Q4 2022 Zscaler Inc Earnings Call
Brian welcome to the scale of fourth quarter and fiscal year end earnings conference call. At this time, all participants are in a listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask a question at that time. Please press star one on your Touchtone telephone.
As a reminder, today's conference call is being recorded I would now.
Ill turn the conference over to your host Mr. Bill Choi Senior Vice President of Investor Relations, Sir you may begin.
Good afternoon, everyone and welcome to the Zee scalar fiscal fourth quarter and full year 2022 earnings conference call on the call with me today are Jay Chaudhry, Chairman and CEO and remote connects our CFO . Please note that we have posted our earnings release and a supplemental financial.
<unk> to our Investor Relations website.
Unless otherwise noted all numbers, we talk about today will be on an adjusted non-GAAP basis, you will find a reconciliation of GAAP to the non-GAAP financial measures in our earnings release.
Like to remind you that today's discussion will contain forward looking statements, including but not limited to the company's anticipated future revenue.
<unk> 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 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 risks and uncertainties 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 I would also like to inform you that we'll be attending the following upcoming events in September Goldman Sachs, Communica, Opiate and technology conference on September 13th.
Missoula software summit on September 28.
Now I'll turn the call over to Jay.
Thank you Bill I'm very pleased to share our strong Q4 results two and another outstanding year in the quarter, we delivered 61% revenue growth and 57% billings growth as customers continued to embrace our zero Trust X.
Jane platform to secure their digital transformation, we are delivering strong growth, while generating strong profitability or free cash flow margin was 24%, which was a record for Q4.
While many public SaaS companies are happy to get to rule of 40, we surpassed a rule off 80 for the quarter and for the full year. These outstanding results reflect the strong underlying unit economics of our business that has high 90% gross written.
Tension rate and over 80% gross margins.
This is possible because of our differentiated service and purpose built multi tenant cloud platform that scales efficiently.
For the full year, our revenue grew 62% to $1 $1 billion and billings grew 59% to $1 $5 billion, we're seeing revenue growth across all products industry verticals and market segments and geographies our platform is secure.
Over 34 million users for over 6700 customers.
And we are making great progress towards our goal of protecting 200 million users to reach our goal.
We will continue to invest aggressively in growing our business and driving innovation, while focusing on operational efficiencies to drive the bottom line.
<unk> shared with you some of my observations and how we plan to manage through the uncertain macro environment in fiscal 'twenty three.
Trust My conversations with hundreds of exact has confirmed that cyber security remains the number one priority and a top board level issue.
Independent CIO Sotheby's confirm zero Trust security and SaaS Evo continues to be a top priority.
These killers proxy based cloud platform is the best solution for tackling sophisticated cyber security challenges.
In addition, the rise of hybrid work and the need for secure digital transformation are driving the demand for Zee scalar. We believe periods of macro uncertainty can accelerate adoption of disruptive technologies like ours, which offer a better <unk>.
<unk> and user experience, while substantially reducing cost and complexity.
As the pioneer and recognized leader in security service edge, we are well positioned to capture this ongoing market shift towards zero Trust.
Second we address our 72 billion dollar market with significant new customer and up sell opportunities our superior architecture and proven experience delivering measurable outcomes at the <unk> level.
Elevate us above the competitive noise, we drove 62% year over year growth in customers with greater than $1 million in ear are ending with over 320 of these customers, including over 20 customers exceeding 5 million.
In <unk>.
We have a blueprint for delivering great value, which drives strong upsell for us approximately 60% of our new business comes from existing customers and our net retention rate has again exceeded 125% now for seven.
Second quarter's happy customers buy more and our net promoter score continues to exceed 70, which is more than two times. The average NPS for SaaS companies. In addition, we expect our deep and wide platform together with our enviable cut.
Our base of large enterprises to continue to drive Upsells as we have indicated before we have a six times upsell opportunity with our existing customers just for our core CIA and CPA product pillars lastly, our consultative.
Sales process plays a major role in our success and enables us to maintain a high level of engagement with our customers, especially at the C level.
As part of this process, we produce CF already business cases, with Ottawa and payback periods calculated in collaboration with our customers in Q4.
As we saw more deals getting scrutinized, we delivered more of these business value assessments, which helped US close many large multi year multi product pillar deals. We believe an adaptive sales process makes us resilient to changing business environment.
And we'll continue to drive our business.
Looking forward I'm excited about fiscal 'twenty three as we continue to win opportunities with new and existing customers increasingly customers are buying Z I E. S. Z P. A N C D X together to deliver a complete zero trust solution for users. This accelerates.
Our customers' transformation journey and makes us a critical partner for bank, let me discuss two such deals in Q4.
In a new logo win a fortune 50 pharmaceutical company purchased Z Z P. A N Z Dx for all 145000 employees. This deal started with a regional needs to improve security without compromising user experience in China with multiple data center.
And China covering various regions with premium connectivity auctions Zee scalar has superior zero trust access for multinationals out of China next this customer engaged us for global M&A integration and hybrid work use cases.
Pressed with these resolve they accelerated their company wide zero trust adoption with us.
The disc quantified their incumbent Nextgen firewall vendor, who had no reference table customer at the required scale 400, SaaS cloud VPN product this customer understands that a VPN either as an appliance or hosted in the cloud under any name is not zero.
Trust and is the biggest security risk. This customer also purchased Zscaler for workloads for 10000 workloads to enable multi cloud app to have connectivity to support our M&A strategy. This was a three year eight figure deal for all four pillars.
Of our platform.
Z P. A Z Dx and Zee scalar for workloads or what we used to call cloud protection. We close this deal with AWS marketplace, which is becoming a larger channel for US next one of our largest deals in the quarter came from a delighted.
Fortune 500 tech customer who deployed the entire zee scalar for users offering, including Z I E Z P and Z Dx this provided fast and direct access for users working from anywhere to applications in the data center or in the cloud with.
<unk> improvements and user experience employees are buzzing about the change one employee slack and I caught every morning, a long into my machine.
I'm thankful for Zee scalar.
This customer doubled their seats to 120000 users and extended the commitment for another three years.
The journey with US started with a small M&A integration use case, which quickly expanded into a company wide zero Trust initiative in less than two years. This customer's annual spend with Zscaler grew 13 acts to well over $10 million.
Next from a product perspective, we saw strong performance across all pillars of our platform our core pillars Z I N CPA have never been stronger and we are excited about the rapid adoption of our emerging products CTX two managed.
Digital user experience and Zee scalar for workloads to secure servers and workloads.
Emerging products contributed 14% of our new business in fiscal 'twenty, two and we expect continued growth in fiscal 'twenty three.
We continue to innovate rapidly and expand on platform.
At our Zenith live conference in June we launched posture control for public clouds as a fully integrated solution that correlate vulnerabilities and risks across CSP M. C. I M and infrastructure as code scanning.
In addition, we integrated our recently acquired deception technology into our platform and saw great adoption by our customers.
This is an example of a highly targeted early stage acquisition strategy shortening our time to market for new innovations and expanding our market opportunity.
Let me highlight three deals that are driven by our emerging products. We won a seven figure ACB with a government agency in Australia for CIA as CPA and CTX <unk> accounted for approximately $1 million off the total ACB value <unk>.
<unk> points and resolve performance issues in real time by monitoring Expedience of every user every network hub and every application regardless of their location and the customer said vd acts as a must have as it delivers immediate value by reducing troubleshooting time.
And improving employee productivity in a seven figure ACB upsell win a fortune 50 insurance company purchased VP a transformation bundle for zero trust access to implement user to App segmentation. This customer understands that if a user.
<unk> connects to the network with an on Prem or cloud VPN, that's not zero trust with this latest purchase they plan to replace their legacy network security, including VPN network access control, our knack network based segmentation and VDI.
Infrastructure. They purchased these color deception to detect an intercept bad actors trying to infiltrate the network finally, a global 500 financial services customer in APG purchase Zee scalar for workloads for 36000 workload.
To complement the Z I and Cps service for users with many apps running in AWS and Azure. They wanted to implement a zero trust architecture to prevent lateral check movement and eliminate back hauling workload traffic through the data center for inspection.
We reduced cost and complexity by eliminating the need for virtual firewalls and site to site VPN networks, while improving security and operational efficiency.
Next let me discuss the progress we're making in federal vertical we now have fed ramp high authorization for CIA, which together with CPA makes us the only cloud security service to have two products at the highest level of fed ramp certification. In addition.
<unk> is the only zero trust solution with D O D IL five certification.
These certifications are driving our federal business in Q4, we added over 25, new federal customers and over half of them purchased C. I.
And CPA together.
No. We have landed 10 after 15 cabinet travel agencies as customers with plenty of opportunities for upsell add these large organizations.
I want to highlight one federal deal that I am particularly excited about.
We were awarded a five year $46 million contract by a large cabinet agency with over 100000 users.
The value of this contract will be granted over time based on deployment against this award we received an initial low seven figure ACB task order for Ci and CPA.
Next let me comment on the increased leverage we are driving with our channel programs, we saw over 50% year over year growth in channels source deal registrations working closely with our cloud centric von partners, we are building momentum down market.
In the enterprise and commercial segments, which is providing higher contribution to our new business at RSA Conference you heard a key partner often talk about the plan to grow with us and further invest in Zee scalar certifications for their consultants.
I'm also excited about the opportunities we can unlock to gather with a global S size that are building large zero trust and SaaS transformation practices.
Moving to cloud marketplaces. This channel is growing very well for us we have made strategic investments in our collaboration with AWS and Azure, including deep technology integrations cross selling opportunities and demand generation programs in Q4 are new.
Business through cloud marketplaces grew nearly five X year over year for.
For example, we signed five greater than $1 million deals through the AWS marketplace, including two of our top five new and upsell deals after quarter, our strengthening Azure and AWS partnerships also gave us access to their customers sizable.
<unk> budgets, which can streamline the deal close process.
I want to highlight another important area for our customers their ESG goals.
Our highly efficient cloud eliminates the need for on Prem appliances, which significantly decreases the waste energy uses and carbon emissions. We are also committed to our own ESG goals.
<unk>, achieving 100% renewable energy last year, we are proud to be carbon neutral for calendar 'twenty, two covering relevant scope, one two and three categories, including travel customer use public cloud use and procurement.
I am excited to announce our goal to be net zero by 2025, joining our customers in a collective effort to transition to a low carbon economy in closing even with uncertain macro conditions, we continue to see favorable demand for our zero Trust.
Exchange platform, which makes businesses more agile and competitive simplifies consol.
Consolidates point products and reduces cost, we believe customers trust zee scalar more than any other provider for securing their cloud journey.
We have grown our global team to approximately 5000 employees, who share our mission to secure the Hyperconnected world of cloud and mobility I'm extremely proud of our strong growth and profitability we delivered in 2022.
Want to thank our employees and our partners for their tireless efforts and commitment to our customers' success, we will continue to invest aggressively to delight, our customers and capture the large opportunity ahead of us while delivering operational excellence.
No I like to turn over the call to remove for our financial results.
Thank you Jay we're pleased with the results for the fourth quarter and full year.
Revenue for the quarter was $318 million up 61% year over year and up 11% sequentially.
The PPA product revenue was approximately 19% of total revenue.
Growing 80% year over year from a geographic perspective, we had broad strength across our three major regions.
<unk> represented 52% of revenue.
EMEA was 33%.
P J was 15%.
P. J continues to be our fastest growing region with revenue growth of 88% year over year.
For the full year revenue was $1.09 billion.
Up 62% year over year.
An acceleration from the 56% growth we delivered in fiscal 2021.
Our total calculated billings in Q4 grew 57% year over year to $520 million with billing duration comparable to a year ago and slightly above the midpoint of our normal 10% 2014 months range.
We saw strong growth in our top five verticals finance manufacturing health care technology and services.
Remaining performance obligation or <unk> grew 68% from one year ago to 260 $7 billion. The current IPO is 49% of the total RTL.
As a point of clarification, the total contract value of the five year $46 million award from the U S. Federal Government agency that Jay mentioned is not included in our RPI.
Our apio for this contract will be recognized.
As the individual task orders are received which are 12 months in term legs as is typical for our federal customers moving onto our product pillars for the full year emerging products, which include zodiac and <unk> scalar for workloads for what we used to call cloud protection met our targets and contributed 14% towards.
Total new business.
Including our new seen app interception offering.
Scalar per workload pillar.
We expect emerging products to contribute high teen percentage of our total new business in fiscal 2023.
CPA was 27% of our total new business in fiscal 2022 and grew with a mix between the two core Gia and CPA pillars.
We have a large opportunity in all our pillars, and we will continue to innovate and expand our portfolio to strengthen our leadership position in the zero Trust security market.
Our strong customer retention rate and our ability to up sell the broader platform have resulted in a high dollar based net retention rate, which is again above a 125% for the last seven quarters. We have a strong base of large enterprise customers, which provides us with a significant opportunity to upsell our broader.
<unk>.
We had 327 customers paying us more than $1 million annually up 62% from 202 in the prior year.
<unk> strength this metric speaks to our large enterprise focus and strategic role we play in our customers' digital transformation initiatives.
We added 198 customers in the quarter paying us more than $100000 annually.
And in the year at 2089 such customers.
Expanding our field engagement with small enterprises with 2000 to 6000 employees and increased investments in our summit partner program are contributing to our overall customer growth turning to the rest of our Q4 financial performance total gross margin of 81, 6% was up nearly one percentage.
Point quarter over quarter and year over year.
Our total operating expenses increased 8% sequentially and 60% year over year to $221 billion.
Operating margin was 12% and free cash flow margin was 24%.
We continue to expect data center capex to be around the high single digit percent of revenue for the full year.
Ended the quarter with over $1.73 billion in cash cash equivalents and short term investments.
Before providing our guidance I would like to share a few thoughts about the framework for our business outlook and the current environment.
He scalar is operating from a position of strength.
We're entering this fiscal year with a record pipeline and a large set of customer opportunities we have confidence in the durability of our business model with very high contribution margins. After the initial lamp and proven ability to retain and upsell to our enterprise customer base.
With customers increasingly adopting the broader platform with long term commitments, we plan to continue to invest in capturing our large market opportunity.
As Jay mentioned, there with more deal scrutiny at the end of Q4.
Which resulted in business being more backend loaded.
We think it's prudent to expect this higher level of review and scrutiny by our customers to continue given the uncertain.
<unk> economic outlook.
While demand for disease scalar platform remains very strong.
The business environment changes, our business model allows us to adapt quickly and to deliver on our operating profit and margin goals.
In fiscal 'twenty, three and our guidance, we intend to deliver operating margin expansion of approximately 150 basis points.
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 and amortization of intangible assets.
For the first quarter of fiscal 2023.
We expect revenue in the range of $339 million to $341 million, reflecting a year over year growth of 47% to 48%.
Gross margins of approximately 80% I would like to remind investors that a number of our merchant product will initially have lower gross margins, but our core products. Because we are more focused on time to market and grow rather than optimizing them for gross margins.
Operating profit in the range of 37% to $38 million.
Net other income of $5 million.
Income taxes of $2 $5 million.
Earnings per share of approximately <unk> 26.
Assuming a $155 million fully diluted shares. Please note that starting in fiscal 2023, we adopted the new accounting standard which requires the use of <unk>.
If converted method for calculating EPS to account for convertible notes, you'll need to add back $360000 in quarterly interest expense and includes 763 million shares to the fully diluted share count or.
For the full year fiscal 2023, we expect revenue in the range of 149 billion.
To one 5 billion or year over year growth of approximately 37% calculated billings in the range of $1 92 billion to $1 $94 billion or year over year growth of 30% to 31%.
While we don't normally guide to quarterly billings I want to remind you that we will have a difficult year over year comparison in Q1 in the year ago quarter, We had a one off deal in multiyear invoices that resulted in billings duration at the high end of our normal 10 to 14 month range.
With that in mind, we expect Q1, 'twenty three billings to grow approximately mid 30% year over year. We also expect our first half mix to be approximately 42% to 43% of our full year Billings guide, which is higher than the first half mix in the last few years.
Operating profit in the range of $173 million to $176 million income taxes of $14 million.
Earnings per share in the range of $1 16 to $1 18.
Assuming approximately 157 billion fully diluted shares.
As noted earlier to account for convertible notes in EPS, you will need to add back one for $4 million in annual interest expense and <unk> 763 million shares to the fully diluted share count Let me conclude with comments on our investment framework.
We will balance growth and profitability based on higher business is growing.
We continue to have high growth will prioritize investing in the business as.
As we have discussed if we're growing revenue faster than 30% you can expect less than 300 basis points of margin expansion in the year, we remain confident of reaching 20% to 22% operating margins in the long term.
With a huge market opportunity and customers increasingly adopting the broader platform, we're committed to investing aggressively in our company while balancing this with our operating profit goals.
However, if we see a deteriorating global economic environment, we have the flexibility to place a higher priority on operating profitability. Operator, you may now open the call for questions.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one one on your Touchstone telephone again to ask a question. Please press star one one we do ask that you. Please limit yourself to one question to allow every once I get a question. Thank you. Our first question comes from Andrew Nowinski of Wells Fargo. Your line is open.
And a lot of interesting data points, I guess, but I'll start with the big bad deal. It doesn't sound like it contributed maybe any revenue in Q4, given that it's not an <unk>, yet but wanted to clarify that.
I'd imagine a deal that size was likely competitive. So just wondering if you could discuss which vendors you beaten that deal and then finally, given the upcoming fiscal year and with the fed.
The remaining pipeline in the fed look this quarter given the strong results you just put up thanks.
I'll take the first part A&D.
Absolutely right Theres not much revenue in the quarter for that large deal.
But you call out also that is not in the <unk> great call out also which is.
What we've been talking about with our <unk> growth, it's better for Zee scalar to look at billings growth because that entire $46 million or most almost all of that $46 million is not an RPI now.
Okay.
So regarding.
The deal in nature than competitiveness, you can imagine that almost all federal do you need to go through.
Yes.
And all of the obvious names you would expect all competing all legacy vendors network security firewalls in my life.
<unk>.
But eight one architecture.
One at the end.
We are excited about it but as you know some of these federal deals take time, we do have churn after 15 cabinet agencies at our customers and there's a lot of opportunity for us federal market.
That's great. Thank you so much.
Thank you. Our next question comes from Brad Zelnick of Deutsche Bank. Your line is open.
Yes.
Guys on a fantastic.
An unbelievable execution against a tough environment, which leads to my my question, Jay I think it's well understood that security and connectivity are essential non discretionary budget items for customers, but but two related questions. One it would seem in tougher times, it's more difficult to land new logo customers and I'm curious if that's true.
Zee scalar and how you mitigate that and just related is there any shift that you're seeing in terms of where the budget is coming from for customers to fund their network and our it transformation initiatives. Thanks.
Thanks, Brad It is true that it takes more time and effort.
Gross.
The venue current customers are very happy to Mike.
That's why our business is coming from both sites expansion of new logos and what are we trying to do to get new logos in current market.
One very exciting thing, which is very unusual a big source of new logos for US has been <unk> frequently move from company to company B.
They often call us.
How do you parse the same party.
Well, we are probably a few tests.
CX was when they called US wants to do a discussion the conversation goes along faster.
In addition, we are doing a lot of demand Gen program, what our demand Gen programs and doing the outlet channel partner in Hawaii.
Largely focused on new logo.
Wanted to do both new logos as well as upsell.
Second part of your question is where the budget is coming forward to fund.
We yes, we are driving transformation, but nature of our transformation has been changed.
First of all fourth Corvid network transformation used with big <unk> tall.
Killed all of that discussion is that Internet is the corporate network.
Actual transformation evangelism, it's fallen away, it's mainstream that you should be able to go and what many of you.
Now where does the budget coming from.
Number one thing Cio's and CFO is going to ask now.
Please help me eliminate a lot of products help me save money. So cost reduction by elimination is a big thing and especially our platform Wildlife Z stood at which can eliminate fossil products, we actually end up showing good ROI.
And in the past is getting a bigger budget Sir.
One part the second part is.
I highlighted in my prepared remarks that marketplace spend on hospitals some of these large deals.
<unk> actually coming together.
Got a question.
Broadcast revenues already.
And it is true that customers are asking for.
Better business value quantification and Thats, what we do meet with a very mature business value process. That's why you've seen us do very well.
<unk> increased.
Okay.
Fantastic. Thank you so much and congrats again guys.
Thank you. Thank you.
Thank you. Our next question comes from Alex Henderson.
Your line is open.
I think back to your.
Zenith live event you talked about.
Conditions, such that yes, there may be some stretching of duration, but that in turn is resulting in.
A higher adoption rate.
Mainly because you are able to help them lower cost.
Lower the amount of employees they need to run their operations.
As well as eliminating the point products. So as the conditions have tightened further over the last month and a half have you seen.
And increased our win rate.
Some larger deal sizes as a result of that.
Ability to help companies significantly diminish there.
The staffing and cost requirements.
We have actually many many customers.
Publicly stated in our conference is that.
Number of resources needed to one offering CE center service as much at all.
Got it.
<unk> got assets based on what it takes one appliance complete firewall companies in the life.
So that's part of our operational costs.
There are four pieces of cost that customer looks back bone reduction on the scanner.
Operationally is obviously one part of it.
Cost savings from elimination of point products is an important area you won't believe all many security products offsetting at.
Any large enterprises.
<unk>, so called appliance for P J.
Third area is to improve business productivity, which is linked to.
User experience. It is interesting as uses of working every payer access being very critical information.
Users are Barry.
Well I Shouldnt say not.
Intolerant any slowness in as far as speeds and four things production, it's hard to quantify risk, but our customers are looking at what's the cost of reach what's the cost downtime in July . So we have always had a good business value assessment process. It has sharpened and also.
We work with C level at the senior level becomes sponsor of the process.
Help us show them savvy embedded helps us get our deal done.
The question just to be clear was has there been a change in that.
The environment that has been amplified the benefit of those four factors.
Yes.
Probably EBIT right.
The direct answer would be it is more and more meat.
A strong assessment.
Nation and commitment to delivering those results absolutely yes.
Great quarter.
Quarter, Thanks for the answer.
Thank you.
Our next question comes from Joel Fishbein of choice. Your line is open.
The question and congrats on the great execution Raimo just to.
One question two parts.
Great outperformance on the gross margin side of the business wanted to understand what the drivers of leverage going forward will be I know you gave us some a little bit of color on the FY 'twenty three and then also $1 7 billion in cash what are you what's the best use of cash at this point in the evolution.
I mean good questions.
So the outperformance in gross margin in Q4, we did 81, 6% and year.
Basically it's the efficiency that we've created with our software optimization and just overall lower cost bandwidth cost co low cost depreciation as.
As well as the outperformance on the top line. So those are the primary reason key thing to recognize with our gross margin.
The ability to come out with applications faster by putting basically applications in public cloud, we will continue to do that.
Again from our perspective.
We are going to deliver the best product as quickly as we can to our customers and our gross margin. We expect in fiscal 'twenty three and also the midterm is 80% from a long term perspective, we expect gross margins between 78 and 82% so as long as we're within that bound.
Just give us tremendous flexibility from a modeling perspective or zee scalar because we have such high gross margins with high growth to invest in the business.
Irrespective of the $1 7 billion in cash.
Really no plants.
It will be used for strategic purposes, we clearly don't needed for working capital as our free cash flow last year was significant and also from a free cash flow perspective in fiscal 'twenty three I would expect free cash flow margin to be 20% or above so really just for strategic purposes.
Cash.
Thank you.
Thank you. Thank you. Our next question comes from John Fucci.
Of Guggenheim Your line is open.
Yeah.
My question is sort of a high level question that goes back to brad's, a little bit in terms of the macro environment, which which no one really escapes and it's good to hear you acknowledge it even though you really don't see it in your financial results Youre, New ACD per our calculations accelerated against a more difficult comp.
And your guidance implies some confidence in future rate so.
You kind of talked about how you think about the macro softness and why it's not affecting your business right now.
This is probably for Primo how did you think about it or how does it implied in your annual guidance if at all.
This softness or whether it can get worse.
Other than you did mentioned business as being more back end loaded and that was sort of assumed but you've closed it anyway. It's just back end loaded.
Is there any any other color you can give us.
No.
It's a great question and I think that's one of the key questions.
You for asking it.
We did see higher deal scrutiny in Q4, so that played into our guidance.
That higher deal scrutiny related mostly to.
Large multi year multi product pillar type deals.
As you mentioned, John not a significant impact on our business.
<unk>.
From our perspective, and we took a look at our guidance.
Many customers have not put their budgets in place.
For calendar 'twenty three that will happen.
A few months.
There are a couple of quarters, so that does create a level of uncertainty in the second half of our fiscal 'twenty. Three so we took a look at all of those factors in consideration when.
When we did our guidance and that is the reason that we guided toward a higher contribution.
In the first half of our billings between 42 and 43%.
And that compares to last year, which was 41, 5% so.
A lot of thought put into the guidance.
We feel it is prudent.
And also again, we're recognizing that the second half of our fiscal year.
We don't have good visibility and Thats why we have better visibility in the first half.
And if I may add on two things Paul.
Finally at two things we have done to make sure we do a good job.
One is.
We are working more closely with our customers to identify.
What needs to go what needs to change.
<unk> not.
A lot more focus on helping customers save money because CIO is asking us what can you do to save money on have a lot of legacy debt bonds. Please help so our sales process is focused more on that than it used to be.
That's one and the second B alluded to it but the business value assessment needs to be much sharper than in Houston.
Okay. Thank you very much guys that makes a ton of sense. Thank you.
Great. Thank you.
Thank you. Our next question comes from Roger Boyd of UBS. Your line is open.
Quarter.
Just to touch on the cloud marketplaces. It seems for a couple of quarters now you've highlighted the momentum with AWS and Azure, but buybacks growth really stuck out this quarter any sense for how big of a channel that is for <unk> today, and how big that could get given it seems like a win win for customers of ours and ISG is like yourself.
Yeah.
Yes.
Start then I'll ask Jay.
It's still relatively early.
Still relatively a small part of our business.
But the cloud marketplace is increasing.
And we do see it as a very.
Important and strategic basically channel for us so with that I'll turn it over to Jay.
It becomes a new channel.
Revenue for us over the.
Let me pull district plenty in the past two years has gone from eight.
Pretty significant that's why from a small base the numbers are looking big but those big providers are now working with us and core selling to generate net new pipeline for us.
Good the other party, that's helping us kind of interesting is some of these budget saw.
<unk> or hyper scaler on annual basis, and our solutions qualified to become open those budgets that becomes one more justification with a little bit easier budget approval.
One more area for us.
We are dedicating resources, we are making investments in this channel will become bigger.
Great color. Thank you.
Thank you. Our next question comes from Mike Walkley of.
<unk> Your line is open.
Yes.
Thank you very much and congratulations on the strong results.
I just wanted to get your thoughts just given the economic uncertainty and increased deal scrutiny.
Zee scalar is value proposition.
This year being a year you even accelerate share gains in the market.
Or alternatively are you just seeing customers given the uncertainty just tightened budgets and sticking with what they currently have.
Okay.
Thats, what I'd calories more or less be more aggressive.
Okay.
Okay.
It's a great question.
We'll have to wait and see.
<unk> got our guidance.
When we give guidance, we'd like to be prudent.
However.
Again from my perspective, and you take a look at Zee scalar.
Was purpose built for this world.
The highest level of security proxy based going down to SSL traffic.
As Jay talked about lower complexity.
The number of security professionals in the world.
A major need for it and that's going to get worse than lower cost.
Again.
We'd like to do our guidance, we'd like to be prudent.
And we'll see how things play through but I don't see any other.
Please.
We are well positioned let's just say that will help position. The company, yes, that's what I would say I mean, sorry hard times, obviously acquired a lot of extra effort to make things happen.
I'd say with all the great things that are positioning us well I expect us to do bought better.
Most of the vendors.
Makes sense. Thank you.
Thank you. Our next question comes from Hazmat firewall of Morgan Stanley . Your line is open.
Okay. Thank you for taking my question.
We've obviously had a lot of change.
Over the last couple of years in terms of the nature of work.
<unk>.
And to me it seems like security architectures still haven't fully caught up to that and there is still a lot of technical debt.
I'm curious when <unk> does come in and do some of these transformational deals.
Is there more pressure.
For <unk> and <unk> to want to replace existing solutions.
Who are you or what technologies are you seeing yourself replace more often these days as we are.
Entering into a more hybrid world going forward.
This is a very good question.
If you think about an hour.
While big product portfolio at <unk>.
Essentially replacing all branch kind of devices.
The higher CPM.
<unk> allocated a waiver.
It's been out there.
Number two the GPA, we are beginning to.
They place obviously, the VPN was a starting point, but think of inspired inbound DMC that many customers actually report that's the second part.
Branch Firewalls branch proxies on desktop is number one.
Cloud workload with the announcement of our new solutions, we are done with.
These killer for workloads with Zero Trust is being brought to the problems and this is relatively new monarch in the past eight or nine months.
Have no quite a few customers who have no firewall in the cloud.
So typically they buy a bunch of virtual firewalls in the fall.
We see real life, we think our customers will be firewall.
Bob.
The third part is data center.
That gets our slowest moving on that data center DNV. All these boxes are very complicated and we actually don't like to go and fight in that area because that area is kind of pretty clumsy and cluttered and data centers are shrinking over time.
Put my focus on where the puck is headed.
So that's where we see a number of customers buying firewalls for data centers on the light because there is also demand coming from the corporate side of it.
But.
All of our branches.
Replace almost every single public cloud or at least stage, but very promising signs and data center will leave it alone for a while.
Did I answer your question.
Yeah.
That's helpful. Thank you.
Thank you. Our next question comes from Joshua Tilton of Wolfe Research. Your line is open.
For taking my question and I'll Echo my congratulations on the quarter.
You guys. Obviously gave operating margin guidance for next year are there are there any guardrails you can provide us on how we should think about maybe the delta between the operating margin in the free cash flow margin for the full year.
Yes.
When you take a look at the last two years.
Our free cash flows and above 20%.
When you take a look at.
<unk> that we gave before.
For fiscal 'twenty three.
It's the same basically.
Would follow would have done in the last two years being over 20%.
The value that these scalar has for a very efficient company and you take a look at our cloud tip.
Typically our cloud.
Capital expenditure expenses.
High single digit.
One quarter, which is relatively low or high gross margins.
Our overall operating profitability.
The key thing also with our free cash flows that we typically bill annually. So are our billings range between 10 and 14 months so.
It's just we're just in a really good position very efficient model.
And again looking at the last two years I wouldn't expect anything different from a free cash flow margin perspective, I would expect things to be similar higher than 20%.
Thank you very much.
Thank you. Our next question comes from Gregg Moskowitz.
Zillow group your line is open.
And congrats on Gia as fed ramp authorization given that you are clearly already seeing a lot of momentum in your federal business. Jay maybe you could expand on what having dual fed ramp high authority will add to Zee scalar incrementally and then for Raimo.
Interesting to me that your head count growth actually accelerated in fiscal 'twenty, 2% to 58%, especially since you grew a robust mid fifties in the prior year.
Even that the macro uncertainty how are you thinking about hiring growth over the next six to 12 months. Thank you.
I will start.
We had good results in Q4, we are expecting healthy results for federal business in Q1.
But we do know that federal business takes time.
It's taken us.
<unk> got the got it at a high level.
Probably more painful than any other efficient ISC, but a good one so they are positioning us well.
<unk> certification still startups with smaller businesses.
And there's a lot of opportunity to expand for example, Canada 15 cabinet cabinet level agency. He talked about that mostly they have started small and plenty of opportunity for us to expand so we are investing resources on our pipeline is growing and we have high expectations from our practices.
From a from a head count perspective.
Greg Youre, absolutely right it.
It was a.
A great year for us.
Kent expansion expansion in fiscal 'twenty two.
We talked about we are excited about the opportunity.
We felt that the best interest for everyone.
We continue to prioritize growth, but being mindful of operating profitability. We plan to continue to still prioritize growth going forward, but because of the leverage in our model, we're able to deliver we are planning to deliver.
150 basis points basically margin expansion.
The reason for that that we're able to do that.
SaaS model with ratable revenue with the AR balance you've got pretty good visibility coming in to the year. When you couple that with high gross margins at 80% plus.
It just makes it a very attractive model.
For us to really manage our business.
Right now where we're at.
We feel we have the right product at the right time, which addresses a significantly.
Or are customers, we plan to invest.
Across the board in the company, we're going to be investing in go to market R&D in our cloud.
Really help customers navigate through this difficult time, where they can lower their cost increase.
Increase their security.
And basically decrease their complexity so from my perspective.
We'll continue to prioritize growth and we will continue to hire so that as our plans for fiscal 'twenty three if I may add just a comment on hiring and we did well last year.
Yes to be hiring this year.
Have become the destination for comments.
In R&D and in sales.
The best organization, both to got it alright.
Six nine months ago. Some of these startups that are funded like nothing else. There. They are all trying to hire people. There are laying people off and we are investing heavily in it and by that way, we acquired Brandon Castle, our new Chief people Officer. He comes from Google.
Expertise and scaling talent acquisition and development, so very very excited and bullish about the business.
Very helpful. Thank you Beth.
Thank you. Our next question comes from Sean.
Cowen Your line is open.
And guys congrats on the ongoing strong performance and guidance.
Question for either Remo or Jay.
So clearly J as you've indicated you showing great ROI for your customers wanted to actually focus on your.
Trends, maybe can you provide us with some color on our recent ARPA trends are they.
On par with recent quarters have they been moving up in recent months.
Have you instituted any pricing increase over the course of the past few months.
Thanks for that.
Yes.
I'll take that.
<unk> has been increasing on a year over year basis.
<unk>.
Increased 20%.
Weighted two price increases.
We typically do it on an annual basis, and really it's interrelated to additional applications and bundling.
So yes.
With that prices to go up but they go up probably in the mid single digit type range, nothing really significant but it relates to the additional applications and bundling.
That's typically done on an annual basis, yes, we haven't done anything just like some of the hardware vendor you saw recently they talk about here's a deadline of price due to kind of give the order before that we have had no deadline, so not any of the pricing cap or stock got pulled into our business.
Thank you Scott.
Yes.
Thank you. Our next question comes from Keith Bachman of BMO. Your line is open.
Students.
And the question is.
How are you thinking about mix in particular, and what I mean by that is I think Jay you said.
60% of your new Biz.
Some existing customers do you see that changing as perhaps new logos get more challenging and or do you see a different composition associated with our solution set.
Meaning.
The Pn replacement has been a really strong business for the last couple of years is there any saturation. There just any comments on how we should be thinking about mix and finally within the guidance I also wanted to ask renal you mentioned visibility is lower.
In the second half of the year, which I think is completely understandable, but.
Did you take.
A heavier cuts so to speak or a more careful more prudent approach, we say versus what youre seeing in the current macro environment as you thought about that.
Second half.
Guidance.
I'll start.
By the way regarding our mix I think the 60% I said upsell or the percentage.
The other way around.
So yes, you are right.
Well at this point.
Now historically, we have grown our enterprise business very well large enterprises come from there and our business is getting bigger on customer base is getting bigger so upsell is getting bigger.
The platform is bigger more customers yourself build a bigger platform.
<unk> is naturally increasing our upsell percentage of the total business we are doing.
And you will see both ups and a new large customers when it comes to lower end of the market.
You will find us largely focused on getting new logos in that market our demand Gen and channel programs that are helping us to get more normal is there.
And our channel partners.
On helping us with longer so I think youll see a combination.
Meanwhile, you probably can give a little more guidance, but I expect an upsell to <unk>.
ROE higher.
Our client because our customer base.
Absolutely.
So we will go above.
60%, which it was this past year.
Just for the reasons you know J J mentioned, we've got 6700 customers.
And when you take a look at we've talked about a <unk> opportunity to sell just the IAA CPA.
At our last analyst day.
That does not include workload so.
Another part of our business, so significant opportunity to upsell to customers related to.
Consideration related to the second half, yes, that's why we gave the first half contribution of our total billings.
At the midpoint 42, 5%.
Versus 41, 5%, which we had last year. So again, we're saying of our total guide of the 30%, 31% billings growth year over year.
We expect to see 42% of that in the first half.
This year versus 41, 5% last year, that's how we took into account.
Okay alright. Thanks.
Thank you. Our next question comes from Phil Winslow of Credit Suisse. Your line is open.
Congrats on another great quarter.
Obviously, the sales productivity metrics that we can follow up from the outside looking in remained renamed Superstar I Wonder if you could give us more color on sort of what youre seeing there, particularly in terms of the time to ramp ramp new reps their productivity metrics and as you think about just the forward guidance, obviously, you're talking about continuing to lean in on that.
Go to market in terms of head count, but what do you think about what's implied in terms of guidance, what sort of productivity levels relative to what we had been seeing are baked in there.
Yes, great questions. So time to ramp is faster there.
There is no doubt.
And that's basically the market is more mature as.
As well as our sales operation sales in April the group, we have an absolutely outstanding sales Naval group, which gets our sales reps basically trained very quickly.
In addition to that channel as Jay talked about the contribution of the channels up the.
The marketplace.
Cloud marketplace also all of those things basically are helping for these sales reps to ramp.
Faster related too.
What's embedded in the guidance for fiscal 'twenty three for sales rep productivity.
Expecting sales rep sales rep productivity. These flattish to down the reason for that is basically again, we talked about we're still going to prioritize growth over operating profitability.
But even with.
Flattish to down sales productivity.
Productivity.
Can still bring in about 150 basis points of operating margin expansion year over year, which is what our guidance is.
Again, the model, we have with the high gross margins in the high top line growth gives us the flexibility towards what we feel we can do to make the right decisions to really capture this market.
And if I may add.
I understand the importance of operating profitability, especially in today's market.
We will definitely be mindful of that.
The most central balanced growth and profitability.
Got it excellent.
Thanks for the color and keep up the great work.
Thank you.
Thank you. This does conclude our conference like to turn the call back over to Jay <unk> for any closing remarks.
Thank you.
Continued interest in <unk>.
I hope to see many of you at the upcoming south side events.
Goodbye.
Thank you.
Thank you goodbye, ladies and gentlemen.
This does concludes today's conference. Thank you all for participating you may now disconnect have a great day.
The conference will begin shortly to raise Johan during Q&A, you can dial star one one.
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Yes.
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Okay.
Yes.
Okay.
Yes.