm curious are you running into each other in an increasing fashion in that segment and it's just that the space is so big that you are both able to grow.
These rates are do you think you're serving different segments of the overall opportunity in the market.
And final vendors started making noise a couple of years ago. A lot of noise. Then it died down about six months after that in the field, we haven't really changed seen a whole lot of change to it.
When it comes to large enterprises, where we dominate.
Haven't seen any change in competitive landscape and I can understand why large enterprises are security savvy. They understand the difference between oxy and non proxy they understand zero trust and VPN.
And.
And that's why we don't expect to see firewall based architecture in those enterprises and on all of you guys are so close to banks find a large bank who believes in not having proxy, but using firewall architecture for security I have not found one.
I think when it comes to Boa and other spectrum, probably in the 5000 users up below we do see final vendors from time to time.
And and.
From time to time, you know these guys on debt sophisticated they're going to be probably tucked into buying something that may not be that sophisticated.
So you will see less sophisticated solutions being bought on the lower end.
But on the higher end, we haven't seen any change in competition.
Thank you.
Yeah.
Thank you. Our next question or comment comes from the line of Patrick Colville from Deutsche Bank. Your line is open.
Hey, Bill. Thank you for taking my question.
Congrats on a very impressive quarter just I'm.
Thinking about the head count hiring I mean that was a major theme on.
Fiscal 'twenty and it.
It looks you know potentially in the numbers that you know, that's probably helping to contribute to growth. This quarter. I mean can you just help us understand how you guys think about hiring now and if you can share any numbers around net head count adds.
Year on year sequentially that'd be great.
Yes.
I'll take that so.
The net head count as we had in the quarter was about 240 and it was about $2 60.
In Q1.
Generally speaking, it's around 60% sales and marketing heads.
And that's what it was ultimately.
Historically, it's been pretty much every quarter and that was the case in Q2.
The the.
The comment about accelerating hiring yes, we are we're accelerating hiring.
We see a huge market opportunity we.
We see that we are doing well.
See that we've got the right product for the market. So we're going to continue to invest.
You know across the board in the company.
In particular with you know a few quota sales reps, we had a record quarter hiring in Q4.
We had a comparable quarter in Q1, we had a very good quarter in Q2.
And we plan to continue to hire aggressively.
Route the back half of the year.
Again from our perspective.
You know we've talked about putting growth.
And our profitability will be mindful of profitability.
And since our public offering we have been positive.
Profitability and free cash flow, you know Jay and I are very mindful of that and will continue to be mindful of that.
But this is such a big opportunity opportunity.
We feel that we want to take advantage of it and we're going to invest in it and we're going to try to capture it.
If I may add over the past four quarters, we have pretty openly shared with you our game plan on.
Scaling on sales organization building, our sales engine on the enablement training and all of those things and I think you have seen the results being delivered quarter. After quarter. So we are bullish about it and we'll keep on.
Increasing our head count in sales and engineering and customer support and all other related areas.
Alright, thank you so much.
Mhm.
Thank you. Our next question on comment comes from the line of Fatima <unk> from UBS. Your line is open.
Good afternoon. Thank you for taking my question Raimo question for you Jay in his prepared remarks alluded to a number of very large sort of wall to wall transactions that were also bill type product. So I'm wondering if you could comment on the large deal activity that you saw in the quarter and if it was maybe out.
<unk> in any particular region that.
That would be really helpful. If you can give us some quantification of that.
Yeah good.
Good question. So no large deal activity was strong in the quarter it was comparable to Q1.
It was a significantly higher than last year.
From a geographic perspective, all regions did well I mean, we are investing in all regions, you know pretty pretty pretty much. The same same level a P J probably faster than the other regions, but all regions have done well and we continue to invest.
Related to the other comment I made before when when companies see.
The breadth of the platform that we have in.
And companies see the value of Zee scalar and the ease of implementation the increased security.
And also the ROI.
The value proposition is resonating with our customers and so we're seeing that and so by adding Z Dx in D. C P and broadening the platform it actually increases the value.
On <unk>.
Scalar if I may add a couple of points to it.
We are truly expanded the platform, we haven't gone on a buying spree.
And throw them in there and calling on a platform because those this in unintegrated products don't add a lot of value on customers see the value. For example, do turn on Z ex it's literally a few minutes.
Hardly takes anything because the traffic is already flowing through everything that is happening.
The second one on like demand gains, yes, we did have what you call. It wall to wall deals I guess that meant on pillar deals.
But the no mega deals in the quarter, Okay, and there's no one time kind of special deals that artificially.
Increased billings numbers and was properly distributor.
Various pillars and across all Geos.
Oh on for Jay also it was a near record quarter also for new customers. So it was broad it was strong and as Jay mentioned.
Theres no mega deals that we've had in the quarter.
Very thorough thank you so much.
Thank you.
Thank you. Our next question or comment comes from the line of Matt Hedberg from RBC capital markets. Your line is open.
Yeah. Thank you this is Matt Swanson on for Matt.
Kind of going back on some of those large deals. It seems like you have a lot of success Upselling C. I N D. P. A I know at the analyst day, we talked about maybe a six times upsell opportunity within your base.
When it comes to kind of realizing that opportunity is it more just a matter of time and as customers see the value theyre coming back or are there steps you can take to kind of more aggressively pursue that expansion.
So I think our customers on.
Happy and trusting us so that's a starting point if that's the case you one cell to do need proper sales execution engagement on engagement shopping on C level.
<unk> machine that bill is helping us so we are getting pretty good share on upsell deals.
In fact, we don't have differentiation between incentives sales incentives for our sales force a new himself. So we are pleased with the upsell performance and new performance, we have an internal debate with being how much do we need new versus upsell and even when I decide that's the total ACB route.
Both opportunities.
But we all we have seen good growth good upsell numbers every quarter.
Yeah.
Quick follow on for Jay just some numbers.
I felt was very strong.
New business was very strong also.
The split between new and upsell in the first half was approximately 50 50.
So in Q2 was slightly below 50%.
We saw on it just on a new new new nicely below excuse me new was slightly below 50 per cent.
And going forward, we think a good mix.
Zscaler is 50 50.
And the reason is the point that you brought up I mean, six ex ability to upsell into existing customers just for the I a N V P.
So it is significant.
Thank you guys great quarter.
Thank you.
Thank you. Our next question or comment comes from the line of Brian Essex from Goldman Sachs. Your line is open.
Yeah, Hi, good afternoon, and thank you for taking the question great to see that billings acceleration.
And on that I was wondering if we could get a little bit of color around you know youre hiring rate I think it was brought up in a previous question, but wondering have you reached some kind of a terminal velocity in terms of the rate of hiring in the rate of training in the rate of maturation within your sales force and maybe a little bit of color too around how youre attracting talent.
And in the in the market as it is it primarily in.
Localized area or is it from from multiple geographies that you are able to attract.
Better count on your platform.
I will start then even though you can add on so first of fall.
We have become the top destination for top talent.
One the market is competitive.
Don't have fallen on attracting good talent, whether that's in sales organization on engineering. So pleased obviously with that you need to make sure you have things in place on property team.
Hiding, but that's happening.
To do Jones on where their concentration is from sales point of view, we on where the customer is we had a very global organization with big presence all over the U S. All over Europe, a P J, Japan, India Singapore.
All of these spaces somebody on attracting counting from every bill.
And generally on the sales side, but looking for talent coming from companies, who know how to sell solutions was need to sell software who know how to sell transformation sales. That's the first part the second part was if energy to train over the past four quarters, we shared with you how we built the sales enablement team on.
We build the team with sales leaders that proper.
Lynn.
Process for interview for these people.
The whole documented processes.
We have very optimized I would say is as optimized as I've ever seen out there.
So that's why you're not able to.
<unk> significantly large number on and make them pretty productive and a shoulder among the clients that we would do otherwise we share a little bit off debt during our analyst day that kind of impact that's being made a bit better training.
And better enablement.
Yeah just.
A quick follow on from from my perspective.
Yeah.
And sales.
Sales organizations.
Career really good sales organizations.
Nothing matches, what we have here at Zscaler nothing.
The organization top to bottom on the way, it's structured and the ability to scale.
He talked about the training with the sales enablement groups never seen anything like it in my career.
It gives us the ability as Jay said.
We're not looking for people who sell traditional right. We're looking for people who can fill transformation.
And to do that you need to be trained and we are on destination.
So you know we have the ability to increase our hiring pace. We do we have the ability to onboard quickly we do do we see salespeople getting.
Productivity faster, we are so I mean.
It's a good place to be.
Got it that's helpful. Thank you.
Yeah.
Yes.
Thank you. Our next question or comment comes from the line of Tao Li on me from Bank of America. Your line is open.
Hi, guys.
My question is about the comps for a 2021 do you feel or do you have any data to think that some of the growth. This year was related to COVID-19 and increasing in license.
Take rate because of Covid and if that's the case, we might have an issue second half 'twenty one with the comps.
I know that this is on investors mind and I'm wondering if you have any data.
To support the view one way or another.
Yeah, Let me start with a general comment on email you can be more specific I gave you the hard part.
On Wednesday.
But we do believe that force for many bidders head on to stay guests.
Yes COVID-19.
Became on cash needs to shake off inertia, it actually changed the mindset.
And it's really not just gave momentum but also brought to light limitations on legacy network unsecured.
So we are seeing our customers, saying, we are implementing zero trust, which means they need G. I N Z P. A top on deployments.
Even after everything gets back to normal.
If that's not the case day would be doing shows Z P. A deal and saying I'm going back to the office I no longer need to do the needle on CPA beyond seen debt. So we think that all this changing.
Going back to the office should not be impacting our odd momentum of the business. That's what look at it overall dream on pipeline is strong and interest is high in Zscaler.
And engagement is significant.
Got it.
Okay.
Thank you much.
Go ahead.
Thank you. Our next question or comment comes from the line of Hamzah final Waller from Morgan Stanley. Your line is open.
Hey, guys. Thank you for taking my question Jay My first question for you you talk talked about really strong traction with Didi ex I think it was over 200 customers on that product.
When you initially launched the solution that seemed like it would be something that would be.
Perhaps more complementary with the monitoring vendors I'm wondering given the strong traction that you've had you know what is your sort of ambition with this product.
So it is complementary bread application monitoring right.
Mhm so.
Got it.
It's not a complementary but network monitoring vendors because net threat monitoring vendors about monitoring traffic between your branch office and the data center or whether you're a private network.
Net folks are going away people are sitting anywhere when you're sitting at home and going to office 365, All your data center, what's network monitoring tools can you use hardly any.
So we are sitting on the endpoint we are connecting to use the application we're setting them at all we see the application side, we did see the endpoint side.
Best place to give you end to end monitoring and complement application monitoring vendors.
Got it and then just maybe a follow up question for remote.
Obviously, you know massive expansion in the sales force and the channel over the past.
A couple of years, but I'm curious what percentage of these reps are fully productive right given the traditional ramp period that they have.
Yeah.
Well, let me just answer it saying that two thirds of our sales reps are still ramping.
So they're not fully around when I say ramping they havent been here, if they've been here for less than one year.
Got it that's helpful. Thank you.
Thank you.
So as a reminder, ladies and gentlemen, we ask that you. Please limit yourself to one question on next question or comment comes from the line of Gray Powell from B T. I G. Your line is open.
Oh, great. Thanks for work on me in.
I'll be quick.
So just looking back last year, a lot of companies that they went out and they purchased additional VPN capacity.
From legacy vendors really as part of continuity initiatives.
Or are you seeing smoothed deals come up for renewal and do you think that gives you an incremental opportunity to gain share as as those companies look to modernize their solutions.
Yeah.
Yeah, well I would say as I have discussion without large enterprises and I personally do quite a few.
I have yet to find a customer who as I talk to who said I want to keep vpns on a long run.
They're all in various stages on the journey the growth you see often CPA.
From our customer base is that it's all done more and more <unk> customers embracing zero Trust.
Z P a.
I do believe that all going to be some exception, but most of most of these customers will embrace it and I see that more and more embracing <unk> well our strategy of offering.
Hello.
<unk> integrated platform.
Four pillars.
It's working well.
Two years ago. The question used to be Kan VP AK call.
Debt.
Question has been answered over and over another question is can <unk> call early indications are very good.
But back to your question on is VPN and placed on vendors and opportunity for us.
Absolutely, yes, our starting point.
Z I E is it pacing that user protection, which typically is a proxy and then start expanding into the fold bundle.
C. P. A entry point is generally a VPN vendor and then you expand to.
Zero Trust with App segmentation.
Got it okay. That's that's really helpful. Thank you very much.
Thank you.
I have time for one last question. Our final question will be from the line of Yung Kim from loop capital capital market. Your line is open.
So Jay on the new cloud workload protection product sales.
Youre already getting some early traction there.
Are you seeing an opportunity to partner with the Hyperscale line.
AWS and Azure.
<unk> a.
A lot of other cloud one close.
On reside on those Hyperscale on our platforms and I know you already have partnerships with V. I N T E.
And then also in addition.
Do you see the need to begin to target like Dev ops team for your cloud world pump on our workflow product.
Yeah, it's a.
Good question.
As you said, we have already engaged with leading cloud providers G. I N G. P M. Okay.
On the hone protection area, we got some early initiatives going there's a good complementary fit b C with them and I think it's a little early I mean, it's only a quarter or so but the momentum is strong the pipeline is building a strong.
You should look at these kind of climate protection is not the way you look at traditional vendors, who say I'm going to take my final one and put the virtual firewall on the clogged.
Trying to replicate your data center and the cloud never walk for even moving apps, how is that going to work for security.
Look at workloads like mirror image of users and should be protected like users. So bill Zadar Cross exchange, we're able to connect a workload in regenerate to workload the region be or what the internet coming through on zero interest exchange that's to me what.
Makes us very different architecture.
No.
The next part of your question was all left to ship stuff.
As we are engaging with that customer be on having dialogue with us as they are figuring out their left ship strategy. It's a new area and we are we are.
We're closely monitoring it.
As the market evolves you can rest assured we will be there to serve our customers.
Okay, great. Thank you so much.
Yeah.
Thank you that concludes our question and answer session for today I'd like to turn the conference back over to Mr. Jay Chaudhry, Chief Executive Officer for any closing remarks.
Alright. Thank.
Thank you for joining us I hope this session was worthwhile, we hope to see you next.
Next earnings call or before that in one on staff.
First on events will be joining thank you. Thank you.
Ladies and gentlemen, thank you for participating on today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
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