Q3 2022 Zscaler Inc Earnings Call
Good day, and thank you for standing by and welcome to the Zee scalar third quarter 2022 earnings Conference call. At this time, all participants are in a listen only mode.
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I would now like to hand, the conference over to your Speaker today, Mr. Bill Choi Senior Vice President of Investor Relations and strategic finance Mr. Choi the floor is yours.
Good afternoon, everyone and welcome to the Zee scalar fiscal third quarter 2022 earnings conference call on the call with me today are Jay Chaudhry, Chairman and CEO and remote connect the CFO. Please note that we have posted our earnings release and a supplemental financial schedule to our Investor Relations website unless.
Otherwise noted all numbers, we talk about today will be on an adjusted non-GAAP basis, you'll find a reconciliation of GAAP to the non-GAAP financial measures in our earnings release.
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 written.
Pension rate future hiring decisions remaining performance obligations income taxes earnings per share our objectives and outlook, our customer response to our products and our market share and market opportunity. 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.
I would also like to inform you that we'll be attending the following upcoming events in June loop.
Luke software conference on June 1st.
Bank of America's Global Tech Conference on June eight.
Mizuho virtual cyber security summit on June 13th.
And we will also host an investor briefing focussed on our latest innovations at the Zenith Live conference on June 22nd now I'll turn the call over to Jay.
Thank you Bill we are pleased to report another strong quarter in Q3, we delivered 63% year over year revenue growth, 54% billings growth and 15% free cash flow margins, all while investing for high growth why.
Most public SaaS companies are happy to get to rule of 40, we again exceeded our rule off 70 based on revenue growth and free cash flow margins.
With our increased guidance today, we expect to achieve the rule of 80 for the full year. We are not only delivering excellent growth. We are also delivering strong profitability. We are disciplined in making investments for innovation and go to market scale with the breath.
And depth of our ever expanding zero Trust platform, we can efficiently sells to our growing base of enterprise customers. We believe our clear focus on securing large enterprises makes us the partner of choice for our customers' zero Trust sick.
<unk> journey.
Whilst there are broader macro challenges and economic uncertainties, we have seen an increase in large multiyear commitments for multiple product pillars of disease platform.
Periods of uncertainty can act as a catalyst for change.
This coupled with growing cyber threats, such as ransomware are driving I T leaders to transform security from castle and moat security to Zero Trust architecture in this environment customers cannot risk transformational and mission critical projects with them.
Immature offerings from unproven vendors as the pioneer and category leader in Securities service edge or S. S E with a white desk and deepest offerings Zee scalar is a trusted partner for vendor consolidation cost savings increased user productivity.
And battery cyber protection.
We are adding new global 2000 customers at a record pace in the last two quarters. We added close to 80 <unk> customers now 40% of the fortune, 530% of global 2000 companies Trust Z scanner to secure the beach.
Bold transformation.
Approximately half of our global 2000 customers have bought XE I a N C. P E and I am excited to report that Z P has surpassed over $200 million in annualized revenue.
In Q3, we had significant growth in new 1 million dollar plus ACB deals across major geographies and customer verticals. We are seeing an acceleration in multi year multi product pillar deals as enterprises are racing to transform their business we provide.
Pat for large strategic customers to ramp into larger and longer commitments for our entire transformational platform not just for elements of it.
<unk> is driving a strong growth in bookings with a total value of our committed future revenue, reaching a key milestone a test surpassed $2 billion no. Let me highlight some customer deal wins during the quarter as I mentioned before I believe all customers will ultimate.
You'll see purchase Z I Z P. A N C D X for all users this quarter, we've seen ample evidence that customers are buying Z I S. P. A N C D X together, providing zero trust security for users with fast user experience.
Our new logo win a global 500 food services conglomerate headquartered in Euro purchase Z I E. S. Z P. A N C. D X for all 100000 users leveraging our globally distributor S. S. E platform. This customer is consolidating dozens of <unk>.
<unk> vendors point products across hundreds of locations in 45 countries.
Customer was most excited about having a single zero Trust security policy framework for inline inspection across its business units in every location.
Given the significant cost savings up level security and improved user experience across the company the CEO and CFO signed off on this non budgeted for your commitment.
In addition, they started a paid pilot for our sito trustful workloads offering for the sizeable AWS footprint, which we are very excited about.
Next in an upsell deal a global 10 oil and gas customer headquartered in Europe . After deploying Z I N C. P for 100000 users purchase Z Dx for all 100000 employees.
<unk> is delivering immediate value by reducing our customers' time to troubleshoot performance issues by 50% to 80%, while consolidating 40 legacy performance point products.
In addition, the customer upgraded to a newly introduced Z P. A transformation bundle that includes browser isolation application protection and deceptions services. This is a four year deal that increased our customers' annual spend by over 70%.
This customer's journey with Zee scalar is remarkable I eat.
Remember were sitting with the chief architect in their office finalizing the purchase of our C. I a professional bundle six years ago. Since then the annual spend has increased over 40 next to well over $10 million net.
Next we look forward to working with them on zero Trust for workloads.
Upsell win a fortune 500 bank in Asia that has deployed Z I for over 50000 users purchase Z P. A N C. D X for all 50000 employees. This is another example of a large customer buying Z I E. S. P. A N C D X for all us.
Yeah.
While the immediate objective for this deal was to replace our legacy multi vendor VPN infrastructure ZIP VA was selected to implement zero trust access by establishing an application level policy, where users connect to specific applications not to our network.
Hence achieving apps segmentation without having to do legacy network segmentation.
CPA did not just a place VPN.
Eliminating the need for the entire inbound DNC, including Ddos protection App delivery controllers, and firewalls generating a payback on disease killer purchase within six months.
Because of the substantial auto why even in a tougher macro zee scalar can help reduce cost while driving transformation.
Our integration with Microsoft E five suites across Z I N. C. P was also an important decision factor for them.
This latest purchase more than doubled the customer's annual spend.
V I, a CPA and <unk> together form a complete solution to implement zero trust for users. Our next immediate big opportunity is zero trust for workloads powered by the same core Z I and CPA technology.
Let me highlight a few exciting wins in this area and.
An existing fortune 100 financial services customer with Z I deployed for 60000 users purchase zero Trust, where workloads to protect 50000 workloads spanning across multiple data centers and public clouds.
This eliminates the need for virtual firewalls and site to site Vpns.
This multi million dollar <unk> deal is our largest workload deal to date and more than doubled the customer's annual spend.
The customer now protects both users and workloads under a single policy framework and enhancing their cyber protection, providing visibility and simplifying operations.
Lastly, let me discuss the new customer purchasing all four product pillars together.
Elite Research University purchased our comprehensive Z I as C. P. A N C D X offerings for 35000 users and zero Trust for workloads for over 3000 workloads for the multi cloud environment.
The CIO was top priorities to eliminate the risk of legacy Vpns and lateral threat movement as universities are increasingly becoming a target for ransomware and intellectual property theft.
So a critical requirement for this win was our zero Trust platform meeting the criteria of Zero Trust framework as recommended by NIST. We closed this three year eight figure deal through AWS marketplace, I'm very happy with our continue.
Its success in expanding our routes to market via cloud marketplaces.
Next I'm excited to highlight U S Federal government, where we are having considerable momentum great.
Driven in part by the President's Executive order, we are seeing increased interest in our zero Trust exchange across all levels of the government.
We are excited to help our country dramatically improve our security posture, while significantly reducing legacy costs.
We have the highest level of fed ramp certification for C. I N Z P. A.
In addition, CPA as the only zero trust solution with D O D IL flight certification.
There are only a select few cloud companies that have this level of certification and there's no other cyber security company at this level.
IL five certification is an important differentiator for US let me highlight two new customer wins this quarter, where this was an important factor for us.
But defense contractor that purchase G. I N Z P E and a six year seven figure <unk> deal.
Second a D O D unit also purchased Z P E for secure access to SAP be instances in AWS Gov cloud too.
Two important considerations for our ongoing success in the federal market are.
Z P. A is the only cloud security service with fed ramp high authorization for zero Trust remote access.
We connect users to applications and not to the network eliminating lateral check movement.
Core principle of Zero Trust architecture that can't be achieved by next Gen firewalls or cloud Vpns second Z I as proxy architecture, which inspect tls encrypted traffic at scale delivering superior security.
Our proven track record running the world's largest inline security cloud makes these killer to all abuse and trusted partner of choice for governments and enterprises. We know had 288 customers exceeding 1 million doner in E. R. R.
An increase of 77% year over ear.
We deliver a mission critical service that requires unmatched reliability and availability for an inline cloud.
There is no compression algorithm for over 10 years of operational experience running such a cloud and example of our proven scale is that zee scalar processes over 240 billion transactions in line per day, which is more than 20 times the number of Google.
Searches per day.
No let me share a few observations about our high net retention rate, which has exceeded 125% for the last six quarters. We made a number of investments in customer success services technical account managers partner services and certification.
<unk> or partners, which together are driving a faster and greater adoption across our broad portfolio.
We have a solid blueprint for accelerating value delivery, which is driving up sells.
All of these investments result in happy customers demonstrated by our net promoter score or NPS off more than 70, which is more than two times that of an average SaaS company.
Next let me now highlight our rapid pace of innovation after having built the most comprehensive platform to provide zero trust for users. We are now expanding it for zero trust for workloads. Unlike scores up vendors, who offer point products for cloud native apps.
<unk> has developed a fully integrated CSP M C. I E M and infrastructure as cord scanning with a common backend and fully correlated action able dashboard.
Gartner calls this functionality seen that but we have moved beyond seen app by integrating the threat and data awareness from Ci and CPA, we will be highlighting it and other innovations at zenith live our annual cloud summit next month.
Hans our AI ml engine for CTX, our fastest growing new service to leverage billions of telemetric points from millions of users to improve digital user experience.
It cannot only ultimately figured out what we had performance issues are but can also provide information about the quality of voice video and screen sharing due to our integration with Microsoft teams and zoom we have.
Also integrated Z D X with service now, making customer end user support far more efficient.
<unk> also bought certified and became available on our federal cloud.
Threat lamps security research team is tracking over a dozen apd groups and getting better reconnaissance about the tools and behavioral patterns, resulting in higher order threat intelligence.
Specific threat Intel coupled with a massive cloud effect from 240 billion transactions and 300 trillion signals per day enables zee scalar to deliver better threat protection than other vendors.
Moving beyond users in workloads, we are not bringing zero trust to Iot and Ot systems are large emerging opportunity today, Siemens and Zee scalar announced the availability of an integrated all in one solution to accelerate secure access to Ot systems.
Our joint development with Siemens brings the benefits of disease killer, two factory and industrial control systems. We are thrilled to have Siemens a longstanding customer asset development and go to market partner.
In closing in spite of uncertain macro conditions, we continue to see strong demand for our services.
We are in a strong financial position and we will continue to aggressively invest in our business. We are focused on hiring and developing talent and creating a culture that rewards innovation at all levels.
We have grown our global organization to approximately 4500 employees, who are energized by our shared mission to secure the hyperconnected world of cloud and mobility.
Grew our total sales and marketing head count by 54% year over ear and we remain focused on investing in our go to market machine.
In today's competitive hiring market Zee scalar is a destination for top talent to drive continued growth in hiring and to build on these killers high performing hybrid work culture. This month, we welcomed Brandon Castle Google's formal global head of talent acquisition.
As our new Chief people officer.
Brandon has proven experience in building highly motivated and productive teams at scale with App transformation already mainstream network and security transformation is also becoming mainstream.
We pioneered with our zero Trust exchange, we believe customers Trust Z scooter more than any other provider for securing their cloud journey.
Recent uncertainty in the macro environment is driving customers to accelerate their network and security transformation with our integrated platform, resulting in a reduction in cost complexity and business risk we are adding a record number of global 2000.
Customers know with 30% of global 2040% of Fortune 500 customers trusting Zee scalar.
These demanding customers are making large multiyear commitments to our platform. We are not just growing rapidly at any cost. We are also profitable and delivering efficient growth.
We will continue our disciplined investment in innovation and growth to capture the large and growing opportunity ahead of us.
No I like to turn over the call to Raimo for our financial results.
Thank you Jay as Jay mentioned, we are pleased with the results for the third quarter of fiscal 2022.
Revenue for the quarter was $287 million up 63% year over year and up 12% sequentially.
On a year over year basis revenue growth exceeded 60% for the third straight quarter, driven by strong customer demand for our zero Trust platform.
CPA product revenue was approximately 18% of total revenue.
87% year over year.
From a geographic perspective, we had broad strength across our three major regions Americas represented 52% of revenue EMEA was 33%.
P J with 15%.
Hey, P. J continues to be our fastest growing region with revenue growth of 105% year over year.
Our total calculated billings grew 54% year over year to $346 million.
With billing duration comparable to a year ago and above the midpoint of our normal 10 to 14 month range.
Our remaining performance obligations for our P. O grew 83% from a year ago.
The two point to one $6 billion.
The current RPI was 49% 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 about 125%.
We had 288 customers paying us more than $1 million annually up 77% from 163 in the prior year.
I'm very pleased with the pace at which we're adding these $1 million a our customers.
We increased by 37 customers in the quarter. The continued strength of this metric speaks to a large enterprise focus and strategic role we play in our customers' digital transformation initiatives.
We added 140 customers in the quarter paying us more than $100000 annually ending the quarter at 1891 such customers.
Turning to the rest of our Q3 financial performance total gross margin of 86% was approximately flat quarter over quarter and year over year.
Our total operating expenses increased 11% sequentially and 70% year over year to $204 million.
Operating expenses as a percentage of revenue was 71% compared to 68% in the year ago quarter due to a partial return of T D.
Operating margin was 9% and free cash flow margin was 15%.
We continue to expect datacenter capex to be around high single digit percent of revenue for the full year.
We ended the quarter with over $1.66 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.
We are once again, increasing our guidance across all metrics for the fourth quarter of fiscal 2022.
We expect revenue in the range of $3 4 million to three $6 million, reflecting a year over year growth of 54% to 55%.
Gross margins of 79%.
I'd like to remind investors that a number of our emerging products, including Z Dx workload segmentation and C. S. P M.
Initially have lower gross margins in our core products.
I'm more focused on time to market and growth rather than optimizing them for gross margins.
Operating profit in the range of $33 million to $34 million, we have more personal events this quarter, including customer events zenith.
Life at RSA conferences.
Net loss on other income of $500000.
Income taxes of $3 million.
Earnings per share of 'twenty to 'twenty one.
Approximately 146 to 147 million fully diluted shares.
For the full year fiscal 2022 we are increasing our revenue guidance to approximately $1.078 billion or year over year growth of 60%.
Increase in calculated billings to a range of $1.4 billion to $5 billion to $1.43 billion or year over year growth of approximately 53%.
Increasing our operating profit to a range of $106 million to $108 million.
Our earnings per share to a range of 64 to 65.
Assuming approximately 147 to 148 million fully diluted shares.
Free cash flow of $215 million, reflecting free cash flow margin of approximately 20% for the full year.
With a revenue growth outlook of 60%.
Free cash flow margin of 20%.
We expect to operate at the rule of 80 for the full year.
With customers increasingly adopting the broader platform with longer term commitments, we plan to invest in capturing our large market opportunity.
We have confidence in the durability of our business model with very high contribution margins. After the initial land and proven ability to retain and upsell to our enterprise customer base.
We will balance growth with profitability based on how our business is growing well.
We continue to prioritize CRO, which we believe 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.
Your question. Please press the pound key.
As we compile the Q&A roster.
Our first question comes from Andrew Nowinski of Wells Fargo.
Your line is open.
Great. Thank you congrats on another amazing quarter I wanted to ask about your.
Federal demand J I think you said you saw you're seeing considerable momentum in the U S. Federal this quarter or this which seems to be an uptick from.
Q2, where I think it was maybe one of the underperforming sectors. So just wondering if you could comment on maybe what what changed and what caused that uptick in demand. This quarter ahead of there you know the usual budget flush in calendar Q3.
Oh.
Andrew I'll start it.
Last quarter in Q2, our federal was low single digit.
New and up sell and in Q3 and it was mid single digits.
Definitely an uptick.
Also on a go forward basis, we do see federal has been an important contributor to Zee scalar, we feel that we're well positioned in the federal market.
Let jay speak more and more to that.
Andrew as you know president exacting owner is to implement zero Trust architecture, and it's well aligned it actually aligns with what we have done.
To be successful in federal do you do you need two things one you need the right architecture Zero Trust, which we have to you need fed ramp certification.
And we have the highest right rems certifications.
And no one is a timing issue asphalt white house issued a memo setting a timeline what agencies do.
We achieved zero Trust architecture within two years of these plans have been submitted and more budgets are becoming available.
All of this is positive long term development from our point of view.
However, fed opportunities always take time.
That's great. Thanks, guys keep up the good work.
Okay.
Thank you.
Our next question comes from Alex Henderson of Needham.
Line is open.
Great. Thank you very much.
I've been listening to a lot of people trying to get into this a zero trust market one of the things that really strikes me as a highly differentiated is one the policy implementation mechanics.
Our so radically different than what youre doing versus the traditional perimeter defense and then second is the sharp increase in attacks.
That we're seeing in terms of.
Encrypted traffic received a report today talking about our over 300% increase in encrypted attacks over the last year.
Can you talk to the relevance of those two data points are those two.
You know concepts relative to your platform and how you solve that better than say alternative.
Vendors and in that context can you just address.
Loud flares comments that theyre getting more aggressive in this space.
Yes. Thank you Alex so so first of all.
So you don't trust implementation.
People, sometimes build a little VPN and planned spend that call. It SEDAR trials, what we see.
<unk> got a private access.
Platform that replaces our entire inbound DMT literally you need nothing between six killer and Florida and application running and in fact on top of that further expanded.
Browser isolation and protection in chicken interception and E. A M best policy that can hop to do segmentation.
Because of that winning big time, so that's one part the second part was attached.
So first of all for someone's door pack they need to find you with.
With our zero Trust architecture your applications hide behind each of them they can't even find.
And but the next part of our taxes and this is in particular tax for that you need a proper proxy architecture that actually terminated connection look at the package and everything.
Find them and take care of that.
For that we have built a very very highly scalable architecture that sets us apart that scales like nothing else out there. So it's a combination of these things with 10 plus years of experience running a massive inline cloud is what sets us apart from others in.
Now regarding some of the competitors coming from C D and market.
Ddos DNS market right. Those guys generally have been focused on cellphones, we started focusing on users to start but it takes a lot of time and experience to build that richness and breadth of functionality. We have built with G. I N Z P. An assertion that functionality I think it would be.
Take a long long time for someone to try to catch us and we aren't sitting in.
Innovating at a very fast pace.
Thank you very much.
Okay.
Thank you.
Next we have asthma.
Morgan Stanley Your line is open.
Hey, guys. Thanks for taking my question.
Question for for Raimo.
I'm wondering if you can give us a little bit more color on how youre thinking about.
The margin trajectory going forward it seems like.
Do you want to continue hiring.
Against the market opportunity that you're seeing.
These killer has obviously been more of a destination for talent in the last couple of years and particularly the incentive structure around around the stock a lot of employees have done well.
Are you thinking about that incentive structure between cash and stock going forward given that we're probably going to be in a more difficult.
Equity market in general and just the pace of hiring relative to what you've done the last couple of years.
There are a lot of questions.
Yeah.
Yeah.
Let me see if I can go through and just kind of give you.
My view and then maybe Jay can help at all.
No.
We currently whereas the rule of AED, that's what we're projecting.
For this year and the way we define the rule of 80 is our revenue growth.
And also free cash flow margin.
Our free cash flow margins. This year, we're projecting to be 20% it was 20% last year.
So we're in a unique position.
To really take advantage of this market opportunity because we've got significant cash flow coming into the company as well as we're in the early stages of this market. So we're going to continue to make investments as we go forward those investments can be across the board.
Throughout the organization and we're gonna.
Our goal is to get to a $5 billion company. So we're building the infrastructure in place to do that.
Related to you.
You know employees and incentives.
Stock options and it's just cash incentives.
The cash incentives do we talked about on the last call related to you know with a frothy environment.
Last quarter with a lot of startup companies and p/e companies or PE backed companies could be really big packages. So we adjusted.
Merit to reflect to get our employees with market level, so from a cash compensation perspective pretty good shape.
Regarding stock.
In fact, all companies basically a decreased stock prices.
All we're doing is we're taking a look at that no decisions made at this point regarding what we can do from a from a stock perspective, but what I can say is our.
Stock based compensation as we go forward.
Will decrease as a percentage of revenue what happens is that when you get to a certain scale as a company and a very large company their stock based compensation becomes goes down we'll follow the same path as the large companies Youll see your stock based comp coming down over a period of time.
Regarding the pace of hiring.
And again, we're seeing all the things that youre seeing related to the global macro environment, we're not seen it.
From our perspective.
Sure.
Strategic for our customers you know as Judy talked about.
Our deal sizes are getting large you know our strategic nature.
Engagement with our customers is increasing.
So our plan is to continue the pace of hiring and if we can increase the pace of hiring we will now regarding.
Color too related to operating profitability and also grow we'll put growth because number one we're mindful Jay and I are mindful of operating profitability and World School quite frankly, we look at the bottom line, but we see we see huge market opportunity huge we feel we're the leader in that.
Market.
We will continue to invest and we will do it on a prudent basis that we feel is the best interest of our shareholders and our employees.
If I may add two quick comments, what Remo said.
It's very high gross margins and unit economics.
Easier for us to invest in businesses.
Secondly.
The hiring environment is.
He is actually getting easier.
Hearing all high flying companies that raised funding and multibillion dollar valuations last year, they're starting to lay off people or freeze hiring.
And companies that are spending to grow at any cost are now starting to slow down. So we will keep on accelerating our plan because our customers want to leverage these data to accelerate their transformation because they want to be competitive advantage.
Very helpful gentlemen, thank you for that.
Thank you.
Thank you.
And next we have Matt Hedberg of RBC capital markets.
Your line is open.
Great. Thanks for taking my questions guys Congrats.
Jay what really stood out to me was the success in large deals and multi product sales.
I think especially impressive given the partner momentum in some of these large deals can you talk about the importance of hyperscale or simply be called out 1% or eight figure deal.
Is there more is there even more that you guys can do to drive even faster partner contribution does it really does feel like that flywheel is really kick in as well.
Yes.
So the partner momentum comes from two sides. One is partners like Microsoft who have been helping us even without fulfilling through marketplace.
Momentum has been leveraged for the last several years, knowing cass extend it over.
<unk> quite a bit.
So that's one area the second area is.
Being able to deliver.
Deliver.
Orders through cloud marketplace. It is one more channel for us to revenue our business through both AWS and Azure has been steadily growing.
And these kind of viewed as a part of our quality transformation solution.
So when it is fulfilled through our marketplace channel. It often comes out of an annual cloud spend that's already committed by the customer with the hyperscale. It so that makes it actually easier in many ways.
In Q3.
One of our largest deals through AWS marketplace.
And if you recall, we did a very large deal last quarter through agile marketplace, and we are training AWS and Microsoft sales teams and I think there's a good opportunity to create more leverage and and these are generally larger deals. So you have seen on momentum and larger deal.
In the last two quarters.
<unk> added almost 80 global 2000 companies to our portfolio I mean, that's pretty remarkable and we don't see any slowdown.
Super excited thanks, guys.
Thank you.
Thank you.
Next we have Patrick Colville of Deutsche Bank. Your line is open.
Thank you so much of a meal and then I guess.
Everyone else's congratulations on a very impressive set of numbers.
My question is on the Billings guide, which to me was probably the standout metric of the quarter.
So.
And I think above appropriately where many investors were expecting so very healthy. There can you just talk to what you guys are seeing in the pipe spool fiscal fourth quarter and the health.
I guess the underlined the confidence to give that strong billings guidance for the fiscal year.
<unk>.
Yeah, I'll start it and say Oh, Gee, if you'd like to contribute anything.
We have a strong pipeline as we talked about we are becoming more strategic our deal sizes are getting bigger.
When you review our pipeline with our sales organization and based on our projections, we do give a strong guy Patrick which is basically up 6% basically a guide up.
The key thing is that you know.
With the World that's changed.
With.
As we've been this way for a while with applications in the cloud and users are mobile and workloads.
In the cloud and on Prem and other.
Other locations.
Platform that <unk> created.
Really addresses this market and on.
Also the efficiency that we create.
For customers at a very attractive ROI, it's really what stands out and so we're seeing with large customers.
Adopting more of the platform as Jay talked about we're seeing that so.
This basically reviewed the pipeline review, we feel we're comfortable to guide too. Yes. So 19, what are you most at projections always take into account.
Pipeline on customer engagements.
But ed.
Quantitative map.
As I talked to lots and lots of CIO and T cells.
There is a sense of uncertainty and they are beginning to think about how do I do my cost and complexity reduction might consolidation and that's where we start becoming pretty potent.
And for that customers are driving transformation, we help them with it on top of that cyber is a big issue. So when you bring all these things together, we become more important for them and start that discussion.
Jay what all security products and networking products cannot even plays with you.
And now we are able to actually talk about a bigger set of products that need to be removed, which actually leads to a bigger part out.
Platform can be bought.
No.
Top of that it's interesting to see suddenly on Dol, how you flying private startup companies talk about all kinds of settlement hiring how many points all of that stuff is getting tempered down that means the unnecessary noise in the market, it's expected to slow down and it's fast.
Adding to see people, calling us from those start ups already.
So we are bullish on the business.
Excellent stuff. Thank you so much.
Okay.
Thank you.
Up next we have Joel fishbein.
Just.
Your line is open.
Thank you and echo the congrats on the great execution this quarter.
I just wanted to ask about workloads segmentation it sounds like you're I know, it's early days Youre very excited about it and have some good uptake I'm really interested in go to market around working with segmentation and actually Iot and Ot it doesn't seem like they're natural.
They have different buying centers inside of organizations in the eye and DPA and Gtx love to hear how youre going to plan to go to market, there and increased deal sizes around those specific areas.
Okay very good.
Crush.
In Q2, we talked about hall number of our.
Large customers are beginning to buy.
What loans are zero trust and workflows, but at a smaller scale.
Last quarter, we start to see them actually buying some very large orders in this area. So thats very encouraging now in terms of the buyer and the products. The cloud protection products can be put in two broad buckets, one what gartner now called feed App is a collection.
Ill.
<unk> type of stuff, it's API based security, it's a new area.
Everyone. It's a simpler to build and we have already been offering in that space be reached revamped our <unk> offering which will be launching at zenith live next month.
And parallel with that zero Trust workload, which is taking the eye and CPA technology and making it available workloads, because one closed need to talk to Internet that goes through <unk> engine, they need to talk to each other which goes with CP engine. This is bringing zero trust your workloads.
Bringing the two together in line piece of it and API piece of it.
Lets us apart from any other vendor in the market out there.
Regarding buying centers.
Really look at it if we were selling at a lower level of buying will be very different no matter, who buys the product when it comes to security part C. So is definitely involved so all good relationships. So on helping us with zero trust for workload in the cloud protection <unk>.
<unk> had a net working on helping us because in the old World you are extending your data center to cloud with all of these data links onto ETR.
We are developing and building more relationship is the <unk> side of it but since ceased all relationships are strong. It is it is helping us.
We are not creating an overlay team, but we do have product specialists you need overlay teams when youre selling point products are low level. When we had been selling platform at a high level I don't need overlay teams I do need products specialist, which we are hiring what without <unk>.
<unk> sales team.
Help.
Very much. Thank you so much.
Great.
Thank you.
And next we have a team of <unk> of Citi. Your line is open.
Good afternoon, and thank you for taking my questions.
This one's for you.
James script, a lot of anecdotes around Zen multi land transactions and ticket.
Deal momentum in the million dollar customer mill that so what I wanted to ask you was just from a bookings standpoint, I think you've called out that you are seeing a bigger multi year commitments from some of your customers. So we're certainly not seeing that impact on billings in terms of your invoicing duration, but I'm curious if you can comment.
Sure any sort of observations on where backlog and if theres any duration impact in there that we should be thinking about more critically thank you.
Yeah. That's a great question, if you take a look at our Po and CRP DAU grew.
On a year over year basis.
<unk> committed those are committed deals or <unk> growth was 83%.
<unk> growth was 75%.
Related to duration the duration was comparable on a year over year basis, There's no headwinds, we expect duration to be in that 10 to 14 month range. So I mean, the key things from billings billings is calculated billings, which is calculated off of deferred revenue. So thats, what we actually bill but.
But we look at the <unk> and <unk> growth rates.
<unk> is 83% and <unk> and 75% growth rate on a year over year basis, now having said that you know.
Even though those metrics are outstanding.
We still feel that billings is the best measure for.
Zee scalar.
Because we've found that duration period from 10 to 14 months.
That's so so I hope that answers your question I believe that answers your question, but.
The actual commitment, but customers are making to zee scalar.
Impressive.
But do you mind, if I may add one thing.
This is about.
And outstanding quarter.
SAP customers Duane.
Bulk type product pillar deals are multi years, which is very exciting.
Sure.
Very clear thank you gentlemen.
Thank you.
Next question comes from Bill Baldwin of Cleveland Research.
Your line is open.
Good afternoon, everyone. Thank you for taking the question.
I wanted to go back to the topic around cloud marketplaces.
Remarks can you quantify how much of the business is being transacted over cloud marketplaces today or how that has evolved and then I'll also interested in any way, we should think about the margin implications of that business versus other sales channels.
Yes, I mean not much business.
Currently going through cloud new marketplace, there is business going through but we see that as a very important channel for us and in a related to margin. We expect good margins through <unk>.
<unk> placed.
Yeah.
One thing the business through cloud marketplaces has been steadily growing over time.
That is very good for.
For us.
I don't think that driver is once a fulfillment channel for US personally catabolic partners, who actually helped me, but strategic sales to that customer.
Microsoft account exact <unk> kind of gone exactly be able to sit together with the CIO and talk through a large deal it is extremely useful.
But.
It does help to get.
Wow.
Hyperscale sales team more engaged because they actually do compensated for a business that flows through their channel partners through cloud marketplace. So we actually.
We are putting more focus on training AWS and Microsoft sales team, so which helps them and helps us.
Thank you.
Thank you.
And next we have Paul Liana <unk> of Bank of America. Your line is open.
Hey, guys I have.
Two questions one in general I'm trying I get this question a lot from investors I'm trying to understand.
Economic slowdown what's the impact on your business, it's a little bit of a philosophical question, but it's a question we're being asked a lot and I would like to hear your view on this topic in second.
We are at times of focus on cash flow and margins and I look at your operating margin.
In the last four quarters.
Down from 13% to eight 7% the previous quarter this quarter slightly recovered.
And at the same time your revenues went up by 50% give or take so we don't see much leverage on the margin and the question is if I fast forward two to three years, if I, if I think about margin leverage and what needs to happen for you to have serious margin upside.
Can you talk about the pros and cons of your operating margin.
Thanks.
Well I'll start with that.
Absolutely do have leverage in the model.
SaaS model with 80% gross margin growing at the scale that we're growing.
We absolutely have no leverage.
We talked about.
This large market opportunity it would be just served through.
To our shareholders and our employees, if we tried to drive top line operating profitability.
At this stage, having said that when you take a look at our free cash flow margin last year, it was around 20% or over 20% and we're projecting free cash flow margin. This year at 20%. So when you have that kind of.
Free cash flow margin at the scale, we are making the investments that we're making in this position that we are as a company in this very large market theres no better use of our cash or our resources and investing in the business and really executing and trying to drive.
Top line growth.
Having said that we will be mindful.
Be mindful.
<unk>.
If we wanted to drive operating profitability it doesn't take much with our free cash flow margin, where it is.
We're very very comfortable now from an economic slowdown perspective security is important.
Companies basically are not the tax you're going to keep coming and they're probably going to increase.
Also companies going through this downturn.
Have to find areas to save money.
We are an efficient <unk>.
Why is absolutely outstanding.
It is significant ROI with the highest level security down to the deepest level. So from an economic slowdown perspective, we're not seeing it currently now can that change.
But right now based on our pipeline.
Based on what we're seeing.
And.
We talked about we're going to continue to hire at pace.
Jay and I last.
As I mentioned before have a lot of experience.
We've been we've seen to three downturn, three or four downturns actually in our lifetime art careers.
The scale is different and we feel we're in a great position will be we will take things into account all things, but you know and driving operating profitability at this stage.
If it is really we will increase operating profitability as we go but we're going to be also trying to drive that topline growth J. Two quick comments first of all I do believe this uncertain certainties, helping us because we are going to help customers with cost reduction and complexity reduction.
And on the other.
The other side.
Our flagship <unk> products. They have reached significant scale and are generating good margins.
We are reinvesting that drive.
The growth of new products, we have proven that when we brought CPA on we managed successful we've seen we brought C D Exxon be making successful it's growing even faster than <unk>.
And we have high expectations from workload protection asphalt.
So I think with such a large platform, we expect that we'll keep on growing fairly efficient.
Got it thank you.
Thank you.
Our next question comes from Roger Boyd of USB Securities. Your line is open.
Hey, Thanks, Thanks for taking my question and congrats on the results.
Just a quick question on SD Wan and historically, you've had some success tied to adoption. There I know there's these go to agnostic to how customers ultimately onboard to the zero Trust exchange, but.
With some of the SD Wan vendors phasing, some disruption share losses and potential change of ownership.
Do you think about those changes in terms of a potential opportunities or risks.
Yes.
<unk> came in.
These used to start with let's do network transformation.
When Covid started two and a half years ago.
Stephen went out the door there was nobody working the branch offices and crossroads customer start to rollout the scanner by downloading a lightweight agent and hindered goes so with that that all off any net.
<unk> became really insignificant today.
Most of our customers are all it out on laptop mobile with a lightweight agent. They can work from home different Boston office with SD Wan without SD bet. So we'll stay neutral to supporting SD Wan vendors.
Our sales processes are no longer led by SD Wan, if a customer centered on rolling on SD Wan.
Generally the preferred choice and that's what we've seen it so we don't really see any changes in there in the air.
SD Wan marketplace impacting us.
Got it thank you.
Thank you.
Our next question comes from Joshua Tilton of Wolfe Research.
Your line is open.
Hey, guys. Thanks for taking my question here.
I don't believe you mentioned it in the prepared remarks, but can you talk about any impacts to the business you are seeing other positive or negative from the Russia, Ukraine crisis.
Yes, Russia, Ukraine, It was a big upswing quarter on home.
I decided years ago not to sell in Russia, hence.
Hence, we do not have any <unk> exposure, Russia Ukraine.
But cyber security is a global threat Snorter regional effects.
Our research team is tracking items cyber threat environment.
<unk> is making every CIO seasonal more nervous in this area.
So this is driving the adoption of zero Trust architecture.
And it is increasing our engagement with customers.
More so in Europe actually European customers are more worried about it.
<unk>.
But we have some very large deals in Europe this quarter.
<unk> a couple of them I highlight.
We don't really see any negative impact.
Conflict and we remain engaged with our customers to drive the transformation they want to become a child comparatively we play it all there and then fiber on top of that so.
Don't see any negative impact.
Thank you very much.
Thank you.
The next question will come from Rob Owens with Piper Sandler.
Your line is open.
Great. Thanks for taking my question wondering if you guys could drill into the Siemens partnership a little bit and I guess, Jay more broadly what you see as the opportunity in the Ot from where you sit.
Ot plants and factories have been slow in changing typically plans to take their own time, but all of these critical infrastructure acts and somewhat.
I have made it a priority.
<unk> like seems big.
Big providers of <unk> systems.
They see this as an opportunity for really providing.
Should I say, taking firewall and BP VPN based security of all of the systems to Zero Trust based security where are you no longer connect these ot networks and <unk> networks, but you no longer need remote VPN to accident. These systems. So Siemens has worked with us over the last year.
So they essentially chose us as a partner we did joint development, whether it be made art technology available only a hardened will be systems and this combined solution they'll Siemens and ours is not available to our customers all games.
It's a good opportunity for us I think it's a matter of our claim but all Iot ERP system will embrace zero trust and we are positioned well for that opportunity.
Alright. Thanks.
Thank you.
And this concludes today's QE.
Q&A session I'll turn the conference back over to your CEO , Jay Chaudhry for closing remark.
Thank you I want to thank you all for your continued interest in <unk>. Kim I also want to thank <unk> employees customers and partners are delivering a strong quarter. We look forward to seeing many of you at <unk>.
Cloud some thank you. Thank you.
Yeah.
This concludes today's conference call Goodbye.
Thank you all for participating you may now disconnect and have a pleasant day.
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Yes.
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Okay.
Okay.
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