Q2 2022 Zscaler Inc Earnings Call
Good day and thank you for standing by welcome to the Zee scalar second quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speakers present.
There will be a question and answer session to ask a question during that session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.
If you require any assistance during the call. Please press star zero.
I would now like to hand, the conference over to your speaker today.
<unk> Senior Vice President Investor Relations and strategic finance.
The Detroit the floor is yours.
Good afternoon, everyone and welcome to the Zee scalar fiscal second quarter 2022 earnings conference call on the call with me today are Jay Chaudhry, Chairman and CEO and Remo <unk> CFO . Please note that why is it only five.
<unk> and a supplemental financial schedule B round at our Investor Relations website.
It was noted all numbers, we talk about today will be on an adjusted non-GAAP basis, you will find the reconciliation of GAAP to the non-GAAP financial measures in our earnings release I would like to remind you that today's discussion will contain forward looking statements, including but not limited to the company's anticipated future revenue calculated.
Billings operating performance gross margin operating expenses operating income net income free cash flow dollar based net retention rate future hiring decisions remaining performance obligations income taxes 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.
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.
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 would also like to inform you that we will be attending the following upcoming events in March <unk> dramatic software conference on March 2nd.
<unk> Securities Technology Conference on March seven.
And Wolf Research virtual software conference on March 23rd.
Now I'll turn the call over to Jay.
Thank you Bill I'm pleased to share our strong results for fiscal Q2.
We continue to see strong demand for our zero Trust exchange plan.
As our customers embrace the cloud.
We delivered 63% Euro what your revenue growth and 59% billings growth, while also generating over 50% growth in operating profits and free cash flow.
Public SaaS companies are happy to get to rule of 40, and while we have been exceeding the rule of 70 for the last 12 months validating our strong execution and pursuing our large market opportunity.
Our continued investment in scaling our engineering and go to market machines is yielding the best revenue growth. We've had in three years, even as we surpassed $1 billion in annualized revenue.
To keep on making substantial investments across the company to continue our rapid pace of innovation and growth.
Once we deliver without platform is critical to our customers' highest priorities. This is reflected in our deal sizes, which are increasing due to our success for large enterprises, who are buying more of expanding platform with a significant growth in the number of new logo and upsell cusp.
On orders, we don't want a $1 million in annual value.
Now have over 250 customers exceeding $1 billion in IRR or an increase of 85% year over year.
<unk> momentum for a zero plus exchange is strong due to the market need for a modern security architecture in the world of cloud and mobility.
Flagship XI offering has been growing very well as we continue to expand our cyber and data protection services.
<unk> has emerged as a second flagship offering supporting millions of users and the majority of our global 2000 customers.
We are the clear market leader in Zero Trust application access with proven maturity and scalability.
<unk>, we had demonstrated our success implementing zero trust for users.
Our next big opportunity is to bring zero trust to workloads.
Our CCP pillar powered by the same core CIA and GPS technology.
In addition on CTX pillar is enabling a highly productive workforce and it is seeing strong demand.
And our single integrated cloud platform.
<unk> plus exchange provides secure any to any connectivity.
Users applications workloads, and Iot and Ot systems, regardless of their location.
While many vendors claim to offer a platform because they bought a bunch of point products that are very hard to integrate no. One comes close to the capabilities of our cloud native extensible platform, we will continue to invest in engineering and customer support.
Marketing and sales to accelerate the growth of our new products, while keeping the strong momentum on our flagship products. We believe we are in a sustained high demand environment.
Have a large and expanding market opportunity powered by our customers' digital transformation journeys, which continue at a pace that we're seeing before.
According to Idc's recent state of the CIO.
A top CEO mandate.
In 2022 is to upgrade cyber security to reduce business risk.
Whether it is supporting remote work, all enabling new digital customer and employee experiences.
Leaders must ensure that business operations in Chile, a resilient and secure cabling explosion and ran some weird on high profile data breaches.
It leaders are looking to face castle and moat security.
Zero Trust architecture to unlock the full performance of digital transformation.
It is clear from our growth and a large enterprise wins that architecture matters. Despite legacy vendors marketing plans truly zero Trust security can be built on the legacy network security architecture.
I have highlighted before there are two reasons why enterprises are selecting Z scatter.
One.
The only proven cloud security provider with a proxy architecture that inspect.
Encrypted traffic at scale to deliver superior security.
We connect users to applications and not to the network eliminating lateral type movement.
Core principle of Zero Trust architecture that can't be achieved by next Gen firewalls are cloud vpns.
Let me discuss some of our Q2 wins that highlight the advantages of our zero Trust exchange.
I'll start with a big.
Right.
Fortune 100 professional services customer initially purchased our transformation bundle plus casspi and DLP AMC VX 125000 employees working from anywhere this quarter.
175000, <unk> to secure all 300000 employees.
Load for strategy and mission critical client facing data at stake the selected a proven scalable platform with a global footprint needed to support the business in cohort 150 countries.
With 93% of the Internet traffic and ticket.
Inspection was a major requirements.
And the customer only consider a proxy architecture.
Next is our new logo customer started with CPA.
As part of our strategic initiatives to transform their it infrastructure. This global 50 manufacturer headquartered in Europe .
As the 200000 users to implement zero Trust security.
Eliminate that are tax subsidies or hours and so private applications behind our zero Trust a change painless to apps can be discovered exploited our ddos.
We are replacing their firewall based vpns that along lateral movement, a global systems integrator partner, who is implementing the overall transformation project played a major role in driving the <unk> going to win an example of the channel leverage we are creating.
With our investments in our App site partners.
As the shift to the cloud accelerates customers are buying Ci and CPA together, enabling a true transformation with direct and seamless access and SaaS and private applications, whether on prem or in the public cloud, let me highlight several such deals.
And a new logo win of a fortune 50 insurance customer signed a four year commitment on <unk> and CTX to securely enable 65000 employees working from anywhere.
Our comprehensive cyber and data protection they are purchased.
Hi Inn transformation bundle, plus Casspi advanced DLP and SSP or.
<unk> SaaS security posture management, which is like <unk> or SaaS.
Fast user experience and superior cyber security were the key factors are win.
Another new customer win a fortune 500 Fintech company.
Grown through acquisitions signed a nearly five year commitment.
Up level security and simplify it.
If purchased CIA transformation, plus <unk> and DLP as well as the EPA and CTX. Our 60000 employees. This consolidates seven different security products and accelerating the closure of 24 data centers. Moreover, zippy.
Also shortens new employee onboarding with fewer days.
<unk>, two and a half months. It also eliminates the need many of the employees had to laptops to access two separate networks.
I'm also excited about our success selling security transformation and new countries.
<unk> 500 manufacturer headquartered in Mexico purchase.
And CTX are over 18000 users and CPA for 14000 users.
This is our first seven figure annual deal in Latin America.
Region, where BD assemblies target, making investments.
M&A is an allergan used case or disease killer platform.
Upsell deal diversified industrial conglomerate with over 20 operating companies that previously purchased CIA transformation bundle added CPA for 16000 users to accelerate M&A integration and reduce business risk with that.
Having to connect two corporate networks with legacy firewalls, which could have taken 14 months in a mall or zero Trust exchange provided secure access to applications across both companies and weeks saving time and money this customer purchased a high.
And the EPA bundle with integrated browser isolation to enhanced data protection. They also bought our deception technology to intercept bad actors, who may have infiltrated the network. This latest purchase more than doubled their annual spend with US next let's.
The highlight customers purchasing all four pillars of our platform and a new logo win of global 2000 leader in technology products purchased <unk> transformation with DLT, and Casspi, CPA and CTX 11000 employees and CCP workload.
Good posture for 6000, workflows and multi cloud environment.
The accelerated digital transformation, a cio's priority was to eliminate the risk of legacy Vpns and natural tech movement, while ensuring the best to use that experience. Therefore.
Therefore, the CTX two the test by asking us to troubleshoot pool, Microsoft 365, Expedience, often executive traveling in Europe .
<unk> map the entire network path over the Internet and real time, isolating specific issues and allowing the customer quickly resolve the issues and improve the user experience. This proof of value led to the quick CD expertise I believe that over time.
<unk> customers will embrace gtx as workforce productivity is one of the highest priorities, but as CIO.
Lastly, I am happy with our early success in expanding our routes to market via.
Cloud marketplaces, flushed with AWS and now with Azure, Let me highlight two azure marketplace deals.
An existing global 200 far month customer.
Headquartered in Europe .
She is EPA for all 87000 employees, enabling zero trust access to the private apps hosted in hybrid cloud environments. This purchase was done with just a couple of more specs and it doubled annual spend with us.
A new fortune 500 customers in the energy industry made a three year eight figure commitment for <unk> and CTX.
All 23000 employees.
We will continue to invest in cloud marketplaces, as a new channel to revenue.
Enterprises trustees cover over the cloud imitators, and new entrants because we have a true zero trust architecture and have over 10 years of operational experience running the largest security cloud in the world of Zero Trust exchange processes over 210 billion.
Transactions in line and prevents more than $7 billion, the acuity and policy violations per day, providing our customers unmatched network effect for superior secure.
Full honestly, Ron the world's largest security Kong with five nines of availability.
<unk> more than security expertise it requires networking expertise and ability to control the traffic paths.
<unk> was born as a cloud company and has been operating in inline cloud. Since 2008, we have gained this expertise over time, there's no compression algorithm for use of experience.
His expertise will become even more important as we address hundreds of millions of workloads and billions of Ot and Iot devices.
We shared an example, our cloud operations differentiation, Microsoft extended direct fiber connectivity from the major data centers two hours because of the volume of traffic that flows between Zee scalar and Microsoft.
Connectivity enables us to deliver higher reliability and performance aimed at traditional Internet exchange peering approach.
This is a validation of our scale and the criticality of our services to our mutual customers.
Another example of delivering great availability and high performance is our integrations with Microsoft and zoom.
With API based integration teams and soon we proactively identify and resolve performance issues for these latency sensitive apps without which user collaboration is disrupted and business productivity is lost on a proven track record.
<unk> the world's largest inline security cloud makes zee scalar b, all views and trusted partner of choice and.
<unk> prices need to securely access mission critical applications. Let me also talk about our recognized market and innovation leadership.
<unk> pioneered the zero Trust architecture.
And over time on platform subsumed functionality of multiple point products into our secure web Gateway Foundation.
As the market evolves and customers migrated towards a platform approach such as the skin.
Gartner expanded the scope of this secure web gateway and Q2 include functionality such as Kasper.
<unk> digital experience monitoring and browser isolation and renamed it S. S E R Circuity service edge.
After 10 consecutive years of being named a leader in Gartner MQ, our secure web gateway.
Again named a market leader.
SP.
Many of you are aware it off faster.
So how are SaaS and SSC related.
SaaS fee framework is the combination of <unk> SC and Wan edge.
He has all the security capabilities built on Zero Trust architecture and is independent of the type of network.
<unk> edge, which is generally SD Wan provides connectivity to an SSC cloud.
Importantly, zero Trust security is implemented.
SC cloud not in the Wan edge.
As a category leader in SC with the widest and deepest offerings. These color is the go to platform for vendor consolidation cost savings increased user productivity and better cyber protection.
It's on market opportunities expand we are promoting two strong leaders to continue scaling zee scalar.
Expanding Amit Sinha Haas role to president of the company.
That will continue to lead our engineering and cloud operations teams, while also assuming broad responsibilities on expansion of our platform into new areas.
We are also promoting golly.
To Chief operating officer.
The only will continue to lead our global sales organization, while also assuming broader responsibilities for interlocking among sales marketing business development and transformation teams to further enhance the customers' lifecycle journey.
The new roles, Amit and <unk> will be responsible for driving further growth operational excellence and collaboration across the <unk> care as we continue the path towards our next milestone of $5 billion in.
<unk> to enable our customers' ever growing digital transformation aspirations and extend our market leadership.
Prior organizations focused on attracting and developing talent and creating a culture that rewards innovation at all levels.
We added approximately 1000 employees globally in the last six months and have over 4000 employees, who are energized by our shared mission to create a HIFU connected digital world in which the exchange of information is all were secure and seamless.
Yes.
In today's competitive hiring market see scalar is a destination for top talent. We are probably would offer glassdoor rating, which is among the highest in the industry.
Scalar has never been stronger and I believe we have a large and growing opportunity in front of US no I would like to turn over the call to remain on our financial results.
Thank you Jay as Jay mentioned, we are pleased with the results for the second quarter of fiscal 2022.
Revenue for the quarter was $256 million up 11% sequentially and 63% year over year.
On a year over year basis revenue growth accelerated in the quarter driven by strong business activity.
Product revenue was 17% of total revenue from a geographic perspective, we had broad strength across our three major regions Americans.
Americas represented 51% of revenue EMEA was 35% and a P. J was 14%.
P. J continues to be our fastest growing region with revenue growth of 116%.
Our total calculated billings grew 59% year over year to $368 million with billings duration near the midpoint of our 10 to 14 months range. We're also pleased to report 61% year over year growth in short term billings.
Remaining performance obligations or <unk> were 195 billion.
As of January 31.
90% from one year ago.
Current RPI is 50% of the total RPM.
Our strong customer retention rates and our ability to up sell the broader platform have resulted in a high dollar based net retention rate, which was again above 125%.
251 customers paying us more than $1 billion annually up 85% from 136 in the prior year.
The continued strength of this metrics speaks to the strategic role we play in our customers' digital transformation initiatives.
We added over 560 customers in the past 12 months paying us more than 100000 annually and in the quarter at 1751 such customers.
Turning to the rest of our Q2 financial performance total gross margin of 84% was approximately flat quarter over quarter and down 90 basis points year over year, our total operating expenses increased 13% sequentially and 62% year over year to $183 million.
Operating expenses as a percentage of revenue of 72% were similar to a year ago, even as we made ongoing investments in smoke screen Entresto businesses, we acquired in the second half of last year.
With a partial return obtaining.
Operating margin was 9% and free cash flow margin was 12% we.
We continue to expect Capex as a percent of revenue to be the high single digits for the full year.
We ended the quarter with over $161 billion in cash cash equivalents and short term investments.
Now moving onto guidance and modeling points.
As a reminder, these numbers are all non-GAAP , which excludes stock based compensation expenses and related payroll taxes.
Amortization of debt discount and amortization of intangible assets.
For the third quarter of fiscal 2022, we expect revenue in the range of $270 million to $272 million, reflecting.
Reflecting a year over year growth of 50, 354% gross margins at 79%.
I'd like to remind investors that a number of our emerging products, including zix workload segmentation and CSP will initially have lower gross margins within our core products. Because we are more focused on time to market and growth rather than optimizing them for gross margins.
Operating profit in the range of $19 million to $20 million as noted before we have more interest events, starting this quarter, including customer events conferences, and our internal mid year sales events.
Net loss in other income of $100000.
Income taxes of $4 million.
Earnings per share of 10 to 11.
Assuming a $149 million to $150 million fully diluted shares for the full year fiscal 2022.
We are increasing our revenue guidance to a range of 1.0 $4 5 billion.
To 1.0, a $5 billion.
For year over year growth of 55% to 56%.
Increasing calculated billings to a range of 136 5 billion.
To one $3 7 billion.
For year over year growth of 46% to 47%, increasing our operating profit to a range of 95% to $98 million.
Increasing our earnings per share to a range of 54 to 56.
Assuming approximately $149 to $150 million fully diluted shares.
Please note that our share count guidance includes dilution from our convertible debentures based on the existing treasury method of accounting.
With a large market opportunity and customers increasingly adopting the broader platform, we're committed to investing aggressively in our company.
We see a window of opportunity to extend our first mover advantages in there.
This fast growing market.
Which will have positive long term impacts.
We'll 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.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone to Australia. A question. Please press the pound key.
We also ask you please limit yourself to one question at a time.
Yes.
Now standby LC compile the Q&A roster.
Our first question comes from Andrew Nowinski of Wells Fargo. Your line is open.
Great.
Congrats on a nice quarter nice afternoon gentlemen.
I'd like to start off with a question on.
The impact from the Russia, Ukraine conflict. So at the start of the Covid pandemic, you clearly saw some new momentum with DPA as more employees were forced to work remotely I'm wondering if the Russia Ukraine conflict.
Had a similar effect, creating any new demand for your solutions and whether whether it's from companies in the region or even outside of Ukraine that might be concerned with the ensuing cyber attacks that could be launched.
Andrew.
A little bit early to tell by impact, but our customers are concerned this higher hybrid sensitivity.
I was talking to a <unk> from Germany earlier today.
And he actually opened the call I had with him with this topic.
And.
Customers want to make sure it's secure and one of the things. We think is going to help us directly as CPA, which been hired Dr. Ptak stock base as you can see something you can attack.
<unk> becomes more important for all of the in line protection.
Our research team is seeing signals of increased client activity increasing over the past few weeks, we have $100 a research team and we're making them available as a resource to our customers.
Got it thank you.
Thank you.
Our next question comes from the line of Matt Hedberg of RBC capital markets. Your line is open.
Yeah. Thank you this is Matt Swanson on for Matt Hedberg.
Jay first of all incredibly impressive to be able to find and hire a thousand people over the last six months in this environment, but when you kind of think about one of every four new scalar employees being new to the company could you just talk about how you are managing that growth and also given the expanded breadth of the products and the more multi pillar.
Sales, how we should think about the ramp time for adding new sales head count.
Okay well. Thank you multipart question. So first of all let me by start by saying that we are very pleased that we have been able to do good timing in this tough fighting environment, because we had a top destination for top talent.
So hiring is obviously the starting point to.
I think we are doing a number of things that needs to be done to make sure. These people can be easily incorporate in the company.
And in the past, we talked about a very strong enablement team a number of boot camps for obtaining we do.
Buddy system, we align so a number of things we're doing to make sure. These people are becoming part of it and.
That is all we have shown over the past two years show that in this COVID-19 environment, we have been able to do a good job and making them productive.
The next part.
From a head count perspective.
We called out last quarter that we had an outstanding quarter.
<unk> put up as well.
And equally great quarter also in Q2.
So.
Our plans are to.
And really push growth.
As a huge market opportunity.
We're going to continue to do that and we're going to continue to hire across the company only comment I'll add next year. It is it's not just honest FEMSA matter for us.
Top down strategic sales process requires a saline.
Architects, we have transformation team.
<unk> CTO.
All play an important role and we're doing well across the board in hiring.
Thank you.
Okay.
Thank you.
And next we have the line of Alex Henderson Needham Your line is open.
Great. Thanks, and let me also extend my complements to an outstanding quarter, you guys really against the very tough comp.
That really deliver the superb results.
I was hoping you could talk a little bit more.
In terms of hiring around the capacity expansion within your sales organization.
To what extent.
Delivered.
The prior hiring.
Say, a year ago getting to quota and where we are on the current hiring getting too.
When do you think they'll get to quota and what's your expectations are for cys.
'twenty two.
We're staffing increases in <unk>.
Sales capacity is it reasonable to think that.
It could be another year with 50% capacity growth.
Okay.
Yes.
I'll take it.
So from a quota perspective.
We are seeing people getting ramped quicker but.
They're on full quota after one year, so that hasnt changed at all.
Regarding sales capacity I don't want to give percentages out.
What I'm, what I'd like to say is that.
This is a huge market opportunity and we see it. So we will continue to build sales capacity.
In our model the one thing that we did call out.
In the last quarter the quarter before if we're growing.
Over 30%.
The topline revenue you can expect less than 300 basis points of operating margin expansion.
Our view is that this is a huge market opportunity and you are right. Alex These results for the company and our scale are outstanding Theyre, absolutely outstanding when you've got the billings growth that 59% you've got short term billings growth that 61%.
When you look at our model, that's got tremendous leverage in our market.
In my opinion huge.
We're going to continue should really focused in on that top line and invest in our business.
We're very confident that we have the best product in the huge market opportunity.
Sure.
Great. Thank you very much.
Thank you.
Next we have the line of <unk>.
<unk>.
Auto and.
Morgan Stanley Your line is open.
Hey, guys. Thanks for taking my question.
<unk> if I could direct my question to you first.
So let me Jay mentioned, a lot of great things about the demand environment about some of the secular tailwind that you guys are seeing.
Larger deal sizes.
If I look at the billings growth and 59% growth at this scale is obviously very impressive.
It was a little bit below sort of the usual seasonality in the 70% type billings growth that you guys were.
Doing over the last four quarters. So I'm just curious when we think about.
Billings at this scale.
Is there anything that we should be mindful of in terms of <unk>.
Seasonality going forward or anything that was perhaps one timey.
A year ago or last quarter, when we think about billings growth in relation to revenue growth over the next four quarters.
Yes, a lot of.
A lot of questions there.
Let me try to answer.
So.
59% billings growth as you mentioned is absolutely outstanding.
If I take a look at Q2, if there is one area that didn't perform at the level that we bought it.
It was federal minerals was low single digit of our new and upsell business now why is that it's just a bunch of constraints basically so our feeling is that in.
Federal will be a big portion or substantial portion of our business.
Got the fed ramp certification.
Also we built up a strong piece with the relationships so.
But the call out one thing in the quarter, let's say.
Didn't comment as we expected would be federal low low single digits.
Regarding billings and revenue as we go forward hard to say.
It all depends on our really top level growth.
Like I mentioned before.
With with Alex.
It's a huge market opportunity absolutely huge.
We feel we're well positioned.
The traction with our customers I believe.
We had 251 customers greater than a $1 million, which is growth rate, 85% over the prior year.
Our customers with greater than 100000.
<unk> was like 750, so substantial growth also year over year things like 500 customers or something like that are 550.
The market is.
Is there and.
And we feel we have the solution.
Again for.
From my perspective, the results that we've put up were outstanding results.
The key thing for investors.
We're going to continue to invest in topline growth in the business. We see no reason to slow down we will be cognizant it related to.
Operating profitability.
You are all aware.
The SaaS model with 80% gross margin.
Getting to operating profitability high operating profitability, it's not a difficult thing.
And really trying to take advantage of this market.
After.
Got it really helpful.
Okay.
Okay.
Thank you.
And next we have Joel Fishbein Fishbeck.
Fishburne twist your line is open.
Thank you and congrats on the great.
Great execution I guess it is.
Deferred J N Raimo.
<unk> been pretty successful in terms of cross selling a lot of different products and obviously deal sizes are going up pretty dramatically I'd love to.
Get your take on how RP proceeds it's been trending.
And then the second part of that is.
How is it being able to sell into different.
Parts of an organization since the product's effect, obviously different parts of an organization that would be helpful. As well. Thank you.
I can start and my prepared remarks I covered so many deep.
<unk> worked together in a number of deals with all four products cylinders per box.
We are actually very happy with the traction we're seeing you have seen over the past couple of years as VP of common together has become a fairly common thing and <unk> for the last one year is becoming more and more common we see lots and lots of customers buying CTX, because we don't as you tend to troubleshoot it.
Something goes wrong somewhere.
DCP is becoming an interesting seating opportunity for us because that's an early market for the workloads and beyond.
Positioning ourselves well to growing so feeling very good about that.
The cross selling framework and give further color.
Yes.
<unk> is definitely increasing and we'll be giving information on that on an annual basis.
New versus upsell in the quarter.
45%, new and 55% upsell, so a good quarter balanced between new and upsell for us.
Yes.
Thanks.
Yes.
Thanks.
Thank you.
And next we have Greg Powell of BPI.
Your line is open.
Oh, great. Thanks for taking the question and congratulations on a strong quarter.
So I know a lot of people are focused on billings as the primary metric, but if I'm doing my math correctly. It looks like current RPI grew about 80% this quarter.
Pretty close to 83% last quarter and well above your 63% revenue growth rate.
So just curious what do you think we should be looking at as the best leading indicator for future revenue growth and so they should converge to RP O trends over time.
Yes, that's a great question.
If you take a look at our.
<unk> growth year over year, it was about 90%.
And <unk> growth was 79%.
We've always called out.
And when the RVO.
Growth rates in <unk> growth rates are going to triple digit we've.
We brought back investors that billings is the best way to look at our business.
And when you take a look at <unk> and <unk>.
We're more sensitive to the timing of large deal the timing of renewals contract durations and other specific terms for.
For these reasons that.
We want we feel that people should be looking at billings.
<unk> <unk>.
Also our especially when we are in the range of 10 10 to 14 months, so and both in the quarter. Our duration was right in the middle of the range of 10% to 14 months. One thing I'll also call out that investor should probably look at short term billings growth our short term billings growth was 61% so.
I would look at everything as an investor, but from a scaling perspective, it's really billings.
In that range, 12% to 14 months to kind of ounces and then also short term billings growth. Those are the key metrics that takes all of that noise level, all the things going on with <unk> out of the equation.
Okay.
Understood.
Really helpful. Thank you very much.
Okay.
Thank you.
Okay.
Our next question comes from the line of John <unk>.
<unk> of Baird. Your line is open.
Yes, Hey, guys.
So you announced last quarter general availability of workload communications, So I'm just kind of curious.
To hear commentary on adoption trends expectations around that ramp.
How would you view long term adoption over time, we will be somewhat limited to larger organization similar to what you've commented on workload segmentation or is it a bigger opportunity.
So very good question.
What flowed segmentation is only one soft offering.
Of course, the basic offering is.
What would be called Zero trust for workflows, one close.
On a mirror image of users light users they talk could connect and Mike users talked workloads, what closeouts or Dr.
So we've taken.
As trusted zero Trust.
Users Ci is EPA and apply to workshop workflows. So today.
What's done to really secure workloads.
And the cloud, it's largely VM versions of filings.
Firewall before you go to maintenance as a firewall before you go to another region.
So on cellphone.
Believe we will disrupt.
So what flows based security the same way, we did it or using zix EPA.
The massive opportunity I highlighted a number of deals.
Actually multiple products got bought together, including GCB. Some of these deals included a fortune 500 semiconductor company, a fortune 500 financial services company, a global and final logistics company.
I would say that customers do start small in the water area and then they grow with us.
Helpful. Thanks, Jeff.
Okay.
Thank you.
Our next question comes from the line of the team up with <unk> of Citi. Your line is open.
Yeah.
Hey, good afternoon. Thank you for taking my questions.
Another question for you on cash flow, we thought the relationship between operating margin and cash flow margins converge pretty materially over the course of the pandemic and we are starting to see that consolidate a little bit. So I'm curious if you can shed some light on how we should think about the free cash flow trajectory from here, particularly in the <unk>.
Yes.
The multi year commits in large deals that you alluded to in his prepared remarks.
Could you a lot more enterprise.
Large deal Stephanie Thank you Rebecca.
Yeah, Let me, let me first say, we'd like to be prudent with our projections.
So keep that in mind.
You take a look at our free cash flow margin in Q1, it was like in the $35, 36% range of revenue.
In.
Physical <unk>.
In Q2, our free cash flow margins were 12%.
With operating profitability at nine.
From my perspective.
I think it's just prudent to think about free cash flow will be slightly higher 345 percentage points higher than operating profitability. It is going to fluctuate on a quarter over quarter basis.
Our.
Q1, and Q3 s are typically our highest quarter for <unk>.
Free cash flow.
The reason for that is that a Q2 Q4 is our biggest billing quarters. So youre collecting the cash in Q1 and Q3 s.
As we get bigger.
We build typically annually.
So and Thats, when we talk about billings being a good metric between the 10 and 14 months.
As we've talked about certainly we could increase free cash flow by doing multiyear billings, but thats not our model, but we try to do is get multiyear commitments.
<unk>, which we have seen increased.
Free cash flow or free cash flow or billings, we typically say it.
One.
No.
Sure.
Very helpful. Thank you.
Good morning.
Thank you.
And next we have Todd Liana <unk> of Bank of America. Your line is open.
Hi.
I wanted to ask about billing growth because the stock is going down on lower billing growth then.
Buy side expectations. So you grew billing around 71% pretty stable with the previous four quarters.
This quarter it was much better than guidance, but it was.
Lower than what we've seen the previous four quarters, So thats, 59% the guidance for the year is 46% or less.
So the question is how should we think about billings growth.
Can you say about this quarter why is it lower than previous four quarters, and then what's the explanation or what's the.
What are the puts and takes for the following few quarters. Thanks.
Yes.
Great Great question.
While four quarters in a row at this scale with 70% plus is outstanding.
Is that sustainable.
Is that.
It's very hard to sustain that when you get to the size that we are.
59% billings growth is outstanding.
If you take a look at some of the prior quarter's duration plays into that topline billing growth.
If you look at short term billings growth it was 61% and so if you go back in prior quarters Youll see Thats, a 61% short term billings growth is pretty good number very good number.
Going forward <unk> got our projections, we'd like to be prudent with our projections.
The key thing is that we see this as a huge market and.
We were going to continue to invest and we're going to keep on.
Driving that topline numbers those numbers are revenue and.
Billings in short term billings.
And then because of the value that you get from driving that top line number the leverage you get.
Is huge because in a SaaS model with a contribution margin and that 60% range for years, two and three.
It doesn't take long to get to the operating profitability. So building up your IRR is really really important and getting that market share and being the dominant player. That's our focus.
Got it.
Thank you.
Thank you.
Our next question comes from Mike Walkley, Canaccord Genuity your line.
Hey, guys. Good afternoon, its standalone for months. Thanks for taking my question so over the.
Over recent periods had been working on really improving their sales motion within an enterprise segment could.
Could you give us some color on how this part of your business trended this quarter end.
So if youre recognizing some additional wins given the investments you've made so far.
I will start.
Enterprise segment, which we define as 2000 to 6000 employees per company, it's progressing very well and we continue to make significant investments in growing the team.
Moving to small enterprise is a natural step for us it's an attractive market.
And enhance our market channel can play a bigger and bigger role in summit channel program has been helping us quite a bit. So we plan to continue to invest and grow to say you want to add any yes, I mean in the quarter all segments grew well, but given our strength in large deals during the quarter largely.
And price it better.
Okay, great. Thank you so much for the color.
Thank you.
Our next question comes from.
Patrick Colo.
<unk> Bank your line is open.
Alright. Thank you so much for taking my question can I just double click on the points you made earlier in the call around federal.
Cool.
Central.
Was only low single digits.
And up so can you just give us a framework.
That was like.
Like last quarter or last year. So we can get a frame of reference and can I also just ask.
The deals that were pushed out.
That has subsequently close after January 31.
You would hope.
We should be aware of.
Now ill answer the first part and Jay can answer the part about.
Deals but.
Typically federal has been mid single digits, sometimes even high single digits, but and I don't recall, Patrick what it was last year.
You can think of federal would be mid single digits on an average contribution of our quarterly new and upsell business and in this quarter. It was low single digits.
Yeah.
And in terms of.
Pipeline and deals and all is going.
Pipeline is going we are very engaged and we're seeing more momentum coming from somewhat new mammals and initiatives being put in place. We got the architecture will be gone in fact uncertainty sketchy.
One thing remains a little bit unpredictable as some of the federal budgets and the timings.
Thank you so much.
Okay.
Thank you.
Our next question comes from Keith Bachman of Bank of Montreal. Your line is open.
Hi, Thank you.
A clarification question.
You mentioned.
Duration and if you look at short term billings grew at 61%, so a little bit of a degradation called seven points from the previous quarter, but the compare was six points higher so youre short term billings have been pretty pretty steady.
If I look at the <unk>.
January through July quarters of last year, you grew 70 plus percent, but can you just remind me how much that was enhanced by duration. So we can normalize for the compare and then if I'm allowed to sneak one in I just wanted to see if you could just talk about <unk> trends as you see going through the year does that does it stay steady or do you think as Youre rolling out.
New products like <unk>.
Those transactions may improve.
We'll take growth thanks very much.
No problem.
I'll just call out one quarters that I'm aware of which is Q3 of last year Q3 of last year.
That 10% to 14 month range.
It was close to that 14 months ranch in Q3, so thats the duration impact Q3 of last year, which I can recall.
Regarding new products.
Comment that we made.
Last quarter.
If it's over 125%.
Not going to give out specifically with the <unk> it was over 125% in the quarter.
But our new products are doing well I mean, our new products are doing well as well as <unk>.
CPA and those are pretty big contributors related to that in our <unk>.
If I may add we extract and arent well, but having said that it's one of those thing to see the bigger bundles, we fell upfront.
The lower the NR.
If we do the past due today and in two quarters, we do the second half Savio.
Really get picked up and add on and off so happy with <unk>, but in the past <unk> said that we.
We don't really try to focus too much on.
That's why we gave you 125% or higher that's a good indicator.
Great. Thanks, Jay.
Thank you.
And next we have Brian .
Essex of Goldman Sachs. Your line is open.
Hi, good afternoon, and thank you for taking the question and congrats on the results.
I guess.
Jay maybe if you could.
Address this one I know I know in daily came onboard focus at his with increasing deal velocity and also hiring will now you've got you're kind of getting larger deals you have a more mature sales force. So there are some puts and takes there.
Maybe any commentary you can provide on an <unk>.
Sales cycles and now that you are.
Larger growing over larger numbers with bigger deals, but now with a more mature sales force, how youre managing that that dynamic and what those sales cycles look like thank you.
Yes.
It's a good question. So first of all it is.
Sales force with all the processes and enablement, we put in place has helped us grow exceptionally well over these over the past two and half three years since we put this new motion.
Number one number two I think at that time merely focus on the higher end of our market largely major anomalies now be expanded further to enterprise SaaS vault, which is doing quite well as you would expect.
Sounds cycle is lower towards the lower end of the market. It remains fairly high on the high end of the market. It is a transformation fails it involves CIO CTO.
CTO multiple parties, but as we go in the engage we ended up winning back and not only that we stock whenever we get going in these accounts VR.
So sticky that it became.
Upselling and growing so I'm very confident very comfortable obviously ask numbers are growing.
We need to keep on doing the same thing the market as their product portfolios. There we have no competitive pressure.
And it clearly needs to keep on executing I think they're doing good job and we'll keep on driving and we have good margins and the.
Gross margin level to keep on investing.
Great any way to quantify what sales cycles are and how they've trended.
I would say we haven't come in stat that reduce by X percent, but I would say, it's a range of August at the lower smaller deals, let's say two six months in bigger and better from six to 12 months.
It's getting bigger probably there is a movement for some.
The lower side of it but.
<unk> come in many shapes and sizes.
But we are we have a very rapidly growing pipeline.
Our close rates are pretty good as well, so I feel very bullish on comfort.
Sure.
Very helpful. Thank you.
Thank you.
Yes.
Next question comes from Roger Bullet of UBS your.
Your line is open.
Hi, Thanks for taking my questions.
Wondering if you could talk about.
First of all really really strong performance out of the $1 million plus <unk> cohort I'm wondering if you could talk about what youre seeing in that smaller enterprise cohort in terms of competition and then also was the recognition of Gartner on their new secure services service edge Magic quadrant means as you go to market.
With that smaller 6000 2000 cohort.
Alright, so good question so.
So first of all Bob MQ is not just the lower market <unk> across the board probably more relevant larger markets to some degree because larger companies tend to be you got from customers, but I would say frankly I was surprised to see.
The cast tool vendors.
<unk> lifted in the leaders quadrant.
Because we don't see them in the real world out there.
So if I were to equivalent with the criteria that Gartner Hughes I believe eight boss overweight on cash which is much easier to build its outer band.
And it was underway from secure web Gateway, which is foundation of zero trust and much harder to build because it is in line.
In our customer base, we are implanting a lots of past the point products that have been sold over the years.
You look at our platform and it has expanded significantly.
<unk>.
Now second question related to smaller enterprises.
We do see more vendors in low end of the enterprise can be saw when do we see on the high end INR very savvy.
A rule on <unk> some of the vendors, we don't have the right architecture and they also look for operational excellence yesterday, I had a call with a CIO of a large financial services company.
You wanted to start the discussion by saying this.
I see so many vendors that keep on coming and talking about all kinds of features and functionality.
And when I tossed their operational experience in running their clubs. They don't know how much you can talk about.
If they don't because they haven't really done it before.
So.
Operational experience is becoming more and more important as some of these.
You have seen issue of AWS, Azure and <unk> and some of those tough out there.
But on the lower end and we do see firewall vendors as it goes on the wall or some other new entrants, but once we engage and we win almost every time typically in the past we had less presence in enterprise, but now we are actually engaged in putting more resources in the lower end of the market and winning.
It's a growth area for us.
Very helpful. Thanks Chip.
Okay.
Thank you.
And next we have dashwood Tilton of Wolfe Research your line is open.
Hey, guys. Thanks for squeezing me in.
I just wanted to follow up on the previous competition question, but just a little bit more broadly.
Would you, possibly kind of just comment on how have your number of it thats been trending and how would you characterize your overall win rates across the entire market relative to maybe previous quarters.
Oh I'm sorry, the first part one of how our numbers.
The number of Youre at that strengthening are you are you getting more opportunities less opportunities how's that been trending over the last couple of months in previous quarters.
Yeah, So first of all.
Driven by transformation deals.
Too many cases, where we do have the backhaul sooner in the securities business people are used to bake offs and all we do less of that because typically we go and be helped drive transformation working with the CIO and going down from there.
And in case, they do have backhaul, so you're almost all of it has been to the degree you don't have any tax on any.
When do we expect.
Engage and win the main reason.
<unk> is because we couldn't really get the thing closed in the quarter. It moved onto the next quarter and the like so probably.
Getting delayed as part of the reason it's not.
It's not generally that competitive pressures kind of hurting.
<unk> our business.
And as we grow more and more platforms and the market is shifting fast it's no longer the days off Ninety's in early 2000 and its the same play.
I mean look at it two years ago, three years ago or when we did IPO.
Small piece.
Non Cif transformation bundle it became a big thing now <unk> together so every user.
Wherever then we moved the game to have visual experience being part of the requirements and no one close and what not so it's we think on that competitive. So we are good we just need to make sure we keep on our hiring and training people to do it is top down strategic sale.
Thank you those are helpful.
Thank you.
Thank you.
And that concludes the Q&A portion of the call I will hand, the conference back over to Jay <unk> for final comments.
Thank you everybody joining us and your continued interest in <unk>.
I also want to thank our customers partners and employees for helping us deliver a strong quarter.
We look forward to seeing you at upcoming Investor events are to updating you next quarter on our continued progress. Thank you again.
Yes.
This concludes today's go file.
This concludes today's conference call. Thank you for participating you may now disconnect have a pleasant day.
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