Q2 2023 Zscaler Inc Earnings Call
Speaker 1: the
Speaker 2: earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised.
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Speaker 2: I would now like to hand the conference over to Bill Choi, Senior Vice President, Investor Relations and Strategic Finance. Sir, you may begin. Good afternoon, everyone, and welcome to the Zscaler second quarter fiscal year 2023 earnings conference call. On the call with me today are Jay Chowdhury, Chairman and CEO , and the Zscaler second quarter fiscal year 2023 earnings conference.
Speaker 3: 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.
Speaker 3: 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, dollar-based net retention rate, and the
Speaker 3: 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 guaranteed as a future performance, but rather are subject to risk and uncertainty, some of which are beyond our control.
Speaker 3: 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.
Speaker 3: I would also like to inform you that we'll be attending the following upcoming events in March. Morgan Stanley TMT Conference in San Francisco on March 6th, JMP Technology Conference in San Francisco on March 7th. Now, I'll turn the call over to Jay. Thank you Bill.
Speaker 4: We delivered a solid Q2 despite economic challenges that have impacted the broader tech industry. For the quarter, our revenue grew 52% year over year and billings grew 34%. Billings were impacted by new customers being more deliberate.
Speaker 4: strong growth in our expansion business with existing customers, increasing their deployments, and adopting a broader platform. Once again, our dollar-based net retention rate was over 125%. We continue to delight our customers by accelerating their path
Speaker 4: exceeds 80, which is more than two times the average for SaaS companies. And today, more enterprises than ever before recognize Zscaler as the best choice to secure their digital transformation, strengthening my confidence.
Speaker 4: in our $72 billion serviceable market opportunity. Our disciplined approach to growth is reflected in our strong operating profit and free cash flow, both of which doubled on a year-over-year basis. Our operating margin expanded by approximately 4% points.
Speaker 4: While our revenue also continued to grow at a very high rate, as the world's largest security cloud, we have outstanding unit economics with a stable high 90% growth retention rate and 80% growth margins.
Speaker 4: These best-in-class metrics are the result of our differentiated services, market leadership, and highly scalable multi-tenant cloud platform.
Speaker 4: Let me share with you some of my observations about the environment and how we plan to manage our business for the remainder of 2023.
Speaker 4: With macro concerns weighing on business leaders, more organizations are being cautious and measured about their spending. In January , we saw a higher scrutiny on budgets compared to December , resulting in additional delays in large deals. These deals haven't gone away.
Speaker 4: and customers are taking longer to make decisions and requiring additional approvals. In select instances where timing of budgets was a hurdle for new customers, we enabled them to ramp into larger subscription commitments. These strategic deals lowered our first-year billings.
Speaker 4: but will grow into a higher annual run rate level in the second year. We typically have some ramp deals each quarter, but in Q2, the impact of ramp deals on our billings was higher.
Speaker 4: These ramp deals position us to expand the customer relationship over time to create long-term value. As we enter the second half of fiscal 23, we are expecting customer cautiousness to continue. We have accounted for further lengthening of sales cycles.
Speaker 4: and the uncertain timing of large deals in our outlook. Even though our current pipeline has grown and has more mature deals, we are assuming a slight deterioration in close rates.
Speaker 4: While not immune to economic slowdowns, cybersecurity is relatively more resilient. In my conversation with hundreds of IT executives, cybersecurity remains their organization's number one IT priority. Two weeks ago, we hosted a CISO summit with 80 CISOs from global 2000 companies.
Speaker 4: They talked about the business need to innovate, become agile and gain competitive advantage with security as enabling foundation. They talked about their plans to shift to zero trust security to reduce attack surface and to adopt the direct to cloud architecture that Zscaler pioneered.
Speaker 4: Customers are excited by the new innovations being added to our platform and their engagement with us remains very strong. Given the large opportunity we see in front of us, we will keep on building and innovating while also increasing profitability.
Speaker 4: After significantly growing our teams in recent years, we took a fresh look at our organization and found opportunities to streamline operations and to align people, roles, and projects to our strategic priorities. As a result of that review, we initiated our targeted cost optimization plan to...
Speaker 4: C-level leaders are telling me that technical debt of legacy network and security point products impedes progress and slows down business operations. By consolidating point products and embracing zero trust architecture with Zscaler.
Speaker 4: Our customers are modernizing their security while reducing costs, giving them the competitive edge they need to succeed in today's rapidly evolving business environment. We have expanded our business value team to collaborate with customers to create CFO-ready business cases with clear ROI.
Speaker 4: customers who initially purchased a single 10 SASE solution from the incumbent firewall vendor that failed to deliver in the real world. These customers were misguided by the flawed message... Black Lives Matter.
Speaker 4: when your users are on the road or in a branch office. A single tenant architecture, whether deployed as appliances or as virtual machines spun up in a public cloud, will not allow enterprises to fully realize the benefits.
Speaker 4: of secure digital transformation. Every customer we have one has lots of firewalls in the data centers, but when it comes to zero trust security and digital transformation, the choosing Zscaler because of our multi-tenant cloud architecture that scales and delivers business agility.
Speaker 4: of traffic provides us with more than 300 trillion signals per day to feed our machine learning and AI engines for better detection of user and application traffic anomalies resulting in superior threat protection.
Speaker 4: Our EIML capabilities are driving customer success at scale in the real world today. Let me share an example with you. In December , we helped a global 500 conglomerate experiencing a targeted cyber attack on one of its divisions.
Speaker 4: Our Threat Labs team worked closely with the customer to identify the root cause of the attack and act quickly to prevent any potential damage. Subsequently, this customer upgraded to our ZIA Transformation Bundle to prevent zero-day attacks and secure the entire ecosystem.
Speaker 4: This win highlights the value of our high-end product bundles and the benefits that our threat labs research brings to our customers. I'm delighted to share that an increasing number of customers are purchasing our comprehensive platform capabilities, which not only accelerates their business value realization, but also guides their business Realaining future results Teaching andTown StarCraftrek.com
Speaker 4: but also establishes us as a critical partner for their success. As I mentioned before, customers are increasingly buying Zscaler for users, our complete platform for user protection, which includes CISA, ZPA and ZDX, bundled together.
Speaker 4: In addition, we're gaining traction with workload protection powered by the same core CIA and CPA technology. Thanks to new and existing customers purchasing these expanded bundles, we drove a 51 percent year-over-year growth in the number of customers with greater than $1 million in ARR.
Speaker 4: ending with nearly 380 of these customers. And over 30 of these customers have ARR greater than $5 million. Let me highlight three deals this quarter where the customers purchase all four product pillars. In a new logo win, a top 10 global IT software and services company.
Speaker 4: Purchase Zscaler for users bundle for 400,000 users, including our advanced data protection suite, and our Zero Trust for workloads for 3,000 workloads. This customer pursued a Zero Trust strategy due to their business growth resulting in a complex application and network environment.
Speaker 4: they will simplify their security operations by consolidating dozens of point products, including firewalls, VPN, VDIs, DLP, and CASB. By purchasing all four product pillars, the customer is making a platform bet on CEScatter to secure their users, workloads, and devices, regardless of their location. Next...
Speaker 4: in an exciting upsell win. A major auto manufacturer upgraded to Zscaler for users bundle for 35,000 users and purchased zero trust for workloads of 8,000 workloads. This platform purchase was driven by the customer strategy to digitally transform the business operations.
Speaker 4: including management of the vast supply chain. In fact, we are helping them accelerate time to market for new EVs. Before purchasing ZPA, this customer experienced significant delays in commissioning new vehicles as third parties did not have fast and secure remote access for collaboration.
Speaker 4: By using ZPA and ZDX, they can now provision secure access to new third parties within a few days, compared to over a month it used to take with legacy remote access technology. In addition, Zscaler for users significantly reduces the risk of ransomware.
Speaker 4: that the firewalls and VPNs allow. Finally, a global 500 pharmaceutical company upgraded from CIA for 45,000 users to Zscaler for users bundle for 85,000 users and purchased Zero Trust for workloads for 2000 workloads. They purchased all four product pillars to pursue a cloud first trial.
Speaker 4: Earlier, I mentioned that in some instances, we enable new customers to ramp to larger commitments. In one such new logo win, we are excited to partner with an innovative retail leader that's using facial recognition technology and cashless checkouts to redefine their future store experience.
Speaker 4: This is a significant win for us, as retail was a smaller vertical for us historically, where we are now enabling new digital transformation possibilities.
Speaker 4: This retail company committed to an eight-figure total contract value for a multi-phase ramp to secure over 90,000 ZIA users, 20,000 ZPA users, and 400 petabytes per month of data from the 20,000 retail store operations.
Speaker 4: This customer had bought a five-hour base SASE solution, which failed to scale as well as expanded their attack surface. Leveraging our highly scalable and reliable Zero Trust Exchange platform, they will use ZIA to create direct Internet access for employee tablets.
Speaker 4: and terminals while using ZPA to secure private access for store managers. Additionally, Zero Trust for workloads will secure all traffic from cameras and terminals in the retail stores to the cloud. Cloud protection accounts for approximately...
Speaker 4: 40% of the total deal value.
Speaker 4: As these deals show, customers are embracing our expanded platform, including our two emerging product pillars, ZDX for digital user experience management, and Zscaler for workloads for securing servers and workloads. These emerging products are on track to meet or exceed our full year target of contributing high team percentage of our new business.
Speaker 4: Our zero-trust for workloads solution is roughly doubling year-to-year. In addition, our new CNAP solution is generating significant customer interest. You may recall at ZenaFly in June , we launched our CNAP solution called Z-skiller POSHA Control, which is an integrated solution.
Speaker 4: that correlates vulnerabilities and risks across CSPM, CIEM, and infrastructure as code scanning. This quarter, we had a partial control op-cell win with a global 1000 engineering company for half a million dollar ACV to secure 5000 workloads. Posture control provided visibility across multi-cloud assets.
Speaker 4: remediated compliance violations and revealed previously undetected, high-risk vulnerabilities. We are proud that our posture control solution was recently recognized by recent phone Cheeto in the leader quadrant based on independent peer reviews. We are bringing more innovations to our customers than ever before.
Speaker 4: both internal innovation and highly targeted acquisitions to expand our leadership in the SASE and Zero Trust security markets. As announced a few weeks ago, we acquired Canonix Security, an innovative startup in SAS supply chain security, which protects customer data in SAS applications. For example, Google Suite could be sharing data with 30 other third party connect.
Speaker 4: applications and customer data. As we look ahead to the next few years, we are committed to driving broader adoption of our Zero Trust platform for users, workloads, and IoT and OT to maximize the value of our customers' secure digital transformation efforts.
Speaker 4: CIOs are telling me that they're using this challenging environment to drive change. ROI and cost organization are becoming bigger priorities as they're being asked to do more with less. With our superior architecture and proven experience, we deliver measurable outcomes at the CXO level.
Speaker 4: that are aligned with our customers' top priorities. Our business value proposition is resonating, and more customers are consolidating multiple point products with our broader platform, which increases our wallet share with them. We believe that we are still in the early stages of a significant market opportunity to enable secure virtual transformation.
and we are on track to achieve our $5 billion ARR goal. Now, I'd like to turn over the call to Rino for our financial results. Thank you, Jay. Our Q2 results exceeded our guidance on growth and profitability even as we managed through continued deal scrutiny and longer reviews. Revenue was $388 million, up 52% year-over-year, and up 9% sequentially.
ZPA product revenue was approximately 20% of total revenue, growing 74% year over year. From a geographic perspective, Americas represented 53% of revenue, EMEA was 32%, and APJ was 15%.
From a new business perspective, EMEA grew strongly on a year-over-year basis despite continued macro challenges in the region. Our total calculated billings in Q2 grew 34% year-over-year to $494 million.
Until we get more certainty around the macro environment, we believe looking at total billings on a sequential basis can be a relevant measure of our billings performance in the near term.
On a sequential basis, billings grew 45% quarter over quarter. Our current billings grew 32% year over year, which includes the impact of strategic deals with phased subscription ramps that Jay talked about earlier.
Our remaining performance obligations, or RPO, grew 44% from a year ago to $2.809 billion. The current RPO is 51% of the total RPO.
Our dollar-based net retention rate was once again above 125%. We have a strong base of large enterprise customers, which provides us with significant opportunity to upsell our broader platform. At the end of Q2, we had 378 customers with greater than $1 million in ARR.
up 51% from 251 in the prior year. The continued strength of this metric speaks to the strategic role we play in our customers' digital transformation initiatives.
We added 120 customers in the quarter with greater than $100,000 in ARR, and in the quarter at 2,337 such customers, turning to the rest of our Q2 financial performance. Total gross margin of 80.4% is unchanged from the prior year.
Our total operating expenses increased 6% sequentially and 44% year over year to $263 million, primarily due to higher compensation expenses. As we indicated last quarter, after exceeding our hiring plans in Q1, we moderated our pace of hiring in Q2. This contributed to a strong operating margin performance.
in the quarter with operating margin increasing 380 basis points year-over-year to 12.6 percent, which exceeded our guidance. We're seeing the leverage in our financial model that is driven by our strong underlying unit economics.
Our free cash flow margin was 16%. We continue to expect data center capex to be around the high single digit percentage of revenue for the full year.
We ended the quarter with over $1.9 billion in cash, cash equivalents, and short-term investments. Next, let me provide more details about the Targeted Cost Optimization Plan that Jay mentioned.
In the past 18 months, we doubled the size of our team to approximately 5,900 employees as we invested aggressively based on a strong market momentum. As we watched the macroeconomic uncertainty at the start of fiscal 2023 in the fall, we commented that if the business environment becomes more challenging, our business model allows us to adapt quickly and to deliver expanded operating profitability while we grow. With the announcement today, we're adapting to the changes we saw in Q2.
This is a targeted optimization initiative to address inefficiencies in certain job functions and projects. As a result, we're reducing our workforce by approximately 3%. Most of the impact from these changes will be seen in Q3 and will take a charge of $8-10 million, including non-cash expenses. We'll continue to hire the best candidates in high priority areas.
Now moving on to guidance and modeling points. As a reminder, these numbers are all non-GAAP . For the third quarter of fiscal 2023, we expect revenue in the range of $396 million to $398 million, reflecting year-over-year growth of 38 to 39%. Gross margins of approximately 80%. Operating profit in the range of $55 million to 56 million.
To account for our convertible notes, you will need to add back $360,000 in quarterly interest expense. For the full year fiscal 2023, we expect revenue in the range of $1.558 billion.
to $1.563 billion or year-to-year growth of approximately 43%. Calculated billions in the range of $1.935 billion to $1.945 billion or year-to-year growth of approximately 31%. For Q3, we're assuming billions to decline by approximately 9% sequentially.
Compared to the mid-single digit percentage declines we've seen in the last few years. This guidance incorporates the macro-related uncertainties that Jay mentioned in his comments. Operating profit in the range of $213 million to $215 million are guidance reflects approximately 250 basis points of operating margin improvement.
compared to last year, which is an increase in our prior guidance while growing revenue at above 40%. Income taxes of $18 million, earnings per share in the range of $1.52 to $1.53, assuming approximately 156 million fully diluted shares. As noted earlier, to account for convertible notes and EPS.
You will need to add back $1.4 million in annual interest expense. Let me conclude with comments on our investment framework.
We remain confident in our ability to deliver on our growth opportunity while increasing profitability. We will balance growth and profitability based on how our business is growing. The recurring nature of our business model gives us good visibility on top-line revenue and allows us to adapt quickly to changes in market conditions.
to deliver on a operating profit margin goals. If the environment becomes more challenging, we will continue to prioritize profitability, leveraging our strong unit economics, and driving efficiencies in our cost structure.
In fiscal 23, as a result of our focus on operational efficiency, we're increasing our profitability in the second half to achieve a full year operating margin of 13.7%, reflecting a 350 basis points expansion, while revenue is still growing over 40%.
If the environment improves, we'll prioritize growth. Our long-term investment framework still applies. If we are 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 percent operating margin in the long term. With a large market opportunity and customers increasingly adopting the broader platform, we'll 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. Ladies and gentlemen, as a reminder to ask the question, please press star 11 on your telephone and wait for your name to be announced.
To withdraw your question, please press star 11 again. Due to limited time and several people in the queue, we ask that you limit yourself to one question.
Please stand by while we compile the Q&A roster. Our first question comes from the line of Brad Vilnick with Deutsche Bank. Your line is open.
Great. Thank you so much for taking the question. Jay, I appreciate the backdrop is tough. We hear it from every company. But can you frame for us your outlook in terms of things within your control and things that aren't? And maybe also if you could, comment on the integrity of the data that you look at that underpins your confidence in Zscaler's competitive position in the market. Thank you.
Thank you. If you look at that quarter, we found that our upsell was quite strong. Customers loyal to us and like our solution, upselling becomes easier for us. In terms of challenging, new logos with large deals are more challenging as there is additional scooping and additional approvals needed. The other thing that worked well was the customers like the fact that we are able to do consolidation of lots of point.
with thousands of customers, well deployed and very happy customers.
In fact, other things, we are beginning to see that some of the solutions that are sold by firewall vendors that have the solution, and when customers can't deploy them, they are falling apart. You know, I have been asked many times in the past two years, hey, are you replacing the firewall or others on this tool and because of the supply chain, because the community
The answer I used to give is I haven't seen very many out there, and now you're beginning to see some of them. A large retailer I mentioned on my call with 20,000 stores tried for about 18 months to deploy a firewall-based SaaS solution to speak and eventually gave up, and we are really taking care of it.
The other thing I would mention is Remo has often said we can adjust our business model as needed. As the environment is getting tighter, we are adjusting the model by slowing down hiring. Our unit economic cost is very high. So you're seeing expansion as gross margins and operating margins, which our investors do like to see. My confidence is coming from tons and tons of customer calls I make.
the more they're able to fend off the flop being spread by competitors. So I'm very confident and comfortable in our ability to stay far ahead of the competition. Jay, thank you very much for the added cover and thanks for taking the question. Thank you.
Thank you. Please stand by for our next question. Our next question comes from the line of Sterling Aufy with Muffet Nathanson. Your line is open. Yeah, thanks. Hi, guys. I'm just kind of curious Jay.
When you look at the business, can you give us a high level sense of how much of the business in the quarter is replacement of legacy security solutions where cost savings is a driving factor? And how much of the business is actually brand new implementations to enable some sort of project where maybe it's a little bit risky.
of sticky web gateway and ZI-ZPA starts replacing some kind of VPN that expands from there. So almost all business we do start by replacing something except well upsell too. Actually if you look at out upsell that means we may have ZI some pieces deployed we may be upselling to replace
CLP of some vendor or we may be replacing VP of some vendor or some of the stuff. So almost all business is replacement for us. You can call on some of the stuff expansion, for example, when customers want to have done access to application sitting and add your NAWF.
without going through the data center, we're still replacing some of the stuff sitting in the data center and some of the direct connects they may have bought. So it's replacement of a bunch of point products into a fewer interior offerings. That's really where the savings come from. That's where it is simplicity and operational.
E is coming. Got it. Thank you. Please stand by for our next question. Our next question comes from the line of Andrew Newinsky with Wells Fargo. Your line is focused. Thank you.
Great, thank you, good afternoon everyone. So I just wanted to ask about those ramped deals that you talked about. Just wondering if you could quantify how much those deals would have added to Billings in Q2 if they were normal deals versus ramping over time. And also, our customers contracted to spend a certain amount that was deferred or can still back out of that ramp piece of it. Thanks.
Yeah, so they're contractually obligated to the ramps and the ramps are strategic, you know, as they talked about with large deployments, you know, we are seeing more ramps. The impact on filling, probably a couple of percentage points is what you can think. But again, you know, with large customers, large deployments find more of our pillars, you know, ramps were more...
more in detail. If I may add, I mean we look at it at this as a strategic investment on our part to help customers get started and actually manage their cash for investments in year one by differing some of that stuff to future years. Understood, thank you.
If I may add, I mean, we look at it at this as a strategic investment on our part to help customers get started and actually manage their cash for investment from year one by different some of that soft to feature here. Onters, so thank you. Thank you.
Please, thereby, for our next question. Our next question comes from the line of Alex Henderson with the Needleman Company. Your line is open. Great. Thank you so much. So was actually interested in asking about the ramps as well, but I also wanted to put it in context to the duration, you know, in the calculated building numbers. Can you give us some sense of, you know, the magnitude of each of those? I guess a couple of percent on the ramps, but if I look at the ramps, don't you get all of that back in a couple of quarters once they get past the initial start day? So isn't that actually just the timing issue?
You're absolutely right, Alex. The ramps are a timing issue. Lower billings up front and higher billings later based on the ramp. Related to the billing duration, it was slightly favorable in Q2. If you look at our calculated billing,
Our next question comes from the line of Roger Boyd with UBS. Your line is open. Your line is open.
Hey, thanks for taking the questions. I don't know if I could poke up the efficiency versus capacity to debate. I knew you reiterated the $5 dollar long-term goal and J, you're confident to the market opportunity. But if you do see conditions in pre-, how do you think about sales capacity heading into fiscal 24 and your ability to?
accelerate growth and ad job base. Thanks. Yeah, that's a great question. We are a growth company. We've sealed as the market opportunities huge, $5 billion still, what we are shooting for. We saw this as based on the comments that I made, we've increased our head count almost 100% over an 18 month period. And we saw basically inefficiencies in our organization. That's why we're doing this cost optimization.
Having said that, our selling capacity remains very strong, and we are going to continue to invest in our selling capacity as we go forward into the second half. So we are going to moderate hiring throughout the company, but our focus is still selling capacity and R&D development.
Yeah, so we are still selectively going to hire core deck carrying sales reps as well as core engineering leaders, sorry, core engineering team members. And we expect our year-end headcount to be higher than the headcount today.
Thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Joyeux Fishman with CHUIS. Your line is open. Thank you for taking my question, Remo.
Just on the billing side, if you could, just give us a characterization of how you would say, is it conservative? Is it based on what you're seeing today? It getting worse, the environment thing worse, getting a lot of questions on that, be happy, hopefully get any color you have on that. Thank you.
So, a little more conservatism related to your Billings guidance than past.
And we are assuming the current levels of these fruit needs will continue.
Thank you very much. Appreciate it. Thank you. Please stand by for our next question. Our next question comes from the line of Patrick Colville with Scotia bike. Your line is open. Thank you. Thank you for taking my question.
or has that process been kind of wrapped up and that's in the background now?
Patrick, as we discussed, we made changes to our enterprise segment, the lower end of the market segment at the start of the year. And we are ignoring both the geo leaders. Those changes are behind us, they're done Q1, they're no bearing on Q2 numbers. The main thing we're seeing at the...
high-eslapped with some of the macro conditions and are impacting from the higher-end modules are low end automatic segments and price and commercial. They actually had done quite well. They're still impacting. That's very clear. Thank you so much.
conditions impacting from the high-end modulo-dews are the low end of the market segments and to price and commercial. They actually had done quite well. It is still impacting. Okay, that's very clear. Thank you so much. Thank you.
Please stand by for our next question. Our next question comes from the line of Sacket Kalia with Barclays. Your line is open. Okay, great. Hey, guys, thanks for taking my question here. Remo, maybe for you, can we just dig into the ramp deals just a little bit more? And maybe specifically, are these deals that take multiple years to ramp up to their sort of normal run rate on average? Or are these things that maybe come back in the next couple of quarters? And relatedly, are you assuming a similar mix of ramp deals in the second half as you think about the conservatism in that guide?
So, you know, it's not multiple years. You know, it's just short of that. Also, you know, related to what we think in a ramps in Q3 and the second half, similar to what we saw in Q2. You know, again, as we talked about, dealers are getting bigger by more of our platform. It is a, you know, very, it's a strategic, you know, buy for, you know, large companies. Bridget Goldworth College, 2002, the
regarding the architectures throughout there today, companies understand. They understand that they've got a problem. And for that, these ramps do help us. I would expect it to continue about the same pace in Q3 and Q4.
the route there today, you mean companies understand? They understand that they've got a problem. And for that, these ramps do help us. I would expect it to continue about the same phase in keeps when you're too formal. Very helpful. Thanks, Gus.
Thank you. Please stand by for our next question. Our next question comes from the line of Matt Hedberg with RBC. Your line is open. Great. Thanks for taking my question. I just wanted to ask about linearity. It sounded like in your prepare remarks that January was worse than December . I'm curious.
Did those trends continue into February , was February worse than January ? And is there any way to quantify sort of the impact of the deals that pushed out of the quarter? I mean, some deals certainly pushed into February . And February , again, some of the deals that we thought we'd do in January came through in February . Regarding linearity, overall linearity was actually spatter in Q2 versus Q1. But that's also a function of the elongation of the deals. So that's why linearity is better.
Going forward, I would expect back in low to linearity, I guess we've seen, the last few quarters, I really don't see that changing. Thank you. Thank you. Please stand by for our next question. And then.
Our next question comes from the line of Mike Walkley with Canaccord. Your line is open. Great, thanks. Remo, I guess with new customer pipeline taking longer to close, it seems like upsell is going to be maybe even greater mix over the intermediate term.
Can you share with us maybe how that mix changes over this and slide guidance for the remainder of the fiscal year? That's a great question. If you recall in Q1, it was about 50-50. That's right. And when we said, you know, we felt, you know, on, you know, four of the years going to go more in the 60-40 upsell versus new.
In Q2, it was about 35% new and 65% upsell. From my perspective, I think for this year, I think 64 is still the right metric to think about 64% upsell and 40% new. Thank you. Thank you. Thank you.
Please stand by for our next question. Our next question comes from the line of Keith Bachman with VMO. The line is open. Hi, good evening, good afternoon, many thanks. I wanted to ask about if you look at the stage deals and or just the general economic backdrop. Is there a change in pricing? In other words,
are more customers asking for release in terms of pricing. And related to that, Remo, I know you talked about the billings and you're assuming some, you know, more conservative or things can get worse, but if I look at the billings guide, if in fact billings are down 9% sequentially...
in the April quarter. In order to make the annual guide, the sequential growth in July quarter is 50% or higher. And that's roughly equal to or above the sequential growth of the last three years. So I'm just struggling a little bit to understand why the Billings Guide, we should think there's basically some room, if you will, when I look at the Q4. It just seems like you're asking a lot for Q4. Yeah, I will start on the pricing pressure discount you talked about the remote and get into the billing part of it. So due to a tighter macro environment, there is increasing scrutiny and price.
the first year cost for the customer to manage a spend. But being strategic, being dealing at the right level, and actually delivering a lot of ROI value, reduces pressure on us from pricing point of view.
Yeah, so if you look at the average what we've had in the second half sequentially from Q3 to Q4, it's in the 48, 49% range, so we've gotten our guidance of 46%.
Yeah, so if you look at the average we've had in the second half, you know, sequentially from Q3 to Q4, it's been in the, you know, 48-49% range. So if we've gotten our guidance, it's 46% at the midpoint.
Okay. All right. Thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Jonathan Rookhaver with Cantor. Your line is open.
Yeah, thanks. So Jay, I'm wondering if you can talk in more detail on the adoption trends you're seeing around cloud workload protection and what those initial lands look like from a deal size perspective relative to the CIA and VPA. And also just touch on the go to market are all rep.
equipped to sell that solution today is there an initial overlay strategy. Thanks. Thank you. The overall adoption of clove or her clothes product.
is pretty good as planned and as customers are launching more and more workflows, they have two options either they extend a corporate network just like a branch network to every cloud region and for so by all there all they do is zero trust architecture with these together.
So these products are primarily sold to our customers, our customers understand the value of it, and that's where they're raising it. Now, the initial views are smaller, customers are growing, and there are some large deals, but the majority of the deals start small and customers start.
Why into it? It largely end up doing the same thing just like ZIF users, CPA for users, and there's a ZIF for workloads, CPA for workloads. That's where we believe the opportunity for us to sign in front in terms of go-to market.
All reps are equipped to sell it, but we also understand that there are a bunch of new ones, discussions in Syria. So we do have product specialists. This notes overlay sales team. These product specialists are experts in this area and they do help in the sales process.
I'm even over all of you expecting the emerging product to be a really product still tracking to a PIT team, a pill new and upsell.
would all be expecting the emerging product to be a emerging product still tracking to a PIT team, a pill new and upsell. Thank you.
Thank you. Please stand by for our next question. How next question comes from the line of Gabriela, Borges with Goldman Sachs. Yelena is open.
Hi, good afternoon. Thank you. I want to ask you one of the market opportunities for such a breed. With these cows now having over 30% of the global 2000s, how do you think about the risk that the enterprises that care most about best of breed are essentially already these gala customers? In other words, when do you think the ceiling is?
to about $2,000 per iteration rate. And again, see back some, let's say the next set of, next set of data, but perhaps, we have carried much about the degree technology. How do you think about that? Thank you. Thank you.
Okay, next big calls. I'm sorry, can you expand a last part again? Yeah, I'm sure we do look at your competing for today. Are you getting any time to see back from customers saying, we know you're best of breed, but we're not going to priority you.
Now, our customers are not looking for best-of-breed point products. They're looking for best-of-breed platform with a bright architecture. They're looking for best-of-breed point products.
We can tell you, when you talk to a low end of the market, they can go and live with some of the solutions that are going to have to wait. But when you talk about global 2000, these customers are generally pretty savvy, the requirements are complicated. And we believe the best architecture. The best architecture.
We'll win in the long term. I gave you an example this time. We had a large retailer and had gone a different way, thinking that a firewall-based architecture work tried, failed, and came back. I expect to see a lot more customers do the same thing. I think we have ample opportunity in the global 2000 to take our current penetration to a much, much higher level.
Thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Peter Levin with Evacore, the line is open. Thank you.
Great, thanks guys for squeezing me in here. So maybe just to piggyback off an earlier question on upsell versus that news. So it seems like you're able to kind of somewhat toggle your sales force to maybe focus more on those back to base opportunities. So one, are you changing your incentives, comp plans at all to better incentivize your sales force to focus more on those back to base opportunities? And then second, the ones that you're seeing a better upsell.
platform is very broad and big so we really we want new logos and we want expansion and expansion we know that expansion means upsell is a little bit easier than new logos that's why you've seen some of the upsell numbers going up this quarter as computer new logos now we keep on making the refinements to a go to market structure in models on time to time but there's nothing significant
best security. That's why we win and I think we'll keep on re-creasing driving it. But in today's market, we expect upsell numbers to stay high because it's a bit easier as compared to a new low. And at which products are getting the biggest hit rate?
Oh, sorry, big product, yes. If you look at almost every Z-Skeller customer has ZIA. ZPA can be a starting point, but that's not common. But more and more, if customers are starting with ZIA, ZPS, ZDX, but there's still a sizable install base, that is ZIA. Now ZIA and ZPA together in a higher end.
So we close to 60% right? And that means so many customers have the ISEP above. There's an upsell opportunity on ZPA. There's an upsell opportunity within bundles. So all of these customers are bought business. They move to transformation from transformation. There's a big opportunity for us to sell data protection.
Data protection, especially advanced data protection, very much in the mind of large corporations. And there's a lot of old stuff, sitting from semantic one, two, and some of the macapies stuff. And when you deploy these killers, you can't be really sitting with the old school DLP technology.
Data protection is a big opportunity for us. If it is one other product I would highlight, it is CDX. Digital experience is one of the favorite services of CIOs and head of networking because when someone is coming from some home, some coffee shop, some hotel, when things are slow, customer struggles will figure out.
CDX has become very sophisticated to help them pinpoint issues and take care of them. User experience is becoming more and more important and this is highly, highly differentiated service that we offer. Can I answer your question? Thank you very much. Thank you very much. Thank you.
Thank you. Please stand by for our next question. Our next question comes from the line of John Defeche with Guggenheim. Your line is open.
Thank you. You said that to me, it grew strongly here of a year. But what did the kind of growth you thought it would be? Because the reason I asked is that our checks in the regions were pretty mixed and your revenue growth decelerated in the region and given the recurring model of revenues, usually I laggy indicator I get that. But...
I guess the answer to that question and how do you expect the region to progress for going forward? Is there any reason that region might be more competitive? I'll start, can we move on to that? This corner, Amir had less dependency on large deals. As large deals are getting more smooth, and US was relatively significant weaker because they had higher dependency on large deals.
You want to add any more? Yeah, I mean, be right, John . I mean, Rebby's a lagging indicator. And for our new and upsell business, you know, it was one of our strongest, not very strong, but you know, so immediately did do well.
Okay, and if there's another color, I could give you on the market, what do you kind of stuff? You know, there are certain verticals that are better than others, and you would expect that tech vertical was weak in today's market.
Okay. It's some of the retail and all what the lovers from stores. But that would be more through the US, right? Jay, the tech vertical? Or the US, that's correct. That's correct. Got it. Okay, thanks a lot, guys.
Okay. And some of the retail and all what the lovers from stores. But that would be more through the US, right? J, the tech vertical. Or the US, that's correct. That's correct. Got it. Okay, thanks a lot, guys. Thank you.
Please stand by for our next question. Our next question comes from the line of Shaw, Yoll, with Cohen. The line is open.
Thank you. Good afternoon guys. Jay or Remo, one of the topics that you're in recent quarters is cloud related costs or in other words some enterprise customers are indicating that some of the cost benefits they have subscribed to under the big cloud promise and we've seen some of the
I think we've caught something about maybe hyper-scaler and can you imagine if you can repeat that.
we've caught something about maybe hyperscaler and what is impressed if you can repeat that. Yeah, I know. So I was asking...
What are some customers have been bringing up maybe some disappointment with the overall promise as it relates to cloud related concepts? Is that a topic that has been brought up in recent discussions with your customers? Let me show you a lot of conversations I have.
Customers are embracing club. Okay, there's no somebody's not saying I'm going to come back or not embrace the club.
That's point number one. Point number two, the speed at which these guys are moving forward is slowing down. You can expect because some of these large software development projects are slowing down for cost reasons. Number three, that's actually creating an interesting phenomenon whereby customers aren't able to use all the spend that's committed.
That's actually giving us an opportunity where we are actually partnering more closely with some of these hyperscalers where our RDs can be part of that customer commit because we are as an approved partner for some of the cloud spend. So those are some of the things we are seeing. But overall, we do see.
It's rare to find a CIO that says, I don't like cloud anymore. Are there complaints about cost in the cloud? Do they see an alternate to go back to data center?
the CIO that says, I don't like cloud anymore. Are there complaints about cost in the cloud? Yes. Do they see an alternate to go back to the data center? No.
Thank you so much for that. Thank you. Ladies and gentlemen, due to the interest of time, that concludes our Q&A session. I would now like to turn the call back over to Jay for closing remarks. Thank you for your continued interest in ZSKR. We look forward to seeing you at some of the upcoming conferences. Thank you again. Thank you. Ladies and gentlemen, this concludes today's call.
Thank you for your participation. You may now disconnect. In short, to raise and lower your hand during Q&A, you can dial star 11.
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