Q1 2024 Zscaler Inc Earnings Call
Okay.
Thank you for standing by and welcome to Descale as first quarter 'twenty 'twenty four earnings conference call. At this time, all participants are in a listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask a question at that time. Please press star one on your telephone.
As a reminder, today's call is being recorded.
I would now turn the call over to you how we're supposed to Bill Choi Senior Vice President of Investor Relations and strategic Finance. Please go ahead.
Good afternoon, everyone and welcome to the Zee scalar first quarter of fiscal year 'twenty 'twenty four earnings conference call on the call with me today are Jay Chowdhry, Chairman and CEO and remote Knesset CFO.
Please note that we have posted our earnings release, and a supplemental financial schedule to our Investor Relations website.
Unless otherwise noted all numbers, we talk about today will be on an adjusted non-GAAP basis, you'll find the reconciliation of GAAP to the non-GAAP financial measures in our earnings release.
Like to remind you that today's discussion will contain forward looking statements, including but not limited to the company's anticipated future revenue calculated billings operating performance gross margin operating expenses operating income net income free cash flow dollar based net retention rate future hiring.
Decisions remaining performance obligations income taxes earnings per share our objectives and outlook, our customer response to our products and our market share and market opportunity. The statements and other comments are not guarantees of future performance, but rather are subject to risks and uncertainties some of which are beyond our control.
These forward looking statements apply as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements. After this call for a more complete discussion of the risks and uncertainties. Please see our filings with the SEC as well as in today's earnings release.
I also want to inform you that we'll be attending the UBS Global Technology Conference Tomorrow.
Now I'll turn the call over to Jay.
Thank you Bill I'm pleased to share our first quarter results, which exceeded our guidance across all metrics, we delivered 40% revenue growth and 34% billings growth.
Our operating profit and free cash flow more than doubled year over year and free cash flow margin reached a record 45% we exceeded the rule off 60 for the 13th consecutive quarter.
At a significant scale off $2 billion plus in E. R. R. We are delivering a unique combination of high growth and high profitability that only a few SaaS companies have accomplished.
In Q1, we executed well in a challenging macro environment and what is typically a slower quarter for us.
Elevated scrutiny of large deals remains mostly unchanged the increased frequency of high profile breaches, coupled with impending FCC disclosure requirements has propelled zero trust security more into focus at the management and the board level against this backdrop, we achieve.
<unk> Q1 record for number of new logo customers with over $1 million in Iraq. We also achieved a record for new pipeline generation in the quarter.
More customers are adopting a broader platform to consolidate multiple point products, increasing our average deal size.
As a result, we are actively working on more large multiyear multi pillar opportunities than ever before.
To meet this demand and to further scale our business. We are adding two key go to market leaders one in sales and one in marketing I will provide details about these new executives after reviewing our Q1 performance.
Let me highlight three factors that drove our strong Q1 performance.
Past large new logo wins were strong this quarter with a Q1 record of 14, new logos contributing over $1 million or are.
We ended with 468, such customers up 34% year over year.
These wins spanned across many verticals proving that every vertical needs. The scalar second customers are buying a broader zee scalar platform with multiple product pillars, I've said before over time I believe every one of our customers will buy Z I Z P. A N C D X.
For every user to deliver secure fast and reliable access to any application anywhere.
This quarter.
Nearly half of our new logo customers purchased all three user pillars Z I Z P E and CTX. In addition, strong platform Upsells drove our 120% dollar based net retention rate.
Third this was a record U S federal quarter with new business up over 90% year over year, including four deals that are greater than $1 million in HCV.
We are starting to see larger awards as multiple U S. Federal agencies are standardizing on Zee scalar to meet the President's executive order to adopt zero Trust security.
We are extremely proud of having landed calls after 15 cabinet level agencies as our customers, where we have plenty of opportunity to expand.
For example at a cabinet level agency, we expanded the C. I N CPA deployment from 25000 users to 100000 users while cross selling C. D X for all 100000 users.
We also won a top defense integrator, who purchased Zia I E Z P. A M Z Dx for its employees in parallel they launched a go to market service to pick zee scalar to their federal customers as our Si partners are selling and deploying zee scalar for their customers.
We are also adopting zee scalar to make their own business secure agile and competitive.
From my conversations with hundreds of I T executives, it's clear that cyber security is the number one <unk> spending priority adopting.
Adopting zero trust architecture, and protecting their enterprise from Jenny I risks are top priorities for <unk> in 2024.
We have enhanced our data protection policies for E. I am it applications and tools to protect our customers' risk of data loss due to increasing use of Janney out our AI powered threat protection users of diffusion model to detect complex exploits and two cats sophisticated phishing attack.
That evade traditional security controls. These AI driven features are included in our advanced plus bundles, which are often priced 20% higher than advanced bundles.
<unk> secured on average over 2 billion transactions every month for our customers.
Next let me discuss some of our Q1 deals, which demonstrate our differentiation and business value.
We are starting to see some wins where customers are coming to us. After initially purchasing a firewall based single vendor sassy solution that failed to deliver in the real world.
For those who are not familiar firewall based single vendor sassy is the combination of SD Wan and firewall and VPN deployed as Vms in the cloud.
A leading software company made an architectural shift to our zero trust platform after trying to deploy a leading firewall vendor sassy solution across 50 office locations and multiple public clouds sites.
It became clear to the customer that this solution expanded their attack surface to all locations and increased risk of Blackrock crack movement. They decided to move to a zero Trust security with the purchase of Zee scalar for users are complete bundle for C. I, a CPA ANZ Dx, but all too.
<unk> 5000 employees.
Our zero Trust exchange connects users directly to apps, eliminating attack surface and lack of movement.
Unmanaged devices, the customer is deploying our browser isolation with CPA to enable third parties to access their applications.
Deals like this reinforced our conviction that firewall based sassy solutions are not a feature of security that some analysts advocate.
Customers are choosing Z Skinner's purpose built zero trust platform let.
Let me highlight one new logo win with our superior security helped a customer after a breach.
Despite extensive investments in firewall and vpns are hospitality and gaming company experienced a crippling ran somebody a breach.
To restore their operations they purchase the entire six killer for users bundle for 25000 users.
With six killer apps are now hidden from pet actress behind our Zero Trust exchange and can't be discovered exploited our Ddos. This customer also purchased our new risk 360 solution to understand their organization wide risks and to get actionable information to reduce it.
We have shared with you that data protection is one of our fastest growing solutions for us.
For our customers after implementing cyber protection adopting data protection is the natural second phase after a zero Trust journey.
For example, a fortune 500 travel and hospitality services provider more than doubled their annual spend with us with data protection being a critical component of the upsell.
The first purchase was C. I a for 22000 users to inspect all traffic, including T. L. S encrypted traffic for cyber protection.
As a next step we are implementing real time inline DLP for sensitive data.
Our solution also enables the customer to enforce policies for secure use of AI applications.
These deals highlight the breadth and depth of our zero Trust security platform.
Also help our customers achieve high rois by eliminating tech debt and consolidating multiple point products.
For example, a fortune 200 financial services group current Buzzi scalar to consolidate data centers and safely adopt cloud with the necessary security controls for regulatory compliance they purchase the scalar for users bundled for 10000 employees and workload communication for 1500 works.
Votes.
By leveraging our cloud platform they will eliminate half of the day, our centers reduced at mpls spend and consolidate security and networking client products.
We are eliminating several point products, including secure web gateways firewalls, Ips appliances, vpns, Casspi and DLP from seven security vendors.
This deal is expected to generate a remarkable five X Ottawa for the customer.
I'm also excited to share that <unk>, one of our emerging pillars continues to gain significant customer adoption.
It is an important part of every deal conversation due to its unique ability to eliminate blind spots C. D X significantly reduces helped us our spent on ticket resolutions and manual correlation of metrics.
Let me highlight a new logo deal with C. D X played a pivotal role.
A top ranked U S Hospital network purchased Zia I E N Z Dx advanced plus 87000 users and CPA for 40000 users.
What initially began as a V I a N C. P. A project quickly evolved into a significant C D X opportunity.
The CTX continent alone is seven figures and a C V.
Unlike the existing performance tools C. D X provides comprehensive visibility and root cause analysis for users devices and applications.
This deal is a great example of the leverage we gained from working with system integrators like Accenture, who was awarded the overall transformation project.
We're also seeing strong customer interest in workload protection on other emerging product pillar.
Zero Trust exchange is designed for any to any secured communications. It may be users two apps, what trop, two workload or Iot Ot devices.
Thousands of enterprises already leveraged six killer platform for secure user to App communication.
It is natural for them to extend our sito cross platform to secure that workload communication.
To radically simplify multi cloud connectivity and automated deployment of workload protection at scale. We recently released significant enhancements to our workload communications offering including <unk>.
Granular workload segmentation using AWS user defined tags, the fast zero Trust security solution for workloads in the market.
The only alternative is legacy virtual firewalls, and real time auto discovery of cloud resources.
More than a third of our customers have made initial purchases for workload protection.
Cloud communication often starts with small land deals and we expect to rapidly expand to secure the growing number of workloads.
Zee scalar pioneered zero trust and sassy both delivered by a cloud data platform, we have established ourselves as a premier provider for user protection and unknown, making progress expanding into workload protection and Iot Ot protection.
We continue to push the boundaries of what our platform can achieve extending it but b to b and five D use cases.
As we have like a switchboard for all communications, we collect full transaction logs and trillions of signals daily.
We are utilizing those signals and logs to belabor AI powered insights and automation for our customers.
Let me discuss a few of the high value products in our AI cloud family.
We recently launched <unk> 60, which is the industry's first holistic AI powered risk quantification and mitigation solution.
It delivers up to their risk posture and recommends corrective actions to mitigate risk in a timely fashion.
We have already closed Penn plus RISC V 60 deals and are in active evaluations with over 100 enterprises.
But these deals were getting six figure ACB on average and we expect to grow this value over time.
Christy 60 provides critical insights to cisco's when reporting on cyber security risk strategy and governance, particularly in light of new FCC regulations.
Another exciting new product reach predictor currently underdevelopment uses predictive and generative AI models to anticipate potential breach scenarios and eliminate those risks before they materialize.
Feedback from customers, who were previewed breach predictor indicates the enormous potential value of this solution can deliver.
We are working with our technology partners to bring this world class innovation to thousands of customers to proactively protect against potential breaches.
While we have achieved tremendous success for user protection solutions or platforms potential in other categories. It's just beginning.
Our relentless innovations have paved the way for an ever growing stream of opportunities.
As our platform continues to scale and expand our go to market efforts are continuing to evolve and scale as well to enable the next stage of go to market scaling I'm excited to share the appointments of two exceptional leaders, Mike rich as Seattle, and President of global sales and choice.
As CMO.
They bring a wealth of experience and driving revenue and pipeline growth Mike joins from service now where as a precedent for America us establish an efficient and scalable process to drive deeper engagements with large enterprises and to scale their business to over $8 billion in revenue and <unk>.
<unk> that's critical to the next phase off on growth journey.
Joyce his previous experience includes CMO roles at Twilio Genesis and with expertise in building high performance marketing teams and driving impactful marketing strategies and campaigns.
With Mike assuming leadership of our sales organization Dani in his capacity as the C. O can focus on scaling our business operations.
He has been instrumental in establishing that go to market process, which has helped <unk> achieve a milestone of $2 billion in E. R. R.
With our expanded portfolio of products and expedient, Seattle and see them on board, we will further scale our value ladder sales process for larger platform deals, which will sustain our high growth.
I'm thrilled to have strong go to market leaders, who we believe will drive world class execution to scale, our business beyond $5 billion in Iraq.
No I 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 with ongoing customer scrutiny of large deals revenue was $497 million up 40% year over year and up 9% sequentially.
From a geographic perspective Americas represented 53% of revenue EMEA was 32% and a P J with 15% as Jay highlighted.
From a new business perspective, federal had its best new ACD quarter ever growing over 90% year over year, our new a C. D outside of the fed also grew year over year.
Our total calculated billings in Q1 grew 34% year over year to $457 million.
On a sequential basis total billings declined 37% quarter over quarter with a difficult comparison to Q4, which had a $20 million upfront billing on a multi year deal.
As a reminder, our contract terms are typically one to three years, we primarily invoice our customers one year in advance.
Our calculated current billings grew 33% year over year, and a seasonal decline of 32% quarter over quarter.
Our remaining performance obligations or P. O grew 30% from a year ago to $3 $49 billion.
The current RP O is approximately 51% of the total RPM. We ended Q1 with 468 customers with greater than $1 million in a R. R.
Adding 19, such customers in the quarter.
14 of the 19 $1 million a hour customer ads were new logos, which was a record for Q1.
The continued strength of this large customer metric speaks to the strategic role we play in our customers' digital transformation initiatives. We also ended the quarter with 2007 or eight customers with greater than $100000 in air are.
Our 12 months trailing dollar based net retention rate was 120%.
Turning to the rest of our Q1 financial performance.
Total gross margin of 80.7%.
Appears to 80.7% in the prior quarter and 81, 4% in the year ago quarter.
Higher public cloud usage for immersion products drove the year over year change in the gross margin, partially offset by approximately 60 basis points of benefit from a change in accounting attributed to the longer useful life of our cloud infrastructure.
As mentioned last quarter as a result of advances in technology and efficiencies and how we operate our server and network equipment.
Starting this quarter, we extended the depreciable useful life of these assets and our cloud infrastructure from four to five years.
We continue to generate significant leverage in our financial model with operating margin reached 18% and.
An increase of approximately 620 basis points year over year.
Our free cash flow margin was 45%.
<unk> datacenter capex of approximately 6% of revenue.
Free cash flow benefited from strong collections from Q4 billings, including the $20 million upfront billings I mentioned.
We ended the quarter with over $2.3 billion in cash cash equivalents and short term investments.
Next let me share some observations about the macro environment.
And our framework for guidance for the rest of the fiscal year, while the global macro environment remains challenging and customers continue to scrutinize large deals.
Our perspective customer sentiment seems to be stabilizing.
Our customer engagements remains strong and we have a large and growing pipeline. However, we want to be prudent in our assumptions given the sales leadership change.
In our outlook for fiscal 'twenty, four we're balancing our business optimism and continued sales execution with ongoing macroeconomic uncertainties.
With that in mind, let me provide our guidance for Q2 and full year fiscal 2024.
As a reminder, these numbers are all non-GAAP for the second quarter, we expect revenue in the range of $505 million to $507 million.
Reflecting a year over year growth of 30 or 31%.
Margins of 80%.
The change in accounting for useful life of server equipment.
I would also like to remind investors that a number of our emerging products, including newer products like Z Dx and Zscaler for workloads will initially have lower gross margins than our core products.
We are currently managing the mercy products for time to market and grow not optimizing them for gross margins.
Operating profit in the range of $84 million to $86 million.
Net other income of $15 million.
Income taxes of $8 million.
Earnings per share in the range of 57 to 58 cents.
Assuming $160 million fully diluted shares.
For the full year fiscal 'twenty 'twenty four we are updating our guidance as follows.
Increased revenue in the range of $2.09 billion to $2 $1 billion or year over year growth of 29% to 30%.
Calculated billings in the range of $2.52 billion to $2.56 billion or year over year growth of 24% to 26%. We still expect our first half mix to be approximately 42% of our full year Billings guide increase.
Increased operating profit in the range of $360 million to $365 million.
Which reflects up to 250 basis points of operating margin improvement compared to last year.
Income taxes of $35 million increased earnings per share in the range of $2 45 to $2 48, assuming approximately 161 million fully diluted shares.
We expect our free cash flow margin to be up year over year and in low 20% range.
We continue to expect our datacenter capex to be high single digit percentage of revenue for the full year.
Reflecting a three to four percentage points of headwind to free cash flow margins.
We expect the timing of capex spend to be more towards the second half of the year.
As we invest in upgrades to our cloud and AI infrastructure.
Our guidance reflects our plans to invest aggressively in our business to pursue our significant market opportunity.
With our new CFO and CMO coming on board, we expect to step up our sales and marketing investments in the coming quarters. In addition, we'll increase investments in our technology platform and cloud infrastructure with a large market opportunity and customers increasingly adopting the broader platform we plan to invest aggressively.
Position us for long term growth, while increasing profitability.
Operator, you May now open the call for questions.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone again to ask a question. Please press star one one we do ask that you. Please limit yourself to one question and then feel free to rejoin the queue one moment for our first question.
Our first question comes from the line of Brad Zelnick.
Deutsche Bank your line is open.
Great. Thanks, so much and congrats on a strong start to the year.
Nice to see the leverage in these results.
Youre distinction SaaS. He has always been clear and it's perhaps a little more obvious than right now at a time when traditional network security providers are having a tough time selling more and more boxes and it seems they are paying you a nice compliment as they all double down their focus on the cloud and SaaS fee. So as this all plays out competitively in your <unk>.
Kris singly subject to the law of large numbers.
Should we think about your ability to sustain high growth.
Typically the rate at which you can scale your emerging product portfolio. Thanks.
Thanks.
Very good question it is flat changes fee.
Vendors, becoming chassis vendors overnight.
But the challenge for them would be it's a different architecture, it's not an incremental change in feature you can now add on to it.
We spent a dozen plus years building a true data architecture, which is an advantage.
That's why we became the market leader, we pioneered this market would be annualized.
Fact that this is what's needed for better cyber security and data protection and cost reductions.
I look at.
To sustain hydro.
The following one is that a market demand came out in the market is growing and expanding it much faster.
Than I, even thought to but you have the right platform. The right architecture and functionality you have seen us build this platform on a crude unit restaurant protection expanded over the years, what we had at the time of IPO versus what we have today.
And the third area.
Let's go to market execution.
Done a great job.
With IPO crossing the $2 billion.
And now I'll be got our sights set on crossing 5 billion and we have.
Boeing and adapting our go to market also along with a platform. That's why I'm very excited about bringing two key leaders, Mike Seattle and choice, a CMO, who can help us take us with next level great market execution, great platform <unk> I'm very excited about.
In front of us.
Thanks I appreciate it.
Thank you one moment please.
Our next question comes from the line of <unk>.
<unk> Kalia of Barclays. Your line is open.
Okay, Great Hey, guys. Thanks for taking my question here.
Jay maybe for you just building off of that last question on on some of the slowness that we've seen with the traditional network security guys and the challenges with appliances.
He was maybe do you feel like customers are more willing now to replace their appliance firewalls at least at the branch with with SaaS architecture like Zscaler provides so well.
I have said many times firewalls won't go away, but it will become like mainframes, we had been in place a firewall and the branches.
The last several leaders.
That trend is into one of the new things that Don.
Salary demise of firewalls and branches is our branch connector technology, which package to make it available. So you can become a Starbucks flight office in a matter of minutes strat than trying to wait for a long long time, So we're seeing Ken.
Crush environment, becoming just like that the only place we have firewalls have been playing a.
Significant role for a while is the data center the east West traffic in the light.
The traffic is going away from the data center and <unk>.
Demand has to go away.
The big thing for someone to do it right at two really.
<unk> box like Brian Zero Trust architecture market has made progress, but traditional SD Wan.
Traditional SD Wan is how does it translate into technology and once we approach the market with launch connector actually as the next big phase two maintenance.
Very excited for the opportunity to make the world free of firewalls.
Makes sense thanks, guys.
Thank you.
One moment please.
Our next question comes from the line of Alex Henderson of Needham <unk> Company. Your line is open.
I'm torn on what to ask but I think I will go with the question around the channels.
So you guys have been doing a lot of work on expanding your var channels.
Spanning region to federal expanding reach into MSP is expanding into the cloud arena as much as possible can you give us some sense of how you think the mix of your sales leads.
Driven by.
By those different channel opportunities.
As we move through.
The current fiscal year. Please.
Sure. Alex you rightfully said, we don't want to have a simple straight bar channel that traditionally firewall and.
Network security vendors.
We have payroll we have system integrators and service providers and then the separate setup size for our federal business as well.
Let's talk about each of these areas.
Slow to adopt <unk>, but now as the market has moved more and more of them on embracing us and our leader call has launched a number of programs, where we're seeing very good progress, but new sourced pipeline coming from China.
Yes.
Yes.
We see probably a better.
Betty absolutely growing opportunity is global systems integrators.
My coming phone service.
A lot of partnership with global Si play a big role I expect that to accelerate.
And then this next level of fulfillment versus transmission.
Life partners work with us and what the partners, Saudi our customers' digital transformation.
And we have been selected if you aren't going to find us that 5000 or 10000 channel partners our partners at <unk>.
And we are doing targeted programs and working with some of the very large.
Very large deals to do transformation I mentioned one of these deals.
My prepared remarks, and I mentioned, another asked sorry actually broad six internal.
Along with actually launching a service to go three when do you want to add any more color.
I think thats great Jay.
Okay.
Thank you Robyn no comment on internal sales.
Which is obviously a piece of it.
Our own ships frictions.
So yes, we.
Increased our capacity in the quarter for sales reps.
Our plan is to increase capacity through the year.
The one comment I'd make on Q1 is that.
We were we didn't hit our expectations internally, but we expect to.
Basically our sales targets for the year.
The current sales capacity that we add supports our guidance.
And as Jay mentioned.
New leadership with Mike on Board.
We'll be looking to accelerate our hiring as we go through.
2004.
Great. Thank you so much.
One moment please.
Sure.
Our next question comes from the line of Joel Fishbein.
Chris Your line is open.
Thanks, and thanks for taking my questions Great execution here, Jay one for you and then I'll jump back in queue.
On the on these new advanced plus bundles, obviously very exciting just can you share with you. He said AI is including some of the new apps are included within that can you talk about adoption rates and whether or not youre getting any pushback on pricing as it relates to some of those bundles.
Yes, so we have at advanced bundles that include a bunch of functionality.
No we have added functionality.
Some of that data protection can be done with AI advanced techniques. Some of the cyber threat protection can be done using debt. So we clear these bundle will be call them advanced plus so we're getting very good traction in these advanced as our spend goes on about 20% or so higher than the non plus.
Bundles. So this is a good area and this is a good way faster to reach our customers as they're looking at buying these bundles with additional functionality, it's helping them helping US now. In addition, we are also creating some standalone skus. We talk about risks. These <unk> are very popular recently.
Introduce product.
I talked about having closed 10, plus deals now pretty significant matter, where the average ACB sitting in six figures.
And then you'll see some more skus coming down the road as you really AI cloud is one of the big focus areas in there.
He is going to be making progress because we are battle logs better data to train AI ml models, starting point a good AI ml is the data that we had.
Anybody else.
Okay.
Great. Thank you.
Thank you one moment please.
Our next question comes from the line of Rob Owens with Piper Sandler Your line is open.
Great. Thanks for taking my question, maybe building a little bit on Joe's question. You mentioned in your prepared remarks with an example around data protection as kind of one of the faster growing solutions and how it doubled spend.
Existing customer.
Curious the potential for that and what Youre seeing relative to typical uplift when you are able to attach that solution. Thanks.
Sure.
<unk> got our customers started working with US several years ago, our number one focus, but then bought cyber action. So they don't get compromised.
Data protection was slower.
<unk> there a protection also takes a little bit.
There's more applications that customers need it.
And in large enterprises, where our large customers have been.
Jews semantic one two as one of the primary data protection products.
Five six years ago, we have expanded our data protection platform significantly not just in line, but can be actually endpoint DLP cloud data protection all of those things, including EDM IBM technology, some errors with all of that technology.
We are in a great position to replace some of those.
Complicate or data protection products out there.
And it's natural if we are sitting in traffic path. If we are doing as system inspections natural customers, who use our cloud because the traffic is coming to a cloud from all locations.
Surely driving growth, that's where why we talked about this data protection.
<unk> is approaching about quarter of a $1 billion and do 60% year over year for us NBC a lot of growth for quite a long time industry.
Did I answer your question.
Yes. Thanks.
Yeah.
That's one comment I'll make is we have more.
Complete platform and data protection.
And customers want one set of policies rather they want to secure data address our data at <unk>.
Why.
It's picking up quite fast.
Thank you one moment please.
Please.
Our next question comes from the line of Joseph Gallo of Jefferies. Your line is open.
Hey, guys I appreciate the question.
Raimo I appreciate the rationale on the full year Billings guide, but just our methodology is there any changes there I mean, you saw a strong <unk> driven by <unk> why not pass along some of that be.
Is that solely due to the market are the go to market change conservatism or is there anything else you're seeing there with large customer calendar 'twenty for budgets and then maybe just simplistically ask its fiscal 'twenty for billings more or less conservative now than it was 90 days ago.
Great great questions. So.
The guidance that we gave is solely related to basically the go to market with our new sales leadership on board.
We feel it's prudent to do that when you take a look at close rates.
For Q2, this year versus last year, we're being a little more conservative with our close rates. This Q2.
From a market overall market perspective.
Macro still remains challenging, but we feel that things.
As more of an acceptance of zero trust, there's more of an understanding of our platform. So we feel good.
Regarding.
Guidance, whether it's more conservative now or not I'd like to say, we'd like to be prudent.
<unk>.
Again, it's all related to go to market with our CRO and I don't want to comment any further than that.
Thank you.
Thank you.
Please.
Our next question comes from the line of Gabrielle <unk> of Goldman Sachs. Your line is open.
Good afternoon. Thank you I wanted to ask you about plus the idiosyncratic drivers and your federal business and more specifically as we think about the momentum that you're seeing now.
Should we think about the durability of growth in the federal vertical meaning is this like a three to five year product cycle, where we will see a ramp and then we should be cognizant of the slowdown is it 18 months to 36 month product cycle. How do we think about some of the visibility you have and thorough in how it's going to impact your growth over the medium term.
Another great question Gabriel.
I'll start maybe Jay can come in also.
We've invested significantly in federal.
This is not an overnight basically occurring this is occurring over the last five six years of significant investments.
Both from a platform technology as well as people put them to federal organization that worked at.
Works for us.
We're in 12 of the 15 agencies cabinet agencies.
As Jay talked about in the script our growth rate in federal.
In Q1 was 90% year over year.
I feel that we.
Sure.
Very well positioned in federal what we've talked about we've got incredibly strong federal team.
And I feel that going forward federal should be a good driver potentially significant driver for Zee scalar.
And we're doing well in federal I'll turn it over to Jay Yes. So.
I think about it first of all number of users and the federal government.
On the.
Yes, we do have called a 50 cabinet level agencies, but they are in various stages.
Big Big upsell opportunities theatre itself.
Yes, just scratching the surface out there. So if you look at for a number of users point of view.
Massive market in front of us because number of users.
Their workloads.
There is a whole range of Iot Ot devices, and federal business tended to be taken care off.
Massive stuff, but then on top of that it's.
Our platform has expanded its keeps on expanding.
I think this is a significant growth opportunity.
Our long long time.
And then.
Takes us to the next party federal it takes to other federal frankly.
He is out there.
All want to fund that NATO friendly countries want to adopt but U S has done here, that's an opportunity for us.
Governments are getting.
Hi.
What are your thoughts adopting zero trust, that's another big opportunity for us So very bullish big investments and Thats why we have some of the best certifications.
Or six kind of back from than any other company out there.
Thank you for the color and congrats on your quarter.
Thank you one moment please.
One moment please.
Our next question comes from the line of Jonathan Rocking Haver of Cantor Fitzgerald. Your line is open.
Yes. Thank you.
So Jay we are seeing this convergence between.
Cloud workload protection platform CSP Ci.
A lot of other acronyms that are being thrown into this.
Kind.
Kind of bucket.
As the number of Nextgen vendors did seem to have.
Product led growth sales motion aimed at the developer.
Contrast, with your approach, which is more high touch aimed at the C level.
As the product sits between build and run time environment.
You could argue maybe that portfolio shifting either even further lap how do you balance those dynamics when you look to go to market with.
Operator.
It's a very good question. So all of those four letter acronyms U K, but we are trying to track them.
And there have been 100, plus vendors in that space over the past two years, though.
About a year ago I used to see a new vendors show up every other day.
Last year, sorry, this lockdown and execute that's shrinking.
Adjacent but next to that is cloud workload communications.
Volker communication is about workloads talking weeks network, both talking to each other and that's where our core strength comes in to Zero Trust architecture. We are the only bank I know out.
We have workloads talk to each of the two zero Trust architectures.
On the network.
Thats Astani then we looked at is seen as an extension to me has seen assets almost like SaaS being many ways. Judy you make API calls reading logs, the leerink configurations to figure out the risk and what not and that is towards shifting more to the left we.
We believe that combination.
Workload protection, along with seeing that puts us in a better position.
Regarding product that grows I think that's an interesting opportunity some of the companies. Obviously, if we don't come from that side I haven't seen very many security companies that grow into hundreds of millions of dollars doing product that growth, but we are watching and monitoring the space, but we will be going fall, where our strength is orange.
Customers love seats Cologuard users northern embracing.
Workloads communication and data allows us to extend it to see that space as well that's something we look at it.
Yeah. That's helpful. Thank you guys.
Yes.
Thank you.
No. Please.
Yes.
Our next question comes from the line of Patrick Colville.
Scott Scott tells you Bank your line is open.
Hey, Thank you for taking my question.
I mean really really impressive set of results guys. So congrats on starting the new fiscal year.
With you guys.
Very impressive momentum.
I guess I wanted to touch on the leadership change.
These two new executive level hires.
How has <unk> changed is he still let the firm or is he moved on and if so.
What how does it how.
Can we expect business will change going forward.
Yes, Tony has an active role as the CEO of the company. He has played a phenomenal role in these kind of growth you have seen over the past four years.
We built great go to market machine that has helped us grow past $2 billion in error.
No.
<unk> goal is to take us to.
Two $5 billion and beyond.
This spring Tommy do focus more.
In his capacity as a CEO too.
Really help scale our business operations.
What do you mean by that.
We are growing at a rapid pace we have.
Many things to improve on scaling side up in the operational side.
Streamlining our post sale customer engagements.
Ranging pumps or Tam to deployment to success, how do you bring them together and make it more productive and better streamline for battery value realization of the customers.
Second example.
Cash process.
Tactically improvement streamlining if we do a better job in these areas as a company will become a lot more productive and Donny is experienced across the company, but help us achieve some of those key things that are needed.
Thank you so much. Thank you one moment please.
Kim.
Sure.
Our next question comes from the line of John di Fucci.
<unk> Securities Your line is open.
Thank you.
Jay and remove both spoke about the challenging macro backdrop and I think raimo if im correct me if I'm wrong, but I think you said that you did not hit your internal targets for <unk>.
I guess, what do you think the reasons for that were.
You have new go to market people can you explain that with the guide with Joes question and sometimes that means the previous people were an issue.
It was really good at it to say the least I know.
I know <unk> had customer sentiment is stabilizing but I'm not quite sure how that sort of fits in is the macro gotten a little worse or is there something else that I'm not thinking about.
Yeah, the macro has not gotten worse in the comment John was related to.
Quota carrying reps.
We didn't in our internal projections for internal reps.
We do expect to catch up we've talked about before on earlier calls.
And a huge market opportunity, we're going to invest significantly in in our company.
You can see in the second half we're going to <unk>.
Increase our sales and marketing spend based on our guidance.
It's related to just overall, we've got a new CMO onboard with Mike on board.
But just the <unk>.
Comment.
Its related basically purely to.
Quota carrying reps, we did increase capacity, but not to the levels. We wanted and from my perspective, John It's really execution on our part we need to execute better on that.
Got it thank you very much.
Thank you one moment please.
Our next question comes from the line of Tyler <unk> of Bank of America. Your line is open.
Hi, Liana. Please please please go ahead.
Jonathan.
I'm, sorry, I pressed on the.
But so.
You can hear me now.
Yes, perfect. Okay RPM growth was slower also the billing guidance.
Was a tad below although you you hit the quarter, you're above the quarter expectation so.
I wanted to ask about the discount level contract duration was there any change in the pricing environment or contract duration. This quarter that is driving the lower rpms and.
And also how do I think about I know you don't provide kind of quarterly, but how do I think about.
First half versus second half in terms of billings and <unk>.
Thanks.
Yes, I mean.
A lot of questions in there.
I appreciate you, bringing it up.
Bringing up.
RPM decline is primarily.
Related to federal Federal is a big piece of our business and when you look at federal federal contracts that are multiyear contracts.
Take federal and.
For one year and our CRP.
That was a big driver for that when you take out basically federal.
Out of the contract duration really contract durations are comparable year over year and also quarter over quarter.
Discount levels, no not really seen anything on the discount level perspective, I'd say, it's the same same for awhile.
First half second half.
You can expect billings to be in the 42% range in the first half.
And the rest basically in the second half.
But the IPO.
Basically relates to primarily relates to federal business, which was one year one year recognize got it. Thank you.
Thank you.
Please.
Our next question comes from the line of.
<unk> of Citi. Your line is open.
Good afternoon, and thank you for taking my questions David.
This one's for you you were very explicit about that.
The success in the federal business coming from very strong wins and partnerships with federal side. So I wanted to better understand what the moat and differentiation is.
If you can help explain to us why this wouldn't necessarily cannibalize your direct business, which you are.
Executing just fantastically.
So.
On direct versus channel business, almost all of our business is supposed to be churn.
A few customers insist that they must do a deal directly with us.
The channel as opposed to bring leverage more channel partners are working closely with us.
The more heavy lifting to do better productivity better our sales.
Salaries should happens so it's important for us and a transformational sale like a.
The channel wasn't quite ready to say, Hey, tell me the latest box AMETEK yourself.
To work with them to show them transformation.
Federal enrollment is driving big transformation at all levels President's executive order.
Yes.
Zero Trust architecture, and a large number of systems integrators, and the Franco market, who actually need technology like ours can make it happen.
And in fact, it becomes even more interesting as you must have certification of concern levels.
<unk>.
Fed ramp certification at the medium level at high level and what not.
Most of them so when certainties patients leveraging those system integrators, we are able to drive transformation and I think we are in very good shape sitting there in the big market working side by side with our partners.
So there's no cannibalization.
Did I make it clear on did I Miss summit.
No that's super clear thank you.
Okay. Thank you.
One moment please.
Our next question comes from the line of has enough firewall or Morgan Stanley. Your line is open.
Hi, Good evening, Thanks for taking my question remote regarding your comment on the sales changes.
And the impact of the full year Billings guide.
Is it are you anticipating the leadership change will drive a broader restructuring and the sales org like you saw a few years ago. When he came on board or is it going to be more incremental thank you.
Yes so.
The leadership, we have in our sales organization is very strong.
All of these created I don't see significant changes, maybe Jay can speak to it but I don't see significant changes and again the structure that we've built.
Under <unk> leadership was a very strong basically structure yes.
In many ways, our sales process at <unk> similar to sort of install sales comps.
Consultative it is top down selling enterprise.
Any so we expect the same kind of subcarrier it needs to be there will be ongoing refinements, but don't expect any big changes some of the things as I talk to Mike or Neil Asses understanding organization.
You don't see probably more focus on top accounts program, we have a big opportunity to take on large customers and double triple or quadruple.
With us because our platform supports.
Youre going to see more focus on more nickels, we already have some level of imported vehicles public sector as a vertical for us.
You'll see more focus there you're also going to see more persona focus in our sales staff and I mentioned early on to Youll, probably see more focus on global system integrators as they drive some of the large transformations.
But no significant changes.
Helpful. Thank you.
Thank you one moment please.
Yeah.
Our next question comes from the line of Matthew Hedberg of RBC. Your line is open.
Great. Thanks for taking my question Raimo question for you on the macro.
There's been a couple of questions on billings and <unk> and obviously, the federal strength, but I guess, maybe I'm just a little confused because when I look back at your Q4 script. When you talked about the macro as you said you noted global uncertainty, but it seems to me like you.
There was a change in tone from your commentary I think you said.
Customer sentiment is starting to stabilize so I guess I'm just curious what drove that comment that things are starting to stabilize versus last quarter. When you noted uncertainty. It was just something that happened during the quarter or anything that kind of prompted to maybe change the script a bit from <unk>.
Yes ill, let Jay.
So I think what I commented last time, what is a slight.
Production is currently after.
<unk> are used.
What we're seeing we're saying there's no change in macro waiver you havent seen so macro is not claim at all at this stage to say.
Forecast HBA, assuming macro is not getting any worse than it has.
Okay.
Thank you.
Thank you.
No. Please.
Our next question comes from the line of <unk> <unk>.
Baird Your line is open.
Yes, Thanks for taking my question and congrats on the great quarter R. J Raimo, it's great to see.
Focus on large transformative deals and top accounts as we just highlighted the.
The ongoing traction with bundled offerings.
Cros.
Margin new products contributing to the new business. So all of that speaks to create in house kind of innovation model that we have.
<unk> talked about.
How do you see the roll off of strategic M&A play and expansion plans as we are starting to see with some others.
Actually there on cloud and data security and a lot of any any potential areas to focus and BMO can you provide the new versus upsell split in the quarter and how it compares to the expected 40 60 mix. Thanks.
Yes.
Question, so with tied to funding and lots of security companies out there, you're seeing lots of attractive opportunities coming our way.
We are looking at a number of innovative technologies and strong development piece, it's an auction and done a number of small ones in the past. Some time, yes. There are some interesting technology, especially in the new world of data IMEI kind of stuff.
It's an option.
You will not see us trying to buy revenue.
And M&A youre going to see us buy innovative disruptive technologies that can help us get to market sooner.
Foster is important and that.
Integrates with our platform.
To see acquisitions being done where you have standalone products that don't work together with each other.
But we are actively exploring yes. There is no reason why we should not.
And the new and upsell was 45% 55% upsell.
On our year end call. We said, we expect upsell to be above 60%, that's still our expectation for the year, but for the quarter. It was 55% itself.
Alright, Thanks, a lot Jan remote appreciate it.
Thank you one moment please.
Our next question comes from the line of Brian Essex of JP Morgan Your line is open.
Hi, good afternoon, and thank you for taking the question I guess I wanted to dig into margins and specifically maybe gross margins.
You guys are about three times. The size you were two and a half years ago would you have hovered kind of in the.
Just below 81% gross margins.
Take 50 basis points or so and I. Appreciate the comments you had that emerging products will initially have lower gross margins I think that's been the case for some time, but how do we think as you continue to.
Grow at an accelerated pace and scale.
How can we expect that to impact your margins. How are you managing your infrastructure and then maybe just an adjacent comment on sales and marketing it seems as though.
That was quite a bit lower than billings did you did you hold back on sales and marketing spend ahead of the arrival of Mike Joyce. Thank you.
Yes, a few questions.
If we hold back sales and marketing spend.
Other problems with the do we hold back sales and marketing spend not really.
It's just the way things worked out.
Maybe a little bit on the marketing side.
It's about it but it's not not really from a gross margin perspective, our stated gross margin.
As been between 70, 882% and Youre right, Brian we've been in the 80% range for a long time.
The beauty.
Zee scalar quite frankly, the platform technology, that's been created when I started here.
We're doing 30 billion transactions per day, we are doing 360 billion transactions per day, right now and we still have 80% gross margin.
The benefits that we have is we can make decisions relative to maximize gross margin or to get applications.
Applications or increase the strength of our product.
By going through public cloud, so we balance that.
I would expect gross margins to be in that 70, 882% long term.
Short term mid term I'd expect the 80% gross margin range.
We need to shift our focus with more increasing our margins, we will but we do manage it we do look at it.
Emerging products do carry lower gross margins and we will keep on innovating.
Don building more products.
Alright Thats helpful. Thank you. Thank you.
Thank you.
Thank you and that is all the time, we have for questions today I'd like to turn the call back over to Jay Chaudhry CEO for any closing remarks.
Yes.
My sincere thanks to our employees, our customers and partners by delivering a strong.
Thank you for your interest in <unk>.
Look forward to seeing you at some of the Investor Conference.
Great. Thank you.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all participating you may now disconnect have a great day.
Okay.
[music].
Okay.
Okay.
[music].