Q1 2023 Zscaler Inc Earnings Call
The conference will begin shortly. To raise your hand during Q&A, you can dial...
Thank you for standing by and welcome to the Z-Scale of Fiscal Year 23 First Quarter Results Earnings Conference Call.
At this time, all participants are in a listen-only mode.
After the speaker's presentations, there will be a question and answer session. To ask a question at that time, please press star 1 1 on your touchstone telephone.
As reminded, today's call is being recorded.
I will now turn the conference to your host, Mr. Bill Choi, Senior Vice President in investor relations and strategic finance. Please go ahead, sir.
Good afternoon, everyone, and welcome to the Zscaler first quarter fiscal year 2023 earnings conference call. On the call with me today are Jay Chowdhury, Chairman and CEO , and Remo Canessa, CFO . Please note that we have posted our earnings release and a supplemental financial schedule to our investor relations website.
Unless otherwise noted, all numbers we talk about today will be on an adjusted non-GAAP basis. You will find the reconciliation of GAAP to the non-GAAP financial measures in our earnings release. I'd like to remind you that today's discussion will contain forward-looking statements including but not limited to the company's anticipated future revenue, calculated billings, operating performance, gross margin, operating expenses, operating income, net income, free cash flow and 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 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. I would also like to inform you that we'll be attending the following upcoming events in December . UBS Global TMT Conference in New York City on December 5th.
For a higher billing duration a year ago, billings grew 42% as customers continued to embrace our Zero Trust Exchange platform to secure the digital transformation. Our disciplined approach to growth is enabling our operating profits to grow 76% year over year.
with operating margins expanding by 150 basis points over the same period. Our free cash flow margin was 27%, which once again placed our performance above the rule of 80 for the quarter, a combination of growth and profitability that we believe
only 1% of the public SaaS companies achieve. As the world's largest security cloud platform, we have outstanding unit economics in our business, reflecting high 90% gross retention rate and over 80% gross margins. These industry leading retention and margins are possible because of the lack of security and security.
because of our differentiated service and highly scalable multi-tenant cloud platform. In September , Zscaler celebrated our 15th anniversary. When cloud and mobility were in their infancy, we founded the company with a bold idea to transform security and the corporate network.
We started with a clean slate and created the Zscaler multi-tenant inline cloud platform, establishing modern zero trust architecture.
Which will significantly improve their security posture as employees unwittingly bring in fact that laptops back to the office.
Organizations need a true zero trust platform to eliminate the risk of lateral movement.
Next in an upsell deal a global 1000 financial services company in Asia.
After deploying <unk> for 110000 users last year.
Upgraded to Zee scalar for users our entire user protection platform for all 130000 employees.
As a growing company.
Are using these color too quickly and cost effectively opening new branch offices with secure internet connectivity, reducing the branch opening costs by 50% compared to legacy firewall based architecture also CPA replace.
Is the extensive VDI infrastructure with zero Trust access.
This customer said and I quote CPA provides a far more seamless user experience for sales or existing VDI solution and now we will have visibility to which users accessing which applications.
One of our key security requirements with.
With this latest seven figure purchase this customer's total <unk> more than tripled in just over one year.
These two wins illustrate when these large financial services companies were ready to embrace the cloud Zee scalar was the only platform that met their needs with security as a major requirement. These financial services companies chose a proxy architecture.
<unk> with the ability to inspect tls traffic at scale and disqualified firewall based SaaS solutions. We now have eight of the top 10 global banks and seven of the top 10 insurance companies outside of China as our COO.
Customers I'm also excited to see more $1 million ACB wins in our enterprise segment, let me share a new enterprise customer in the tech sector, who bought all four product pillars Z I E Z P. A M Z Dx for 4000 users.
And posture control for workloads Zee scalar is enabling the secured digital transformation for direct and seamless access to SaaS and private applications, regardless of their location. This supports the remote fast strategy, enabling them to close.
<unk> 12 offices and consolidate half a dozen point product. This deal was sourced by a var partner and speaks to the progress we are making with the channel as this win shows deal sizes in the smaller enterprise segment are growing at.
Customers adopt a broader platform next we are also executing well on our federal government opportunity, which had a strong quarter. We remain the only cloud security service to have two products at the highest level of fed ramp certification.
These certifications are driving our federal business as the U S government pursues a zero trust strategy to enhance our nation's cyber security.
We had four deals in the federal vertical that were each over $1 million all of which included <unk> and GPA.
Our highly differentiated architecture, which connects users to applications and not to the network eliminating lateral track movement was critical to winning these deals. We have now landed 12 of the 15 cabinet level agencies as customers.
With plenty of opportunity to upsell at these very large organizations and as I mentioned overall demand from customers to consolidate on our platform is growing our net retention rate has again exceeded 125% now for eight consecutive.
Quarters.
<unk> customers buy more and our net promoter score continues to exceed 70, which is more than two times. The average NPS for SaaS companies, we have our six X upsell opportunity with our existing customers just for our core CIA.
And CPA product pillars.
An important area of continued innovation I like to highlight is data protection. Our comprehensive data protection offering has been gaining traction as customers are concerned about data leakage with employees working from anywhere in Q1, we delivered in <unk>.
Industry fast zero configuration data on protection service, leveraging and building on our eight years of innovation in AI and ml. This DLP service provides auto classification of unstructured data to expedite deployments with zero configuration in it.
<unk>, we completed the integration of recently acquired shifts right what flow automation technology with our data protection solution to enable organizations to manage hundreds of potential risks and incidents in our simple yet very sophisticated.
Way to significantly reduce case resolution time data protection is the fast of many areas, where we book broadly integrate ship fright workflow technology into the Zero Trust exchange platform. These additional features combined with previously.
Released exact data match and index data match technology makes us the leading data protection platform in the market beyond our core products. We are excited about the rapid adoption of our two emerging product pillars Z Dx to manage digital user experience.
And these killer for workloads to secure servers and workloads, new HCV from a workload communication product is growing nearly 100% year over year, and our newest dissection and CNS offerings are seeing strong customer interest.
Let me highlight two upsell deal this quarter that were driven by our workload products.
Fortune 500 analysts based customer that is accelerating its AWS and SaaS adoption.
Purchase Zee scalar for workloads to inspect one petabyte of Tls encrypted workload and Iot traffic per month, resulting in better security. This customer purchased our Zee IH transformation bundle for 115000 users two years ago.
So as they have already committed to our zero Trust architecture. It was seamless for them to add workload protection, which is built on the same core zero Trust exchange. This seven figure ACB workload deal more than doubles, the customer's annual spend with us.
In another upsell win a long time customer upgraded and expanded the purchase to Z I E Z P E and <unk> for 2000 users and also added Zee scalar for workloads to accelerate application migration to Azure Zee scalar for.
Workloads now represents one third of this customers $1 million plus annual spend with us as these customer wins illustrate our proven track record running the world's largest inline security cloud makes zee scalar the RBS and trusted partner.
Of choice, our zero Trust exchange processes over 270 billion transactions in line and prevents more than 7 billion security and policy violations per day.
We're widening our customers an unmatched network effect for superior security, our demonstrated ability to scale, our cloud platform becomes even more important as we address hundreds of millions of workloads and billions of Ot and Iot devices in closing.
While there are broader macro challenges and economic uncertainties. We are seeing an increase in large multiyear commitments for multiple product pillars as I mentioned earlier.
As deal sizes have increased we have adapted our field level customer segmentation to better serve our customers and to deliver more consistent execution on a consultative sales process enables our account teams do quantified the business value of.
Platform.
To remain close to the customers, especially at the C level and to get deals across the line.
I believe periods of uncertainty can act as a catalyst for change customers are engaging with us to embrace zero Trust architecture consolidate point products simplify <unk>.
And standardize on the Zee scalar platform, all of which delivers better security and lower cost Cio's are telling me that they are using this challenging environment to drive change and to eliminate the technicals that of legacy <unk> products.
Which are expensive to buy and operate customers are increasingly turning to zee scalar in today's challenging environment. While overall it budgets are tightening we believe that security budgets remained more resilient.
We are bringing more innovations to customers than ever before while scaling our customer support and go to market organization.
We believe we are still in the early innings of a significant market opportunity to enable secure digital transformation and achieve our 5 billion dollar payout our goal now I'd like to turn over the call to remove for our financial results.
Thank you Jay our Q1 results exceeded our guidance on growth and profitability, even as we manage through additional deal scrutiny and longer reviews revenue was $356 million up 54% year over year and up 12% sequentially.
<unk> product revenue was approximately 19% of total revenue growing 78% year over year.
From a geographic perspective, the Americas represented 52% of revenue EMEA was 33% and <unk> was 15%. Our total calculated billings in Q1 grew 37% year over year to $340 million against a difficult comparison as we expected billings duration was a headwind.
This quarter.
Our Q1 billings duration was above the midpoint of our normal 10% to 14 months range, but was below last year's higher levels, we estimate that duration negatively impacted our billings growth by approximately five percentage points normalized for this higher duration, our billings grew 42% year over year.
Our remaining performance obligations or <unk> grew 57% from one year ago to $2 68 $2 billion. The current RPI is 50% of the total RPM, 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 was once.
Again above 125%, we have a strong base of large enterprise customers, which provides us with a significant opportunity to upsell our broader platform at the end of Q1, we had 348 customers paying us more than $1 million annually up 55% from 224 in the prior year.
The continuous strength of this metric speaks to our large enterprise focus and a strategic role we play in our customers' digital transformation initiatives. We added 128 customers in the quarter paying us more than $100000 annually and in the quarter at 2217 such customers.
Turning to the rest of our Q1 financial performance total gross margin of 81, 4% was up nearly 85 basis points year over year, our total operating expenses increased 12% sequentially and 53% year over year to $247 million, primarily due to higher compensation expenses.
Very successful hiring quarter operating margin was 12% and free cash flow margin was 27%. We continue to expect datacenter capex to be around the high single digit percentage of revenue for the full year.
We ended the quarter with over $182 billion in cash cash equivalents and short term investments before providing our guidance I'd like to share a few observations about the current business environment.
Demand for the Zee scalar platform remains strong.
Across our key customer segments.
Seeing deals getting larger as customers are trying to consolidate more and accelerate their security transformation around our zero Trust exchange customers are expanding their commitments with us from a targeted use case to a much broader platform centric approach in our opportunity pipeline. We are actively working on more multi year.
And multi pillar opportunities than we historically have.
While good for our business larger deals take longer to close as customers introduce more checks and reviews.
In this environment, we think it's prudent to expect a higher level of review and scrutiny by our customers to continue.
We will continue to balance growth and profitability based on how our business is growing in our outlook for fiscal 'twenty three we intend to deliver operating margin expansion of more than 150 basis points, which is an increase from our prior guidance now moving to guidance and modeling points. As a reminder, these numbers are all non-GAAP , which.
Stock based compensation expenses and related payroll taxes, and amortization of intangible assets for the second quarter of fiscal 2023, we expect revenue in the range of $364 million.
$366 million, reflecting a year over year growth of 42% to 43% gross margins of approximately 80% operating profit in the range of $42 million to $43 million net other income of $8 million income taxes of $4 5 million.
Earnings per share of <unk> 29 to 30 <unk>.
Assuming 156 million fully diluted shares.
Please note that starting in fiscal 'twenty 'twenty three we adopted the new accounting standard which requires the use of the if converted method for calculating EPS to account for our convertible notes you will need to add back $360000 and quarterly interest expense and includes $7 6 million shares to the fully diluted share count.
For the full year fiscal 2023, we expect revenue in the range of 152 5 billion.
153 billion or year over year growth of approximately 40% calculated billings in the range of $1 $93 billion to $1 $94 billion.
Our year over year growth of approximately 30% to 31%, we expect our first half mix of billings to be approximately 43% of our full year Billings guide operating profit in the range of $179 million to $183 million. Our guidance reflects a 150 to 180 basis points of operating margin.
When compared to last year.
Revenue at 40% income taxes of $19 million earnings per share in the range of $1 23.
To $1 25.
Assuming approximately 157 million fully diluted shares as noted earlier to account for our convertible note and EPS youll need to add back $1 $4 million in annual interest expense and includes $7 6 million shares to the fully diluted share count Let me conclude with comments on our investment framework, we remain confident in our ability.
To deliver on our tremendous growth opportunity, while increasing profitability. We continue to see a robust pipeline and are prioritizing our investments in innovation and selling capacity, while also being thoughtful and prudent in managing our overall cost structure. The recurring nature of our business model gives us good visibility on top line revenue and allows us to.
To adapt quickly to changes in the market conditions, while delivering on our operating profit and margin goals. 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.
<unk> and customers increasingly adopting the broader platform. We will continue our disciplined approach to managing our business to maximize value for our shareholders. 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 on your Touchtone telephone again to ask a question. Please press star one one we do ask that you. Please limit yourself to one question and then you may rejoin the queue for a follow up.
Our first question comes from Matthew Hedberg of RBC capital. Your line is open.
Great. Thanks for taking my question guys.
Maybe just a question on the sales segment re org seems like a really good thing to kind of achieve these longer term goals, maybe just a little bit deeper understanding of what that looks like and also I think Jay you may have mentioned it may be a slight impact to Q1 billings as a result of that wondering.
If that was the case and if theres any way to quantify that.
Of course, Matt.
As you know we started to pursue smaller enterprise segment, a couple of years ago at the time, we put the enterprise sales team under our global leader, who Dot act be reported to our Seattle <unk>.
As this segment has nicely grown it was the right time for us to move it.
<unk> cure teams under Geo leaders, so that was one change in the sector.
We've made changes where accounts got lead distributor among our four market segments and our field level as you know when you've got major large enterprises enterprise and commercial.
And this contributed to a late ramp in a seasonally tougher Q1.
But these changes are done and we're already seeing better results better pipeline and we think this is the right thing for us to do.
Two to grow too.
Big target of 5 billion IRR.
Thank you one moment please.
Our next question comes from Alex Henderson of Needham <unk> Company. Your line is open great.
Great. Thank you very much.
First off I'd like to complement your outstanding execution in what is obviously a toughening environment.
I was hoping you could give us a little bit of a context of what's going on in the lower end of the marketplace for you I know you don't do much in the SMB space, but that has obviously been an area that a lot of other companies have seen Chad.
Challenges I was wondering if you were seeing any issues.
And what you call your smaller business segment.
Thanks.
Yeah, No Alex overall, I mean, I think all segments were impacted.
A quarter I think the macro environment issue as you mentioned is that.
All companies are basically feeling in the macro impacts.
The enterprise segment change that we made also impacted basically our results in the quarter.
The lower end were doing okay, but it did impact all segments I think it's more driven by macro than anything else.
But dream on the low end wasn't more impacted than others. So yes, no low ended a little bit better than the upper end yes.
Thank you one moment please.
Our next question comes from Andrew Nowinski of Wells Fargo. Your line is open.
Great. Thank you very much for the question and congrats on a nice another nice quarter.
I guess I just wanted to ask a question.
The billings guidance.
Maybe a little bit of a lateral arrays than you've done historically.
Wondering.
Number one did you factor in a change in duration or what kind of duration assumptions you make.
With regard to your billings and then did you add any extra levels of conservatism into that guide given the macro backdrop.
Yes.
The billing guide for Q2.
The duration is similar to last year slightly above the midpoint.
One thing to call out for fiscal 'twenty three fiscal 'twenty. Three Q3 is going to have headwinds because in Q3 of last year. The duration was longer related to the conservatism related to our billing guide.
It's really related to what we saw happening in Q1, so what we saw happening in Q1, we're taking forward into Q2 and for the rest of the year.
What we're seeing basically is elongation of sales cycles.
As we talked about and Jay mentioned on the prepared remarks.
Our deal sizes are getting bigger customers.
And more of our platform, it's more of a platform sale all good our pipeline is increasing and pipeline is increasing by region. Each recent pipeline is increasing but.
Whereas before for the larger deals we talked about nine to 12 months.
Sales cycle, it was trending down into more than nine month, you announced trending up more into the 12 month type range. So all those things basically were taken in consideration with our guidance.
If I may add.
But the strong pipeline in Q2 is what we feel pretty good about but we do know that there is a closing time factor we are factoring in.
Thank you. Our next question comes from Joel Fishbein of choice. Your line is open.
Thanks for taking my question Jay just wanted to follow up on your comments about the fed space, obviously being the only one that has fed ramp high love to understand how you are positioned competitively how long the tail is on some of those deals.
Government undergoes some of these security transformation projects.
A little more color around that thank you.
Sure.
The French business.
Good for US we have been building on it we are investing on it that's where it has taken us to all these certification.
Impact on macro is less on the federal business. It has its own budget cycle goes through its own process.
We now have landed 12 of the 15 cabinet level agencies and we are.
Helping them and they all start actually at a fairly small level and they have been growing at a pretty decent pace and so it's early stage, though last quarter. We did have a sizable $46 million project, which actually gets billed on a periodic basis.
So I feel very good and strong about the federal business, but federal it takes us on time and closing some of these deals.
Thank you one moment please.
Our next question comes from half My firewall of Morgan Stanley . Your line is open.
Hey, guys. Good evening and thank you for taking my questions.
Maybe for Jay or remote feel free to chime in.
So obviously macro is impacting every company.
So thats clear I think.
On the other hand.
These killer did have the chance to kind of give a full year guide back in September and it seemed like at that point.
A lot of Europe outlook seemed GE risk.
For what we're growing macro concerns at that time. So is it really these salesforce changes that's driving that.
Somewhat incremental headwind that you're talking about and are we talking about a full on sales re org or is it just.
Tweaks that are being made to <unk>.
Help you align better tier long term growth opportunities. Thank you.
Hi.
Yeah, I'll start I think it's both.
The macro.
Basically what we're saying.
For the full year guide that we had game of the year, we have $1 2 billion $1 92 billion.
The billings growth up to 194 billion.
The billings growth that we've revised it to its 193 billion up to $194 billion. So the midpoint has increased.
Macro is playing playing into it and what we've talked about is that.
If there is uncertainty related to the macro and that's why we gave the guide that we did we tried to de risk basically our guide, but it's both it's really primarily the macro.
And also somewhat the changes, but as Jay mentioned, the changes are pretty much behind us.
And things are looking very positive.
Yes, sorry, if I may add first of all it was not a full re organization as I said, we have four segments.
And as our deals are getting bigger some of these deals that SaaS and lower segments, they're getting bigger they need to be handled by the upper segment and so on so forth. So.
Aligning the segment it was good for us to optimize the <unk>, who should be working on that.
And the second was this lower.
Lower enterprise team, which used to report to the Seattle directly noise linked to Geos.
They're not massive changes, but there are more than normal that we typically have done but none of these deals are going away. We are well positioned winning some already we are working on more so and you said the pipeline as a result of some of the changes made is growing and <unk>.
I feel very good and comfortable to volume.
Yes, one other point.
Really when you take a look at the amount of accounts that shifted.
It's a pretty substantial amount of accounts that shifted.
Into the various segments.
So again as we mentioned Jay mentioned before we feel largely that is taken care of could there be some impact going forward. There is but again from our perspective, it's largely macro.
Thank you.
One moment please.
Our next question comes from <unk> of Bank of America. Your line is open.
Please make sure your phone is on mute.
Cargo can you hear me now.
Loud and clear.
Perfect. Thank you.
I have two related questions. The first one is <unk>.
From a Palo Alto Prisma heard much better than expected results on the same kind of like for like and.
The question is do you see any changes in the competitive landscape do you see any changes in the pricing dynamics and aggressiveness of other players.
That might drive some of the changes we're seeing.
And the second question is kind of I want to understand the bigger picture. If someone asked me a year ago, what could be the impact of economic slowdown I would say that this particular area, where you're acting should not be impacted much because youre, replacing capex with opex and youre actually enabling the change to customers without putting out.
Tremendous capex upfront so if their budget issues. They should actually do it then the question is why are we seeing this area impacted as well. Despite the fact that it enables companies to lower their spending if they need to.
Yes.
Okay I'll start.
Your first question.
About competition and pricing dynamics.
Kelly on the higher end of the large enterprise segment, we haven't really seen much competitive changes Paul these large and prices are savvy. They look for the right architecture. They take this thing better UCSB.
And.
And almost all of these large deals when firewall companies that tried to comment on compete there often excluded I mentioned some of them. During my call. So I do wonder where do those deals come from because if you asked me somewhat larger steel.
Opex deals, we aren't really competing with the firewall companies out there.
<unk> dynamics will matter. If you really are competing that's number one but also number two.
The services, we are selling is very mission critical in fact, it's probably more mission critical than office 365, that's what I hear from CIO, because we under switchboard, we're connecting everything to everything so we have not seen pricing pressure from competitive side of it.
We have been told a few times that the customer said, yes. This vendor came in and offered US a third of core price, but we decided we announced this about it because it doesn't meet the requirements.
And the second part question part of the question was impact on.
On technology or economic slowdown.
It is very true that we are playing in really does two things for customers. One it's important cyber area.
<unk> two with consolidations simplification.
And and standardization customers do save money. So those are the two things that are helping us a lot more than many other market segments, but you know when the broader macro is there is obviously some impact but I would say, it's better to lease speaking it is far less than other areas.
As I had talked to many <unk>, they don't see securely budget getting reduced much.
As compared to budget.
Budgets, we are in a much better shape, but there is impact.
And that was already in one part of the impact is.
These large deals are going more and more to cfos and Ceos for approval.
Thank you one moment please.
Our next question comes from John <unk> of Guggenheim. Your line is open.
Thank you.
So.
This macro slowdown is much different than the last one we saw due to COVID-19, where zee scalar benefited from more distributed access so as we look out into fiscal 'twenty three and beyond.
As we layer in the soft then perhaps softening further softening macro backdrop, how should we expect the appetite for new customers.
Undergone a transformation of their security paradigms.
Yes, that's a good question, Youre, basically, saying well new customers start transformation projects.
It depends on what kind of projects you are looking at.
<unk> are prioritizing projects must do versus projects that can wait.
That's one part, but if you look at what we do where do we fit okay.
Cyber is not going away the risk of cyber is still there. It is a board level discussion. It's happening number two there is pressure on cost consolidation and simplification, yes, while customers won't start big new projects, but projects that.
Can be done without big investments.
And they are being done if you look at our total budget.
Of our CIO and the security is a fairly small part of it by engaging at the CIO level, we are actually able to get our fair share of the budget. So I think we feel pretty good about fiscal 'twenty three having said that will there be.
Bigger hurdles to cross to close those deals absolutely, yes, but to do so you need two things one you need <unk> level of engagements, which we have traditionally done two unique bedroom business justification to make a strong case CFO that it makes sense and we have.
We're doing that for quite a while and nor the number of <unk>.
Assessments value assessment, we are doing is actually much higher than it used to be.
Yes.
A couple of comments John .
Our split with new and upsell in Q1 was approximately 55 now Q1 was driven.
<unk> talked about on the call Federal Court.
For large federal deals and also we did well in the financial sector.
With new accounts.
No.
On a go forward basis, I still think for fiscal 'twenty three as I mentioned before probably that 40 60 range is probably the right way to think of things.
40%, new 60% himself.
But we shouldn't lose track of how big this market is I mean this this market.
Both user and workload, we estimate that two years ago to be 72 billion.
Thats clearly bigger now and it's growing.
When you look at the penetration that we have in this market as well as others.
The very early stages still.
So as you go through this global economic macro environment.
It's going to work itself.
Through and we're in a position now that the macro environment is not favorable but it'll turn it will turn the advantage of Zee scalar is that from a cost perspective security perspective and user experience.
It is a.
The top platform, we feel in the world for networking and security. So again, we need to kind of.
Wade through this macro environment keep on executing and we feel things will up.
Take care of themselves.
Thank you one moment please.
Our next question comes from the line of Roger Boyd of UBS. Your line is open.
Yes.
Great. Thanks for taking the questions.
I don't think you gave the contribution of emerging products to new business and forgive me if you did but.
It sounded like you did as a nice wins in the quarter, there with <unk> and Zscaler for workloads. So I'm wondering if you can just update us on how you're thinking about up selling these solutions in the current environment relative to your guide last quarter for call. It high teens percent of new business. Thanks.
Yes, Hey, Roger there theyre tracking filled to the Pi team so.
Well CTX.
And our cloud protection products, they are tracking in the high teens for the year.
I may add in fact, <unk> has been our fastest growing service. It has grown faster than <unk>. If you look at the similar timeline those similar stages.
In our cloud protection has two main areas. One is what we call has seen an API based security desktop posture controlled product and second is zero Trust World workloads, while in line security and we are the only vendor who has done tight integration between the two.
And on actually customer interest has been pretty strong our new ACB nearly doubled year over year for a zero Trust world workloads by talked about a couple of deals large deals during the earnings thing one was a seven figure ACB workload deal, it's more than doubled customers.
You will spend with us are significant in other deals I mentioned, what closer represent one third of this customers.
Million dollar annual cost spend with us. So these things which used to be fairly small three four quarters ago are beginning to get pretty significant.
Thank you one moment please.
Our next question.
So it's a.
Assume that in the first.
Hi can you hear me guys.
Yes.
Hey, So just a quick question you talked about the pipeline growing I'm. Just wondering is the coverage ratio growing added significant.
Level to offset the elongation in sales cycles. Thank you.
We take that all into account in our guidance. So that's all been taken into account in our guidance.
So, yes that would be taken into account.
Thank you one moment please.
Our next question comes from the lineup Fatima <unk> of Citi. Your line is open.
Our next question comes from Fatima <unk> of Citi. Your line is open.
Hey, good afternoon, and thank you for taking the questions either for Jr.
Shannon.
I appreciate a lot of the commentary you've shared around.
The opportunity that you have with large multiyear multi pillar deals the pipeline composition or those types of transactions is increasing but against a much much tougher environment. So there's a little bit of a dichotomy there and I wanted to Peel that back a little bit because if your business and execution and pipeline is that much more.
Reliance on some of these larger deals and the environment is admittedly harder to execute in what are some of the things that you are doing and that you have under your control to make sure that we do.
See the type of slippage that could cause some more variability into your into your billings performance.
Just as a related matter or are you changing incentives.
In short you are driving that type of behavior and successful close rates on those large transactions, which it seems like you are becoming more dependent on thank you.
Right <unk>, yes.
Multiyear multi pillar deals those pipelines are growing and get tougher environment with more scrutiny and more approval levels Thats what were seeing so there are.
Two significant things that we have been doing that are helping us to make sure. We are able to get those deals closed one as customers look for better business justification.
That's what I mentioned about CF already business cases business value assessment, which we do to help quantify that if you remove these eight point points security and networking products. This is our ROI you can get and in fact, we are showing more than 200% ROI and many more.
The majority of the cases that is very strong.
We've done it we are doing a better job in that area.
The second thing to get deals done in a tougher environment is having strong C level engagements because youre going to make a case there to show what needs to be done and also if you're part of a cio's budget had been just security budget, you actually have a better chance of doing it though both of those things are helping us.
And we are keeping those factors in mind as we are providing you our forecast.
And from an incentives perspective, I wouldn't say, we've been doing anything out of the ordinary but we've done in any quarter. So no real changes from an incentive perspective.
Thank you one moment please.
Our next question comes from the line of Mike Walkley of Canaccord. Your line is open.
Great. Thanks for taking my question just maybe following up on that.
Alaska last answer as you work with closing these larger deals are are these larger customers may be slowing the pace of deployment.
Helped their own opex in terms of how they're ramping deals or once you close them theyre ramping kind of similar to prior experiences.
Yes so.
It's an interesting dynamic in the market market is tougher, but when <unk> looked at what needs to be done there look for consolidation simplification, that's driving our deals to get bigger.
Or do you mean more scrutiny.
And but we are helping our customers to ramp into larger commitments to deploy our platform. So it is a phased thing we are doing so we are we have been doing that for a few quarters and it does continue.
So we're not seeing any increase ramping it's always been part of our business we call it out.
Look at the type of deployments, we have with hundreds of thousands of users you can't do that overnight. So again, we're not seeing any increase ramping.
It's been part of our business for a long time.
Thank you one moment please.
Our next question comes from the line of Joshua Tilton of Wolfe Research. Your line is open.
Hey, Thanks, guys for squeezing me in here.
Two quick ones.
First one goes back to Andy's question I, just want to ask it a little differently.
<unk> has normal duration comps is there any reason, we shouldnt expect that billings growth should kind of return to this 40% plus range that you saw in Q1 after adjusting for the duration and.
My second question is if you look at the deferred revenue did decline sequentially from <unk> to <unk> for the first time in a while so just anything.
Anything unusual to call out there.
Yes.
<unk> got our guidance so we feel comfortable with how we're going to come in we will see at the end of the quarter.
Related to the decline in deferred revenue Q4 to Q1.
Again, there is seasonality to our business. So the growth rates from Q4 to Q1 of them very small.
<unk> declined slightly this quarter, nothing really to call out other than seasonality and our performance in the quarter.
Sure.
Thank you one moment please.
Our next question comes from the line of Peter Levine of Evercore. Your line is open.
Okay.
Great. Thank you for squeezing me in here so.
One just to kind of repeat I think on an earlier question from John as well could you talk about what youre seeing at the top of the funnel meeting given we're kind of closer to the tail end of the Covid work from home wave of deals that you saw.
Could we see the rest of it yes.
Drop off in the pipelines or hit to net new billings kind of obviously given the backdrop here but.
It sounds like <unk> pipeline seems strong, but any color you can add to that.
Yes, Q2 pipeline is strong it is accurate pipeline.
We did get some benefit of Covid, but data was starting in March of 2020, and most CIO has had to do something in a quarter or two of that so most of the effect of Covid actually ended by mid of 2020. So.
Since then it is kind of growth of our business driven by the need for securities transformation digital transformation and the like.
I think we.
We have been doing good pipe funnel. It is true that some of the changes we made in Q startup Q1 did kind of caused some slowdown for us.
It would be a path that it's good pipeline on a question is how much how well do we overcome the schools me an extra level of approvals to land that means we need to land and that's when we are working on Thats really part of our job.
But good good strong pipeline.
Thank you you may you want to add any.
Great.
Thank you. Our next question comes from the line of Keith Bachman of BMO. Your line is open.
Okay.
Hi, Thank you very much I wanted to ask Raimo question and there's two parts to it remote has been talked about.
The billings beat this quarter is one of the smallest in many years and you're moving the midpoint up but the top end of the Billings guide is remaining the same.
The macro has gotten tougher last quarter I think a lot of it's jumped off the call and said it seems like it.
It seems like.
<unk> de risked the numbers, but given all of that backdrop. It just seems like there has been incremental risks introduced to the billings and just wondered if you'd characterize it.
On to that and the second part of the question is youre raising opt income.
By about $6 million from the previous guidance and yet.
It seems like.
How would you respond to why not raise it more if in fact that growth.
Is an accelerating and youre kind of keep the billing range. The same why not give a little bit more on the op income side Thats. It from me. Thank you.
Yes, great great questions Keith.
If the macro environment's changed I mean, we talked about the uncertainty going into.
Calendar 'twenty three.
Theres a lot of uncertainty.
I mean, youre seeing all the earnings reports coming out or mostly earnings reports and we're all seeing the same thing. It's the macro backdrop, which is the primary reason as I mentioned secondarily is that the enterprise segment changed with that.
What's left.
So the macro environment has changed that's number one.
Related to.
Giving them more operating profitability.
As I mentioned with our contribution margin as high as it has in years, two and three over 60%.
Getting to operating profitability for easy thing.
But I believe it's short changing the company and our shareholders.
No.
Its RFP.
If you look at our free cash flow margin and you look at our profitability, we are increasing our operating profitability.
We're going to be prudent and discipline related to our approach how are you.
Run the business.
The key thing is.
And the size of this market.
It's early stage.
Our priority is growth and.
But we will as we go forward as you've seen slight increase in operating profitability will be more focused on operating profitability than what happened in the past.
But it is going to be a measured approach from our perspective, it will be measured in what we feel is the right balance and really to run our business.
Thank you one moment please.
Our next question comes from Sonic Cavafy of R. W. Baird. Your line is open.
Hey, guys. Thanks for taking my question.
Therefore, China.
You spoke about 500, electrical Carlos brand in financial services vertical clearly our top brand global buy for your family dollar coming Tonight.
Broadly.
You'll be hearing again.
Some vertical.
The tag for CPG retail getting impacted more than others public.
Public sector defined utilities, our solid is that something that you guys are observing.
In terms of bifurcation or Tyler doesn't factor that is our guidance building onto itself.
Follower of macro into.
So far less attractive verticals.
Ill speak.
Speak specifically about the verticals.
<unk>, if you like to add more comments please do.
In Q1, the verticals that we saw to <unk> for financial Federal services and health care. Those are the strong strong verticals for us.
Had we taken into account the impact of earthquakes going forward.
Answer is yes, and that's specifically per vertical but per customer and where that deal is.
And the deal cycle. So it is being taken into account but.
Speaking to other verticals <unk> would like to comment on that.
I think even though we did well in some of the verticals zeeman pointed out.
So overall, what we call is a big big factor macro is impacting broadly, but there are certain verticals that have less for example in the oil and gas doing differently than many of the others, but I won't say.
A big factor for us it is a factor, but not a major effect.
Thank you one.
One moment please.
Our next question comes from the line of <unk> Kalia of Barclays. Your line is open.
Please make sure your phone is on mute.
Our next question is from.
Okay.
Sure.
Sorry, I was on mute there hey, guys. Thanks. Thanks for taking my question here a lot of my questions have been asked Jay maybe maybe for you just a little bit of a broader one.
Clearly the fiscal year for Zee scalar is very different but.
Then a calendar year, but a lot of your customers operate on December fiscal years, maybe the question for you is what have you heard anecdotally just in the prospect of budget flush. This year from your customers is that something that you think is going to be more muted for security. This year or is it more related to timing any perspective that you have there would be <unk>.
So.
Look as you have seen in the past few quarters.
Dave will talk more and more backend loaded we saw that a few quarters ago. We saw that in Q1, we think we will have.
The linearity.
Similar to Q1, maybe a little bit better than Q1.
<unk>.
But I don't think that that is somewhat significantly change everything out there premium.
Yes, I mean.
From could could there be.
A positive impact related to 12 31 December there could be.
From a linearity perspective socket.
I would be thinking something similar that we have had basically in Q4, and Q1, which is more backend loaded.
But.
Can it happen it can but I would be thinking more of a similar type plenty Eric.
Thank you one moment please.
Our next question comes from the line of Adam Borg with Stifel. Your line is open.
Awesome. Thanks, so much for taking the questions just two quick ones just on the federal space not sure if I missed it but what was the mix.
That business represent in the quarter and when you think about the opportunity it's great to hear those wins is it really just on Gia in BPA or what's the opportunity for DDS and Keith Taylor for workloads and the <unk>.
Federal state Thanks.
Let's start at a broad level three months, then you can get into specifics.
Yes federal is most of the staff in place.
GPA.
Building strong interest on <unk> and some of the newer products.
Currently.
Strong mix of Zix EPA.
Yes, Jay mentioned, 12% to 15 cabinet agencies, four deals greater than $1 million was clearly.
Really a good quarter for us our federal will be giving how federal is doing on annual basis.
Our new and upsell perspective.
So but.
Federal was a strong good quarter for us in Q1.
Thank you.
Ladies and gentlemen, this does conclude our conference I would like to turn the call back over to Jay Chaudhry for any closing remarks.
Thank you for your interest in <unk>.
Look forward to seeing you at upcoming Investor events.
And goodbye. Thank you thank.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all 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.
[music].