Q4 2021 Zscaler Inc Earnings Call

September 9, 2021

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Zee scalar fourth quarter 2021 earnings Conference call.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker to your first speaker today, Mr. Bill Choi Senior Vice President.

That's the relationship and strategic finance. Thank you. Please go ahead bill.

Good afternoon, everyone and welcome to the Zee scalar fiscal fourth quarter and full year 2021 earnings conference call on the call with me today are Jay Chaudhry, Chairman and CEO and Remo Knesset 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 Youll.

Youll find a 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.

<unk> net retention rate future hiring decisions remaining performance obligations income taxes earnings per share our market share and market opportunity. 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 market adoption of our offerings.

And our expectations regarding 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 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'll upload a copy of today's prepared remarks to the IR website, when we move to the Q&A segment of the call.

Now I will turn the call over to Jay.

Thank you Bill.

We had a very strong quarter closed out a spectacular year.

In Q4, we delivered growth of 57% in revenue and 70% in billings.

As customers embrace our expanded cloud platform to accelerate the digital transformation.

Let me share a few highlights of fiscal 'twenty one.

Our full year revenue grew 56% to $673 million and billings grew 70% to reach $934 billion.

We are seeing revenue growth across all verticals customer segments and geographies.

51% of revenue was from outside of United States.

I'm very excited to see our <unk>.

Approaching $1 billion and pleased to note that our new annualized bookings and new logo acquisition accelerated throughout the year.

All product pillars of our platform saw strong demand.

Notably CPA revenue surpassed $100 million in fiscal 'twenty one.

Growing 166% year over year.

Increased cyber security risk and accelerating digital transformation have increased the need for our zero Trust architecture.

We are uniquely positioned to reduce business risk and make businesses agile and more competitive.

We are the only cloud provider at scale with a proxy based architecture to deliver tools Zero Trust security.

Firewall and VPN based castle and moat to acuity connect users to the corporate network, which facilitates lateral movement of trends increasing cyber risks.

<unk> care connect users only two applications.

Now to the next call.

<unk> principal of Zero Trust architecture.

That reduces ransomware attacks and other cyber risks.

Built from the start to enforce policy at the edge.

Advocated by the SaaS framework.

These color club spans 150 data centers with five nines of availability, providing fast and secure access to all applications, whether in your data center or in a multi cloud environment.

Because of these architectural advantages and our proven ability to scale.

<unk> Zero Trust exchange has become the foundation for a solid transformation.

With a record number of seven figure <unk> deals in Q4.

We now have over 200 customers with greater than $1 million in.

All at all.

Over 5600 enterprises, including 35% of the Fortune 500.

These killer to secure their transformation journey.

While the increased net promoter score of SaaS companies is 30.

These killers is 74, which is two five times higher.

Proof of the value of Zee scalar deliveries.

No I will link to discos fee market segments, we have we made significant progress during the quarter and the fiscal year.

The financial services sector has become our top warranted.

As these companies are embracing the cloud and office 365.

Let me highlight key new customer wins in Q4 for the purchase of Ci and CPA together.

First is the global bank.

<unk> Zero trust strategy to protect over 100000 employees with high end CIA and CPA bundles.

They purchased every module we offer in the CIA cover, including firewall sandbox can't be DLP and browser isolation.

Fast user experience and enhanced cyber security one of the key factors for our wind.

Our second new logo win it's a fortune 500 asset management company that purchased VII and CPA to secure over 30000 employees.

And third is a fortune 500 insurance company that purchased Zia II in CPA, our 26000 employees to enable what phone anywhere.

These wins illustrate when companies are ready to embrace the cloud. These killer is the only cloud native multi tenant platform that meets the needs.

With <unk> as a major requirement these financial services customers only considered.

C architecture.

That can provide SSL inspection at scale.

And rejected firewall based architecture.

We now count eight of the top 10 global banks and seven of the top 10 insurance companies outside of China as our customers.

Next let me highlight our progress in the enterprise market segment, which includes organizations with 2000 to 6000 employees.

We started focusing on this segment at the start of fiscal 'twenty one.

And the results have exceeded our expectations.

This segment includes over 12000 organizations, representing $8 billion of our serviceable market for user protection.

Deal sizes in this segment are growing as customers adopt more of our platform.

I'm excited to see our first.

Seven figure upsell wins in <unk>.

Enterprise segment, where the customer is buying all four pillars of our platform.

DPA AMC Dx for 6000 users and DCP workloads segmentation, our almost 3000 servers.

Our IRR with this customer now exceeds $6.0 million.

<unk> a significant opportunity in this market segment.

To further penetrate this segment, we are developing targeted marketing programs significantly growing our sales team and doubling down on our summit partner program to recruit and enable channel partners to drive further sales leverage.

Finally, we continue to invest to capture our large federal opportunities.

With a sizable fed sales team and the highest fed ramp certification.

We count well over 100 government agencies and federal integrators as customers.

In Q4 alone we added over 20, new federal customers, including four with over $1 million in annual contract value each purchasing CIA and GPA together.

Driven by the President's recent executive order, we are seeing increased interest in our zero Trust exchange across all levels of the government.

We are among a select group of companies chosen by NIST, a national standards body run a pilot program in support of the executive order.

We are excited about this opportunity to help our country dramatically improve our security posture, while significantly reducing legacy costs.

Next let me highlight our technology innovations and emerging products, which are expanding our opportunity.

We started with a highly scalable multi tenant globally distributed cloud capable of providing inline inspection of internet and SaaS traffic with Ci.

Securing access to private applications with CP.

Over the past few we extended our platform to protect cloud workloads and to manage digital user experience.

We're very excited about the early traction of our emerging products. The next growth engine for us.

Our emerging products contributed high single agents as a percentage of our new and upsell business in fiscal 'twenty, one which is well ahead of our expectations.

<unk> is the fastest growing solution in our history and a natural complement to Ci and CPA.

With a single lightweight endpoint agent. It is frictionless to tunnel CTX to provide end to end visibility, who hope resolved performance issues on every deal.

In Q4, one of our largest <unk> deals came from a fortune 500 Tech company.

That purchase to empires <unk> portfolio.

As well as CPA and CD Expo, all 60000 employees to support work from anywhere while embracing zero Trust architecture.

We were pleasantly surprised to see so many large enterprises adopt CTX so rapidly.

Other notable <unk> wins include a fortune 500 pharma company for 70000 users a fortune 50 energy company for 55000 users a fortune 500 European Bank for 39000 users an industrial manufacturing company for 28000.

Users.

And a health care company for 25000 users.

I believe that every use EIA and CPA customer will embrace gtx as user experience is one of the highest priorities for a CIO.

We are receiving very positive feedback from customers of.

Fortunately 600, healthcare executive, indicating CTX contributed to an 18 point gain and employee net promoter score.

For the <unk> service desk in two quarters.

And after having disrupted premier best acuity with our Zero Trust exchange our users. Our next big opportunity is to bring in zero trust to workloads with Sis cloud protection or CCP.

Every organization is building their applications in the cloud and will look to implement SEDAR Trust security to protect workloads.

Our zero Trust exchange securely connect workloads to workloads and process to process using business policies, eliminating the need for traditional networks and associated cyber risks.

Solutions within our CCP pillar include.

Workload posture, which includes see SPM and see IEM ensures proper configuration and enforces lease privileged access for multi cloud environments.

Workload communications powered by CIA in CPA technology, secures app to App and cloud to cloud communication and workflow of segmentation achieves micro segmentation without legacy network segmentation.

We have over 300, CCP customers and are seeing increasingly strong interest from new and existing customers.

Let me highlight a few as ECP wins during Q4.

An existing <unk> customer in the consumer goods sector with over 100000 employees purchased workload communication or quantify it doesn't workflows.

Ian workload segmentation for 10000 workloads.

This customer has a large subtler environment on a traditional net group Inc.

Implementing on SEDAR Trust for workloads will reduce their cyber risk by minimizing lateral movement, while securing their migration to the cloud.

We are also landing new logos with DCP.

For example, we landed a fortune 500 professional services company.

With the CCP was the main driver.

This customer purchased workload communications for 6000 workloads.

What node segmentation of five new workloads as well as the <unk> tires EIA bundle for 40000 employees.

Our team collaborated with crowd strike.

Technology partner and a global S side, our channel partner for this deal.

Let me conclude some thoughts on our vision and strategy.

We envision a world in which the exchange of information is all way to secure and seamless.

In today's hyper connected digital World are zero Trust exchange secures any to any connectivity for users application workloads, and Iot and Ot systems, regardless of their location.

And at our Analyst day in January we laid out our ambitious goal of serving 200 million users and $100 million workflows.

In order to achieve this goal we are focused on attracting and developing talent and creating a culture of excellence.

We hired over 1100 employees over the past year and enable them to be productive and successful all during the pandemic.

We are investing in our people through learning initiatives and building, a culture, where our global and diverse workforce and deliver excellent powering on customer success.

Our employees are engaged and completely aligned to our mission.

On our last employee survey, 96% of employees understand and belief in the strategic direction of the company.

I'm proud that we are recognized as a great place to work in that 2021 glassdoor ratings.

We are focused on driving broad adoption of all four pillars of our platform the.

The breadth and depth of our platform is resonating with customers and are purchasing our higher end bundles to consolidate the security and networking point products like.

I believe these killer is the go to platform for vendor consolidation cost savings increased user productivity.

And better cyber protection.

As we demonstrated over the last 12 months, we've built a sophisticated go to market machine that delivers business value and measurable outcomes at the <unk> level.

I am extremely proud of our go to market team.

And how we executed our sales strategy this year.

Even with significant growth in our sales force sales productivity has increased over the prior year.

Seeding our expectations.

On Slide partnered channel program consists of hundreds of cloud focused retailers system integrators and service providers that are contributing to our deal win and increasing sales leverage.

As our market share that mutation and brand awareness continue to strengthen.

Boeing number of cloud and SaaS providers on integrating with our platform further strengthening our strategic position with our joint customer.

An expanding ecosystem is contributing to our sales philosophy and broadening our reach.

I believe we are on the right track to capture a material share of <unk> $72 billion serviceable market.

We also see additional opportunities to bring SEDAR trust to Iot and Ot systems.

Moreover, five G.

Pushes computing further to the edge.

<unk> some additional opportunities for Zee scalar.

To pursue these markets we have a two pronged innovation strategy.

One investing aggressively in internal R&D and scaling our world Class Engineering organization, which continues to rapidly deliver new products and features.

We recently opened a new R&D hub in Israel and are expanding our R&D centers across the U S, India, Canada and Spain.

Two making highly targeted acquisitions to enhance our platform and shrink time to market.

During fiscal 'twenty, one we completed two acquisitions crustose strengthens on CCP pillar and positions us better to pursue our shift left strategy.

And smoke screen enhances our active defense capabilities with Honeypot technology.

Through internal innovation and highly targeted acquisition.

We will further expand our leadership in the SaaS and Zero Trust security markets.

In summary, with all of these drivers and innovations ahead of costs you can see why we are pretty excited about our future.

I would like to turn over the call to remodel for our financial results.

Thank you Jay.

As Jay mentioned, we are pleased with the results for the fourth quarter and full year 2021.

Revenue for the quarter was $197 million up 12% sequentially and 57% year over year.

<unk> product revenue was 17% of total revenue.

From a geographic perspective, we had broad strength across our three major regions.

Americas represented 51% of revenue EMEA was 38%.

<unk> was 11%.

For the full year revenue was $673 million up.

Up 56% year over year.

This was an acceleration from the 42% growth we delivered in fiscal 2020, our total calculated billings grew 70% year over year to $332 million with billing duration in the middle of our 10 to 14 months range.

We're also pleased that year over year growth in short term billings accelerated to 71% in the fourth quarter from 61% in the previous quarter.

Our strong billings performance was driven by a record number of new seven figure annualized contract value deals in the quarter as we sold more of our platform offering.

We saw strong growth in our top five verticals.

Finance manufacturing services to healthcare and technology.

Meaning performance obligations or IPO were 155.3 billion.

As of July 31 up 98% from one year ago.

The current RPI is 49% of the total IPO looking at our pillars. The EPA was 27% of our total new and upsell business in fiscal 2021.

Our emerging products, which include <unk> and DCP are tracking ahead of our expectations and contributed high single digits.

Of our total new and upsell.

We are seeing strong customer interest and we expect emerging products to contribute low teens percentage of our total new and upsell business in fiscal 2022.

The adoption of our emerging products is pacing ahead of CPA in its early years.

We have a large opportunity with all our pillars and we will continue to expand our portfolio to strengthen our leadership position in the zero Trust security market.

Our strong customer retention and ability to upsell the broader platform have resulted in a consistently high dollar based net retention rate, which was 128% compared to 126% last quarter and 120% a year ago.

As we have highlighted this metric will vary quarter to quarter, while good for our business our increased success selling bigger bundles selling multiple pillars from the start and faster upsells for the year can reduce our dollar based net retention rate in the future.

Considering these factors, we feel that 128% is outstanding.

We have a strong base of large enterprise customers, which provides us with a significant opportunity to upsell our broader platform.

We had 202 customers with <unk>.

Greater than $1 million up 87% from 108 in the prior year.

We also had one 480 customers with <unk> greater.

Greater than $100000, which compares with 973 customers last year, our new customer adds accelerated in fiscal 'twenty one.

We organically added approximately 1000, new logos in fiscal 'twenty, one excluding acquisitions and.

And we ended the year with over 5600 customers.

<unk>, our field engagement with smaller enterprises with 2000 to 6000 employees and the increased investments in our partner program are contributing to higher new customer growth.

Turning to the rest of our Q4 financial performance total gross margin of 80% declined by one percentage point quarter over quarter and improved by one percentage point year over year.

Our total operating expenses increased 15% sequentially and 60% year over year to $138 million.

Operating expenses as a percentage of revenue increased by one percentage point from 69% a year ago to 70% in the quarter, primarily due to increased hiring and higher compensation expenses as well as $2 million in expenses related to trust stone and smoke screen operations.

Operating margin was 10% and free cash flow margin was 14%.

We ended the quarter with over $6.0 billion in cash cash equivalents and short term investments.

Now moving onto guidance.

As a reminder, these numbers are all non-GAAP, which excludes stock based compensation expenses.

And related payroll taxes amortization of debt discount and amortization of intangible assets.

For the first quarter of fiscal 2022, we expect revenue in the range of $210 million to $212 million, reflecting a year over year growth of 47% to 49%.

Gross margins of 79%.

I'd like to remind investors that a number of our emerging products, including <unk> workload segmentation and see SPM will initially have lower gross margins than our core products, because we're more focused on time to market and growth and optimizing them for gross margins.

Operating profit in the range of $18 million to $19 million other income of $400000 net of interest payments on senior convertible notes.

Income taxes of $3.0 million.

Earnings per share of approximately <unk> 12.

Assuming a 148 million fully diluted shares.

For the full year fiscal 2022, we expect revenue in the range of $940 million to $950 million or year over year growth of 40% to 41%.

Calculated billings in the range of 123 billion to $1 two 5 billion.

Or year over year growth of 30% to 34%.

We expect our first half mix to be approximately 42% of our full year billings, which is in line with the average of the last three to four years.

Operating profit in the range of $85 million to $90 million.

Earnings per share in the range of 52 to 56.

Assuming approximately $149 million to $150 million fully diluted shares.

Note that our share count guidance now includes dilution from our convertible debentures.

We have a cap call with a strike price of $322.0

Every $10 increase in our stock price above the strike price will add 250000 to 300000 shares to our fully diluted share count.

For your modeling purposes, I would like to discuss the anticipated teeny and M&A impact to fiscal 2022 operating expenses.

In fiscal 2021, we saw a 280 basis point benefit to margins from lower <unk> compared to fiscal 2020.

With plans for in person meetings and events in the second half of this year, including sales conferences in Q3. It was implied in Q4, we expect <unk> as a percentage of revenue to be approximately 250 to 300 basis points higher in fiscal 2022 as compared to fiscal 2021.

As mentioned previously the recent acquisitions of trust AUM and smoke screen are expected to have an immaterial impact on revenue in fiscal 2022.

We expect to incur approximately $13 million, the $15 million and operating expenses to further invest in these products and incorporate their technologies into our platform.

This was incorporated into our guidance.

Let me conclude with comments on our investment framework.

Balanced growth and profitability based on how our business is growing.

At our analyst day with consensus estimates at that time, reflecting approximately 30% revenue CAGR, we outline our target of achieving 20% to 22% operating margins in fiscal 2024, which implies 300 basis points of margin expansion per year.

Since then we delivered outstanding results with revenue growth exceeding our expectations.

If we continue to have high growth and strong unit economics, we will prioritize investing in the business, which would lead to lower than 300 basis points of margin expansion per year.

To that point, our fiscal 2022 guidance of 40% to 41% revenue growth and 9% to nine 5% operating margins reflects approximately 150 to 200 basis points of margin expansion. After adjusting for the increased <unk> M&A expenses.

We remain confident of reaching 20% to 22% operating margins in the long term, but growth will continue to take priority considering our strong business momentum with a huge market opportunity and customers increasingly adopting the broader platform, we're committed to investing aggressively in our company.

Operator, you May now open the call for questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw.

Your question press the pound key please limit yourself to one question due to time constraints. Our first question comes from Alexanderson with Needham You May proceed with your question.

Great. Thank you very much.

Looking out into the new year I was hoping you could talk a little bit about his thoughts on the type of expansion you're planning relative to the sales capacity.

<unk> been extremely aggressive over the last year in fact as I understand it increased your targets three times over the course of the year.

Certainly the environment is extremely robust can you talk about.

Where youre going as we go into the new fiscal year.

Thanks, Paul.

I'll start with that Alex and Sanjay can come in.

Youre right I mean, but at the same that we called out in the call.

We're seeing strong momentum for our business and particularly in the second half and Youre absolutely correct. We did increase our fuel quota sales reps by number in fiscal 'twenty one versus fiscal 'twenty.

As we go forward, we will be making continued investments in our sales organization.

As well as marketing.

And also channel, but that's only a piece of it.

Again, we will be increasing the number of.

Head count for Darts fuel quota sales reps in fiscal 'twenty two versus fiscal 'twenty one.

But more broadly speaking the opportunity is so big we're going to continue to best throughout the company to really position ourselves to move forward.

And really be substantial company, that's operating efficiently that's across all areas R&D G&A, our cloud when I started with Zee scalar we're doing about 35 billion transactions a day, we're upwards I don't know what the number is now but I know, it's well north of 160 billion transactions per day. It is critical.

If you're a cloud company like C scalar to provide a reliable service that customers can rely on to ensure they are operating efficiently and securely. So our focus going forward. This can be broad throughout the company, but we will continue to invest in sales and marketing and we will increase our field reps sales head count.

More in fiscal 'twenty two versus fiscal 'twenty one.

Well I.

I don't think I need to add a whole lot more we are hitting on all cylinders and very excited.

Thanks.

Thank you. Our next question comes from Matt Hedberg with RBC you May proceed with your question.

Yes. Thank you for taking the question. This is Matt Swanson on for Matt.

If I could just dive in a little bit more to the federal opportunity great color today on the call Jay, but what we're thinking about that zero Trust directive.

Our unique visibility into the federal space with a 100 customers and then obviously I would say our trusted leader what do you think the gap is right now in the current federal environment to achieve Zero Trust framework and then any sense you can give us of kind of the magnitude and the duration of the opportunity.

Suppose three months from now that mandate became mandatory for all federal environment Skip the zero Trust, how big is that gap.

So if you think of.

We have federal market.

It's large need today.

Network security, it's largely castle and moat, depending bone firewalls, vpns and alike.

Good thing is that <unk> administration has recognized that zero Trust architecture has to be done so it's great to see that.

<unk> is focused on implementing sooner.

And where we stand today is we started investing in federal market about three and half years ago and got all the certifications that are needed.

We also have the right architecture and we have built the sizable team we already have pretty good business, but we are barely scratching the surface of the federal market I think a lot of thing has to do with education. Good thing.

And some of the new meetings that widened administration is having that high profile CEO of sunlight.

Raising visibility in this space, we are participating in some of these new partners on and all we are excited but we also know that some of these federal deals take their own time.

Thank you.

Thank you and our next question comes from Keith Bachman with Bank of Montreal. You May proceed with your question.

Yes. Thanks, so much I wanted to ask a little bit about the net retention rate was very strong this quarter.

But you seem to be signaling that there may be some tension on the number but I was wondering if you could comment on how investors should be.

Thinking about the net retention rate.

As we look out in particular I did want to reference some of the information you provided at the analyst day.

You talked about a significant expansion on the annual price per user both in the user protection category workload protection category as well as to seek growth. So I'm, just I'm a little bit surprised to hear you almost down.

I guess downplay the 128 number but if you could just talk a little bit about how investors should think about that over the next fiscal year. Thank you.

I'll start then Remo can add on.

Our common bond metric tension rate had been consistent since we went public.

And here is the real thing if I were a one product company.

It matters, new logo offset all of those things with such a great platform that is growing rapidly. We have also internal debates should meet any pain sales up more for new logo versus up sell.

The answer is we really want to grow the overall, new FCB, whether it's coming from upsell audit is coming from new logos.

So the message is not to really say downplayed metric tensor.

The message is the net retention rate by itself is not a good indicator of what we're doing is good we are proud of 188, <unk> 125 to <unk>.

If I can sell a bigger platform upfront im okay, with a lower and not only that.

That's some F&B and we are happy to get bullish but metrics by itself is not the best thing as a leading indicator.

I'll follow on with that Jay is absolutely 100% correct.

We talked about on prior calls the only time, we understand the importance and that retention rate.

Basically our compensation structure, which we stay the same for new and upsell, we really don't look at it and so.

We have projections, but we're going to do during the quarter.

We really look at at the end of the quarter now having said that as you take a look at what we talked about at the analyst day, and Youre absolutely right Keith.

The opportunity to sell at a higher price point and we've talked about for the users for 5000 users.

We expect to have basically a price point of about $145 per user.

We are seeing that.

And so we are seeing basically companies that are buying CIA the CIA add on CPA and CTX, we're seeing those type of dollar amounts.

So the other the other point, which we haven't talked about the average revenue per user is increasing substantially.

So what we're seeing is that we're seeing customers.

By our broader platform, we're seeing customers who are actually buying.

<unk> and not buying the user protection initially so all indications are that.

Things are going well.

Net retention rate the positive impacts are the new products.

If you take a look at the number of global 2000 companies have both Gia and CPA, it's 44%.

So I wouldn't take.

Comments related to net retention rate.

It's going to go down.

We really just don't focus on it and we're just trying to really condition, our investors to really think about the broader platform, we have both new and upsell and basically our topline growth.

Perfect.

Yes.

From.

Thank you. Our next question comes from Mike Walkley with Canaccord Genuity you May proceed with your question.

Great. Thank you congratulations on the strong quarter and year, maybe just building on that last answer a little bit you've highlighted.

Enterprise segment targeting 2006 thousand employees as your fastest growing segment.

Did these smaller customers with faster sales cycle.

Similar land is your larger customers that have a long runway for upsell or are they landing.

Landing with a large amount of your platform.

Overall cost of our today, whether it's new enterprise segment or a larger one more and more.

Buying bigger and bigger plants.

It is true that enterprises plenty to do 6K.

Tend to go along with bigger from the start.

But it's a good it's a shorter sales cycle and these guys have the same risk.

Ill.

And similar tax unlike the others.

We are exiting some price PUC hallmarks traction we're getting in this segment in the past few quarters since you focused on.

The focus also on enterprises through our summit program, we put in place a year ago. So we're seeing strong traction through our summit program.

The summit program is geared towards those customers in that 2% to 6000 range so very positive.

Feedback very positive results as Jay mentioned over this past year and we're excited that this is an opportunity as Jay mentioned, our fastest growing segment.

We're excited about that opportunity.

Great. Thank you.

Thank you. Our next question comes from Jonathan <unk> with Baird. You May proceed with your question.

Yes, hi, guys congratulations on the strong quarter.

J J. This is probably more for you, but when you look at the publicly traded firewall vendors. They are clearly experiencing very strong demand trends for for their virtual firewalls for cloud cloud applications cloud environments and I'm just wondering how do you reconcile that with your comments around the benefits.

<unk> I mean, it doesn't it seem to suggest that there could be different approaches different architectures to securing cloud.

Yes.

Think about this.

Right a bit if you recall three four years ago.

We were asked this question quite a bit and this was being asked.

Why are these proxy vendors like blue coat, so posting good numbers.

I was telling them that we are barely making an impact a lot of traffic or so going through those proxy appliances.

In the data center.

If you look at our local breakout business that Donald.

We are the primary vendor itself.

Others have come out there, but the majority of the enterprise traffic still goes through hub and spoke network has to go through the data center, it's still goes through those platforms.

Does your capex year over year goes up by 33%.

You'll end up getting more data center devices, whether its firewalls are audit staff.

I think then you get to a certain level.

We had as traffic shifts cigna sadly that spend will shift that's my personal view so not surprised at why is the legacy devices like firewalls are still growing.

I think it's a matter of time.

Alright Thats helpful. Thank you.

Thank you. Our next question comes from Gray Powell with BTG. We May proceed with your question.

Okay, great. Thanks for thanks for taking the questions and congratulations on the strong results.

So, yes, I guess I'm curious like how are you thinking about the potential to increase pricing on renewals, particularly now that cloud based network security is more mainstream and the sales process is less evangelical than say three or four years ago.

Or are we looking at increasing the renewal price yes.

Yes, that's one of the questions.

Yes exactly.

Alright, our biggest increase in prices coming fall selling bigger bundles.

And there is some increase in price on each module.

<unk>, which we are expanding our portfolio is quite significant.

And as customers see the value and because B Shaw business back.

The increase in.

And price our customer from <unk> point of view becomes a natural thing.

I think if you if you if you're able to compete on price and compete on saying I'm a batter of firewalls and dose firewalls. Then it gets hard we don't really compete due to place of given firewall to a proxy.

Enabler secured digital transformation, a sale is often driven by the CIO and head of infrastructure to head up security when they look at the amount of money, we can save them due to place all of these legacy firewall security and networking devices to Ottawa is very impressive to justify.

Our price becomes a lot easier so value based business value based pricing is what we have advocated.

Yes.

Got it.

Yes, I think so maybe I can ask the question better I guess my understanding was like.

Four or five years ago, you had to be more aggressive just because I mean like SaaS and he wasn't even a term back then.

And people were less comfortable having security in the cloud today, it's more mainstream so I thought that give you more ability to increase prices that was my question.

Yes, I would think yes, we have done some price increases on the original products, but a big increase has come from adding a lot more modules. If you look at the time of IPO three and half years ago. It was largely secured web gateway with a few things. It is large deal business bundle sale of professional.

Today, but we are selling study different than what we sold three years ago, but any different than what we sold one year ago.

Chassis market that Gartner talks about is a very expensive market.

Includes everything you need to have at what used to be the network security level unlocked elements. These kind of private access it's not just a VPN replacement.

Emanates a need for entire inbound DMC, that's a big thing so ASB expand the platform. It further differentiates us.

The consolidated point products, we love the fact that the market is going we sold fast so rapidly and we're innovating salt fast that's why we think it will be very hard for some of the mid twos to come from behind and catch up with us.

Understood. Okay. That's very helpful. Thank you.

Thank you. Our next question comes from Hamzah <unk> with Morgan Stanley You May proceed with your question.

Hey, guys. Thanks for taking my question.

Jay perhaps a question for you so <unk>.

Last year.

These killer saw a huge uptick in demand.

With the deep scalar private access solution.

To what extent are those customers, who may have bought perhaps.

Smaller licenses or perhaps temporary licenses last year.

Coming back now as they renew and signing larger perhaps.

Elas.

Are you guys.

And our progress to the next few quarters.

So last year when.

Customers need to Dubai, CPA, if I should.

Investors during our earnings calls that if any of you.

If any temporary license the very few actually one year deals most spec deals done for with us on a multiyear basis.

When they are on CPA during pandemic most of the time it was not for a subset of users. It was really done for most of the users.

So from our point of view.

Sales <unk> made last year was really made for a long term is that impacting us in the short term not really but having said that are we selling more and more CPA to every zix customers.

Really no no market thinks that CIA in GPA together should be bought because once you have both of them together you can access any application from anywhere.

In fact, Gartner has further clarify it SaaS.

Positioning it's kind of interesting SaaS.

Could lose framework, but it was confusing to some degree because it kind of got interpreting.

The network and SD Wan and security must be with a single vendor.

In fact, Gartner has a new position paper that came out about a month or two ago, which basically said.

The security part of SaaS fee is secure service edge SD and as a new <unk> that will come out magic quadrant come out and X months and the second part that decoupled the network part of it that Corning wireless edge.

And Thats with Stephen Hart sits there.

We have the most comprehensive offering.

What Gartner is calling now secured some research that's really what gives us.

<unk> that allows us to compete and win and charged good prices.

And really make sure <unk> gets sold to every user not just a subset of users.

Thank you.

Thank you. Our next question comes from Shaul Eyal with Cowen <unk> Company. Please proceed with your question.

Thank you hi.

Good afternoon and congrats.

Congrats on the result.

<unk> guidance.

Jay when I go back to the difficult competitive landscape question.

I know, we've been kind of discussing that as as of lately, but.

Just wanted to check out.

If there's anything new.

Anyone.

That has come to mind as of late some of the things have been seeing in a more pronounced way operating within your markets. Thank you for that.

Yes.

Overall, if you ask me.

Has the landscape changed significantly in terms of players out there.

Not really the biggest change in the landscape.

<unk> posture marketing cloud protection.

When it comes to.

SaaS <unk> competition, there's not a whole lot there is a fair amount of noise that's coming out.

Because when legacy network security vendors are getting disrupted they must do something to make noise. So data you don't become extinct.

I mean, we do hear it every so often when customers says Oh I am doing my firewall VPN in the cloud that is zero trust.

Zero Trust that firewall VPN with cloud onboard yet so if you asked me one of the main things we need to make sure is be clarify that you can't build a zero trust architecture with firewall and VPN. The good thing is smart folks like mist and Gartner on helping that area.

But our momentum is building business is doing good.

I want to keep on investing aggressively as three months that to take a big shout out this increasing evolving sizeable market and the last point I wanted to make it.

The number of modules, we saw itself today on average.

Year ago or three years ago.

As increased significantly which is very good it's no longer a.

Status quo Siloed firewall, our secure web gateway market.

That makes sense got it.

Absolutely. Thank you for that.

Thank you. Our next question comes from Sterling Auty with Jpmorgan you May proceed with your question.

Yes, Thanks, Hi, guys.

I wanted to ask a nitpicky question, obviously the results are fantastic well above guidance and expectation, but given that current RPI has accelerated for three straight quarters short term deferred revenue accelerated billings calculated remained at 70% why would revenue actually ticked.

Down a couple of percent why wouldnt it tick up.

Clearly you know me pretty well I think.

For 20 years.

Our philosophy related to guidance to be prudent.

And we're continuing to be prudent with our guidance.

Anything you called out as the 100% correct, but.

What I've tried to do Zee scalar since I've come here.

And basically I don't want look back I want to look forward I want to give ourselves the ability to really run the business.

No.

You know now is that we're being our guidance.

I was asking about the current quarter the quarter you just reported the 56% change versus only I'd say, we got it I got it ramps okay.

So, yes, something that may have impact im sorry.

Now I've got it thank you.

No.

It's really linearity based and if you take a look at it.

In Q4 of $20 last year related to the Covid impacts that we had we had strong.

Billings growth.

And basically the first part of the quarter.

This Q4 'twenty one went to more normalized so that is what impacted primarily impacted the <unk>.

<unk> <unk>.

Our revenue of growing 57% in Q4 now when you take a look at Q3 'twenty versus Q3 'twenty. One just the opposite effect occurred with Covid in Q3 of 'twenty.

What happened was that the world basically I don't want say stop really slowed down.

In the March timeframe, even early April so the linearity in Q3 last year was lower where Q3 of 'twenty one this year could.

The linearity was more normalized so we had 60% revenue growth in Q3, 'twenty, one versus Q 'twenty and we had 57% revenue growth in Q4, 'twenty, one versus Q4 'twenty directly related to the impact of Covid.

Deb.

In addition in addition, Sterling clears, there's one other element, which is basically when you take a look at the large number of deals that we have that we called out the $1 billion type deals.

Lot of those deals have ramps so with those ramps youre not going to get the full revenue in that current quarter. That's a smaller part of it but that is a part of it but the majority of it is related to the linearity.

Thanks.

Greenville, Thank you I appreciate it.

No problem.

Thank you. Our next question comes from Brian Essex with Goldman Sachs. You May proceed with your question.

Yes, good afternoon, and thank you for taking the question.

I'd love It if you could characterize the nature of enterprise adoption on your platform <unk>.

Primarily from the perspective of enabling meaningful change.

Digital transformation and a shift in architecture versus maybe more evolving with a large enterprise and enabling them to get started down that journey is there any difference this year versus last year and maybe if you could characterize.

The environment is.

Basically, enabling a big architectural shift as opposed to.

Enabling our.

I guess, a slower migration towards your technology platform.

Brian Great question.

The biggest shift.

Bye bye.

Fourth corporate enterprises used to think about adopting <unk> with network transformation branches being broken into local breakout and the like with Covid since network got out of the loop.

Enterprise that I'm going to download the slide with agents and ready to go with CIA to external application CPA to internal applications. Thanks.

Thanks mindset is still there I love it because one when you don't have to deal with the network.

<unk> deployments go much faster so our phase one these days.

Get everyone turn on.

Wherever they are phase III ended up being lets do local breakout for network transformation.

And then phase III ends up being lets look at the cloud workload protection and the like so it is evolving and it's evolving but things are moving at a faster pace.

Got it that's helpful context, Thank you very much.

Thank you.

Thank you. Our next question comes from Erik <unk> with JMP Securities.

<unk> you May proceed to any questions.

Yes, thanks for taking the question and congrats on a very strong quarter.

Hey, Raimo I think you had mentioned that pricing is around $145 for <unk>.

Organization of 5000 users can you remind us where that was about a year ago and then also.

You had talked about some accounts that have been buying the full breadth of modules.

For the EIA.

What kind of discount do you give to that customer when they buy the full breadth of modules.

No we're not.

First of all I don't want to get into how much we're discounting customers, but that's more competitive.

When you take a look at those 5000 users to $145. That's how much that we're seeing customers of 5000 users paint for the full complement of our offerings now with that.

<unk>.

Jay Z.

Which is $25 of that $145.

Largely the CIA add on our new related to browser isolation.

And cast the out of band that's around $30.

This customer buys the full transformation level, which is we have three bundles probe business transformation.

That's about $45 and GPA is about $45 also.

Whereas <unk> gone from a from a price per user basis overall year over year, we're seeing between 35, and 40% increase price per user on a year over year basis. So that's kind of put some context of what we're seeing and again that increase in price.

Per user it's related to customers buying more of our platform.

Also expanding their business with the scaling.

And do you think that 35% to 40%.

Is that sustainable going into next year, given the accelerating expansion of our portfolio.

I don't want to comment related to the expansion.

So I don't want to make those type of forward looking statements, but if you step back and take a look at the importance of the platform that were selling and also more customers buying more of our platform.

In addition to that with the new products, we talked about our emerging products represent high single digit of our new and upsell business.

As we go forward, we're seeing the emerging products represent low teens basically of our new and upsell business in fiscal 'twenty two.

Yeah.

As as the market evolves and as the comments were made we're not in the same place we were four years ago or three years ago, or even two years ago and so.

Expectation is that we'll continue to see increased pricing, but I don't want to quantify it.

And we will just report on it.

As we go forward.

That's great. Thank you.

Thank you.

Thank you our last question comes from Rob Owens with Piper Sandler You May proceed with your question.

Hey, guys. This is Justin on for Rob I, just wanted to double click on the commentary around the federal business. I know you guys usually put at around mid single digits of new ATV in prior quarters any sense that this was higher in the current quarter and then maybe some assumptions for the federal business in the pipeline and the guidance for next year. Thanks.

I'll started today then so federal in the current quarter was mid to higher single digits in Q4.

As Jay talked about.

The federal business for us with the executive order from President <unk>.

As well as federal embracing zero Trust.

And also our investment with our certification and our field organization that we have in federal.

We feel very good about it now how is it going to play through in fiscal 'twenty two.

We feel there is a very big opportunity and we also feel that a substantial portion of our business, but it takes time with federal but we're well positioned.

With that I'll turn it back to Jay.

ICF pipeline is good we have all the start discussions right architectures that federal government recognizes requiring zero Trust architecture, we are investing and pretty positive and confident.

Got it thanks guys.

Yes.

Thank you.

I'd like to turn the weight that.

I would like to thank you for joining us today and your interest in <unk> Kevin.

Look forward to talking to you next quarter.

Thank you. Thank you.

Goodbye.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Okay.

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Zee scalar in fourth quarter 2021 earnings Conference call.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker to your first speaker today, Mr. Bill Choi Senior Vice President Investor Relations and strategic Finance. Thank you. Please go ahead bill.

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 will find a reconciliation of GAAP to the non-GAAP financial measures in our earnings release.

Limited to the duration and impact of COVID-19 on our business the global economy in their respective businesses of our customers vendors and partners market adoption of our offerings.

And our expectations regarding 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 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 the IR website, when we move to the Q&A segment of the call.

Now ill turn the call over to Jay.

Thank you Bill.

We had a very strong quarter to close out a spectacular year.

In Q4, we delivered growth of 57% in revenue and 70% in billings as customers embrace our expanded cloud platform to accelerate the digital transformation.

Let me share a few highlights of fiscal 'twenty one.

Our full year revenue grew 56% to $673 million and billings grew 70% to reach $934 billion.

We are seeing revenue growth across all verticals customer segments and geographies.

51% of revenue was from outside of United States.

I'm very excited to see our <unk>.

Approaching $1 billion and pleased to note that our new annualized bookings and new logo acquisition accelerated throughout the year.

All product pillars of our platform saw strong demand.

Notably CPA revenue surpassed $100 million in fiscal 'twenty one.

Growing 166% year over year.

Increased cyber security risk and accelerating digital transformation has increased the need for our zero Trust architecture.

We are uniquely positioned to reduce business risk and make businesses agile and more competitive.

We are the only cloud provider at scale with a proxy based architecture to deliver tools Zero Trust security.

Firewall and VPN based castle and moat security connect users to the corporate network, which facilitates lateral movement of trends increasing cyber risks.

<unk> care connect users only two applications.

Now to the next.

A core principle of zero Trust architecture.

<unk> reduces ransomware attacks and other cyber risks.

Built from the start to enforce policy at the edge.

Advocated by the SaaS fee framework.

Because of these architectural advantages and our proven ability to scale.

<unk> Zero Trust exchange has become the foundation for Big Bold transformation.

With a record number of seven figure ACB deals in Q4.

We now have over 200 customers with greater than $1 million in <unk> at all.

Over 5600 enterprises, including 35% of the Fortune 500.

Zee scalar and secure their transformation journey.

While the average net promoter score of SaaS companies is third.

These carriers is 74, which is two five times higher.

Proof of the value of Zee scalar deliveries.

No I will link to discuss key market segments. We have we made significant progress during the quarter and the fiscal year.

The financial services sector has become our top warranted.

As these companies are embracing the cloud and office 365.

Let me highlight key new customer wins in Q4 for the purchase all Ci and CPA together.

First is the global bank.

<unk> Zero trust strategy to protect over 100000 employees with our high end CIA and CPA bundles.

They purchased every module, we offer in the CIA color, including firewall sandbox, Casspi DLP and browser isolation.

Fast user experience and enhanced cyber security one of the key factors.

Wayne.

Our second new logo win is a fortune 500 asset management company that purchased Zia II and CPA to secure over 30000 employees.

And third is a fortune 500 insurance company that purchased Zia II in CPA, our 26000 employees to enable work from anywhere.

These wins illustrate when companies are ready to embrace the cloud. These killer is the only cloud native multi tenant platform that meets the needs.

With <unk> as a major requirement these financial services customers only considered.

C architecture.

That can provide SSL inspection at scale.

And rejected firewall based architecture.

We now count eight of the top 10 global banks and seven of the top 10 insurance companies outside of China as our customers.

Next let me highlight our progress in the enterprise market segment, which includes organizations with 2000 to 6000 employees.

We started focusing on this segment at the start of fiscal 'twenty one.

And the results have exceeded our expectations.

This segment includes over 12000 organizations, representing $8 billion of our serviceable market for user protection.

Deal sizes in this segment are growing as customers adopt more of our platform.

I'm excited to see our first seven figure upsell wins in our enterprise segment, where the customer is buying all four pillars of our platform CIA CPA ANC Dx for 6000 users and CCP workload segmentation are almost.

3000 servers.

Our IRR with this customer now exceeds $6.0 million.

<unk> a significant opportunity in this market segment.

Finally, we continue to invest to capture our large federal opportunities.

With a sizable fed sales team and the highest fed ramp certification.

<unk> well over 100 government agencies and federal integrators as customers.

In Q4 alone we added over 20, new federal customers, including four with over $1 million in annual contract value each purchasing CIA and CPA together.

Driven by the President's recent executive order, we are seeing increased interest in our SEDAR Cross exchange across all levels of the government.

We are among a select group of companies chosen by NIST, a national standards quality, who run a pilot program in support of the executive order.

We are excited about this opportunity to help our country dramatically improve our security posture, while significantly reducing legacy costs.

Next let me highlight our technology innovations and emerging products, which are expanding our opportunity.

We started with a highly scalable multi tenant globally distributed cloud capable of providing inline inspection of internet and SaaS traffic with CIA.

Securing access to private applications with CP.

Over the past few we extended our platform to protect cloud workloads and to manage digital user experience.

We're very excited about the early traction of our emerging products. The next growth engines for us.

Our emerging products contributed high single digits percentage of our new and upsell business in fiscal 'twenty, one which is well ahead of our expectations.

<unk> is the fastest growing solution in our history and a natural complement to Ci and CPA.

With a single lightweight endpoint agent. It is frictionless to Parnell CTX to provide end to end visibility, who hope resolved performance issues are <unk>.

In Q4, one of our largest <unk> X deals came from a fortune 500 Tech company.

<unk> purchased the entire <unk> portfolio.

As well as CPA and CD Expo, all 60000 employees to support work from anywhere.

While embracing zero Trust architecture.

We were pleasantly surprised to see so many large enterprises adopt CTX so rapidly.

Users.

And a health care company for 25000 users.

I believe that every CIA in CPA customer will embrace gtx as user experience is one of the highest priorities for a CIO.

We are receiving very positive feedback from customers of.

Fortunately 600, healthcare executive, indicating CTX contributed to an 18 point gain and employee net promoter score.

For the <unk> service desk in two quarters.

<unk>, having disrupted premier best security with our Zero Trust exchange our users. Our next big opportunity is to bring zero trust to workloads with Sis cloud protection or CCP.

Every organization is building their applications in the cloud and will look to implement zero trust security to protect workloads.

Our zero Trust exchange securely connect workloads to workloads and process to process using business policies, eliminating the need for traditional networks and associated cyber risks.

Solutions within our CCP pillar include.

Workload posture, which includes see SPM and see IEM ensures proper configuration and enforces lease privileged access for multi cloud environments.

Workload communications powered by CIA in CPA technology, secures app to App and cloud to cloud communication and what closed segmentation achieves micro segmentation without legacy network segmentation.

We have over 300, CCP customers and are seeing increasingly strong interest from new and existing customers.

Let me highlight a few of the ECP wins during Q4.

An existing <unk> customer in the consumer goods sector with over 100000 employees purchased workload communication for 25000 workloads.

In workload segmentation for 10000 workloads.

This customer has a large subtler environment on a traditional net group Inc.

Implementing on SEDAR trusts for workloads will reduce their cyber risk by minimizing lateral movement, while securing and app migration to the cloud.

We are also landing new logos with DCP.

For example, we landed a fortune 500 professional services company.

With the CCP was the main driver.

This customer purchased workload communication for 6000 workloads.

Workload segmentation for five new workloads as well as the entire CIA bundle for 40000 employees.

Our team collaborated with crowd strike.

Technology partner and a global S side, our channel partner for this deal.

Let me conclude some parts on our vision and strategy.

We envision a world in which the exchange of information is always secure and seamless.

In today's hyper connected digital world on SEDAR plastics chain secures any to any connectivity for users application workloads, and Iot and Ot systems, regardless of their location.

And at our Analyst day in January we laid out our ambitious goal of suffering 200 million users and $100 million workloads.

In order to achieve this goal we are focused on attracting and developing talent and creating a culture of excellence.

We hired over 1100 employees over the past year and enable them to be productive and successful all during the pandemic.

We're investing in our people through learning initiatives and building, a culture, where our global and diverse workforce and deliver excellent powering on customer success.

Our employees are engaged and completely aligned to our mission.

On our last employee survey, 96% of employees understand and belief in the strategic direction of the company.

I'm proud that we are recognized as a great place to work in that 2021 glassdoor ratings.

We are focused on driving broad adoption of all four pillars of our platform.

The breadth and depth of our platform is resonating with customers and are purchasing our higher end bundles to consolidate the security and networking point products like.

I believe these killer is the go to platform for vendor consolidation cost savings increased user productivity.

And better cyber protection.

As we demonstrated over the last 12 months, we built a sophisticated go to market machine that delivers business founded and measurable outcomes at the <unk> level.

I am extremely proud of our go to market team.

And how we executed our sales strategy this year.

Even with significant growth in our sales force sales productivity has increased over the prior year exceeding our expectations.

On slide partner Channel program consists of hundreds of cloud focused retailers system integrators and service providers that are contributing to our deal win and increasing sales leverage.

As our market share that mutation and brand awareness continue to strengthen.

A growing number of cloud and SaaS providers on integrating with our platform further strengthening our strategic position with our joint customer.

An expanding ecosystem is contributing to our sales velocity and broadening our reach.

I believe we are on the right track to capture a material share of our $72 billion serviceable market.

We also see additional opportunities to bring SEDAR trust to Iot and Ot systems.

Moreover, five G with pushes computing further to the edge.

Opens up additional opportunities for Zee scalar.

To pursue these markets we have a two pronged innovation strategy.

One investing aggressively in internal R&D and scaling our world Class Engineering organization, which continues to rapidly deliver new products and features.

We recently opened a new R&D hub in Israel and are expanding our R&D centers across the U S, India, Canada and Spain.

Two making highly targeted acquisitions to enhance our platform and shrink time to market.

During fiscal 'twenty, one we completed two acquisitions <unk> strengthens our CCP pillar and positions us better to pursue our shift left strategy.

And small screen enhances our active defense capabilities with Honeypot technology.

Through internal innovation and highly targeted acquisition, we will further expand our leadership in the SaaS fee and Zero Trust security markets.

In summary, with all these drivers and innovations ahead of cost you can see why we are very excited about our future.

I would like to turn over the call to Raimo for our financial results.

Thank you Jay.

Jay mentioned, we are pleased with the results for the fourth quarter and full year 2021.

Revenue for the quarter was $197 million up 12% sequentially and 57% year over year.

<unk> product revenue was 17% of total revenue.

From a geographic perspective, we had broad strength across our three major regions.

Americas represented 51% of revenue EMEA was 38%.

P J was 11%.

For the full year revenue was $673 million up 56% year over year.

This was an acceleration from the 42% growth we delivered in fiscal 2020, our total calculated billings grew 70% year over year to $332 million.

With billing duration in the middle of our 10 to 14 months range.

We're also pleased that year over year growth in short term billings accelerated to 71% in the fourth quarter from 61% in the previous quarter.

Our strong billings performance was driven by a record number of new seven figure annualized contract value deals in the quarter.

We sold more of our platform offering.

We saw strong growth in our top five verticals.

Finance manufacturing services healthcare and technology.

Remaining performance obligations or IPO were 155.3 billion.

As of July 31.

Up 98% from one year ago.

The current Rps is 49% of the total IPO looking at our pillars <unk> was 27% of our total new and upsell business in fiscal 2021.

Emerging products, which include <unk> and DCP are tracking ahead of our expectations and contributed high single digits.

Of our total new and upsell.

We are seeing strong customer interest and we expect emerging products that contribute low teens percentage of our total new and upsell business in fiscal 2022.

The adoption of our emerging products is pacing ahead of CPA in its early years.

There's a large opportunity with all our pillars and we will continue to expand our portfolio to strengthen our leadership position in the zero Trust security market.

Our strong customer retention and ability to up sell the broader platform have resulted in a consistently high dollar based net retention rate, which was 128% compared to 126% last quarter and 120% a year ago.

Considering these factors we feel that 128% is outstanding we.

We have a strong base of large enterprise customers, which provides us with a significant opportunity to upsell our broader platform.

We had 202 customers with <unk>.

Greater than $1 million up 87% from 108 in the prior year.

We also had 1480 customers with <unk> greater than $100000, which compares with 973 customers last year, our new customer adds accelerated in fiscal 'twenty one.

We organically added approximately 1000, new logos in fiscal 'twenty, one excluding acquisitions.

And we ended the year with over 5600 customers.

Expanding our field engagement with smaller enterprises with 2000 to 6000 employees and the increased investments in our partner program are contributing to higher new customer growth.

Turning to the rest of our Q4 financial performance total gross margin of 80% declined by one percentage point quarter over quarter and improved by one percentage point year over year.

Our total operating expenses increased 15% sequentially and 60% year over year to $138 million.

Operating margin was 10% and free cash flow margin was 14%.

We ended the quarter with over $6.0 billion in cash cash equivalents and short term investments.

Now moving onto guidance.

As a reminder, these numbers are all non-GAAP, which excludes stock based compensation expenses.

And related payroll taxes amortization of debt discount and amortization of intangible assets.

For the first quarter of fiscal 2022, we expect revenue in the range of $210 million to $212 million, reflecting.

Reflecting a year over year growth of 47% to 49%.

Gross margins of 79%.

I would like to remind investors that a number of our emerging products, including <unk> workload segmentation and see SPM will initially have lower gross margins than our core products. Because we are more focused on time to market and growth and optimizing them for gross margins.

Operating profit in the range of $18 million to $19 million other income of $400000 net of interest payments on senior convertible notes.

Income taxes of $3.0 million.

Earnings per share of approximately <unk> 12.

Assuming a 148 million fully diluted shares.

For the full year fiscal 2022, we expect revenue in the range of $940 million to $950 million or year over year growth of 40% to 41%.

Calculated billings in the range of 123 billion to $1 $7.0 billion.

For year over year growth of 30% to 34%.

We expect our first half mix to be approximately 42% of our full year billings, which is in line with the average of the last three to four years.

Operating profit in the range of $85 million to $90 million.

Earnings per share in the range of 52 to 56.

Assuming approximately $149 million to $150 million fully diluted shares.

Note that our share count guidance now includes dilution from our convertible debentures.

We have a cap call with a strike price of $322.0

Every $10 increase in our stock price above the strike price will add 250000 to 300000 shares to our fully diluted share count.

For your modeling purposes, I would like to discuss the anticipated teeny and M&A impact to fiscal 2022 operating expenses.

In fiscal 2021, we saw a 280 basis point benefit to margins from lower <unk> compared to fiscal 2020.

As mentioned previously the recent acquisitions of <unk> and smoke screen are expected to have an immaterial impact on revenue in fiscal 2022.

We expect to incur approximately 13 million to $15 million and operating expenses to further invest in these products and incorporate their technologies into our platform.

This was incorporated into our guidance.

Let me conclude with comments on our investment framework.

Balanced growth and profitability based on how our business is growing.

Since then we delivered outstanding results with revenue growth exceeding our expectations.

If we continue to have high growth and strong unit economics, we will prioritize investing in the business, which would lead to lower than 300 basis points of margin expansion per year.

To that point, our fiscal 2022 guidance of 40% to 41% revenue growth and 9% to nine 5% operating margins reflects approximately 150 to 200 basis points of margin expansion after adjusting for the increased <unk> and M&A expenses.

We remained confident of reaching 20% to 22% operating margins in the long term, but growth will continue to take priority considering our strong business momentum.

With a huge market opportunity and customers increasingly adopting the broader platform, we're committed to investing aggressively in our company.

Operator, you May now open the call for questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw.

Sorry, Your question press the pound key please limit yourself to one question due to time constraints. Our first question comes from Alexanderson with Needham You May proceed with your question.

Great. Thank you very much.

As far as looking out into the new year I was hoping you could talk a little bit about his thoughts on the type of expansion you're planning relative to the sales capacity.

<unk> been extremely aggressive over the last year in fact as I understand it increased.

<unk> targets three times over the course of the year.

Certainly the environment is extremely robust can you talk about.

Where youre going as we go into the new fiscal year.

Thanks, Paul.

I'll start with that Alex and Sanjay can come in.

Youre right I mean, the thing that we called out in the call is that we're seeing strong momentum for our business and particularly in the second half and Youre absolutely correct. We did increase our fuel quota sales reps by number in fiscal 'twenty one versus fiscal 'twenty.

As we go forward, we will be making continued investments in our sales organization.

As well as marketing and.

It also channel, but thats only a piece of it.

Again, we will be increasing the number of head count for darts fuel quota sales reps in fiscal 'twenty two versus fiscal 'twenty one.

But more broadly speaking the opportunity so big we're going to continue to best throughout the company to really position ourselves to move forward.

If you're a cloud companies like Zscaler to provide a reliable service that customers can rely on to ensure they are operating efficiently and securely. So our focus going forward. This can be broad throughout the company, but we will continue to invest in sales and marketing and we will increase our field reps sales head count.

More in fiscal 'twenty two versus fiscal 'twenty one.

Well I.

The only thing I need to add a whole lot more we are hitting on all cylinders and very excited.

Thanks.

Thank you. Our next question comes from Matt Hedberg with RBC you May proceed with your question.

Yes. Thank you for taking the question. This is Matt Swanson on for Matt.

If I could just dive in a little bit more to the federal opportunity great color today on the call Jay but when we're thinking about that zero Trust directive.

Our unique visibility into the federal space with 100 customers and then obviously I would say are true.

As the leader what do you think the gap is right now in the current federal environment to achieving a zero Trust framework and then any sense you can give us some kind of the magnitude and the duration of the opportunity.

Three months now that mandate became mandatory for all federal environment skipped the zero Trust, how big is that gap.

So if you think of.

We have federal market.

It's large need today.

Network security, it's largely castle and moat, depending upon firewalls VPN sort of light there.

Good thing is that <unk> administration has recognized that zero trust architecture has to be done.

We do see that as.

Focused on implementing sooner.

And look where we stand today as we start investing in federal market about three and half years ago and got all the certifications that are needed and.

And we also have the right architecture and <unk> build the sizable team we already have pretty good business, but we are barely scratching the surface of the federal market I think a lot of thing has to do with education. Good thing.

And some of the new meetings that widened administration is having with high profile CEO of sunlight and raising visibility in this space. We are participating in some of these new partners on and all we are excited but we also know that some of these federal deals take their own time.

Thank you.

Thank you. Our next question comes from Keith Bachman with Bank of Montreal May proceed with your question.

Yes. Thanks, so much I wanted to ask a little bit about the net retention rate was very strong this quarter.

But you seem to be signaling that there may be some tension on the numbers I was wondering if you could comment on how investors should be.

Thinking about the net retention rate as we look out in particular I did want to reference some of the information you provided at the analyst day, where you talked about a significant expansion on the annual price per user both in the user protection category in the workload protection category as well as just seat growth.

I'm, just I'm, a little bit surprised to hear you almost down.

Downplay the 128 number but if you could just talk a little bit about how investors should think about that over the next fiscal year. Thank you.

I'll start then Remo can add on.

I think our common bond metric tension rate had been consistent since we went public.

And here's the real thing if I were a one product company.

Bennett matter, new logo offset all of those things.

Eight platform that's growing rapidly we have also internal debates should meet any pain sales up more from new logo versus up sell.

The answer is we really want to grow the overall, new HCV, whether it's coming from upsell audit is coming from new logos.

So the message is not to really say downplay it natural tension right.

It is the net retention rate by itself is not a good indicator.

We are doing is good we are proud of 128 <unk> hundred 152, because if I can sell a bigger platform upfront im okay, with a lower and not only that.

That's some SMB, we are happy that bullish but metrics by itself is not the best thing as the leading it.

I'll follow on with that Jay is absolutely 100% correct.

<unk> talked about on prior calls the only time, we understand the importance and that retention rate.

Basically our compensation structure, which we pay the same for new and upsell, we really don't look at it and so.

We have projections, what we can do during the quarter.

We really look at at the end of the quarter now having said that as you take a look at what we're what we talked about at the analyst day and Youre absolutely right.

The opportunity to sell at a higher price point than we've talked about for the users for 5000 users.

We expect to have basically a price point of about $145 per user we are seeing that.

And so we are seeing basically accompanies underlying CIA the CIA add on CPA and CTX, we're seeing those type of dollar amounts.

So the other the other point, which we haven't talked about the average revenue per user is increasing substantially.

So what we're seeing is that we're seeing customers.

By our broader platform, we're seeing customers who are actually buying.

<unk> and not buying the user protection initially so all indications are that.

Things are going well.

Net retention rate the positive impacts are the new products.

If you take a look at the number of global 2000 companies have both Gia and CPA, it's 44%.

So I wouldn't take.

Comments related to net retention rate.

It's going to go down.

We really just don't focus on it and we're just trying to really condition, our investors to really think about the broader platform, we have both new and upsell and basically our topline growth.

Perfect. Thanks.

<unk>.

From.

Thank you. Our next question comes from Mike Walkley with Canaccord Genuity you May proceed with your question.

Great. Thank you congratulations on the strong quarter and year.

Just building on that last answer a little bit you highlighted the.

Enterprise segment targeting 2000, 6000 employees as your fastest growing segment.

Do these smaller customers with faster sales cycle do they have a similar land is your larger customers that have a long runway for upsell are they landing.

Landing with a large amount of your platform.

Overall cost of our today, whether this new enterprise segment or a larger one more and more they are buying bigger and bigger plants.

It is true that <unk> prices, probably <unk> <unk> <unk>.

And to go along with bigger from the start.

But it's a good it's a shorter sales cycle.

And these guys at the same risk.

<unk>.

And similar tax unlike the others.

So we are exiting some price PUC hallmark traction we're getting in this segment in the past few quarters since we focused on.

Yes.

The focus also on enterprises through our summit program, we put in place a year ago. So we're seeing strong traction through our summit program.

And the summit program is geared towards those customers in that 2% to 6000 range so very positive.

Feedback very positive results as Jay mentioned over this past year and we're excited that this is an opportunity as Jay mentioned, it's our fastest growing segment.

We're excited about that opportunity.

Great. Thank you.

Thank you. Our next question comes from Jonathan <unk> with Baird. You May proceed with your question.

Yes, hi, guys.

Congratulations on the strong quarter.

A proxy I mean, it doesn't it seem to suggest that there could be different approaches different architectures to securing cloud.

Yes.

Think about this quite a bit if you recall three four years ago. We were asked this question quite a bit and this was being asked.

Why are these proxy vendors like blue coat, so posting good numbers.

I was telling them that we are barely making an impact a lot of traffic was so going through those proxy appliances and.

In the data center.

If you look at our local breakout business that's done out there.

We earned a primary vendor itself.

Others, Yes have come out there, but the majority of the enterprise traffic still goes through a hub and spoke network has to go through the data center, it's still goes through those platforms.

Video traffic year over year goes up by 33%.

We end up getting more data center devices, whether its firewalls or other stuff.

I think then you get to a certain level.

We had as traffic shifts significantly that spend will shift that's my personal view, so not surprise that why it's on legacy devices like firewalls are still growing.

It's a matter of time.

Alright Thats helpful. Thank you.

Thank you. Our next question comes from Gray Powell with BTG. We May proceed with your question.

Okay, great. Thanks for thanks for taking the questions and congratulations on the strong results.

Evangelical than say three or four years ago.

Or are we looking at increasing the renewal price yes.

Yes, that's one of the questions.

Yes exactly.

Alright, our biggest increase in prices coming fall selling bigger bundles.

And there is some increase in price on each module.

<unk>, which we are expanding our portfolio is quite significant.

And as customers see the value and because B Shaw business back.

The increase in.

And price our customer from ACD point of view becomes a natural thing.

I think if you if you if you're able to compete on price and compete on saying I'm a battery firewall then those firewalls then it gets hard we don't really compete due to place a given firewall to a proxy.

Enabler secured digital transformation, a sale is often driven by the CIO head of infrastructure to head up security when they look at the amount of money, we can save them due to place all of these legacy firewall security and networking devices to Ottawa is very impressive to justify.

Our price becomes a lot easier so value based business value based pricing is what we have advocated.

Got it.

Yes, I think so maybe I can ask the question better I guess my understanding was like.

Four or five years ago, you had to be more aggressive just because I mean like SaaS. He wasn't even a term back then.

And people were less comfortable having security in the cloud today, it's more mainstream so I thought that give you more ability to increase prices that was my question.

Yeah, I would think yes, we have done some price increases on Dol original products, but a big increase has come from adding a lot more modules. If you look at the time of IPO three and half years ago. It was largely secured web gateway with a few things. It is large deal business bundled sale of professional.

Today, but we are selling study different than what we sold three years ago very different than what we sold one year ago.

Sassy market that Gartner talks about is a very expensive market.

Includes everything you need to have at what used to be the network security level on locating on Z.

Actually it's.

It's not just a VPN replacement.

Eliminates the need for entire inbound DMZ, that's a big thing so ASB expand our platform and further differentiated source. It further consolidates point products, we love. The fact that the market is moving so fast so rapidly and we're integrating salt fast that's why we.

It will be very hard for some of the mid twos to come from behind and catch up with us.

Understood. Okay. That's very helpful. Thank you.

Thank you. Our next question comes from Hamzah <unk> with Morgan Stanley You May proceed with your question.

Hey, guys. Thanks for taking my question.

Jay perhaps a question for you so last year.

These killer saw a huge uptick in demand.

With the deep Zscaler private access solution.

To what extent are those customers, who may have bought perhaps.

Smaller licenses or perhaps temporary licenses last year.

Are coming back now as they renew and signing larger perhaps.

As you guys progressed through the next few quarters.

So last year when.

Customers need to Dubai, CPA and four I should.

Investors during our earnings calls that there are very few.

If any temporary license okay.

Very few actually one year deals most spec deals done for with us on a multiyear basis.

And when they are on CPA during pandemic.

Most of the time it was not for a subset of users. It was really done for most of the users.

So from our point of view.

<unk> made last year are really made for a long term is that impacting us in the short term not really but having said that are we selling more and more CPA to every zix customers absolutely no no market thinks that <unk> GPA together should be bought.

Because once you have both of them together you can access any application from anywhere in fact, Gartner has further clarify it SaaS.

Positioning it's kind of interesting SaaS he wasn't good lose framework.

It was confusing to some degree because it kind of got interpreting as at the network and SD Wan and security must be with a single vendor.

In fact, Gartner has new position paper that came out about them.

A month or two ago, which basically said.

The security part of SaaS is secure service edge SD and as a new <unk> that will come out magic quadrant come out and X months and the second part that decoupled the network part of it that Corning wireless that edge and.

And Thats, where the SD Ben Park <unk>.

We have the most comprehensive offering of <unk>.

What garden routes, calling now secured some research that's really what gives us.

<unk> that allows us to compete and win and charged with prices and really make sure <unk> got sold to every user not just a subset of users.

Thank you.

Thanks. Our next question comes from Sean <unk> with Cowen <unk> Company. We proceed with your question.

Thank you hi.

Good afternoon and congrats.

Congrats on the results and guidance.

Jay when I go back to the typical competitive landscape.

Sure.

I know, we've been kind of discussing that as of late.

Just wanted to check out.

Is there anything new.

Anyone that.

That has come to mind as of late some of the things have been seeing in a more pronounced way operating within your markets. Thank you for that.

Yes.

Overall, if you ask me.

Has the landscape changed significantly in terms of players out there now.

Not really the biggest change in the landscape.

Workload posture market in the cloud protection.

When it comes to.

SaaS <unk> competition, there's not a whole lot now there is a fair amount of noise, that's coming up here because when legacy network security vendors are getting disrupted they must do something to make noise. So data you don't become extinct.

That's why I mean, we do hear it every so often the customer says Oh I am doing my firewall VPN in the cloud that is zero trust.

Now zero Trust and firewall VPN with cloud <unk> Scott.

So if you asked me one of the main things we need to make sure is be clarify that you can't build a zero trust architecture with firewall and VPN. The good thing is smart folks like mist and Gartner on helping that area.

But momentum is building business is doing good and we want to keep on investing aggressively as three months that to take a big share of this increasing and evolving sizeable market and the last point I want to make it.

The number of modules, we saw itself today on average.

<unk> three years ago has increased significantly which is vertical it's no longer.

Our status cost final firewall, our secure web gateway market.

That makes sense got it.

Absolutely.

Thank you for that.

Thank you. Our next question comes from Sterling Auty with Jpmorgan you May proceed with your question.

Yeah, Thanks, Hi, guys.

I wanted to ask a nitpicky question, obviously, the results were fantastic well above guidance and expectation, but given that current RPI has accelerated for three straight quarters short term deferred revenue accelerated billings calculated remained at 70% why would revenue actually ticked.

Down a couple of percent why wouldnt it tick up.

You know me pretty well I think for 20 years.

So our philosophy related to guidance just to be prudent.

We're continuing to be prudent with our guidance.

You called out as a 100% correct, but.

What I've tried to do the scalar since I've come here.

Basically I don't want to look back I want to look forward I wanted to give ourselves the ability to really run the business. So.

You know now is that we're being our guidance.

I was asking about the current quarter the quarter you just reported the 56% change versus 000, I would say, we got it I got it ramps.

So something that may have impact on <unk>.

No I've got it thank you.

So it's really linearity based and if you take a look at it.

In Q4 of $2000 last year related to the Covid impact that we had we had strong.

Billings growth.

And basically the first part of the quarter.

This Q4, 'twenty one went to more normalized.

So that is what impacted primarily impacted the <unk>.

Steve.

Revenue of growing 57% in Q4 now when you take a look at Q3 'twenty versus Q3 'twenty. One just the opposite effect occurred with Covid in Q3 of 'twenty.

What happened was that the world basically its I don't want say stop really slowed down.

In the March timeframe, even early April so the linearity in Q3 last year was lower where Q3 of 'twenty one this year could.

The linearity was more normalized so we had 60% revenue growth in Q3, 'twenty, one versus 'twenty and we had 57% revenue growth in Q4, 'twenty, one versus Q4 'twenty directly related to the impact of Covid.

Deb.

In addition in addition, Sterling there is one other element, which is basically when you take a look at the large number of deals that we have that we called out the $1 billion type deals.

Yes.

Greenville, Thank you I appreciate it.

No problem.

Thank you. Our next question comes from Brian Essex with Goldman Sachs. You May proceed with your question.

Yes, good afternoon, and thank you for it.

Taking the question.

Jay.

If you could characterize the nature of enterprise adoption on your platform.

Primarily from the perspective of enabling meaningful change.

Digital transformation and a shift in architecture versus maybe more evolving with a large enterprise, enabling them to get started down that journey is there any difference this year.

Versus last year, and maybe if you could characterize.

The environment is.

Basically, enabling a big architectural shifts as opposed to.

Enabling.

I guess, a slower migration towards your technology platform.

Brian Great question.

The biggest shift caused by Covid.

Before Covid enterprises used to think about adopting <unk> with network transformation branches being broken into local breakout and the like with Covid since network got out of the loop.

Enterprise that I'm going to download the sniper agent and ready to go with CIA to external application CPA to internal applications. Thanks.

That mindset is still there I love it because one when you don't have to deal with the network.

<unk> deployments go much faster so our phase one these days is get everyone turn on from.

Wherever they are phase III ends up being lets do local breakout for network transformation.

And then phase III ends up being lets look at the cloud workload protection and the like so it is evolving and it's evolving but things are moving at a faster pace.

Got it that's helpful context, Thank you very much.

Thank you.

Thank you. Our next question comes from Erik <unk> with JMP Securities. You May proceed with your question.

Yes, thanks for taking the question and congrats on a very strong quarter.

Raimo I think you had mentioned that the pricing is around $145.

A 5000 users can you remind us where that was about a year ago.

And then also you.

You talked about some accounts that have been buying the full breadth of modules.

For the EIA.

What kind of discount do you give to that customer when they buy the full breadth of modules.

No we're not.

First of all I don't want to get into how much.

Discounting customers to burst more competitive.

When you take a look at those 5000 users and $145. That's how much that we're seeing customers of 5000 users paying for the full complement of our offerings now with that.

<unk>.

Z <unk>, which.

Which is $25 of that $145.

Largely the CIA add on our new related to browser isolation.

And the cast the out of band and that's that's around $30.

This customer buys the full transformation level, which is we have three bundles probe business transformation.

That's about $45 and GPA is about $45 also.

Per user it's related to customers buying more of our platform.

Also expanding their business with the scaling.

And do you think that 35% to 40%.

Is that sustainable going into next year, given the accelerating expansion of portfolio.

I don't want to comment related to the expansion.

Because I don't Wanna make those type of forward looking statements, but if you step back and take a look at the importance of the platform that were selling and also more customers buying more of our platform.

In addition to that with the new products, we talked about our emerging products represent high single digit of our new and upsell business.

As we go forward, we're seeing the emerging products represent low teens basically of our new and upsell business in fiscal 'twenty two.

Yes.

As.

As the market evolves and as the comments were made we're not in the same place we were four years ago or three years ago, or even two years ago and so.

Expectation is that we'll continue to see increased pricing, but I don't want to quantify it.

And we will just report on it as we go forward.

That's great. Thank you.

Thank you.

Thank you our last question comes from Rob Owens with Piper Sandler You May proceed with your question.

I'll started today then so federal in the current quarter was mid to higher single digits in Q4.

As Jay talked about the federal business for us with the executive order from President <unk>.

Titan as well as new federal embracing zero Trust.

And also our investment with our certification and our field organization that we have in federal.

We feel very good about it now how is it going to play through in fiscal 'twenty two.

We'll see we feel there's a very big opportunity and we also feel that a substantial portion of our business, but it takes time with federal but we're well positioned and with that I'll turn it back to Jay.

ICM.

My plan is good we have all the certifications right architectures that federal government recognizes.

Quieting SEDAR Trust architecture, we are investing and pretty positive and confident.

Got it thanks guys.

Yes.

Okay.

Thank you alright, I would like to turn the with that.

I would like to thank you for joining us today and your interest in <unk>, Kevin We look forward to talking to you next quarter.

Thank you. Thank you.

Goodbye.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

Q4 2021 Zscaler Inc Earnings Call

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