Q1 2022 Zscaler Inc Earnings Call

Good day, and thank you for standing by and welcome to the Zee scalar first quarter 2022 earnings call. At this time all participants are in a listen only mode. After.

Good day, and thank you for standing by, and welcome to the Zscaler first quarter 2022 earnings call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question and answer session. Please be advised that this call is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your host today, Bill Choi, SVP Investor Relations and Strategic Finance. Please go ahead, Mr. Choi.

So to speak is presentation there'll be a question and answer session. Please be advised that this call is being recorded.

Fire any further assistance please press star zero.

I'd now like to hand, the conference over to your host today, Bill Choi VP Investor Relations and strategic finance.

Please go ahead Mr. Choi.

Yeah.

Good afternoon, everyone, and welcome to the VSCALER Fiscal First Quarter 2022 Earnings Conference Call. On the call with me today are Jay Chowdhury, Chairman and CEO , and Remo Canessa, 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-based.

Good afternoon, everyone and welcome to the Zee scalar fiscal first quarter 2022 earnings conference call on the call with me today are Jay Chaudhry, Chairman and CEO and remote <unk> CFO. Please note that we have posted our earnings release and a supplemental financial schedule to our Investor Relations website.

Unless otherwise noted all numbers, we talk about today will be on an adjusted non-GAAP basis, you will find a reconciliation of GAAP to the non-GAAP financial measures in our earnings release.

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

I'd like to remind you that today's discussion will contain forward-looking statements, including but not limited to the company's anticipated future revenue.

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.

calculated billings, operating performance.

gross margin, operating expenses, operating income, net income.

free cash flow, dollar-based net retention rate.

All are based net retention rate.

future hiring decisions, remaining performance obligations, income taxes, earnings per share, our market share.

We're 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 uncertainties some of which are beyond our control. These forward looking statements supply.

These statements and other comments are not guarantees of future performance, but rather are subject to risk and uncertainty, some of which are beyond our control.

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.

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.

Web site, when we move to the Q&A segment of the call.

I would also like to inform you that we'll be attending the following upcoming events in December , NASDAQ Investor Conference, Barclays Global TMT Conference, BMO Growth, and ESG Conference. Now I'll turn the call over to Jay.

I'd also like to inform you that we'll be attending the following upcoming events in December now.

NASDAQ Investor Conference Barclays Global TMT Conference PMO growth in ESG Conference now I'll turn the call over to Jay.

Thank you, Bill. Building on our incredible momentum from last year, we had an exceptionally strong start in fiscal 22.

Thank you Bill building on an incredible momentum from last year.

We had an exceptionally strong start in fiscal 'twenty two in.

In Q1, we delivered 62% of revenue growth and 71% billings growth while generating record operating profits and free cash flow. We are again seeing strong revenue growth across all verticals, customer segments, and geographies with over half of our revenue coming from outside the U.S.

In Q1, we delivered 62% of revenue growth and 71% billings growth, while generating record operating profit and free cash flow.

Again, seeing strong revenue growth across all verticals and customer segments and geographies with over half of our revenue coming from outside the U S. B.

We recently achieved a significant milestone of surpassing $1 billion in annual reckoning revenue while continuing rapid growth.

We recently achieved a significant milestone of surpassing $1 billion.

Recurring revenue, while continuing rapid growth.

In my recent dialogues with hundreds of CISOs and CIOs, eight out of 10 are looking to phase out legacy network security in favor of zero trust architecture due to increasing cyber security risks and accelerating digital transformation initiatives.

Recent dialogues with hundreds of <unk> eight out of 10 are looking to phase out legacy network security in favor of Zero Trust architecture due to increasing our security risks.

And accelerating digital transformation initiatives.

I will highlight two main reasons why enterprises are selecting Zscaler over legacy solutions.

I will highlight two main reasons why enterprises are selecting these killer over legacy solutions.

One, we saw a more than 300% year-over-year increase in sophisticated threats hidden in SSL encrypted traffic. A large number of them are ransomware attacks, and most would bypass next-gen firewalls, which aren't designed to inspect encrypted traffic at scale.

One we saw a more than 300% year over year increase in sophisticated fits in.

In SSL encrypted traffic.

A large number of them are ransomware attacks and most would bypass nextgen firewalls, which aren't designed to inspect encrypted traffic at scale.

We are the only cloud provider with a proxy architecture designed to inspect SSL encrypted traffic at scale to deliver better security.

This year, our cloud has blocked more than 20 billion threats hidden in encrypted traffic.

This year on cloud has blocked more than 20 billion threats hidden in encrypted traffic.

Two, by connecting users only to applications and not to the network, a core principle of zero trust architecture.

<unk>.

By connecting users only two applications and not to the next level of core principal of Zero Trust architecture.

We eliminate that whole threat movement, hence reducing ransomware attacks such as the Colonial Pipeline Breach.

We eliminate backhaul type movement, hence, reducing ransomware attacks such as the colonial pipeline reach.

In contrast.

Firewalls and VPNs connect users to the network, enabling natural threat movement. It is clear for our growth and enterprise wins that architecture matters. And zero trust security can't be built on legacy network security architecture. This gives us long-term advantage.

The walls and vpns connect users to the network, enabling actual track movement. It is clear our hallmark of accruals and enterprise wins that architecture matters.

Zero Trust security can be built on legacy network security architecture.

<unk> gives us long term advantage.

Turning to the quarter, let me discuss two factors that drove our performance.

Turning to the quarter.

Let me discuss two factors that drove our performance.

One, we saw continued strength in new and upsell bookings of over $1 million in annual value. We drove 87% year-over-year growth in customers exceeding $1 million in ARR, ending with over 220 of these customers.

One we saw continued strength in new and upsell bookings of over $1 million in annual Manhattan.

We drove 87% year over year growth in customers exceeding $1 million in <unk> ending with over 220 of these customers.

Two, the expansion down market to enterprise segment, organizations with 2,000 to 6,000 employees is scaling and it remains our fastest growing segment.

To that.

That expansion down market to enterprise segment.

Organizations with 2000 to 6000 employees is scaling.

And it remains our fastest growing segment.

With increasing contributions from the enterprise segment, the total number of customers who pay us more than $100,000 per year is up 53% year over year to over 1,600. Our 71% billings growth this quarter speaks to the commitment that customers are making to our zero trust exchange platform.

With increasing contributions from the enterprise segment.

Total number of customers, who pay us more than $100000 perimeter is 53% year over ear to over 1600, our 71% billings growth. This quarter speaks to the commitment that customers are making to answer.

Zero Trust exchange platform.

As we have noted before, the purchase of ZIA is often the first step to adopting our platform. Let me share a couple of ZIA-driven deals.

As we have noted before.

Change of Z IAA is often the first step to adopting our plant.

Let me share a cup.

La Z IAA driven deals.

A Fortune 50 insurance company purchased CIA Transmission Bundle with cloud firewall and cloud storage. A Fortune 50 insurance company purchased CIA Transmission Bundle with cloud firewall and cloud storage.

Fortune 50 insurance company purchased CIA transformation bundle with cloud firewall, and sandbox, plus DLP and Caspian data protection to secure 170000 employees and affiliated agents working from anywhere.

plus DLP and CASB for data protection to secure 170,000 employees and affiliated agents working from anywhere.

This customer wanted secure and fast access to internet and SaaS applications, particularly Microsoft 365 and Teams.

This customer wanted secure and fast access to Internet and SaaS applications, particularly Microsoft 365 and teams.

Connecting to Zscaler's nearest edge cloud, where we have direct peering with hundreds of application providers.

<unk> newest edge club.

We have direct peering with hundreds of application providers. The users are seeing a 75% improvement in response time.

The users are seeing a 75% improvement in response time.

Next.

A leading defense industry integrator purchased ZIA for 200,000 users, plus workload protection for internet traffic. Our ZIA platform, which recently achieved FedRAMP high-ready status.

A leading defense industry integrator purchased Zia II for 200000 users plus workload protection or internet traffic.

Z platform, which recently achieved fed ramp.

<unk> ready status.

will help them meet many requirements for CMMC, a cybersecurity standard for defense contractors.

It will help them meet many requirements for C. MMC, a cyber security standards.

<unk> contractors.

Zscaler is consolidating the several point product.

Zee scalar is consolidating several point products simply find the network enforcing consistent hybrid policy across multiple business units, while reducing operational costs we have.

simplifying the network, enforcing consistent cyber policy across multiple business units while reducing operational costs.

We believe these large deals show that we are the only multi-tent, zero-trust platform meeting the needs of major enterprises to transform the legacy hub-and-spoke network and castle and mold security.

Believe these large deal show that we are the only multi tenant zero trust platform meeting the needs of major enterprises.

Transform their legacy hub and spoke network.

And castle and moat security.

With customers shifting to the cloud more or buying CIA and CPA together, enabling a true transformation, where direct and seamless access to SaaS and private applications, whether on prem or in public cloud.

With customers shifting to the cloud, more are buying C.I.A. and Z.P.A. together, enabling a true transformation with direct and seamless access to SAS and private applications, whether on-prem or in public cloud. Here on.

Hit on a few examples.

A Fortune 500 banking customer signed a four-year commitment for three key pillars of our platform. Their existing ZIA contract was upgraded to include Cloud Firewall, Sandbox, DLP, Caspi, and browser isolation.

A fortune 500 banking customer signed a four year commitment for three key pillars of our platform.

<unk> contract was upgraded to include cloud firewall sandbox, DLP casspi and browser isolation.

They also purchased ZPA for all 100,000 employees to implement app segmentation without having to implement legacy network segmentation.

They also purchased VP for on 100000 employees, who implement apps segmentation without having to implement legacy network segmentation.

In addition.

In addition, ZDX was purchased to identify and help remediate application, network, or endpoint issues to ensure great user experience and employee productivity regardless of their location.

<unk> purchase to identify and help her immediate application network or any issues to ensure great user experience and employee productivity regardless of their location.

This deal more than triples the customer's annual spend with us.

This deal more than tripled the customer's annual spend with us.

having adopted full portfolio for user protection. We are now discussing zero-cost security workloads with this customer.

Having gone through the full portfolio for user protection. We are now discussing zero Trust security workloads with this customer.

Next, in a new logo win, a Fortune 100 insurance customer purchased ZIA Transformation Bundle and ZPA for all 30,000 employees to pursue their cloud-first strategy.

Next in a new logo win a fortune 100 insurance customer purchase Z IAA transformation bundle and CPA, all 30000 employees to pursue the cloud first strategy.

With cyber protection as a major requirement this customer only considered.

With cyber protection as a major requirement, this customer only considered a proxy architecture to perform SSL inspection at scale and rejected firewall-based architecture.

<unk> architecture to perform SSL inspection at scale and rejected firewall based architectures.

ZPA will eliminate their attack surface, hiding their thousands of private applications behind our zero-trust exchange. Hence, they can't be discovered, exploited, or DDoSed.

<unk> eliminated attack surface hiding the thousands for private applications behind our zero Trust exchange, hence they can't be discovered exploited all ddos.

We are consolidating at least three vendor of point products.

We are consolidating at least three vendor point products, materially reducing complexity and operating costs.

Chile is reducing complexity and operating cost.

Our integration with CrowdStrike and Microsoft was also an important consideration for them.

Integration with crowd strike and Microsoft was and also an important consideration for them.

Next, one of the powerful use cases for ZI and ZPA is to accelerate M&A integration with significant ROI.

Next one of the powerful use cases for Ci in CPA is to accelerate M&A integration with significant Ottawa.

An existing European-based global 500 manufacturing customer purchased ZIA Transformation Bundle for 30,000 employees of a newly acquired business.

An existing European based global 500 manufacturing customer purchased Zia II transformation bundle for 30000 employees of the newly acquired business.

And CPA for 50000 users accelerated M&A and integration.

The legacy approach to providing access to private applications post-acquisition requires integrating two complex corporate networks.

<unk> approach to providing access to private applications post acquisition requires integrating two complex operating excellence.

which they expected to take 18 months or more without having to connect two corporate networks.

They expect to take 18 months or more.

Without having to connect two operating excellence. These killers approach provided secure access to SaaS.

Zscaler's approach provided secure access to SaaS or private applications across both companies in weeks, saving time and money. After having disrupted premier-based security for users with our zero-trust exchange, we are bringing zero-trust to workloads with Zscaler Cloud Protection. Let me highlight a few ZCP wins.

<unk> applications across both companies and weeks saving time and money.

If true having disrupted premier based security for users with our Zero Trust exchange, we are bringing zero trust to what floats with these killer cloud protection, Let me highlight a few DCP wins.

An existing <unk> and Vps state government customer.

An existing ZIA and ZPA state government customer purchased workload segmentation for over 4,500 workloads along with ZDX and CASB for the 28,000 employees.

Purchase workload segmentation fallen over 4500 workloads, along with CTX and cast fee for the 28000 employees.

This was a seven figure annual contract value driven by our emerging products.

This was a seven-figure annual contract value driven by our emerging product.

Implementing zero-trust for workloads will reduce their cyber risk by achieving micro-segmentation without doing legacy network segmentation. Moving on to our workload.

Implementing zero trustful workflows with reduced their cyber risk quite achieving micro segmentation without doing legacy network segmentation.

Moving on to our workload postured offering.

We are seeing increased interest from customers in CSBM for configurations and CIEM for entitlements.

We are seeing increased interest from customers and see SPM, but configurations and <unk> E M R and Python.

During the quarter, a tech company bought CSPM for over 9,000 workloads, and a software enterprise bought CIEM for 5,000 workloads.

During the quarter.

Company bought CSP in for over 9000 workloads.

And our software Enterprise C E M for five workloads.

On workload communication offerings, powered by CIA and ZPA technology, is building momentum with additional customer wins in the quarter. For example, a healthcare customer purchased workload communication for 3,500 workloads, and a financial services customer purchased it for 1,000 workloads.

On workload communications offerings.

Powered by CIA in CPA technology is building momentum with additional customer wins in the quarter for example.

Healthcare customer purchased workload communication for 3500 workflows.

And a financial services customer purchased it for 1000 workloads.

When you look at these wins, our success starts with true zero-trust architecture, which is the opposite of firewalls and VPNs.

When you look at these wins on our success starts with true Zero Trust architecture, which is the opposite of firewalls and bps.

Our Zero Trust Exchange is the largest inline cloud security platform in the world.

On SEDAR plus exchange is the largest inline cloud security platform in the world.

processing over 200 billion transactions per day.

Processing over 200 billion transactions per day.

which doubled in the last 18 months and is preventing more than 7 billion security and policy violations per day. This massive amount of traffic provides us 300 trillion signals per day to feed our machine learning and AI engines, resulting in superior threat protection and better detection of user and application traffic anomaly.

Which doubled in the last 18 months and is preventing more than 7 billion security and policy violations per day. This massive amount of traffic for white sauce.

<unk> hundred trillion signals per day to feed our machine learning and AI engines resolve.

Good thing and superior protection and better detection of user and application traffic anomalies.

This network effect is a big competitive advantage for us.

This network effect is a big competitive advantage for us.

Each of our 150 plus data centers receives a continuous stream of more than 200,000 unique security updates every day.

Each of our 150 plus data centers.

<unk> a continuous stream of more than 200000 unique security updates every day.

This can't be done with a single-parent VM-based architecture that legacy security vendors are running on public phones and calling faster.

This can't be done with a single tenant VM based architecture that legacy security vendors on running on public funds and calling SaaS.

This is only possible with a purpose-built, highly scalable cloud that Zscaler built from day one. I'm very proud of our pace of innovation that delivers value to our customers. Let me share a few stats.

This is only possible with a purpose built highly scalable cloud that zee scalar built from day one.

I'm very proud off on pace of innovation that delivers value to our customers.

We issued a few stats for the quarter.

ZIA delivered 29 Agile releases, and ZPA delivered 44 Agile releases. Each product pillar delivered scores of new features and enhancements.

The IAA delivered 29, a giant releases and Z PAA delivered 44, HR releases each product pillar delivered scores of new features and enhancements.

Our Threat Lab security research team discovered and delivered over 495,000 new advanced threat indicators and signatures to our global cloud. In addition, our cutting-edge security research scientists discovered and reported 18 new zero-day vulnerabilities.

Our first lab security research team discover and deliver over 495000, new advanced threat indicators and signatures to other global cloud. In addition on cutting edge security visa point is.

This cohort and reported 18, new zero day on their teams.

These are testimonials of the sophistication and scale of our research team. A great platform combined with a great research team enables us to deliver great cyber protection to our customers.

These are testimonials of the sophistication and scale of our research team.

<unk> platform combined with a great research team enables us to deliver great cyber protection to our customers.

Let me highlight some of the significant features we delivered in Q1. We enhanced our out-of-band CASB to support additional SAS applications. We see more customers buying our CASB along with ZIA and replacing their existing CASB point products.

Let me highlight some of the Cigna and features we delivered in Q1 we.

We enhanced our ultra band capacity to support additional SaaS applications, we see more customers buying our Caspian along with CIA and replacing their existing Cassidy point product.

We added optical character recognition technology to our DLP office.

Added optical character recognition technology to our DLP offering.

addressing data loss problems or images in files like PDF.

Addressing data loss problem images and files like Pdfs.

This feature combined with previously released exact data match and index data match technology makes us the leading data protection platform. We integrated our recently acquired smokescreen active defense technology with ZPA.

This feature combined with previously really used the exact data on match and index data unmatched technology makes us the leading data protection platform.

We integrated our recently acquired smoke screen active defense technology with CP It may.

making it easier for customers to deploy and manage it from a single console. The pace of innovation for our newer pillars like ZDX and ZCP is accelerating.

Making it easier for customers to deploy and manage it from a single console.

Piece of innovation for our newer pillars like the CTX and DCP is accelerating.

For example, one of the most demanded ZDX features is real-time performance monitoring for Zoom and Microsoft Teams, which we delivered by working closely with Zoom and Microsoft through API integration.

For example.

One of the most demanded CD X features as real time performance monitoring for zoom and Microsoft teams, which we delivered by working closely with zoom and Microsoft through API integration.

We added over 150 features to ZDX in the past 12 months, delighting our customers.

We added over 150 features to <unk> in the past 12 months delighting our customers.

One customer said and I quote we now have unprecedented visibility into the environment. We can respond faster and forecast we may have issues and address those areas before they become a problem.

I want to highlight another increasingly important area, helping our customers achieve their ESG goals.

I want to highlight another increasingly important area helped.

Helping our customers achieve their ESG goals.

Our highly efficient clone replaces hundreds of thousands of on Prem appliances, and eliminates the need to buy more in the future. This whole thing and the significant decrease in the energy resources and carbon emissions associated with building transporting <unk>.

Our highly efficient cloud replaces hundreds of thousands of on-prem appliances and eliminates the need to buy more in the future, resulting in the significant decrease in the energy resources and carbon emissions associated with building, transporting, powering, and cooling them.

During and cooling there.

As you may have seen from a recent press release, our cloud platform now uses 100% renewable energy.

As you may have seen from our recent press release, our cloud platform now uses 100% renewable energy.

As part of this effort, we have a cross-functional team with oversight from the board to drive our sustainability strategy. Zscaler has never been stronger, and I believe we have an incredible opportunity in front of us. We have our sights set on the next milestone, growing our ARR to $5 billion.

As part of this effort, we have a cross functional team with oversight from the board to drive our sustainability strategy.

This quarter has never been stronger and I believe we have an incredible opportunity in front of US we have our sights set on the next milestone growing our anr to $5 billion.

I believe the key to sustain growth in the next stage is to accelerate the broader adoption of our platform.

We believe the key to sustained growth in our next stage is to accelerate the broader adoption of our platform.

on zero trust exchange platform with four major pillars, provides a comprehensive foundation for securing and improving application access in the world of cloud and mobility. With ZIA and ZPA, we have proven our success implementing zero trust for users.

Zero Trust exchange platform with four major pillars for why is a comprehensive foundation for securing and improving application access in the world of cloud and mobility with the CIA and CPA, we have proven our success implementing zero.

For users.

Our next immediate opportunity is to bring Zero Trust to workloads powered by the same core CIA and CPA technology. As we shared in our.

Our next immediate opportunity is to bring zero trust to what launched powered by the same core CIA in CPA technology.

As we shared in our deal highlights.

We are seeing solid traction with ZDX and ZCP, the newest growth factors for the company.

We are seeing solid traction with CTX and DCP the newest growth vectors for the company.

We are seeing increasing average revenue per customer, and we estimate a six-times growth opportunity on upsell with our current customers.

We are seeing increasing average revenue per customer and we estimate a six times growth opportunity on upsell with our current customers.

from pre-sales to deployment and customer success. We have a sophisticated sales machine to sell value and deliver measurable outcomes at the CXO level.

Pre sales to deployment and customer success, we have a sophisticated sales machine to sell value and deliver measurable outcomes at the CX will have.

over the next several years. Our innovation engine will further build out the breadth and depth of our platform, extending our already substantial technology lead.

Over the next several years, our innovation engine will further build out the breadth and depth of our platform extending our already substantial technology lead.

We are also pursuing some very exciting opportunities to extend Zero Trust to operational technology or OT systems with manufacturing leaders like Siemens.

We are also pursuing some very exciting opportunities to extend zero trust two operational technology or Ot.

<unk> systems with manufacturing leaders like Siemens.

In summary.

We are very excited about our future and we believe we are still in the early innings of a significant market opportunity to accelerate secure digital transformation.

We are very excited about our future and we believe we are still in the early innings of a significant market opportunity to accelerate secure digital transformation.

No, I'd like to turn over the call to Remo for our financial results.

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

Thank you, Jay. As Jay mentioned, we are pleased with the results for the first quarter of fiscal 2022. Revenue for the quarter was $231 million, up 17% sequentially, and 62% year over year. On a year-over-year basis, revenue growth accelerated in the quarter, driven by strong business activity. The EPA product revenue was 16% of total revenue.

Thank you Jay as Jay mentioned, we are pleased with the results of the first quarter fiscal 2022 revenue for the quarter was $231 million up 17% sequentially.

62% year over year on a year over year basis revenue growth accelerated in the quarter driven by strong business activity in EMEA product revenue was 16% of total revenue from a geographic perspective, we had broad strength across our three major regions Americas represented 51% of revenue EMEA was 35.

From a geographic perspective, we have broad strength across our three major regions. America is represented 51% of revenue.

EMEA was 35% and APJ was 14%.

Percent P J was 14%.

Our investments in APJ are bearing fruit with greater than 100% revenue growth in that region. Our total calculated billings grew 71% year over year to $248 million, with billings duration at the high end of our 10 to 14 months range. We had several customers choosing to pay up front for their multi-year contracts. As a reminder, our contract terms are typically one to three years, and we do not offer any special incentives for upfront payments.

Our investments and eight P. J are bearing fruit with greater than 100% revenue growth in that region are total calculated billings grew 71% year over year to $248 million with billings duration at the high end of our 10% to 14 month range, we had several customers choosing to pay upfront for their multi year contracts as a reminder, our contract.

Terms are typically one to three years and we do not offer any special incentives for upfront payments.

Also pleased to report 68% year over year growth in short term billings I would note that both billings and revenue benefited from a $1 5 million one off deal in the quarter remaining performance obligations or <unk> or $171 billion.

As of October 31.

97% from one year ago with current <unk>, it's 50% of the total IPL, our strong customer retention and ability to up sell the broader platform have resulted a high dollar based net retention rate.

Which was above 125% in the quarter and higher of 128% reported last quarter as we have discussed before this metric will vary quarter to quarter and it's not a metric we manage our business towards.

We focus on growing our net new business without incentivizing differently between new or upsell.

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

Considering these factors, we believe NR above 125%.

It's truly outstanding for us.

We had 224 customers paying us more than $1 million annually.

87% from 120 in the prior year.

Strength in this metrics, thanks to a strategic role to play in our customers' digital transformation initiatives.

We also added over 550 customers paying us more than $100000 annually.

During the quarter at 1616, such customers turning to the rest of our Q1 financial performance.

Gross margin of 86%.

Was approximately flat quarter over quarter, and down 50 basis points year over year, our total operating.

Expenses increased 17% sequentially and 69% year over year to $162 million.

Operating expenses as a percentage of revenue increased by approximately three percentage points from 67% a year ago to 70% in the quarter, primarily due to increased hiring higher compensation expenses.

Investments in smoke screen and trust owned businesses, we acquired in the second half of last year and a partial return obtaining.

Operating margin was 10% and free cash flow margin was 36%.

Which benefited from the timing of Capex spend we continue to expect Capex as a percentage of revenue to be high single digits for the full year, we ended the quarter with over $158 billion in cash cash equivalents and short term investments.

Please note that net other income includes an $800000 loss primarily related to the change in value of our assets denominated in euro and British pound as the U S dollar strengthen.

And minimize such impact going forward, we recently implemented a hedging program for our balance sheet.

As a reminder, we primarily transact sales globally in U S dollars.

Several quarters ago, we put in place a hedging program for international operating expenses for income taxes, our tax expenses, primarily represent international taxes paid to foreign jurisdictions, we do business up.

For several apta countries Thursday withholding tax on sales made to customers in those countries.

As our <unk> business has grown significantly in recent quarters.

Holding taxes were one $5 billion in Q1.

Now moving on to guidance and modeling points.

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

Native payroll taxes amortization.

Amortization of debt discount and amortization of intangible assets for the second quarter of fiscal 2022, we expect revenue in the range of $240 million to $242 million.

Reflecting year over year growth of 53% to 54% gross margins of 79% I would like to remind investors that a number of our emerging products.

Queen CTX workload segmentation and see as Tim will initially have lower gross margins than our core products because they are more focused on time to market and growth rather than optimizing for gross margins.

Operating profit in the range of $20 million to $21 million.

Net loss in other income of $100000.

Income taxes of $4 million.

Earnings per share of approximately <unk> 11.

150 million fully diluted shares.

For the full year fiscal 2022, we are increasing our revenue to a range of $1 billion to 1.01 billion.

Our year over year growth of 49% to 50% increasing calculated billings to a range of $1 3 billion.

To 130 $5 billion.

Our year over year growth of 39% to 40%.

We now expect our first half mix to be approximately <unk>, 43% to 44% of our full year billings.

<unk> operating profit to a range of $90 million to $93 million.

Just on the return of in person conferences and events, we expect operating margin to decline sequentially in Q3 before improving in Q4 updated earnings per share to a range of 50 to 52.

Assuming approximately 150 to 151 million fully diluted shares. Please note that our share count guidance now includes dilution from our convertible debentures with a large market opportunity as customers increasingly adopt in the broader platform, we're committed to investing aggressively in our company.

We will balance growth and profitability based on how our business is growing and will continue to prioritize growth, which we believe is in the best interest of our shareholders employees and customers. Operator, you may now open the call for questions.

And thank you as a reminder, asked a question you will need to press star one on your telephone to withdraw your question press the pound key.

Please ask that you limit yourself to one question and one follow up again, we ask that you limit yourself to one question one follow up and our first question comes from Matt Hedberg from RBC capital markets. Your line is now open.

Great. Thanks for taking my questions guys and congrats on a really strong quarter.

Jamie I wanted to start with you.

<unk> had a you've got a lot of success here recently and you talked on the call about the path from $1 billion in IRR to $5 billion in IRR.

You talked about some of the building blocks, but I wonder if you could put a finer point on how you get there and do you have currently have the products in place to get to that very large goal.

The short answer is yes, and let me expand upon it.

If you look at all.

Main products.

CPA, which had been our flagship products.

It's a fair amount of upsell opportunity to our current base.

Kind of shared that with.

With upsell, we could actually take on Anr six X.

Post spin just wait for upsell, we are focused on adding new customers as well.

We have decent penetration on the high end Fortune 500 companies, 35% global two talking about 25% that means there's a big market still for us to deploy and these especially high end customers look for a proxy based architecture and zero Trust.

On protection.

And then on top of that.

Two other solution zero trust for workloads that Hasnt, just coming out our lease page and we are also moving into zero trustful, Iot and Ot leveraging the core technology, we have in place.

And then on top of that is a newly emerging markets.

<unk> security posture entitlement permissions are alike.

We did a couple of small acquisition that area building upon it and growing it so.

So I do see security market rapidly changing we believed all segments that we know today.

No longer be there.

Disappear over time.

And we have a lead significant lead or otherwise to.

To keep on building more so I feel pretty comfortable and confident to be able to get to $5 billion target anvil.

Yes, just to add just a little bit I'm, sorry, just to add a little bit there.

Our.

Our Sam is 72 billion.

And as we talked about in our analyst day. It does not include other areas, which we are making investments areas.

Areas such as <unk>.

Okay.

Iot <unk> so.

And what's interesting is that this market has really changed over the years from what it was even 10 years ago, and certainly 20 years ago, where a lot of legacy basically technology is still today.

There is a huge market opportunity and one of the things we've done within the company and we've talked about is that we're going to prioritize growth over operating profitability.

One of the areas that we're making significant investment is and isn't our go to market. So we have made significant investments in the past we will continue to make significant investments.

And in that go to market, it's really three pronged inkjet sales.

You've got marketing you've got channel sales organization, we've been making significant investments in the last few years you can see the fruits.

Our civil organization has done well.

We currently we've hired recently about a year ago or a little less than a year ago as CFO, but he is doing absolutely outstanding.

We are making significant investment channel with that also as we talked about trying to get to for getting to a much larger company, we are going to be making investments throughout the company to build the foundation and the strength in efficiencies. So we're going to a unique position in a really really created in my opinion a revolutionary technology.

With the platform was created to 12 years ago that addresses this market pretty much right on.

And thats actually thanks for that last bit that's actually a dovetail into the second question. It looks like you guys had a lot of hiring this quarter. Obviously Q1, you can imagine you want to front end load. Some of your hiring can you talk about the rep capacity coming out of Q1.

How are you kind of think about ads throughout the balance of the fiscal year.

We are going to continue to add aggressively throughout the year.

Our net adds that we had in Q1 was over 450 employees of half of those were in sales and marketing.

From a field quota sales rep perspective.

The comments, we made before.

We've hired more field sales reps this year in fiscal 'twenty to 'twenty, one we're certainly on pace to do that.

Also in Q1, we had a near record quarter for RSM.

Fuel quite a sales rep adds we.

We see zscaler as a destination and so.

Related to your question, how we're going to do going forward.

Like like I said before we're going to prioritize growth and we're going to.

Higher aggressively and we're going to try to really go after this market.

Congrats guys.

Thank you.

And thank you.

Ladies and gentlemen, we ask that you limit yourself to one question again, we ask that you limit yourself to one question and our next question comes from Gray Powell from <unk>. Your line is now open.

Great. Thanks for taking the questions.

And yes, congratulations on the strong results.

So I know you hit like kind of a high level drivers I'd just be curious on the product level. What surprised you most of the upside this quarter was it more on the core DIY and DPA side or was it more on the emerging product side of the of the portfolio.

All products actually did well I mean, this was a stellar quarter, whether you look at the product side are you don't kind of Geos.

That market segment side.

There are a couple of deals we highlighted in my earnings call.

The big <unk> deals.

These still coming up very strong sometimes people think that CIA.

Started army it may be kind of slowing down, but we arent seeing slowdown in Ci GPA is ramping pretty rapidly growing pretty fast.

And <unk> is probably the most sought after product in the market, especially with zoom and teams kind of issues that are almost impossible to decipher and figured out the big integration we did.

A quick pace in the past few months and we announced that publicly a couple of weeks ago grip with the help of Microsoft and zoom, both with an API based integration.

Across the board I think it's wonderful part too.

Pinpoint one product area, yes.

Yes.

From a geographic perspective, what I'd like to do is call out a P. J.

They did absolutely outstanding and what we've talked about before all so I was one of the areas that we're going to invest more in.

P J in particular, Japan.

And so if you look at our performance a P. J was very very strong for us, but as Jay mentioned across the board it was an outstanding quarter.

Got it Okay. That's really helpful I will I'll leave it there.

And thank you.

And our next question comes from Alex Henderson from Needham.

It is now open thanks guys.

Thank you very much.

Outstanding quarter, I didn't catch a growth rate or a percentage of revenues coming from <unk>. If you have one of those that'd be great. My question is.

Predominantly the commentary about your conversations with these CIO CTO T cells.

Clearly the move to cloud direct.

For users is.

Aggressively, but the other side of that coin it seems pretty clear that applications are simply could it become points in the clubs and under that scenario you are the connectivity between both the user.

The application and the application to the other applications demand the domain.

In that world.

Any reason for there to be an enterprise network and so I guess my question is have you had conversations with people.

The enterprise to actually start talking about decommissioning the enterprise network.

The branch home office.

Data centers simply become the islands and the cloud AWS can you talk to whether that vision is penetrating into the into <unk>.

Top management.

Yes, it is actually happening.

Phil I mean, I can tell you because ive talked to so many customers.

Many customers, who don't have any data center.

Any customers, who don't have any.

Private network so to speak it's all broadband connection coming form.

Headquarters that branch office and why now.

No.

I would say that most of that is seen in DC.

Decent sized enterprises, ranging from about five to probably 10 or 15000 users I havent.

Don there yet maybe youre looking at 2030, 30000 person company and commissioning everything that's.

That's happened we've seen clearly a trend moving in that direction.

And your other question Alex related to the breakout of CTX and DCP, we did not give that.

When we talked about on the last call is that <unk> DCP.

As a percent of our total new and upsell business for the year would be low teens.

Still.

Yes.

If I may add one more comment since you talked about natural history and for price some speak.

Before that we talked about data center free enterprise.

I had it.

Customer Advisory Board meeting today.

Nine CIO, so large enterprises was meeting with us and one of them said.

No data.

I have no private network now I want to get to a level, where <unk> firewall three yes, okay. So youll see more and more of that in the wall of the cloud there is no need for any firewall in the data center and they won't be there for a while and it's okay, because theres more effort needed to displace them then phasing.

The data center applications.

Outstanding Thank you.

Yeah.

Thank you.

And our next question comes from tactical deal from Deutsche Bank.

Line is now open.

Hey, Thank you so much for taking my question.

It could be correct to echo everyone's congratulations on that.

To be very stellar quarter.

Can I just ask about.

I think that was.

Really interesting commentary I guess.

I would like to better understand that so you mentioned 450.

In fiscal first quarter.

Just can you just help us think about the kind of trajectory through the rest of the year.

And kind of what you've got baked into the guidance I mean should we expect.

That kind of number again to Q3, Q4, Q1 would be kind of a glide path to be slightly different. Thank you.

Yes, it's a great question it depends on our performance quite frankly.

If we continue to perform at the levels that we are.

As we've talked about we see this as a huge market opportunity, we're going to invest in this market.

And really the major investments that we have are people getting up.

Handing employees to work for Zee scalar.

So.

It was a good quarter for us.

Net assets as I mentioned 450.

I don't want to give a.

Projections of what we're going to add for the year.

But.

Really the takeaway is we continue to grow as we are growing we will continue adding at pace.

Okay.

Well thank you so much.

Thank you Ed.

Our next question comes from Sterling Auty from J P. Morgan.

Your line is now open.

Yeah. Thanks, Hi, guys. So along the lines of the last question help us understand the trends in customer acquisition costs. So when you look at the net new logos that you added in the quarter are you actually seeing the cost to acquire those customers going down going up are staying about the same as what you've seen.

Over the last let's say three or four quarters.

That's a great question based on our performance.

We have and based on our operating profitability.

I would say customer acquisition costs are staying relatively the same because we are putting a lot of investment into marketing as well as our sales organization.

On a short term basis as we as I've talked about but again the contribution margin that we have in years two three is above 60%.

So we're still in that position that we are trying to acquire or bring onboard new customers and we're making that investment.

As we go forward and as the company matures.

That should come down, but right now that's not our focus our focus is to build our topline growth.

Understood. Thank you.

Thank you.

Thank you.

And our next question comes from Jonathan <unk> from Baird. Your line is now open.

Yes.

Congrats guys.

Impressive.

So Jay I think you've commented in the past the workload segmentation is something that you really only see the most advanced company is talking about so obviously very early stage, but you seem to highlight that's going to work.

That capability in terms of their trials and applying its applications and machines.

I'm just kind of curious how you see that.

Adoption. This year is there anything to call out in terms of what you see relative to what you were thinking about that maybe six months ago.

No.

Your question seems to imply micro segmentation advanced segmentation, which is actually only done by advanced companies.

Look at segmentation in three buckets first of all zero two application Saudi.

User to App segmentation VP of a designed to naturally do that so more and more of these kind of customers are doing it because user is the weakest link that's one two.

Actually what cloud workloads segmentation at the water level on BPC to repeat that BPC level BPC.

AWS is to AWS breast, we actually do that with our zero Trust for workloads, which is powered by <unk> and then the third the most advanced one you started out with is being able to do micro segmentation.

And Thats really done only by more sophisticated good companies, but we arent clear.

Really driving all three levels of segmentation, which is wonderful for our customers and good for our business.

Thank you that answers your question.

Well have you seen any change in that.

Use case.

It is the opposite of that use case or is it pretty steady stacked up.

The advanced micro segment, Saudi the micro segmentation.

I think it is growing at a decent rate, but we entered the customer had no option.

Italy was user to App segmentation and.

App to App or <unk> those are the two new areas of pushing and seeing a lockdown great interest literally coming from having no options to <unk> you can do it sold out. So recently, so we won't see much faster growth in that segment.

Okay. That's helpful. Thanks.

Thank you. Thank you and our next question from comes.

Comes from Sicad clear from Barclays. Your line is now open.

Okay, Great Hey, guys. Thanks for taking my question here.

Jay maybe maybe for you.

Yes.

The success of multiple new emerging products can you just talk about any thoughts you have on new bundling strategies and how those could look I mean, the bundles that you've done with Zia and <unk> been so successful in the past how does that bundling strategy change if at all as you know.

<unk> and DCP become bigger parts of the business does that makes sense.

It does.

So overall as you know, we have a deep and broad platform and.

And we also see CIO CFO looking for consolidation they.

They won't solution rather than have Dubai, many products and put them together and also things like <unk> Dx with a single agent literally all three products and get turned on for an easing.

So you won't see more and more bundling overtime youre seeing Gia.

First of all you see bundling.

In <unk> family from Vincent.

Bundled to transformation bundle than you saw in <unk> coming to Gott <unk> <unk> CTX coming to got a.

That trend will continue I think based on different products, probably the timing may be different.

Based on what we learned from the customers.

Got it thank you.

Thank you.

And thank you.

Our next question comes from Hamzah <unk> from Morgan Stanley. Your line is now open.

Hey, guys. Thanks for taking my question.

A question for you just more broadly on.

Security architecture in the market moving more towards.

Sassy in Zero Trust Zero Trust network access.

Think that.

In today's environment, where there's obviously.

Supply chain constraints on.

Things like on premise firewalls.

You should be seeing more adoption.

Towards your type of platform, but we're still seeing customers buy.

On premise firewall right and I think thats, a pretty strong demand environment. So I'm wondering when that tipping point occurs or if thats been put occurs and maybe if you can give us some color of.

The pace of adoption towards SaaS in Zero Trust network, where we are in that adoption curve.

Yes, it's a good question.

Your question reminds me of a question I've asked a few times 70 to scope.

These color is growing so well why is blue coat still growing so well and Fedex software right.

This and our shelf theres a lot of traffic that goes through the data.

And as that traffic grows whether you've got a proxy appliance sitting there or firewall since it takes the traffic.

We really need to upgrade it and grow it over time and we saw <unk> kind of grew and then suddenly fell off a cliff.

And also I think it gets very hard to figure out the numbers, but actual appliance.

<unk> be in there.

At some point when you have to figure it out but I can tell you. This.

Our customers don't want any firewalls in the cloud.

Today, they have some since the Vms out there, but as we are talking about new solutions, our customers want a firewall.

I won't.

For the data center.

Lots of complexity, it's kind of being phased out.

We have zero focus in trying to remove any firewall in the data center and leave them alone and they will become like mainframes overtime.

What is that time I'm not sure.

I can get into it but I have 200% conviction.

A firewall appliances.

<unk> will go away.

Gardening, SaaS I would like to clarify the SSE has become a buzzword for everyone not broken guys have hijacked the Trump because that's what they can attach themselves to SaaS.

And Gartner had to further clarify its not consent.

Can do in Q4 SaaS team because it is a clear.

Collection of things like on the efficiency.

But knowing they have a new magic quadrant coming up.

Core service edge another acronym.

But it is only about <unk>. It is about the functionality OCI to put together and for the network side there'll be a separate shop.

I think there are more customers, who want to eliminate that network.

Because it is an excellent that create macro moment and enable fans' congrats type of attacks on an old desktop is driving on calls.

It's helping but there is a big market out there is in our shelves.

So buying a bunch of these.

Firewall appliances, and the like take VPN.

We all know that VPN is probably the biggest security hold out there.

There's still unabated, placing lots of it that's what's fueling CPA growth, but there is a big market that still buying VPN.

We are making progress pretty aggressively and Gartner and all things that in the next four to five years most of the VPN will be gone and we think whether a vendress, calling VPN into clouded by a different name Oreo VPN. They will eventually go away and that's been a vivo health and SEDAR Trust architecture.

Thank you for the long answer, but I hope it helps.

Very helpful. Thank you.

Thank you and our next question comes from Brian Essex from Goldman Sachs. Your line is now open.

Hi, good afternoon, and thank you for taking my question Jay I was wondering if I could maybe just follow up on a few of the questions that we've had previously.

Considering the investment that you've made in sales reps and sales and marketing over the past few years and particularly your focus on cross sell and up sell.

I have noticed that the billings are growing over it looks like they're growing over twice what customer growth is so maybe.

Maybe if you could put a finer point on how you are investing in particularly your direct sales force to or whether you're leveraging your channel to some greater extent to drive yourself towards that <unk> growth opportunity from cross sell up sell.

So.

So first of all if you look at our growth we had 80, 587%.

Over to you to grow more of our customers with over $1 million at.

At all.

And that customer growth number now if you look at customers with over 100, KAR that year over year growth was about 50, 50%, 53% I think when you look at let's take customer number this lowest small.

<unk> on the low end and whatnot those numbers end up being kind of misleading. So it's good to look at categories. So we are pleased with the with.

With the growth of customers.

Our bigger focus is.

Just overall growth overall bookings growth and alike.

For that as we.

Look at cross selling Upselling, our new logo.

Okay, we actually do not do any special incentive for one or the other we have internally debated quite a bit but when you've got so many products. We sell ammonia portfolio for me do multi based salespeople to go for new business and not focus on upsell wont beat items. So we have essentially the same.

Compensation.

No channel is beginning to play a more and more especially in the enterprise segment. The bigger that the more you have to engage with that might the fortune 500.

But when you come to 2000 to 5000 or you went up to 10000 users.

Channel is big new add more and more value at channel actually is helping us get new logos, because thats one of the big value stay at.

Did I cover the points you asphalt.

Yes, you did that was very helpful. So thank you very much I appreciate it and congrats again.

Thanks, Brian.

Thank you and our next question comes from Gregg Moskowitz from Mizuho. Your line is now open.

Alright, Thank you and I'll add my congrats on a truly remarkable quarter Jay I'm wondering have you begun to see uptake for DTA private service edge and I'm, just kind of curious if thats begun perhaps to help you in hybrid enterprise environments, such that it might be contributing to the robust overall growth that youre showing.

Alright, CPA alright.

Private service edge privates.

Okay. Good yes, VP of private service edge.

He is getting more and more deployed but just to let you know we are not trying to make a lot of money private service per se most of that money comes fall actually subscription fee of users, but what pirate service Doug.

Yes.

It allows you to implement zero trust for on Prem on the network users.

And since people at when they come back to the office they need to make sure that users and applications are not on the same network.

<unk> service as it comes in.

We charge.

A reasonable amount for it but the biggest amount comes from making sure every user whether they're in the office on at home.

Actually use CPA, that's really how we look at its growth and we are very pleased with it and also the second factor to drive that would be as more and more applications are in public cloud like Azure and AWS. They all need to go to <unk> for that.

I made the statement in the past that I expect it.

It's a matter of time when every use it for our customers when they have <unk> and Cvs feed together gives them fast secure and reliable experience.

Alright, that's great and certainly well suited for hybrid working guidance. Thanks Jay.

Okay.

Thank you and our next question comes from Shaul Eyal from Cowen. Your line is now open.

Thank you good afternoon, guys. Congrats on the ongoing strong performance.

So quick one on my end can you talk about the progress.

On the federal front.

Yes.

On the federal side.

We actually are doing quite well.

It's growing.

Much faster than our total overall revenue.

We expect to benefit form infrastructure plan.

During this fiscal year.

And that.

Breadth of that came from White and administration are Leon.

It's actually helping to have seen that.

Federal bodies on X gene.

Should I assess speeding up some of the projects been a steakhouse stock out there.

Two things it needed for zero Trust architecture, which we have been it needed fast ramp starting to fish.

And we have both of those things we are the only security vendor with two highest fed ramp certification.

And we have a sizable team.

Can you give a color on where we are.

So for federal in the quarter were mid single digits of total new and upsell business.

As Jay mentioned, we've made significant investments in the federal sector.

<unk> are significant and as Jay mentioned, we are the only security vendor with the two types of.

Ramps certifications.

In addition, we've got a strong team in federal and.

And good partners.

Federal takes time.

We feel that we're well positioned.

In federal our pipeline is increasing.

And our engagements are very good.

Yes.

Got it thank you great color.

Thank you.

And our next question.

It comes from Keith Bachman from BMO. Your line is now open.

Hi, Thank you very much Jay I wanted to ask you about competition and I wanted to come at it a little bit different way and break it into a few parts.

In terms of.

Greenfield activities.

How often are you seeing.

Because of your different architecture.

Essentially doing one to one negotiations or.

Part B, how much are you seeing the same or different participants.

And what I mean by that is there is.

Think most investors assume Palo Alto, but theres also cloud player in that scope Menlo I boss.

As the field when you're negotiating on particularly new work is it getting more crowded or less crowded and then finally this pricing enter into the discussion.

Particularly for the new work thank you.

It's a good question. So so first of all as we have driven top down with Cio's for transformation.

It's not typically be going and say I will replace this box auto place this fall.

Really one on one replacement type of stock. So we ended up driving churn down from that point of view.

And it used to be that for CIA.

We would show them, how we can help with secure web gateway and associated products and blue coat would be the starting point for replacement on trucks.

Then CPA became an important piece now more and more customers are buying Zia and <unk> together.

That's a different kind of players out there so while having an expanded portfolio of whenever you go in and say I can provide all access to all applications no matter, where they are any we havent Cif CPA.

It just fundamentally changes that Chris no CTX being part of the same thing go CIO cares about user performance.

It's not uncommon for us to get into.

How do you what do you call it bake off kind of stuff because it's really not a one on one type of question.

Now on the lower end of the market, we do see a smattering of players.

<unk> fiscal <unk>.

Time to try and find one guidance.

And once we engage we win that's why you're seeing our enterprise segment to K, two five K users actually growing pretty significantly.

<unk> pricing.

We haven't really seen much pricing pressure by the time, we show the customer all of these point products become displaced operational costs and the like.

Price becomes the least important issue for us right. Okay. It makes a lot of sense. Thank you.

Okay.

And thank you and our next question comes from Joshua Tilton from Wolfe Research.

Your line is now open.

Yeah, Hi, guys. Thanks for taking my question and congrats on the strong result.

As we as we just think about the remainder of the year should we expect any unusual changes to the quarterly calculated billings seasonality, maybe compared to prior years as we continue to lap a very very strong FY 'twenty one.

No.

Basically.

In our Q2 and Q4 is our largest quarters.

And we talked about the billing team.

First half 43% to 44%.

And one thing to keep in mind I mean, the numbers are getting big so as numbers get bigger just keep that in mind related going forward related to your expectation.

Sure.

Thank you.

Thank you.

And our next question comes from <unk> <unk> from JMP Securities. Your line is now open.

Yes, thanks and congratulations.

On the $5 billion commitment.

Can you I understand the issue.

See within your installed base opportunity to get there, but can you talk a little bit about how you view the timing. If you don't want to set a timeframe can you give us some context in terms of kind of aspirations for how you can build towards that.

Yes.

So great question.

Clearly, we're going to try to get there as quickly as we can in a responsible manner.

It really comes down to execution.

And it's really hard to give a timeframe.

We do have internal.

Long range plan model.

And I can tell you that from my perspective related to what I see related to our opportunity.

Really the opportunities there.

No.

The key thing Eric is that if we continue to.

Significant growth, which we had this quarter six 2% revenue growth.

We will again, we're going to forward lean and we will be mindful of our operating profitability, but thats really secondary from our perspective.

Comment about contribution margin and the amount that we're spending.

For the first year getting to new customers Thats critical for us and we continue to get those customers.

Contribution margins in years, two and 360%.

Aye.

I don't want to give a timeframe on the call we are driving aggressively.

And we are putting growth of profitability.

Mindful of profitability.

<unk>.

The benefit that you've got with Jay and myself.

A lot of things in our careers and we've got a pretty good idea of how things are going to kind of work out for us.

When things come up that we need to make decisions and make those decisions, but all our decisions will be made to increase value for our shareholders.

I may add.

I see no external factors.

And I'm overly concerned about.

My teams largely on execution that we need to do.

I want to make sure our team doesn't become complacent and arrogant because with success. So timing keep on hiring the right people right leadership in place the way we had done in the past few years.

That's our focus to continue.

Very good thank you.

And thank you.

I would now like to turn the call back over to Jay Chaudhry for closing.

Thank you all for your continued support and interest in <unk>.

We hope to see you at some of the investment conferences. Thank you again.

Thank you.

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

[music].

Yes.

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Okay.

Yes.

Yes.

No.

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Yes.

[music].

[music].

Good day, and thank you for standing by and welcome to the Zee scalar first quarter 2022 earnings call. At this time, all participants are in a listen only mode.

After the Speakers' presentation there'll be a question and answer session. Please be advised that this call is being recorded if you have.

Why or any further assistance please press star zero.

I'd now like to hand, the conference over to your host today, Bill Choi VP Investor Relations and strategic finance.

Please go ahead Mr. Choi.

Good afternoon, everyone and welcome to the Zee scalar fiscal first quarter 2022 earnings conference call on the call with me today are Jay Chaudhry, Chairman and CEO and remote <unk> CFO. Please note that we have posted our earnings release and a supplemental financial schedule to our Investor Relations website.

Unless otherwise noted all numbers, we talk about today will be on an adjusted non-GAAP basis, you will 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.

Calculated billings operating performance gross margin operating expenses operating income net income free cash flow.

All of our base net retention rates.

We're hiring decisions.

Meaning 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. These forward looking statements apply as of today and you should not really.

Hi 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.

I'd also like to inform you that we will be attending the following upcoming events in December.

NASDAQ Investor Conference Barclays Global TMT Conference PMO growth in ESG Conference now I will turn the call over to Jay.

Thank you Bill building on our incredible momentum from last year, we had an exceptionally strong start in fiscal 'twenty. Two in Q1, we delivered 62% of revenue growth and 71% billings growth while generating record operating.

Profits and free cash flow.

We are again seeing strong revenue growth across all verticals customer segments and geographies with over half of our revenue coming from outside the U S.

We recently achieved a significant milestone of surpassing $1 billion.

We will record revenue one.

Our continuing rapid growth in.

My recent dialogues with hundreds of C stores and CIO.

Eight out of 10 on looking to phase out legacy network security in favor of Zero Trust architecture, due to increasing our security risks and accelerating digital transformation initiatives.

I will highlight two main reasons why enterprises are selecting these killer older legacy solutions.

One we saw a more than 300% year over.

Our increase in sophisticated FX Hayden SSL encrypted traffic.

A large number of them are ransomware attacks and most would bypass next gen firewalls, which aren't designed to inspect encrypted traffic at scale.

We are the only cloud provider with a proxy architecture designed to inspect SSL encrypted traffic at scale to deliver better security.

This year on cloud has blocked more than 20 billion threats.

In encrypted traffic.

<unk>.

By connecting users only two applications and not to the next one but the core principle of zero Trust architecture.

We eliminate backhaul check movement, hence, reducing ransomware attacks such as the colonial pipeline reach.

In contrast.

Firewalls and vpns connect users to the network, enabling natural movement. It is clear hallmark growth and enterprise wins that architecture matters and zero Trust security can be built on legacy network security architecture.

This gives us long term advantage.

Turning to the quarter.

Let me discuss two factors that drove our performance.

One we saw continued strength in new and upsell bookings of over $1 million in annual.

We drove 87%.

What are your growth in customers exceeding $1 million in IRR ending with over 220 of these customers.

To that.

The expansion down market to enterprise segment.

Organizations with 2000 to 6000 employees is scaling and it remains our fastest growing segment.

With increasing contributions from the enterprise segment.

Total number of customers, who pay us more than $100000 per year.

53% year over year to over 1600 hour.

Our 71% billings growth this quarter speaks to the commitment that customers are making to on SEDAR Trust exchange platform.

As we have noted before the <unk>.

Chairs of Z IAA is often the first step to adopting our platform.

Let me share a couple of VII driven deals.

Fortune 50 insurance company purchased CIA transformation bundle with cloud firewall, and sandbox, plus DLP and Caspian data protection to secure 170000 employees and affiliated agents working from anywhere.

This customer wanted secure and fast access to Internet and SaaS applications, particularly Microsoft 365 and teams.

<unk> newest edge clone.

We have direct peering with hundreds of application providers. The users are seeing a 75% improvement in response time.

Next.

A leading defense industry integrator purchased Zia II for two.

200000 users plus workload protection for Internet traffic.

Z platform, which recently achieved fed ramp higher ready standards will help them meet many requirements for C.

Our cyber security standards for defense contractors.

Zee scalar is consolidating several point products.

Simplifying the network and forcing consistent cyber policy across multiple business units, while reducing operational costs.

We believe these large deal show that we are the only multi tenant zero trust platform meeting the needs of major enterprises.

Swarmed, the legacy hub and spoke network.

<unk> Castle and moat security.

With customers shifting to the cloud more offline.

And <unk> together.

Enabling a true transformation, where direct and seamless access to SaaS and private applications, whether on prem or in public cloud.

Here are a few examples.

A fortune 500 banking customer signed a four year commitment for three key pillars of our platform.

Existing zix contract was upgraded to include cloud firewall sandbox, DLP casspi and browser isolation.

Also purchase VP for on 100000 employees, who implement apps segmentation without having to implement legacy network segmentation.

In addition, <unk> purchase to identify and help for immediate application network or any issues to ensure great user experience and employee productivity regardless of their location.

This deal more than tripled the customer's annual spend with us.

Having adopted full portfolio for user protection.

Our node discussing zero Trust security workloads with this customer.

Next in our new logo win a fortune 100 insurance customer part shares Zee IH transformation bundle and GPA, all 30000 employees to pursue the cloud first strategy.

With cyber protection as a major requirement this customer only considered a proxy architecture to perform SSL inspection at scale and rejected firewall based architectures.

<unk> eliminated attack surface hiding the Amazon so private applications behind our zero Trust exchange, hence they can't be discover exploited all ddos.

We are consolidating at least three vendor point products.

Chile is reducing complexity and operating cost.

Integration with crowd strike and Microsoft was and also an important consideration for them.

Next one of our powerful use cases for Ci in CPA is to accelerate M&A integration with significant Ottawa.

An existing European based global 500 manufacturing customer purchased Zia transformation bundle for 30000 employees of the newly acquired business.

And the EPA for 50000 users to accelerate M&A and integration.

The legacy approach to providing access to private applications post acquisition.

Clients integrating two complex corporate excellence, which they expect to take 18 months or more.

Without having to connect two corporate Netflix Zee scalar approach provided secure access to SaaS or pre.

<unk> applications across both companies.

Saving time and money.

<unk>, having disrupted premier based security for users with our Zero Trust exchange, we are bringing zero trust workloads with vascular protection, Let me highlight a few <unk> wins and.

And existing VDI and Cps state government customer.

Purchased workload segmentation fallen over 4500 workloads, along with CTX and capacity for the 28000 employees.

This was a seven figure annual contract value driven by our emerging products.

Implementing zero trust for workloads will reduce their cyber risk by achieving micro segmentation without doing legacy network segmentation.

Moving on to our workload postured offering.

We are seeing increased interest from customers and see SPM, but configurations and Ci E M entitlements.

During the quarter, but tech company bought CSP in for over 9000 workloads.

And a software enterprise bought Cei E M for 5000 workloads.

On workload communication offerings.

Howard CIA in CPA technology is building momentum, but additional customer wins in the quarter for example.

Healthcare customer purchase workload communication for 3500 workloads.

And a financial services customer purchased it for 1000 workloads.

When you look at these wins on our success starts with true Zero Trust architecture, which is the opposite of firewalls and vpns.

<unk> exchange is the largest inline cloud security platform in the world.

So seeing over 200 billion transactions per day.

It's doubled in the last 18 months and is preventing more than 7 billion Circuity and policy violations per day. This massive amount of traffic provides us.

100 trillion signals per day to feed our machine learning and AI engines, resulting in superior protection and better detection of user and application traffic anomalies.

This network effect is a big competitive advantage for us.

Each of our 150 plus data centers.

<unk> a continuous stream of more than 200000 unique security updates every day.

This can't be done with a single tenant VM based architecture that legacy security vendors on running on public funds and calling SaaS.

This is only possible with a purpose built highly scalable cloud that zee scalar built from day one.

I'm very proud off on pace of innovation that delivers value to our customers.

Let me share a few stats for the quarter.

The IAA delivered 29, a giant releases and Z PAA delivered 44, HR and released each product pillar delivered scores of new features and enhancements.

Our Tech lab security research team discover and deliver over 495000, new advanced threat indicators and signatures to other global cloud. In addition, our cutting edge security visa point is.

This cohort and reported 18, new zero day vulnerabilities.

These are testimonials of the sophistication and scale of our research team.

<unk> platform combined with a great research team enables us to deliver grades cyber protection to our customers.

Let me highlight some of the significant features we delivered in Q1 we.

We enhanced our out of band capacity to support additional SaaS applications, we see more customers buying our castle peak, along with CIA and replacing their existing castle point product.

Added optical character recognition technology to our DLP offering.

Addressing data loss problem or images and files like pdfs.

This feature combined with previously released exact data match and index data unmatched technology makes us the leading data protection platform.

We integrated our recently acquired smoke screen active defense technology with CPA may.

Making it easier for customers to deploy and manage it from a single console.

Our pace of innovation for our newer pillars like CTX and DCP is accelerating.

For example.

One of the most demanded CTX features as real time performance monitoring for zoom and Microsoft teams, which we delivered by working closely with zoom and Microsoft through API integration.

We added over 150 features to <unk> in the past 12 months delighting our customers.

One customer said and I quote we now have unprecedented visibility into the environment. We can respond faster and forecast we may have issues and address those areas before they become a problem.

I want to highlight another increasingly important area of helping our customers achieve their ESG goals.

Our highly efficient clone replaces hundreds of thousands of on Prem appliances, and eliminates the need to buy more in the future. This whole thing and the significant decrease in the energy resources and carbon emissions associated with building transporting power.

And cooling them.

As you may have seen from our recent press release, our cloud platform now uses 100% renewable energy.

As part of this effort, we have a cross functional team with oversight from the board to drive our sustainability strategy.

<unk> has never been stronger and I believe we have an incredible opportunity in front of US we have our sights set on the next milestone growing our on our $5 billion.

I believe the key to sustained growth in the next stage is to accelerate the broader adoption of our platform on.

<unk> cluster exchange platform with four major pillars for why so comprehensive foundation for securing and improving application access in the world of cloud and mobility with the CIA and CPA, we have proven our success implementing zero.

For users.

Our next immediate opportunity is to bring zero trust to what clients powered by the same core CIA in CPA technology.

As we shared in our deal highlights.

We are seeing solid traction with CTX and DCP the newest growth vectors for the company.

We are seeing increasing average revenue per customer and we estimate a six times growth opportunity on upsell with our current customers.

Pre sales to deployment and customer success, we have a sophisticated sales machine to sell value and deliver measurable outcomes at the <unk> level.

Over the next several years, our innovation engine will further build out the breadth and depth of our platform extending our already substantial technology lead we have.

We're also pursuing some very exciting opportunities to extend lead our trust to operational technology or Ot systems with manufacturing leaders like Siemens.

In summary.

We are very excited about our future and we believe we are still in the early innings of a significant market opportunity to accelerate secure digital transformation.

Now I'd like to turn over the call to remove for our financial results.

Thank you Jay as Jay mentioned, we are pleased with the results of the first quarter of fiscal 2022 revenue for the quarter was $231 million up 17% sequentially and 62.

<unk> percent year over year on a year over year basis revenue growth accelerated in the quarter driven by strong business activity.

<unk> product revenue was 16% of total revenue from a geographic perspective, we had broad strength across our three major regions Americas represented 51% of revenue EMEA was 35% and a P. J was 14% our investments I think PJ are bearing fruit with greater than 100% revenue growth in that region.

Our total calculated billings grew 71% year over year to $248 million with billings duration at the high end of our 10% to 14 month range, we had several customers choosing to pay upfront for their multi year contracts. As a reminder, our contract terms are typically one to three years and we do not offer any special incentives for upfront payments.

We're also pleased to report 68% year over year growth in short term billings I would note that both billings and revenue benefited from a $1 5 million one off deal in the quarter remaining performance obligations or <unk> or $1 $71 billion as.

As of October 31 up 97% from one year ago with current <unk>, it's 50% of the total IPO, our strong customer retention and ability to up sell the broader platform have resulted a high dollar based net retention rate.

Which was above a 125% in the quarter and higher than the 128% reported last quarter as we have discussed before this metric will vary quarter to quarter and it's not a metric we manage our business towards.

We focus on growing our net new business without incentivising differently between new or up sell.

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

Considering these factors, we believe NR above a 125% is truly outstanding for us.

We had 224 customers paying us more than $1 billion annually.

87% from 120 in the prior year with continued strength in this metrics thanks to a strategic role to play in our customers' digital transformation initiatives.

Also added over 550 customers paying us more than $100000 annually and.

And in the quarter at 1616, such customers turning to the rest of our Q1 financial performance.

Gross margin of 86%.

Was approximately flat quarter over quarter, and down 50 basis points year over year, our total operating expenses increased 17% sequentially and 69% year over year to $162 million.

Operating expenses as a percentage of revenue increased by approximately three percentage points from 67% a year ago to 70% in the quarter, primarily due to increased hiring higher compensation expenses.

Investments in smoke screen and trust owned businesses, we acquired in the second half of last year and a partial return obtaining.

Operating margin was 10% and free cash flow margin was 36%.

Which benefited from the timing of Capex spend we continue to expect Capex as a percentage of revenue to be high single digits for the full year, we ended the quarter with over $158 billion in cash cash equivalents and short term investments.

Please note that net other income includes an $800000 loss primarily related to the change in value of our assets denominated in euro and British pound as the U S dollar strengthened.

To minimize such impact going forward, we recently implemented a hedging program for our balance sheet.

As a reminder, we primarily transact sales globally in U S dollars and several quarters ago, we put in place a hedging program for international operating expenses for income taxes. Our tax expense is primarily represent international taxes paid to foreign jurisdictions, we do business.

For several apta countries Thursday withholding tax on sales made to customers in those countries.

As our FPGA business has grown significantly in recent quarters.

The withholding taxes were $1 5 billion in Q1.

Now moving on to guidance and modeling points.

As a reminder, these numbers are all non-GAAP, which excludes stock based compensation expenses and related payroll taxes ammar.

Amortization of debt discount and amortization of intangible assets for the second quarter of fiscal 2022, we expect revenue in the range of $240 million to $242 million.

Reflecting year over year growth of 53% to 54% gross margins of 79% I would like to remind investors that a number of our emerging products.

Queen CTX workload segmentation and see as Tim will initially have lower gross margins than our core products. Because we are more focused on time to market and growth rather than optimizing for gross margins.

Operating profit in the range of $20 million to $21 million.

Net loss in other income of $100000.

Income taxes of $4 million.

Earnings per share of approximately <unk> 11.

We made $150 million fully diluted shares.

For the full year fiscal 2022, we are increasing our revenue to a range of $1 billion to.

Two 1.01 billion or.

Our year over year growth of 49% to 50% increasing calculated billings to a range of $1 3 billion.

To 130 $5 billion.

Our year over year growth of 39% to 40%.

We now expect our first half mix to be approximately <unk>, 43% to 44% of our full year billings.

<unk> operating profit to a range of $90 million to $93 million based on the return of in person conferences and events. We expect operating margin to decline sequentially in Q3 before improving in Q4 updated earnings per share to a range of 15% to <unk> 52.

Assuming approximately 150 to 151 million fully diluted shares. Please note that our share count guidance now includes dilution from our convertible debentures with a large market opportunity as customers increasingly adopt in the broader platform. We are committed to investing aggressively in our company.

We will balance growth and profitability based on how our business is growing but we will continue to prioritize growth, which we believe is in the best interest of our shareholders employees and customers. Operator, you may now open the call for questions.

And thank you as a reminder to ask the question you will need to press star one on your telephone to withdraw your question press. The pound key we please ask that you limit yourself to one question and one follow up again, we ask that you limit yourself to one question and one follow up and our first question comes from Matt Hedberg.

From RBC capital markets.

Line is now open.

Great. Thanks for taking my questions guys and congrats on a really strong quarter.

I wanted to start with you.

You've got a lot of success here recently and you talked on the call about the path from $1 billion in IRR to $5 billion in IRR.

You talked about some of the building blocks, but I wonder if you can put a finer point on how you get there and do you have currently have the products in place to get to that very large call.

The short answer is yes, and let me expand upon it.

If you look at all.

Main products.

CPA, which had been our flagship products.

A fair amount of up sell opportunity to our current base, we've kind of shared that.

With upsell, we could actually take on INR six X.

Post spin just wait for upsell, we are focused on adding new customers as well.

We have decent penetration.

Hi, Ed Fortune 500 companies, 35% global two talking about 25% that means there's a big market still for us to deploy and these especially high end customers look for a proxy based architecture and zero Trust architecture.

And then on top of that.

Two other <unk>.

Zero Trust for workloads that Hasnt, just coming out of our lease stage and we are also moving into zero Trust for Iot and Ot leveraging the core technology, we have in place and then on top of that is a newly emerging markets.

Security posture entitlement permissions are alike, and we did a couple of small acquisitions that area building upon it and growing it so.

So I do see security market rapidly changing we believed all segments that we know today.

No longer be there.

Disappear overtime.

And we have a lead cigna and lead others.

To keep on building more so I feel pretty comfortable and confident to be able to get to a $5 billion target anvil.

Yes, just to add that's great just a little bit.

Just to add a little bit there.

Our Sam is 72 billion.

And as we've talked about in our analyst day does not include other areas, which we are making investments in areas such as <unk> or <unk>.

<unk>.

Iot <unk>, so and what's interesting is that this market has really changed over the years from what it was even 10 years ago, and certainly 20 years ago, where a lot of legacy basically technology is still today.

There is a huge market opportunity and one of the things we've done within the company and we've talked about is that we're going to prioritize growth over operating profitability.

And one of the areas that we're making significant investment is and isn't our go to market. So we've made significant investments in the past we will continue to make significant investments in and that go to market. It's really three pronged inkjet sales.

You've got marketing you've got channel sales organization, we have been making significant investments. The last few years you can see the fruits.

Our silver organization has done.

Current we've hired recently about a year ago or a little less than a year ago CMO reduce doing absolutely outstanding.

We are making significant investment channel with that also as we talked about trying to get to.

Getting to a much larger company, we are going to make investments throughout the company to build the foundation and the strength in efficiencies. So we're going to do unique position in a really really created in my opinion, a revolutionary technology with the platform was created to 12 years ago that addresses this market pretty much gone.

And thats actually thanks for that last bit that's actually a dovetail into the second question I mean, it looks like you guys had a lot of hiring this quarter. Obviously Q1, you can imagine you want to front end load. Some of your hiring can you talk about the direct rep capacity coming out of Q1.

How are you kind of think about ads throughout the balance of the fiscal year.

We are going to continue to add aggressively throughout the year.

Our net adds do we add in Q1 was over 450 employees about half of those ads were in sales and marketing.

From a field quota sales rep perspective.

The comments, we made before.

We've hired more field sales reps this year in fiscal 'twenty to fiscal 'twenty, one we're certainly on pace to do that.

And also in Q1, we had a near record quarter for RSM.

Our fuel quite a sales rep adds.

We see zscaler as a destination and so.

Related to your question how are we going to do going forward.

Like I said before we're going to prioritize growth and we're going to.

Higher aggressively and we're going to try to really go after this market.

Congrats guys.

Thank you.

And thank you.

Ladies and gentlemen, we ask that you limit yourself to one question again, we ask that you limit yourself to one question and our next question comes from Gray Powell from <unk>. Your line is now open.

Great. Thanks for taking the questions.

And congratulations on the strong results.

So I know you hit like kind of a high level drivers I'd just be curious on the product level, what surprised you most to the upside this quarter was it more on the core DIY in GPA side or was it more on the emerging products side of the of the portfolio.

All products actually did well I mean, this was a stellar quarter, whether you look at the product side.

<unk> you look at that market segment side.

There are a couple of deals we highlighted in my earnings call.

I think the big <unk> CEO.

These still coming up very strong sometimes people think that CIA.

Started early it may be kind of slowing down, but we arent seeing slowdown in CIA GPA is ramping pretty rapidly growing pretty fast.

And <unk> is probably the most sought after product in the market, especially with zoom and teams kind of issues that are almost impossible to decipher and figured out the big integration we did at <unk>.

A very rapid pace in the past few months and we announced that publicly a couple of weeks ago with the help of Microsoft and zoom box with an API based integration.

So across the board I think it's wonderful part too.

Pinpoint one product area.

Yes.

From a geographic perspective, what I'd like to do is call out a P. J.

It did absolutely outstanding and what we've talked about before also is one of the areas that we're going to invest more in.

P J in particular, Japan.

And so if you look at our performance APG, what's very very strong for us, but as Jay mentioned across the board it was an outstanding quarter.

Got it Okay. That's really helpful I will I'll leave it there.

And thank you.

And our next question comes from Alex Henderson from Needham.

It is now open thanks guys.

Thank you very much.

The ending quarter.

Ketchup growth rate or a percentage of revenues coming from <unk> UTP. If you have one of those that'd be great. My question is predominantly the commentary about your conversations with these CIO CTO T cells.

Clearly the move to cloud direct.

Users is taking.

As of late but the other side of that coin. It seems pretty clear that applications are simply going to become points in the clubs and under that scenario you are the connectivity between both the user to the application and the application to the other applications demand the domain.

But in that World I don't see any reason for there to be an enterprise network and so I guess my question is have you had conversations with people.

The enterprise to actually start talking about decommissioning the enterprise network.

The branch home office.

Data centers simply become islands in the cloud. This is AWS was can you talk to whether that vision is penetrating into the into <unk>.

Top management.

Yes, it is actually happening.

Phil I mean, I can tell you because ive talked to so many customers.

Many customers, who don't have any data center.

Any customers, who don't have any.

Private network so to speak it's all broadband connection coming forward.

Headquarters that branch off somewhat now.

No.

I would say that most of that is seen in DC.

Decent sized enterprises, ranging from about five to probably 10 or 15000 users and having fun.

John there yet maybe youre looking at.

2030, 37 person company and commissioning everything that's.

That's happened we've seen clearly a trend moving in that direction.

And your other question Alex related to the breakout of CTX and DCP, we did not give that.

When we talked about on the last call is that <unk> ECP.

As a percent of our total new and upsell business for the year would be low teens.

Okay.

If I may add one more comment since you talked about natural free enterprise some speak louder.

On a go forward that we've talked about data center free enterprise.

I had a customer advisory board meeting today on the nine.

So large enterprises was meeting with us and one of them said.

I have no data.

I have no private network now I want to get to a level, where <unk> firewall three yes.

Okay.

You see more and more of that in the wall. The cloud there is no need for any firewall in the data center and they won't be there for a while and it's okay, because theres more effort needed to displace them then phasing out the data center applications.

Outstanding Thank you.

Yeah.

Thank you.

And our next question comes from Patrick <unk> from Deutsche Bank. Your line is now open.

Yeah.

Hey, Thank you so much for taking my question.

It could be correct.

Congratulations on the.

Undoubtedly very stellar quarter.

Can I just ask about.

I think that was.

Really interesting commentary I guess.

I would like to better understand that so you mentioned 450.

In fiscal first quarter.

Can you just help us think about the kind of trajectory through the rest of the year.

And kind of what you've got baked into guidance I mean should we expect.

That kind of number again to Q3, Q4, Q1 would be kind of glide path to be slightly different. Thank you.

Yes, that's a great question it depends on our performance quite frankly.

If we continue to perform at the levels that we are.

As we've talked about we see this as a huge market opportunity, we're going to invest in this market.

And really the major investments that we have are people getting getting up.

Handing employees to work for Zee scalar.

So.

It was a good quarter for us.

Net assets as I mentioned 450.

I don't want to give a.

<unk> of what we're going to add for the year.

Really the takeaway is we continue to grow as we are growing we will continue adding at pace.

Okay.

Well thank you so much.

Thank you Ed.

Next question comes from Sterling Auty from J P. Morgan.

Your line is now open.

Yeah. Thanks, Hi, guys. So along the lines of the last question help us understand the trends in customer acquisition costs. So when you look at the net new logos that you added in the quarter are you actually seeing the cost to acquire those customers going down going up or staying about the same as what you've seen.

And over the last let's say three or four quarters.

That's a great question based on our performance that we have is based on our operating profitability I.

I would say customer acquisition costs are staying relatively the same because we are putting a lot of investment into marketing as well as our sales organization.

On a short term basis is as I've talked about but again the contribution margin that we have in years two three is above 60%.

So we're still in that position that we are trying to acquire or bring onboard new customers and we're making that investment.

As we go forward and as the company matures.

That should come down, but right now that's not our focus our focus is to build our topline growth.

Understood. Thank you.

Thank you.

Thank you.

And our next question comes from Jonathan <unk> from Baird. Your line is now open.

Yes.

Congrats guys.

Impressive.

So Jay I think you've commented in the past the workload segmentation is something that you really only see the most advanced company talking about so obviously very early stage, but you seem to highlight that's probably aware.

Of that capability in terms of their trials and applying its applications and machines.

I'm just kind of curious how you see that.

Adoption this year anything to call out in terms of what you see relative to what you were thinking about that maybe six months ago.

Okay.

<unk> seems to imply micro segmentation advanced segmentation, which is actually only done by advanced companies I look at segmentation in three buckets first of all zero two application Saudi.

User to App segmentation.

<unk> is designed to naturally do that so more and more of these kind of customers are doing it because users is the weakest link that's one two.

Actually what cloud workloads segmentation at the water level on BPC to repeat that BPC level BPC.

In AWS east to AWS breast, we actually do that with our zero Trust for workloads, which is powered by CPA and then the third the most advanced spun you started out with is being able to do micro segmentation and thats really done only by more sophisticated companies.

But we arent.

Clearly driving all three levels of segmentation, which is wonderful for our customers and good for our business.

Thank you that answers your question.

Well have you seen any change in that use case.

Yes.

It is the opposite of that use case or is it pretty steady state.

The advanced micro segment, Saudi the micro segmentation I think it is growing at a decent rate, but we don't have the customer had no auction literally was user to app segmentation.

And.

<unk> B C. Those are the two new areas of pushing and seeing a lockdown great interest literally coming from having no options to <unk> you can do it sold out. So recently, so we won't see much faster growth in that segment.

Okay. That's helpful. Thanks.

Thank you. Thank you and our next question from comes from.

<unk> from Barclays. Your line is now open.

Okay, Great Hey, guys. Thanks for taking my question here.

Jay maybe maybe for you.

With just the success of multiple new emerging products can you just talk about any thoughts you have on new bundling strategies and how those could look I mean, the bundles that you've done with Zia and <unk> been so successful in the past how does that bundling strategy change if at all as the CTX.

DCP become bigger parts of the business does that makes sense.

It does so overall as you know we have a deep and broad platform.

And we also see CIO CS.

Looking for consolidation they.

They want solutions, rather than have Dubai, many products and put them together and also things like <unk> with a single agent literally all three products and get turned on produce.

So you won't see more and more onemain overtime Youre seeing Gia in fact first of all you see bundling.

In the <unk> family.

Yes.

Bundle to transformation bundle and you saw in Cin CPA coming to gap then you will see <unk> coming to got that trend will continue I think based on different products, probably the timing may be different.

Based on what we learned from the customers.

Got it thank you.

Thank you.

And thank you.

Our next question comes from Hamzah <unk> from Morgan Stanley. Your line is now open.

Hey, guys. Thanks for taking my question.

Jay a question for you.

More broadly on.

Security architecture, and the market moving more towards SaaS.

<unk> Zero Trust Zero Trust network access.

I would think that.

In today's environment, where there's obviously.

Supply chain constraints on on.

Things like on premise firewalls.

You should be seeing more adoption.

Towards your type of platform, but we're still seeing customers buy on premise firewall right and I think thats, a pretty strong demand environment. So I'm wondering when that tipping point occurs or if thats been put occurs and maybe if you can give us some color.

Around the pace of adoption towards SaaS in Zero Trust network.

We are in that adoption curve.

Yes, it's a good question.

<unk> reminds me of a question I was asked a few times 70 to scope.

These color is growing so well why is blue coat's drove growing so well and Fedex software.

Given this and our shelf theres a lot of traffic that goes through the data.

And as that traffic grows whether you've got a proxy appliance sitting there or firewall since it takes the traffic is do you really need to upgrade it and grow it over time and we saw blueprint grew and then suddenly fell off a cliff.

And also I think it gets very hard to figure out the numbers are actual appliance <unk> Vmware.

At some point when you have to figure it out but I can tell you. This.

Our customers don't want any firewall in the cloud.

Today, they have some since the Oems out there.

As we are talking about new solutions, our customers want a firewall.

Cloud won't.

No for the data center.

Lots of complexity, it's kind of being phased out.

We have zero focused in trying to remove any firewall in the data center leave them alone and they.

Will become like mainframes overtime.

At that time, I am not sure I can.

Guests into it but I have 200% conviction that firewall appliances on Vms or go away regarding SaaS I would like to clarify that.

<unk> has become a buzzword for everyone net broken guys have hijacked upfront because that's what they can attach themselves to SaaS.

And Gartner had to further clarify its not consent I can do in Q4 SaaS because it is.

Collection of things like in the kitchen sink.

So now they have a new magic quadrant coming up.

Your service edge and other acronym.

But it is only about <unk>. It is about the functionality OCI CPA kind of to put together and for the network side there'll be a separate shop.

I think there are more customers, who want to eliminate that network.

Because it is the next one that creates macro moment enables fans congrats type of attacks on and all of this stuff is driving on calls it's helping but there is a big market out there is in our shelves.

So buying a bunch of these.

101 appliances and the like take VPN.

We all know that VPN and probably the biggest security hold out there.

It's still unclear to placing lots of them, that's what's fueling CPA growth, but there's a big market that still buying VP and then.

We are making progress pretty aggressively and Gartner and all things that the next four to five years most of the VPN will be gone and we think whether a vendress, calling VPN into close by a different name Oreo VPN will eventually go away and Thats, where <unk> seen our trust architecture.

Long answer, but I hope it helps.

Thank you.

Thank you and our next question comes from Brian Essex from Goldman Sachs. Your line is now open.

Hi, good afternoon, and thank you for taking my question Jay I was wondering if I could maybe just follow up on a few of the questions that we've had previously.

Considering the investment that you've made in sales reps and sales and marketing over the past few years and particularly your focus on cross sell and up sell.

I have noticed that the billings are growing over it looks like theyre growing over twice what customer growth is so.

Maybe if you could put a finer point on how you are investing in particularly your direct sales force to or whether you're leveraging your channel to some greater extent to drive yourself towards that <unk> growth opportunity from cross sell up sell.

So.

So first of all if you look at our growth.

We had 80, 587%.

Year over year growth, but our customers with over $1 million in Iraq.

From a gross number now if you look at customers with over 100, KAR that year over year growth was about 50, 50%, 52% I think when you look at let's take customer number this lowest small.

Just more on the low end and whatnot those numbers end up being kind of misleading. So it's good to look at categories. So and we are pleased with the with.

With that growth our customers.

Our bigger focus is just overall growth, our overall bookings growth and alike.

For that as we.

Look at cross selling Upselling, our new logo.

We actually do not do any special incentive for one or the other we have internally debated quite a bit.

But when you've got so many products, we sell ammonia portfolio for me do more debate salespeople to golf for new business and not focus on upsell wont beat so we have essentially the same compensation.

Noah channel is beginning to play a more and more especially in the enterprise segment.

Bigger that the more you have to engage with that might the fortune 500.

But when you come to 2000 to 5000 or you went up to 10000 users.

<unk> on these big new add more and more value at channel actually is helping us get new logos, because that's one of the big value stay at.

Did I cover the points you asphalt.

Yes, you did that was very helpful. So thank you very much I appreciate it and congrats again.

Thanks, Brian.

Thank you and our next question comes from Gregg Moskowitz from Mizuho. Your line is now open.

Alright, Thank you and I'll add my congrats.

Really remarkable quarter, Jay I'm wondering have you begun to see uptake for us EPA private service edge and I'm, just kind of curious if thats begun perhaps to help you in hybrid enterprise environments, such that it might be contributing to the robust overall growth that youre showing.

Alright CPA.

Yes, okay. Good.

P a private service edge.

He is getting more and more deployed but just to let you know we are not trying to make a lot of money.

I'd say most of that money comes fall actually subscription fee of users, but what private service Doug.

Yeah.

It allows you to implement zero trust for on Prem on the network users.

And since people at when they come back to the office they need to make sure that users and applications are not on the same network. That's a private service as it comes in.

We charge.

<unk> amount for it but the biggest amount comes from making sure every user whether they're in the office on at home.

Actually use CPA.

That's really how we look at its growth and we're very pleased with it and also the second factor can drive that would be as more and more applications are in public cloud like Azure and AWS. They all need to go through CPA for that.

I made the statement in the past that I expect it.

It's a matter of client win every user for our customers when they have <unk> and Cvs feed together gives them fast secure and reliable experience.

Alright, thats, great and certainly well suited for hybrid work environment. Thanks, Jay.

Okay.

Thank you and our next question comes from Shaul Eyal from Cowen. Your line is now open.

Thank you good afternoon, guys. Congrats on the ongoing strong performance.

So quick one on my end.

Can you talk about the progress.

Seems on the federal front.

Yes.

On the federal side.

We actually are doing quite well it's growing.

Much faster than our total overall revenue.

We expect to benefit form infrastructure plan.

During this fiscal year.

<unk>.

Bret that came from Baidu and administration are Leon.

Hey, it's actually helping to have seen that.

<unk>.

Federal bodies on X gene.

Yeah.

Should I assess speeding up some of the projects on a stakeout stock out there.

Needed two things it needed right Zero Trust architecture, which we have been if needed Sanjay I'm starting to fish.

And we have both of those things we are the only security vendor with two highest fed ramp certification.

And we have a sizable team.

Can you give a color on where we are.

So for federal in the quarter were mid single digits of total new and upsell business.

As Jay mentioned, we have made significant investments in the federal sector. The certifications that are significant and as Jay mentioned, we are the only security vendor with the two highest fed ramp certification.

In addition, we've got a strong team in federal.

And good partners.

Federal takes time.

But we feel that we're well positioned.

In federal our pipeline is increasing.

And our engagements are very good.

Yes.

Got it thank you great color.

Thank you.

And our next question.

It comes from Keith Bachman from BMO. Your line is now open.

Hi, Thank you very much Jay I wanted to ask you about competition and I wanted to come at it a little bit different way and break it into a few parts.

In terms of.

Greenfield activities, how often are you seeing.

Because of your different architecture.

Essentially doing one to one negotiations or.

Part B, how much are you seeing the same or different participants.

And what I mean by that is there is.

Think most investors assume Palo Alto, but theres also cloud player that scope Menlo I boss.

As the field when you're negotiating on particularly new work is it getting more crowded or less crowded and then finally this pricing enter into the discussion.

Particularly for the new work thank you.

It's a good question. So so first of all as we have driven top down with Cio's for transformation.

It's not typically go in and say I will pass this box order placed at this fall.

Really one on one replacement type of stuff. So we end up driving the agenda from that point of view.

It used to be that for Zia.

I would show them, how we can help with secure web gateway and associated products and blue coat would be the starting point for replacement on the trucks.

And CPA became an important piece now more and more customers are buying zia and <unk> together.

Now that's a different kind of players out there so while having an expanded portfolio. When we go in and say I can provide all access to all applications no matter, where they are any we havent Cif CPA. It just fundamentally changes that Chris no CTX being part of the same thing.

CIO cares about user performance.

It's not uncommon for us to get into.

How do you what do you call it bake off kind of stuff because it's really not a one on one pipeline question.

Now on the lower end of the market, we do see a smattering of players.

<unk>.

From time to try and find one guidance from time to time.

And once we engage we win that's why you're seeing our enterprise segment to K. Two five can use is actually growing pretty significantly.

<unk> pricing.

We haven't really seen much pricing pressure by the time, we show the customer all of these point products, we can display as to operational costs and the like.

Price becomes the least important issue for us.

Okay. It makes a lot of sense. Thank you.

Okay.

And thank you.

Our next question comes from Joshua Tilton from Wolfe Research.

Your line is now open.

Yeah, Hi, guys. Thanks for taking my question and congrats on the strong result.

As we as we just think about the remainder of the year should we expect any unusual changes to the quarterly calculated billings seasonality, maybe compared to prior years as we continue to lap a very very strong FY 'twenty one.

No.

Basically.

Our Q2, and Q4 is our largest quarters.

And we talked about the billing theme.

First the first half 43% to 44%.

And one thing to keep in mind I mean, the numbers are getting big.

So as numbers get bigger just keep that in mind related going forward related to your expectation.

Thank you.

Thank you.

And our next question comes from <unk> <unk> from JMP Securities. Your line is now open.

Yes, thanks and congratulations.

On the $5 billion commitment.

Can you I understand that you just see within your installed base opportunity to get there, but can you talk a little bit about how you view the timing. If you don't want to set a timeframe can you give us some context in terms of kind of aspirations for how you can build towards that.

Yes.

Great question.

We're going to try to get there as quickly as we can in a responsible manner.

It really comes down to execution.

And it's really hard to give a timeframe.

<unk>.

Internal.

Long range plan model.

And I can tell you that from my perspective related to what I see related to our opportunity.

Really the opportunities there.

No.

The key thing Eric is that if we continue to.

Significant growth, which we had this quarter six 2% revenue growth.

We will again, we're going to forward lean and we will be mindful of our operating profitability, but thats really secondary for from our perspective.

And about contribution margin and the amount that we're spending.

For the first year getting to new customers Thats critical for.

For us and we continue to get those customers and.

Contribution margins in years, two and three in our 60 plus percent.

I don't want to give a timeframe on the call we are driving aggressively.

And we are putting growth of a profitability, we mindful of profitability.

The benefit that you've got with Jay and myself.

We've seen a lot of things in our careers. We've got a pretty good idea of how things are going to kind of work out for us.

When things come up that we need to make decisions, we'll make those decisions, but all our decisions will be made to increase value for our shareholders.

If I may add.

I see no external factors.

Hey, Ken.

Overly concerned.

<unk> largely on execution that we need to do.

I want to make sure our team doesn't become complacent and arrogant because of success. So timing keep on hiring the right people right leadership in place the way we have done in the past few years.

That's our focus to continue.

Very good thank you.

And thank you.

I would now like to turn the call back over to Jay Chaudhry for closing.

Thank you all for your continued support and interest in <unk>.

We hope to see you at some of the investment conferences. Thank you again.

Thank you.

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