Q3 2021 Zscaler Inc Earnings Call
Good day, ladies and gentlemen, and thank you for standing by welcome to the Zee scalar third quarter, 2 thousands and 'twenty 1 earnings conference 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.
Ask a question during the session you will need to press Star then 1 on your telephone keypad. As a reminder, this conference call is being recorded at this time I would like to turn the conference over to Mr. Bill Choi Senior Vice President Investor Relations and strategic Finance Mr. Choi you may begin.
Okay.
So as 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 and 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 and market share calculated billings and 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 uncertainties some of which are beyond our control, including but not limited to the duration and impact of COVID-19 on our business the global economy and their respective businesses.
Our customers vendors and partners market adoption of our offerings.
The impact of any previous or future acquisitions, and the development of 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 and 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 would also like to inform you that management will be presenting at the following upcoming virtual events Jpmorgan technology Media and Communications Conference Tomorrow on May 26.
And then steams strategic decisions conference on June 4th.
And of America Global Technology Conference on June 8.
Baird's Global consumer Technology and services conference on June 10, and Mizuho Cyber security Summit on June 15th.
Sessions, which offer a webcast will be available on our Investor Relations website.
Lastly, we would like to invite you to heat and apply a 2021, which is our virtual customer and partner cloud summit and the.
And the Americas and EMEA events will run from June 15th through the 17th and for a P. J will be June 2000, and to the 2003rd we encourage everyone to register and attend our summit from our website Zscaler Dot com slash being and fly now I will turn the call over to Jack.
Thank you Bill as you saw in our earnings release, we delivered outstanding results for the third quarter.
Salary and growth at scale.
While increasing adoption on broader platform.
We drove 60% growth and revenue and 71% growth and billings.
We also generated strong growth and operating profits and delivered record free cash flow.
And to prices on looking to Zee scalar to secure their digital transformation.
And architect 1 of the.
Work on any real economy.
Which we believe he is the new normal.
On our results exceeded our expectations and we are again, increasing our guidance for fiscal 'twenty 1.
Our business is firing on all cylinders are superior architecture and optimized go to market engine is elevating us about the competitive noise on.
Zero Trust exchange price.
And next users devices and applications.
And just fundamentally different phone firewall based castle and moat security on.
On platform prevents Maxwell movement, and eliminates the attack surface by making applications invisible from the internet, hence reducing business risk.
Furthermore, on proxy architecture designed to inspect SSL encrypted traffic law.
<unk> sophisticated threats and <unk> launch from sensitive data.
Faced with the latest news, making ransomware and other cyber attacks C stores and Cio's are turning to the scanner.
Dramatically improve their security posture, while reducing the legacy <unk>.
Costs.
And as you have heard me say before architecture matters Visco and are purpose built the right high performance multi tenant proxy architecture from day 1.
And as many vendors are trying to retrofit existing solutions, which inevitably payoffs.
Bill from the start to enforce policy at the edge and advocated by chassis framework. We are deployed across 150 data centers with 5 nines of availability.
We are processing more than 160 billion transactions daily.
<unk> up to 7 billion security incidents and policy violations.
This unmatched network effect provides better security and user experience.
Let me highlight 3 factors that drove our strong performance in the quarter.
First building on our strength with large enterprises, we closed on record number of San Juan and Sabre ACB deals across a broad range of industries.
Most of these wins on 3 year commitments to provide our customers the foundation for application network and security transformation.
Second and increasing share off on sales is coming from broader platform purchases by new and existing customers.
Strong platform Upsells drove on 126% dollar based net retention rate in the quarter.
On newer solutions like outdoor bank can't speak <unk> digital experience on <unk>, and these cloud protection or DCP on increasingly contributing to our wins.
The breadth and depth of our platform is resonating with customers and.
And I believe these killer is the go to platform from vendor consolidation and cost savings increased user productivity and battery cyber protection.
And our strategic decision from last year to increase our investments and go to market is yielding fantastic results.
And I'm very pleased with our performance and momentum across all Geos, all market segments and all products.
Earlier this year, we expanded on investment in the enterprise segment, which consists of organizations with 2 Thompson to 6000 employees. This quarter, we saw a higher mix of new business from this segment.
And I'll, let me highlight key wins in the quarter, starting with Z on Inc.
Because of the pandemic a global 500 technology company in Asia was ramping internet traffic off get employees working from home over VPN through the corporate data center.
This created a poor user experience for SaaS applications like office, 365, and overwhelmed and security appliances.
And to power their workplace modernization initiative.
<unk> thousand employees.
The customer purchased Z IAA transformation and condition, including asset sales inspection cloud firewall and Sandbox, Inc. As well as Gtx.
<unk> improves productivity.
Defying and helping resolve.
Is it performance issues over the entire cloud net book paths in real time before users complain.
And other new logo win on a global business services company facing challenges supporting work from anywhere purchased on business edition, plus cloud firewall can't be DLP and Gtx on.
All 46000 employees.
And actually access SaaS applications to reduce business risk and improve user experience.
In addition day replaced the legacy VPN with CPA to provide zero trust access to Highwood applications.
On the 29000 and call center employees.
With the purchase of 3 of our full platform pillars. This customer is accelerating the digital transformation from a 5 year goal into 6 months 300.
Next let me share 2 significant deals that show ongoing momentum in the financial services vertical and on increasing success working with our partners.
On top tier global investment Bank is pursuing a zero trust strategy.
And while rebuilding its security architecture for the modern hybrid work environments.
And the purchased on the IAA business edition, plus DLP cloud.
Cloud sandbox and <unk> from 50000 users.
With security as a major a quantum and only a proxy architecture with SSL inspection at scale was considered.
Our 10 year track record of running a massive highly reliable and available in line security Comed made us the best towards taking advantage on the branch of our platform.
This customer also started limited deployment of additional products, including browser isolation has to be worked towards segmentation and CPA.
This deal is a great example, on a successful field sales collaboration between these killer and our tech partner crowd strike.
And and other financial services win on multi National company embracing cloud transformation purchased and inquires EIA portfolio and.
Including cash be advanced DLP, and see SPM, but Microsoft office, 365, plus Z Dx for 30000 employees.
Like the prior deal this customer only considered a proxy architecture and firewall architectures or disqualified.
As these killer platform purchased consolidated 4 vendors streamline their operations and reduce costs. This.
And this is another great example of field sales engagement and other important tech partner in this case Microsoft.
And as these new customer wins show the attach rate of our data on protection products, including deal out our bank capacity browser isolation and CSP M for SaaS is growing.
Now, let me discuss and upsell deal that was primarily driven by data on protection and existing global 200 farm on customer.
With headquarters and Europe purchased Casspi advanced DLP and sandbox for all 79000 employees to up level day or security.
We displaced an incumbent Aalto bank cash be point product and trained we are increasingly seen as customers on standardizing on Z killers integrated platform.
In addition to access private applications, they bought 3000 and CPA seats.
First step to eliminate the legacy VPN.
This latest purchase was a 7 figure ACB deal with double the customers' anr.
And we look forward to a post pandemic world in which employees unwittingly bring and factor laptops back to the office.
Organizations need a true zero trust platform to eliminate the risk of lateral movement.
And secondly.
We are also seeing SD Wan pronged expertise starting with companies moving to direct to cloud architecture from the legacy hub and spoke network and castle and moat security.
In the quarter and existing global 200 manufacturing customer with headquarters in Europe upgraded to 120000 user subscription from business through transformation bundle to secure local Breakouts Act of 1000 locations worldwide.
And with SD Wan and some without SD Wan.
The transformation bundle added clubs sandbox and cloud firewall, which doubled this customer's anr.
And finally, I will highlight and upsell win with a global pharma company debt previously purchased the transformation bundle and CPA for 15000 users.
The SD Wan deployment was delayed last year.
And now they are accelerating the network and application transformation with a 5 year commitment to Zee scalar.
This quarter, they purchased an additional 15000 and CIA ANC and <unk> to cover on 65000 employees, while also adding DLP on users.
They also purchased our new CPA private debt service edge to enable zero trust access for the employees returning to the office.
This demonstrates customers on implementing GPA for all employees not just for remote users.
In addition to on ongoing success and protecting users. Our next big opportunity is protecting workloads with Zscaler cloud protection.
We are rapidly expanding on DCP portfolio through organic innovation and targeted acquisitions, let me highlight on recent M&A activity.
As announced last month, we acquired costume, a leading provider of cloud infrastructure and entitlement management or C. E M to complement our CSP M solution.
See on a M and CSP M together.
Properly integrated and.
Core rate against the information with configuration data and in force lease privileged access for cloud environments, hence reducing business risk.
This further expands our market opportunity for workload security.
In addition, today, we announced a definitive agreement to acquire smoke screen technologies, which provides us with a deception technology to detect active attacks and lacked told track movement.
We plan to integrate smoke screen with our CIA and CPA solutions to enhance on active defense capabilities.
You will hear more about these solutions and our zenith live cloud summit next month.
And as we look forward to the next few years, our focus on driving broader adoption of our core platform pillars, which together maximize the success of digital transformation.
On core Gi and CPA business has never been stronger and we are excited about the early traction on <unk> and CCP next growth engines for the company.
Now I will highlight 3 points about on go to market machine, which is scaling very well.
On field organization continues to scale and is executing on all cylinders.
Moving to on partners.
And as I mentioned in our deal wins, we have strong and growing technology partnerships. In addition to incremental product integrations. We continue to go on go to market partnership with crowd strike, who also became a customer at this quarter.
<unk> was named the SEDAR Trus champion at Microsoft 'twenty, and 'twenty partner Awards.
Further expanding our technology and relationships, we recently partnered with IBM to add Zee scalar services to the zero Trust security offerings.
This partnership includes integrating with their identity, MDM and <unk> solutions and joint go to market initiatives on the channel front, we are expanding our stomach partner program and adding bars that are building cloud transformation practices.
And our service provider and our relationships are strong and the building joint engagements with system integrators.
On the marketing front, we are aggressively investing in torque leadership for zero Trust security and expanding demand generation programs.
In summary.
We're making tremendous progress across all 3 areas sales organization marketing and channel partners.
And delivering strong results quarter after quarter.
I believe we are on track to capture a material share of our 72 billion Garner serviceable market.
No on a like to turn over the call to remove for our financial results.
Thank you Jay as Jay mentioned, we are pleased with the results for the third quarter of 2021 revenue for the quarter was $176.4 million up 12% sequentially and 60% year over year.
CPA product revenue was 16% of total revenue from.
And from a geographic perspective, we had broad strength across our 3 major regions Americas represented 51% of revenue EMEA was 38% and a 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 Bill.
Billings grew 71% year over year to $225 million with billing duration towards the upper end of our 10 to 14 month range, we had several customers choosing to pay upfront for their multi year contracts.
As a reminder, our contract terms are typically 1 to 3 years and we do not offer any special incentives for upfront payments.
With that and mine. We're also pleased that short term billings, which are calculated based on the change and short term deferred revenue plus reported revenue for the period grew 61% over the prior year.
Remaining performance obligations or IPO, which represent our total committed noncancelable future revenue were $1.2 billion as of April 30.
<unk> grew 85% from 1 year ago.
The current Rps is 51% of the total RPM.
Our strong customer retention and ability to upsell and the broader platform have resulted in a consistently high dollar based net retention rate.
Which is 126% compared to 127% last quarter and 119% a year ago.
As we've highlighted this metric will vary quarter to quarter.
While good for our business, our increased success selling bigger bundles and selling multiple pillars from the start and faster upsells within a year can reduce our dollar based net retention rate in the future.
Considering these factors, we feel that 126% is outstanding.
Total gross margin of 81% was flat quarter over quarter and improved by 1 percentage point year over year.
As a reminder, gross margins and the second half of last fiscal year were pressured by the augmented use a public cloud to meet the tenex surge and CPA traffic as pandemic Lockdowns began.
Turning to operating expenses, our total operating expenses increased 6% sequentially and 53% year over year to $119.7 million.
Operating expenses as a percentage of revenue declined by 3 percentage points from 71% a year ago to 68% and the quarter, primarily due to lower keeney, which was partially offset by increased hiring and M&A expenses.
Sales and marketing expense increased 6% sequentially and 56% year over year to $80.9 million.
The year over year increase was due to higher compensation expenses and investments and building our teams and go to market initiatives.
R&D expenses increased 8% sequentially and 55% year over year to $25.9 million.
The increase is primarily due to continued investments and our engineering teams.
G&A expenses increased 4% sequentially and 33% year over year to $12.9 million.
The growth and G&A includes investments and building our teams compensation related expenses and professional fees.
Our third quarter operating margin was 13% compared to 9% and the same quarter last year and teeny spending at a positive 270 basis point benefit on.
Operating margin was better than our guidance range due to stronger than expected performance and the business and due to timing of certain sales and marketing spend.
Net income in the quarter was $21.4 million or a non-GAAP earnings per share of <unk> 15.
We ended the quarter with over $1.4 billion and cash cash equivalents and short term investments.
Free cash flow was positive $56 million and the quarter.
Which compares to $9 million during the same quarter last year.
The increase was driven by our strong billings growth receivables collection and operating performance.
Now moving to guidance as a reminder, these numbers are all non-GAAP, which excludes stock based compensation expenses and related payroll taxes amortization of debt discount amortization of intangible assets and any associated tax effects.
For the fourth quarter of fiscal 2021, we expect revenue and the range of 185 billion to $187 million.
Reflecting year over year growth of 47% to 49%.
Gross margins of 79% I would like to remind investors.
Number of our emerging products, including CTX workload segmentation and C. S. P. M will initially have lower gross margins and our core products.
We are currently managing emerging products for time to market and growth now on optimizing them for gross margins.
With this in mind, we believe 79% to 80% is a good range for us and the near term.
Operating profit in the range of $13.5 million to $14.5 million.
Other income of $300000 net of interest payments on our senior convertible notes and income taxes of $1.7 million.
Earnings per share of <unk> to <unk>.
Assuming approximately 146 million fully diluted shares.
For the full year fiscal 2021, we now expect revenue and the range of $660 million to $664 million or year over year growth of 53% to 54%.
Calculated billings and the range of $878 million to $880 million or year over year growth of approximately 60%.
Operating profit and the range of <unk> $71 million to $72 million earnings per share of <unk> 47, assuming approximately 145 million fully diluted shares.
The acquisitions of <unk> and smoke screen are expected to have an immaterial impact on revenue in Q4 and in fiscal 2022 as they are early stage companies.
Our plan is to further develop these products and incorporate their technologies into our platform.
We expect to incur $2.5 million to $3 million and additional operating expenses and Q4 related to the acquisitions.
And clearly and new R&D center of excellence and Israel.
This was incorporated into our Q4 guidance.
For your modeling purposes, we expect to incur approximately 13 million to $15 million and operating expenses related to the acquisitions and fiscal 2022.
With the huge market opportunity, we remain committed to invest and aggressively in our company behind that growth and 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 and ahead of us.
While we will balance growth and profitability growth will continue to take priority considering our strong business momentum on.
Operator, you May now open the call for questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then 1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue simply press the pound key.
In order to facilitate as many participants as possible. We ask that you. Please limit yourself to 1 question. If you have additional questions you may rejoin the queue.
Again, if you have a question or comment at this time. Please press Star then 1 on your telephone keypad.
Our first question or comment comes from the line of Alex Henderson. Your line is open.
Yes.
Yeah.
Yes.
And what do we move to the next question. Please.
Howard can we move to and this question.
Yeah.
Howard are you on.
Mr Han and Mr. Please repeat your question.
Yes.
Yes, Sir.
Okay.
And taking it up.
Thank you.
Outstanding results.
And the question I have is really on the sales and capacity that you've been adding over the last year to what extent do you see that capacity.
Maturing and <unk>.
Terms of its productivity and how do you think about additional continuation of that incredibly successful program.
Alex. Thank you as you know, we havent, adding and rather accelerating sales capacity.
The performance and.
And.
We are counting on it to deliver us accelerating growth Fremont you want to give a better color to it the majority.
Our field sales reps are still ramping.
So significant portion of our organization still on ramp phase.
And the key thing that we brought up and the past is that we are aggressively hiring and we had a good quarter hiring in Q3, we expect to have a very good quarter and Q4, so our plans and as Jay talked about and the earnings call is that the market is really strong and it's moving to us.
All indications are that you are and a great position. So we're going to continue to aggressively hire and really.
Bill after the growth.
And as these kind of going forward and if I may add 1 more statement wanted comparative Mont different talent. These kind of has become a top destination for top talent, so and able to attract good talent and.
And go our sales team stronger.
Thank you. Our next question or comment comes from the line of Matt Hedberg from RBC capital. Your line is open.
Oh, Hey, guys. Thanks for taking my question and congrats on it on very strong results obviously.
Jay.
There's obviously a lot of success Youre seeing and the enterprise upsell and large deals, but I had a question on the federal or I guess public sector market, obviously, the colonial pipeline attack highlighted the risk here that some utilities are at.
Just can you talk about how you think about zero trust architecture could benefit from public sector and might that be an accelerant as we look forward for the next year or 2.
And then we have been hearing enterprises talk about zero trust more and more on the loss cost to 18 months, especially after some of the smaller brands.
Thanks.
This has picked up steam but no. It's good to see that federal government is waking up and saying they need to do something good to see a very clear directed coming from.
Alright, and administration, which highlight the need for zero trust and by the way I must say that many vendors are trying to hijack that from SEDAR Trust.
And our trust as victim by value based on that NIST.
Research papers and.
It is not done by firewall, Inc.
Is connecting entities to entities without a pass through connection and we believe we will have a big advantage of it we started investing and federal space thought 3 years ago has gone through a lengthy process of certifications and ramp and the like.
And while it certified we started investing in sales organization about 2 years ago have a strong team a strong and growing pipeline. So federal Sip business seems great and the second part of your question is actually public sector, which is the non federal and Paul.
The state local and.
And education stuff, we are doing and that part very well asphalt stable.
No I think you hit it.
The key thing is that we've invested significantly in federal and it's as John talked about the fed ramp certification.
On a fed ramp heifers EPA and also we are moving towards that ramp high for <unk>, which puts us on a.
Completely different position and other companies. In addition, I think 1 of the strength that we've been able and built the sales organization the organization very strongly and partners and federal.
I feel we're well positioned and the federal market going forward.
Thanks, guys well done.
Thank you. Our next question or comment comes from the line of Gregg Moskowitz from Mizuho. Your line is open.
Okay. Thanks for taking the question and congratulations on a phenomenal quarter.
Jay maybe to follow up a bit on the last question and you sort of touched on this a little bit but from what you're able to gather and have the recent high profile breaches dating back to solar wind that inclusive of the colonial pipeline attack and they had any discernible impact on your pipeline and so you know again, we hear the anecdotes are much like you do I'm just kind of curious if there's anything that.
And he's able to translate to.
And to some extent from what Youre able to tell.
So first of all the number of inbound engagement from.
Not just CIO and <unk> and in many instances.
Board have stepped up so it's clear that there is high degree of interest and making sure that companies are secure.
Point number 1.
Point number 2.
When those level of C level and get engaged the budgets open up they become less of an issue when youre dealing with a CIO, who has budgets and hundreds of billions of dollars to get a few million dollar deal for us.
Generally becomes a lot easier. So we are seeing tremendous interest.
Our customers, having discussions that they need to do zero cost implementation because of security and factors, including colonial and solar Vince yes.
And I quantify what part of business and pipeline.
Probably I'll be guesstimate and 2 months, so I'll leave it open to say a positive impact but hard to quantify.
Okay very helpful context, thank you.
Thank you and our next question or comment comes from the line of Gray Powell from <unk>. Your line is open.
Alright, Thank you very much for taking the question and congratulations on the on the good results.
So yes, you mentioned that you expanded our investment and the mid the mid market or the mid enterprise segment.
We're on companies with 2000 to 6000 employees contributed a higher mix this quarter zone.
The weighted roughly quantify how much of the upside. This segment is driving and then how should we think about the potential contribution from.
On the subject ramping over the next 6 to 12 months.
Yes.
And just for clarification. The enterprise segment is for employees of 2 to 6000 employees for our company and it is the fastest growing segment that we have and on a.
Quarter over quarter basis.
The growth.
For new and upsell business, it's been a couple of percentage points with the shows basically as our investments in the summit program that we've made so the summit program targeted primarily towards bars and bars and primarily towards the segment we are seeing.
Very very good growth and we're happy with the growth as I mentioned is the fastest growing segment that we have the.
The segment's average majors large enterprise enterprise and commercial.
So this is the largest 1.
And large spouses and if I may add it was natural for us to expand into enterprise, we started from the high and having a strong presence and majors and large enterprises and so.
Natural part for US and we are pleased to see the performance from this area and we have been adding quite a bit of.
Sales force in this area and partner program together is delivering good results.
Got it and our sales cycles faster there or is there anything different on the competitive environment.
Yes, they are faster as you would expect typically the bigger debt.
The longer that stuff.
Smaller companies fewer of the stakeholders and fast from the salt side.
Understood. Okay. Thank you very much.
Thank you again, ladies and gentlemen, and an effort to ask as many questions as possible. We please ask that you limit yourself to 1 question. Our next question or comment comes from Atlanta, Mike Walkley from Canaccord. Your line is open.
Great. Thank you and my Congrats also on a strong result.
And just wanted to dig in on on the comments on Z P. A about it's going to all users not history note and any way to size the opportunity and further penetration within your customer base and and just thinking about V. P. A with it taking off with the pandemic any thoughts on longer term modeling and giving potential a tougher comps even though.
And that pipeline accounts strong thank you.
And so so first of all from day, 1 our belief was.
Use EPA with network design and bought access VPN only it was designed as zero Trust architecture implementation.
And then no matter, where the users on I think also our switchboard so they never on the corporate network.
And when and then and Kaplan since every on Los Ramones since <unk> got bought from almost every employee and most of the companies that was a big shift we saw.
Whereby previously company and supplies ETF for 2030, 40, 50, 60% of the employees.
But we knew that.
And that number will get to 100%.
And as employees are coming back to the office and in fact customers on what are you bought these people, bringing debt infected machines back the office, so and they wanted to do zero trust, even when debt and office. So far that they want to go through ours, Aussies SEDAR truss exchange and Capex for that we built.
And on the surface be caught on private service edge.
Imagine a private switchboard running and your data center to implement zero Trust for on Prem users, which is actually a great opportunity for a given customer segmentation for the applications, which is what customers on looking for so I think and.
And some at our time.
Every employee of our customers will have to see I E Z P M and <unk> as well because while <unk> CPA allows you to work from anywhere and access any application and <unk> make sure users have a great experience and the issues and can be easily resolved and free.
Yeah, and from a penetration perspective, or GTK customers, a little over 40%.
Have a CPA, so significant opportunity for us to up sell and into our existing customers started a little over 40% on Ci customers Pepsi expense correct, yes that is correct.
Yeah.
Okay. That's helpful. Thank you.
Thank you. Our next question or comment comes from the line of Andrew Nowinski from D. A Davidson your line is open.
Okay. Thank you congrats on another.
Another great quarter, and so I had a question on the crowd strike when you.
Hear a lot about how endpoint security and and specifically Edr technology is necessary to stop breaches like the colonial pipeline attack.
And given that crowd strike pride themselves on stopping those breaches I'm wondering why they would need zscaler. So if you could provide any more color on maybe on and what they are deploying and how they're using zscaler and and whether you think any other enterprises may follow their lead and deploy both crowd strike and Zscaler together.
Yeah.
And yet to come across a serious large enterprise, who doesn't believe and layered security approach.
And point serves as an important layer and cloud serves as a second layer.
That's the most common thing else do so.
So when you bind to that notion, which is what we do and most customers do it's natural for a customer to say and.
And Colin from crowd strike and cloud security from Zscaler and what's exciting for our customers is for the 2 to be able to want to get.
With proper API based integration.
Chrome strike and as he's going to have done this product integration over the past 12 to 18 months and that integration keeps on going to the next level.
Where we can help each other and customers get the benefit of it so driven by product integration that customers wanted and.
And then on joint sales engagements the field, where our teams are working together because we complement each other it's a great win win partnership for both of our composite parts drone strike and us.
Did I answer your question.
Yes, it did thanks Jay.
Thank you. Thank you and next question or comment comes from the line of Keith Bachman from Bank of Montreal. Your line is open.
Good evening and thank you for taking the question Jay I wanted to see if you could give some more color around both Z C P and CTX and and the question really is.
Any comments or color on attach rates, how much are contributing where the wins are.
Any more color. So we could get a sense about how much those assets and new solutions, rather contributing a day.
And how you see that unfolding over the next 12 months many thanks.
Yes. Thank you I'll start with the strategic positioning and any mark and add on the quantitative side of it.
And as you know CCP cloud protection is a massive opportunity on protecting workflows. There are a couple of <unk> 1 big 1 is communication among workloads.
Which is traditionally done and the old school way by connecting various workloads and availability zones with a wide area network site decided to BP and the light.
Which creates big risks because because of lack of woman so.
With workloads segmentation, we have implemented a zero trust architecture, which will disrupt legacy network based security for workload, just like we've done it for users from <unk>. That's 1 part of it and obviously, it's easy for us to start with our own customers and that's a large customer base and that's where our lease.
<unk>.
And then a second site and as the security posture and type of stuff this severe somewhat offering.
Cloud security posture management and C. S. P M and Trust Zone acquisition combined gives us a strong offering.
We are bullish about the CCP market, which is nascent but it's growing rapidly.
And the C. D X part is very interesting.
This is complementing C. I N C P a to identify and resolve any use of performance issues and so this is a natural add on to N E Z Z P M sale and when will you.
And we used to sell and see Iot and we start selling zix EPS together more and more deals on a and <unk> together at the start and no and we are seeing more and more deals with <unk> Z P M gtx to guidance, which mix and natural bundled on our customers.
2 and enabled employees to work many of you and have a great experience.
Raimo colorant on yeah.
From a numbers perspective, we still expect the contribution for new and upsell for CCT and CTX to the mid single digits. This year it's.
And as Jay mentioned.
Reception of both products has been high and we feel good about those products going forward, let's think about the contribution this year for new and upsell and that mid single digit range.
Okay perfect. Thank you.
Thank you. Our next question or comment comes from the line of Patrick Colville from Deutsche Bank. Your line is open.
Hey, Matt. Thank you so much for taking my question.
So I'll just on the mass.
It's C L. P on billings, if I'm not mistaken rose, 85% this quarter, which are looking at the disclosure. Since you guys have been kind of giving up and C. O P. O seems to be the kind of highest growth rate.
M ever.
So hugely impressive what you know what are you guys seeing.
Uh huh.
Of this real acceleration this quarter you know what are the kind of co.
Confluence of factors and I guess kind of more importantly.
How sustainable are they as we look forward and to the rest of the calendar 'twenty, 1 and 22.
Yes.
Take the first part and.
And give some color.
You're right Patrick it's adjusted.
And any results on CRE.
<unk> growth.
68% and the <unk> growth is 85%, which is absolutely outstanding.
And you couple that with our billings growth of 71%.
It just shows that basically things are going very well for us.
And what's changing is basically what we've seen we've been talking about this what would the accelerant and last year related to Covid hit and.
Companies recognized but they had to get their employees connected to their networks in order to our applications in order to 2 new business and we saw that and that that was the big increase.
And for last year, with CPA, and which is 43% of our doing upsell business.
Since then basically from that brought to life and it's basically the yesterday's networks aren't going to work infrastructures and I'm not going to work and those are the discussions that we've been having.
And with customers that is basically the change which is occurring is recognizing the current infrastructure in place is really not the optimal infrastructure that companies need going forward.
With that.
What we've done as a company we broaden our platform we brought on our platform and we just talked about <unk>.
Workload protection and additional basically features onto our product. So the broadening of the platform and are related to the movement to really.
Transforming your networks has led to basically deal sizes, and it becoming larger and more strategic.
Partnership.
And also you know just the credibility that see scalar and now the public companies for 3 plus years.
And we've got a strong balance sheet and we've got a strong team and and.
And again the key thing is Zscaler was built for this world. The platform was built for this world over 10 years ago.
And it was and if you take a look at the expansion basically.
The amount of traffic that we put through.
And that's the type of gross margins with the type of traffic.
Over 150 data centers.
But <unk> seen so far.
Zero quite frankly on a quarterly basis.
As a testament to the strength of the scale and I think that's what's playing through with our communications with our customers.
And I can't spend it all.
Accelerating digital transformation being 1 expanded portfolio and platform being too large crane sales Force Inc.
And our brand and customer actions all forward on accelerating our sales.
Great. Thank you so much for taking the time.
Yes.
Thank you. Our next question or comment comes from the line of Catherine <unk> from Colliers. Your line is open.
Oh, Thanks for taking my question and congratulations phenomenal quarter.
Okay.
A little bit the summit program, and how well you're doing there versus your sales to the service provider channel and give us a better idea.
Where you really see an explosion and your opportunities.
Yes, and our service provider channel evolve fairly early on as our customers want and transformation and CIO and told Sps to work with us to make that happen. It's a strong channel it's a growing channel.
Vars took time and.
And the past couple of years, more and more advanced and I realize that the bulk sales and not going to last forever. So they are pivoting more and the 1 vault pivoting to the to and embrace cloud transformation services beyond our families and <unk>.
<unk>, becoming part of our summit program, that's what the program was built and the.
Good participation from bond programs and as a result of that we've seen that growth hub for our contribution to the business growing at a faster rate.
From a numbers perspective also bars, you know bill.
Percentage of our revenues from below 50% range.
Sps and size combined below 40% and direct as a mid single digit.
The growth rate and <unk> has been significant year over year also so we've got significant growth and <unk> on a year over year basis.
Okay.
Yes.
Thank you.
Thank you.
Our next question or comment comes from the line of <unk> Kalia from Barclays. Your line is open.
Great Hey, Thanks for taking my question here guys.
Actually maybe just maybe just to piggyback off that last question on channel, maybe a little bit more of a strategic 1 for you Jay.
The service provider channel.
And an area that <unk> worked with for years as you noted and it sounds like the support and you're starting to see some other security vendors, maybe you start to work with them a little bit as well.
And I guess the question is how are your conversations with those service providers and and.
How do you think that that sort of plays out and the future is other security security vendors, maybe start to work with that channel as well on southeast specifically.
Yeah.
First of all as demos at our business and Sps size and over the years growing quite well Inc.
In terms on other firewall vendors and some new news service providers have been selling firewalls type of spend.
Stuff.
Especially for M SSP servers for years and years, so not a new area.
And adding the SD Wan to those firewalls is probably a new area for you and Bob but most of that stuff has happened.
On the lower and you know when you talk on large enterprises.
Actually engage with US and then partnered together and drive the transformation none of that has changed and the lower and.
<unk> combination on some of the SD Wan combined with firewalls.
But we are bullish about on SP channel.
<unk> channel as on the var channel and in fact on investments in channel are growing significantly because that's giving us more and more leverage and we will continue to do so.
Very helpful. Thanks.
Thank you.
Thank you. Our next question comes from the line of probably on me from Bank of America. Your line is open.
When I ask you why are you successful the answer is always the same someone else and ask you again, but I wanted to ask you.
About competition and.
And the fact that you are so successful and such a long period of time.
And we do see new players and the space I'm wondering how the competitive landscape changed what's the what are you who do you see today.
And competitive bids versus what you've seen before and.
How is the GAAP between you and the competitors. So any anything you can share with us on the competitive landscape. Thanks.
Well you know we asked this question to ourselves many many times, we analyze that every quarter.
And frankly, the truth is not a whole lot and changed on the competitive landscape.
We.
Well hearing so much noise from firewall vendors and our lives.
We've seen any change on that on the larger segments larger customers and we always talked about.
Haven't seen on <unk>.
And much at home, we have seen a few cases and I mentioned a couple of them during our prepared remarks bill.
Firewall vendors trying to go in and compete but got disqualified because they didn't have to architecture.
And you could say that now some of them on saying, yes, we have a proxy architecture, but and I'm, saying is 1 thing building a scalable reliable proxy that of large enterprises will depend upon and so very different thing altogether.
Having said that when we come down to the lower end of the spectrum say under 5000 users and so we do see some of that.
Vendors, where it's kind of less.
Security savvy customers.
But as we are engaging more and more and this space.
With our enterprise segment, we do some of them, but once we engage we are winning pretty handsome.
So very comfortable on the comparative front, because customers up more and more actually on every segment looking for consolidation and simplification. So low and players that are coming from point product and trying to expand so to speak don't really make and well some of the bigger ones on legacy vendors.
The old story on Zero Trust exchange platform, that's much better because we are truly a zero trust architecture, and I've said, you can't convert and a firewall Inc..2 zero Trust architecture, that's gonna oxymoron.
Got it and do you feel that you need to make acquisitions in order to grow the Tam or is it more time to focus on execution and and our sales and marketing and just try to within New York current Tam try to get more market share where where is your focus between the 2.
And it's a good question.
Good.
Why not.
Having said that I would say.
And we won't be looking for acquisitions to grow 10, Bill looking for acquisition and build sell and any potential areas that would be to kind.
Kind of strengthen or expand into adjacent markets guidance pretty open to it we have done a few small acquisitions and.
And the right opportunity the right technology.
Look for them and everything that makes business sense, we see that as the market opportunity and momentum is so good so why not keep on moving at a faster pace and and on sales and marketing we are investing and investing heavily in fact, remo and I have lots of internal debates on.
Topline growth was the bottom line.
And I'd say had top line and the priority they'll both of us happened to be such that we can't be spending like drunken sailors and you'll also see our bottom line being pretty good.
Thank you.
Thank you.
Our next question or comment comes from the line of Eric <unk> from JMP. Your line is open.
Yeah, Thanks for taking the question and congrats.
And.
On the AR and the SD Wan space.
Who are your best partners at this point are there different architectures for SD Wan that fit well with you or how do you how do you look at that space.
Okay.
S T band, so and so it's pretty simple United starting with vendors, who compete on the hire and who have enterprise class architecture.
Debt natural to work with us because on large customers want that.
And as I said kind of for the 3 vendors, we see frequently on.
The band deployments and large enterprises.
P M here.
<unk> and Cisco.
Most of our customers have won on Saturday deployed on the high end and the low end customers coming from the firewall side of it.
Do they have some large enterprise customers, yes, but a lot of that business ends up being on the orange and we see them less often but we do have customers who may have and.
Are there asti and vendors, but they decided that we wanted the security cloud of choice and you opened we integrated with everyone and I can take traffic from almost any SD Wan vendor.
But and with some of them, we have stronger what can relationships.
Vmware is on our best partner when it comes to go to market.
Sure.
Very good thank you.
Thank you.
Our next question or comment comes from the line of Hamzah Firewalls from Morgan Stanley. Your line is open.
Hey, guys. Thank you so much for squeezing me and.
Just maybe a high level market question for you I think some of this and you touched on it earlier, but where we're <unk>.
Clearly seeing a critical math in terms of adoption of trends such as SaaS and Zero Trust network access a lot of the stuff that obviously, you've been aligned towards and day, 1 and you're you're clearly.
A big beneficiary of that and have been but at the same time I think.
You know at least on the short term it seems to be kind of a rising tide lifts all boats right and and in many of the firewall competitors that you mentioned earlier are talking about similar.
And similar approaches not.
And not to necessarily go did you talk about any 1 particular vendor but.
At what point do you think that some of the fun right from your perspective kind of when I was down and and and you know people are looking for a.
A solution that's truly architected for the trend like like you've talked about.
Yes.
We've seen this movie before you recall, there's some proxy vendors, whose sales were rising and deep grossing Jay.
You guys operating why aren't they are losing.
And then we are still young we still have a small part of the market with $25, 30% of their customers on.
And have deployed us what are our new guy is doing to keep on dealing with data centers centric model architecture, and network centric architecture and buying more and more of a firewall.
It'll be it'll take some time in Russia is a powerful thing, but I think when it comes to doing truly.
Net new architecture with Zero Trust, but you don't put people on the network you don't have a pass through architecture.
That's the only way to stop colonial type of effect.
Pipe kind of offence and.
Solar wind and top of threats I think don't see things changing and that's that's what I think overall now.
And the market is pretty big right now.
We are on fairly inhibitor dollars on impacted by any of those.
The competitors are doing well I think and.
And our share will keep them going for some time till the architectural really changes take for example, spinning our V. P M and the cloud doesn't make anyone's zero Trust, it's still V. P M, our customers buying and deploying it of course they all.
Will that change over time of course, it will can you make VPN and 2 zero Trust you can't.
Alright, thank you.
Thank you. Our next question or comment comes from the line of Rob Owens from Piper Sandler Your line is open.
Great. Thanks for taking my question Jay relative to return to work and we think about reopening how would you expect the pace of digital transformation, and therefore network transformation and potentially change and where customer conversations right now around the sense of urgency. Thanks.
So customers are beginning to make plans to come and work.
From the office on <unk>.
Many of them have partially opened up what.
And they learn during the Covid crisis was.
And that the Copa and Netflix doesn't play a very important role they could work from anywhere.
But having said that when employees on and the branch office and they need to make sure that traffic and go directly from the branch office to the cloud just like advance on employees home directly without going back and data centers. So that is actually restarting some of the STB on projects. So they can do local breakout but the.
And bigger issue, that's helping also the bigger opportunity that's helping US is they want to make sure their employees in the office still do zero Trust architecture with a product like Z P. M.
So we have seen good interest and fully zero trust. So they don't have an issue where the laxalt movement, that's like solar veins and get them and trouble.
All day and factor machines coming back to office and get in trouble and we are helping companies implement better security and full security out there turning to the office as well.
Overall, a good positive opportunity for us.
Thank you we have time for 1 final question and our last question comes from the line of Brian Essex from Goldman Sachs. Your line is open.
Alright back and the bus. Thank you for taking the question I really appreciate and and congrats on the results and it was.
I was wondering.
And maybe Jay if you did.
Expand a little bit on some of the some of the drivers here in terms of you've got macro headwinds you've got sales productivity, you've got transformational shift to the cloud expansion of your platform and how does that relate to customer growth is there anything you can kind of quantify customer growth and then grade those tail winds in terms of which are the most meaningful with.
With regard to the growth trajectory that you're experiencing bill.
And then you said customer growth are you told a number of customers on revenue.
Yeah, I guess I'm looking for you know logo growth relative to some of the kind of platform expansion and sales productivity.
And initiatives that you have currently in play.
Right, we are doing well in both areas new logo growth and up sell and for.
And it's interesting debate and find the company should be paid more but new logo or not okay and we.
Sided and not.
Because there's so much and opportunity to sell the platform, which falls under upsell and a new logo, we have a good mix of business coming from new logo and what Ive upsell.
So the opportunities and you said the macro environment is helping more focus on security is helping us sales force and done and phenomenal job and the sales organization nausea.
Seeing very good results from our early focus on channel partners.
Marketing and you've got a new CMO, we expanded and strengthened the marketing team a lot more investments and the marketing area.
And platform and chronic machine is really humming and I've got a good speed.
Very bullish on our opportunity going forward.
And from a total customer and perspective, we grew our customer base by about 20% year over year.
Yeah.
Got it that's super helpful. Thank you very much.
Thank you.
That concludes our Q&A session at this time I would like to turn the conference over to Mr. Jay Chaudhry for any closing remarks.
I'd like to thank you all for your continued support.
Please join us add on seen us life annual from summit and mid June thank.
Thank you again.
Ladies and.
And thank you for participating on today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
And.
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