Q2 2024 Zscaler Inc Earnings Call

Operator: Good day, and welcome to the Zscaler second quarter 2024 earnings call. At this time, all participants are in a listen-only mode.

Okay.

Speaker Change: Good day and welcome to the Zee scalar second quarter 2024 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question you will need to press star one one on your telephone you will then hear an automated message advising your hand is ray.

Operator: After the speaker's presentation, there will be a question and answer session. To ask a question, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bill Choi, Senior Vice President of Investor Relations and Strategic Finance. Please go ahead.

Speaker Change: So what's your all your question. Please press Star one again, please be advised for today's conference is being recorded I would now like to hand, the conference over to your Speaker today, Bill Choi Senior Vice President of Investor Relations and strategic Finance. Please go ahead.

Bill Choi: Good afternoon, everyone, and welcome to the Zscaler second quarter fiscal year 2024 earnings conference call. On the call with me today are Jay Chaudhry, Chairman and CEO, and Remo Canessa, CFO. Please note that we have posted our earnings release and a supplemental financial schedule on 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 non-GAAP financial measures in our earnings release.

Bill Choi: Good afternoon, everyone and welcome to the Zee scalar second quarter of fiscal year 'twenty 'twenty four earnings conference call on the call with me today are Jay Childree, Chairman and CEO and remote connects our CFO.

Please note that we have posted our earnings release, and a supplemental financial schedule to our Investor Relations website.

Bill Choi: Unless otherwise noted all numbers, we talk about today will be on an adjusted non-GAAP basis.

Bill Choi: You will find a reconciliation of GAAP to the non-GAAP financial measures in our earnings release.

Bill Choi: 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, future hiring decisions, remaining performance obligations, income taxes, earnings per share, our objectives and outlook, our customer response to our products, and our market share and market opportunity. These statements and other comments are not guarantees of future performance but rather are subject to risk and uncertainty, some of which are beyond our control. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call.

Bill Choi: 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.

Bill Choi: 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.

Bill Choi: Our products and our market share and market opportunity.

Bill Choi: These statements and other comments are not guarantees of future performance, but rather are subject to risk and uncertainty some of which are beyond our control.

Bill Choi: These forward looking statements apply as of today and you should not rely on them as representing our views in the future.

Bill Choi: 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.

Bill Choi: 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 following conferences in March: JMP Technology Conference in San Francisco on March 4th and Morgan Stanley TMT Conference in San Francisco on March 6. Now, I'll turn the call over to Jay.

Bill Choi: I also want to inform you that we'll be attending the following conferences in March J.

Bill Choi: JMP Technology conference in San Francisco on March 4th.

Bill Choi: And Morgan Stanley TMT conference in San Francisco on March six.

Bill Choi: Now I'll turn the call over to Jay.

Jay Chaudhry: Thank you, Bill. I am pleased to share our Q2 results, which once again exceeded our guidance for the top line and the bottom line, even amidst an ongoing challenging macro environment. Revenue grew by 35% year over year, and billings grew by 27%. Additionally, our customer base spending $1 million or more continues to grow by over 30%. Our operating profit more than doubled year over year, and our free cash flow margin reached a record for Q2. During the quarter, we made solid progress on our strategy to scale our go-to-market engine to reach our goal of $5 billion and beyond in ARR. To augment our already strong sales team, we're adding more experienced leaders with a proven track record of running large operations. Considering these leadership changes, I am particularly proud of our field sales execution this quarter. Before getting to the details of our fiscal Q2,

Jay Chaudhry: Thank you Bill I am pleased to share our Q2 results, which once again exceeded our guidance for the top line and the bottom line, even amidst an ongoing challenging macro environment revenue grew by 35% year over ear and billings grew by 27% our customer base spending $1 million.

Our mall continues to grow by over 30%.

Jay Chaudhry: Our operating profit more than doubled year over ear and our free cash flow margin reached a record for Q2.

Jay Chaudhry: During the quarter, we made solid progress on our strategy to scale. Our go to market engine to reach our goal of $5 billion and beyond in a at all or to augment an already strong sales team, we're adding more experienced leaders with a proven track record of running large operations considering these.

Jay Chaudhry: Leadership changes I am, particularly proud off our field sales execution this quarter.

Jay Chaudhry: Before getting to the details of our fiscal Q2, let.

Jay Chaudhry: Let me share a few observations on the business environment. Based on my conversations with hundreds of CIOs and CISOs, I expect demand for zero trust security to remain robust in 2024 and expect customer budgets for zero trust to be up this year, particularly in light of the recent surge in the number of high-profile breaches. Threat actors continue to exploit vulnerabilities in firewalls and VPNs, which allow them to spread ransomware laterally inside an organization. In a recent example, a VPN vulnerability was so severe that CISA, the U.S. cybersecurity agency, took the extraordinary step of mandating that federal civilian agencies disconnect their Ivanti Pulse Secure VPNs within 48 hours.

Jay Chaudhry: Let me share a few observations on the business environment.

Jay Chaudhry: Just on my conversations with hundreds of CIO is in Chico's I expect the main four zero Trust security to remain robust in 2024 and expect customer budgets for zero trust to be up this year, particularly in light of the recent surge in the number of high profile breaches.

Jay Chaudhry: Actors continued to exploit vulnerabilities sell firewalls, and vpns, which allow them to spread ransomware laterally inside an organization.

Jay Chaudhry: In a recent example, a VPN vulnerability was so severe that they saw that U S. Cyber security agency took the extra ordinary step or mandating that federal civilian agencies disconnect yet.

Jay Chaudhry: Anthony pulse secure vpns within 48 hours.

Jay Chaudhry: This is yet another example of why customers are increasingly realizing that their security posture remains vulnerable and are motivated to transform their firewall-based security to our Zero Trust architecture. Spinning up firewalls and VPNs in the cloud and calling it a SASE solution doesn't solve cybersecurity challenges. While customers want to consolidate point products, they're looking for a fully integrated platform that delivers zero trust architecture. Cybersecurity is so mission-critical that customers will invest in industry-leading solutions rather than rely on cheaper or less effective products that are included as part of their ELAs. They want best-of-breed platforms with the best functionality that integrates with other platforms, thus eliminating dozens of point products. Zscaler Zero Trust Platform is an integrated and purpose-built solution that delivers comprehensive security and provides a compelling user experience while reducing cost.

Jay Chaudhry: As of yet. Another example of why customers are increasingly realizing that their security posture remains vulnerable and automotive added to transform their firewall best security to our zero Trust architecture.

Jay Chaudhry: Spinning up firewall and VPN in the cloud and calling it a SaaS solution doesn't solve cyber security challenges, while customers want to consolidate point products, they're looking for a fully integrated platform that delivers zero Trust architecture cyber is so mission critical that customers will invest in.

Jay Chaudhry: The industry, leading solutions rather than rely on cheaper are less affected products that are included as part of the elas. They want best of breed platforms with the best functionality that integrate with other platforms, thus eliminating dozens of point products.

Jay Chaudhry: These colors zero Trust platform is an integrated and purpose built solution that delivers comprehensive security and provides a compelling user experience while reducing cost.

Jay Chaudhry: Strong customer interest in our platform drove a record first-half total bookings, with nearly half of net new bookings coming from new logo customers. We added a record number of new logos for our Q2. This demonstrates the momentum in our business, and we're increasing our outlook for revenue and billings for fiscal 2024. We are operating in a strong demand environment for Zero Trust Architecture. To capture this demand and scale our business to $5 billion in ARR and beyond, we appointed Mike Rich as our Chief Revenue Officer last quarter. Mike joined us from ServiceNow, where he established a scalable go-to-market engine to drive deeper engagements with large enterprises. Going forward, Mike and his team are focusing on three key areas.

Jay Chaudhry: Strong customer interest in our platform drove a record first half total bookings with nearly half of net new bookings coming from new logo customers.

Jay Chaudhry: We added a record number of new logos for our Q2. This demonstrates the momentum in our business and we are increasing our outlook for revenue and billings for fiscal 2024.

Jay Chaudhry: We are operating in a strong demand environment for zero Trust architecture to capture this demand and scale, our business to $5 billion and beyond we appointed Mike Rich as our Chief revenue Officer last quarter, Mike joined US from service now where he established a scalable.

Jay Chaudhry: Go to market engine to drive deeper engagements with large enterprises going forward, Mike and his team are focusing on three key areas first our existing opportunity led sales engine has helped us deliver strong growth over the years, enabling us to surpass $2 billion.

Jay Chaudhry: First, our existing opportunity-led sales engine has helped us deliver strong growth over the years, enabling us to surpass two billion dollars in ARR. To drive our next phase of growth, we are evolving from an opportunity-centric to an account-centric sales process, leveraging Mike's experience in building such plans. As we grow our sales organization, we are adding more experienced leaders and strategic sellers with the right level of experience working with CXOs and global system integrators. As we begin our planning for fiscal 25, we are developing account plans that are aligned with our customers' long-term strategic initiatives.

And <unk> to drive our next phase of growth, we are evolving from an opportunity centric to an account centric sales motion leveraging mike's experience in building such plants.

As we grow our sales organization, we are adding more experienced leaders and strategic sellers with the right level of experience, what can with CX <unk> and global system integrators.

Jay Chaudhry: As we begin our planning for fiscal 'twenty five we are developing account plans that are aligned with our customers' long term strategic initiatives and we are partnering with our customers to build transformation roadmaps to modernize their security and it infrastructure.

Jay Chaudhry: And we are partnering with our customers to build transformation roadmaps to modernize their security and IT infrastructure. Second, we launched our Top Accounts pilot program a couple of quarters ago, which is successfully driving deeper platform engagements and adoption. Building upon our initial success and leveraging Mike's experience, we're scaling this program across more top accounts. Third, we're increasing our focus on vertical selling. We introduced a vertical-specific sales motion a few years ago, starting with the public sector, and we expanded it to the healthcare vertical last year.

Jay Chaudhry: Infrastructure second we launched our top accounts pilot program, a couple of quarters ago, which is successfully driving deeper platform engagements and adoption building upon our initial success and leveraging Mike's experience. We're scaling this program across more top accounts third we are increasing.

Jay Chaudhry: Our focus on vertical selling we introduced a vertical specific sales motion a few years ago, starting with the public sector and expanded it to the health care vertical last year based upon the successful growth in these verticals we plan to continue to expand the program into more verticals.

Jay Chaudhry: Based upon the successful growth in these verticals, we plan to continue to expand the program into more verticals by adding domain experts who can drive vertical-specific strategies to better align with our customers' strategic initiatives. We now have a double-digit number of customers spending more than $10 million with us annually. With our expanded platform and these go-to-market initiatives, I believe we will see more and more of our large enterprise customers reach $10 million ARR levels over time. Now, let me highlight three factors that drove our performance in Q2. First, we are seeing continued success in selling our broader platform, including ZPA, data protection, CDX, zero trust for workloads, zero trust for branch, and AI-powered solutions. Driven by upsells, our $1 million ERR customer count grew by 31% year over year, ending the quarter with nearly 500 such customers. Second, we had a strong federal quarter with particular strength in upsells to cabinet-level agents. We have plenty of opportunity to expand further in the federal market.

Jay Chaudhry: By adding domain experts, who can drive vertical specific strategies to better align with our customers' strategic initiatives.

Jay Chaudhry: We now have a double digit number of customers spending more than $10 million with us annually with our expanded platform and these go to market initiatives I believe we will see more and more of our large enterprise customers reached $10 million ear our levels over time.

Jay Chaudhry: Now let me highlight three factors that drove our performance in Q2.

Jay Chaudhry: First we are seeing continued success in selling our broader platform, including C. P. A data protection C. D. Ax Zero Trust for workloads Zero Trust for our branch and AI powered solutions driven by Upsells are $1 million. He at our customer count grew by 31% year over ear.

Our ending the quarter with nearly 500 such customers.

Jay Chaudhry: Second we had a strong federal quarter with particular strength in Upsells to cabinet level agencies, we have plenty of opportunity to expand further in the federal market third we achieved a Q2 record for new logo additions, reflecting early success without channel investments.

Jay Chaudhry: Third, we achieved a Q2 record for new logo additions, reflecting early success with our channel investment. Our $100,000 or more ARR customer base grew 21% year over year, ending the quarter with over 2,800 such customers. Let me highlight two new logo deals from the quarter. First, a Fortune 100 healthcare customer purchased ZIS, ZPA, ZDX, and advanced data protection for 10,000 users in a seven-figure ACV deal. CPA will greatly enhance their security and user experience while eliminating legacy security gateways by consolidating the VPN and VDI appliance. Protecting patient health care records is of paramount importance to this customer, which made data protection a crucial consideration for this deal. In the next phase, they're planning to expand to over 100,000 users, representing a significant upsell opportunity for us. In another new logo deal, after suffering repeated ransomware attacks, a technology company purchased 20,000 seeds of CIA, ZPS, ZDX, and advanced data protection. They're phasing out the legacy castle and morgue firewall-based security, which failed to protect them against ransomware attacks. This customer excluded the incumbent firewall-based SASE vendor from consideration as they wanted a true zero-trust architecture.

Jay Chaudhry: 100000 dollar or more out of our customer base grew 21% year over ear ending the quarter with over 2800, such customers. Let me highlight two new logo deals from the quarter.

Jay Chaudhry: First a fortune 100 health care customer purchased Z I E. C. P. A C D X and advanced data protection for 10000 users in a seven figure ACB deals.

Jay Chaudhry: CPA will greatly enhance their security and user experience, while eliminating legacy security gateways by consolidating the V P N and VDI appliances.

Jay Chaudhry: Protecting patient health care Records is a paramount importance to this customer which made data protection are crucial consideration for this deal.

Jay Chaudhry: For the next phase they are planning to expand to over 100000 users representing a significant upsell opportunity for us.

Jay Chaudhry: And another new logo deal after suffering repeated ran similar tax a technology company purchased 20000 seats of C. I, a Z P. A C D X and advanced data protection.

Jay Chaudhry: Raising all the legacy castle and moat firewall based security, which failed to protect them against ransomware attacks.

This customer excluded the incumbent firewall based SSD vendor from consideration as they wanted a true zero Trust architecture.

Jay Chaudhry: This is a multi-year, eight-figure TCB deal that is expected to generate over 100% ROI for the customer by eliminating the multiple firewalls, VPNs, and BDI systems. Now, let me highlight two upsell deals that highlight broader adoption of our comprehensive platform. In a seven-figure ACV deal, an existing Fortune 500 financial services enterprise, currently using ZIA, ZPA, and data protection, upgraded to our high-end ZPA transformation bundle and added endpoint DLP for 73,000 users. This also marks our largest endpoint DLP deal since the introduction of this module just two quarters ago in our data protection solution. By moving to the high-end of our ZPA and data protection packages, this customer increased the annual spend with us by over 60% to over $10 million annually. In another seven-figure ACV deal, a major global mining company increased its ZIA and ZDX purchases to 48,000 users and purchased DPA transformation for 30,000 users. With the ZPA purchase, the customer is eliminating VPN appliances and providing zero-cost access for the workforce spread across remote locations worldwide.

Jay Chaudhry: Let's say, it's a multi year eight figure T. C V deal, which is expected to generate over 100% auto why for the customer by eliminating the multiple firewalls vpns and VDI systems now.

Jay Chaudhry: Now, let me highlight two upsell deals that highlight broader adoption of our comprehensive platform.

Jay Chaudhry: In a seven figure <unk> deal an existing fortune 500 financial services Enterprise currently using C. I, a CPA and data protection upgraded to our high end CPA transformation bundle and added endpoint DLP for 70000 users. This also marks our largest endpoint.

Jay Chaudhry: D L. P deal since the introduction of this module just two quarters ago in our data protection solution by moving to the high end offers a P E and data protection packages.

Jay Chaudhry: Customer increase their annual spend with us by over 60% to over $10 million annually.

Jay Chaudhry: And another seven figure ACB deal a major global mining company increased at C. I a N C D X purchases to 48000 users.

Jay Chaudhry: And purchase DPA transformation for 30000 users.

Jay Chaudhry: With the C. P. A purchase the customer is eliminating the VPN appliances, and providing zero trust access for the workforce spread cost remote locations worldwide.

Jay Chaudhry: With this expanded purchase of our platform, the customer's annual spend with us nearly doubled to approximately $5 million. Next, let me discuss our opportunities in the federal market. As I mentioned earlier, we saw strong growth in net new ACV from the federal vertical in Q2. After an initial win at 12 of the 15 cabinet-level agencies, we continue to win additional awards as agencies are increasingly adopting zero trust architecture to meet the president's executive order.

With this expanded purchase of our platform the customer's annual spend with us nearly doubled to approximately $5 million.

Speaker Change: Next let me discuss our opportunities in the federal market.

Speaker Change: As I mentioned earlier, we saw strong growth in net new a C V from the federal vertical in Q2. After an initial lands at 12 of our 15 cabinet level agencies. We continue to win additional awards as agencies are increasingly adopting zero trust architecture to meet the president.

Speaker Change: <unk> executive order.

Jay Chaudhry: For example, in a seven-figure upsell deal, an agency customer expanded its seats with ZISVPA and data protection purchases, nearly doubling their annual spend with us. With this upsell, the customer is already approaching $5 million in annual spend, even though we are still less than 15% penetrated in terms of the number of users, representing a significant upsell opportunity in this agency. With the highest levels of FedRAMP certifications for both ZIA and ZPA, we are very well positioned to benefit from continued growth with our federal customers. Building upon our success in the U.S., we are investing in building public sector programs for half a dozen nations that have adopted FedRAMP-like certification programs. This is a significant opportunity for us. But like any government initiative, this will take time.

For example in a seven figure upsell deal and agency customer expanded its seats with Z I E. S. P. A and data protection purchases nearly doubling that annual spend with us with this upsell the customer is already approaching $5 million in annual spend even though we are still less than.

Speaker Change: Then 15% penetrated in terms of the number of users representing a significant upsell opportunity in this agency with the highest levels of fed ramp certification for boats G. I N Z P. A we are very well positioned to benefit from continued growth with our federal customers Bill.

Speaker Change: Upon our success in the U S. We are investing in building public sector programs for half a dozen nations that have adopted fed ramp like certification programs. This is a significant opportunity for us, but like any government initiative. This will take time moving on our R&D engine.

Jay Chaudhry: Moving on, our R&D engine continues to deliver innovations, rapidly expanding our platform and providing larger upsell opportunities. Given our strategic position, we are interacting with more CXOs than ever before and having much deeper engagements. For example, we recently hosted a CXO summit in India attended by over 200 senior IT leaders, including over 100 CXOs. At the summit, one CXO said, and I quote, the velocity of features that Zscaler releases every time we meet is extremely impressive.

Speaker Change: News to deliver innovations rapidly expanding our platform and providing larger upsell opportunities given our strategic position, we are interacting with more <unk> than ever before and having much deeper engagements.

Speaker Change: For example, we recently hosted a CX summit in India attended by over 200 senior leaders, including over 100 <unk>.

Speaker Change: At the summit once the XO said and I quote.

Speaker Change: Velocity of features that Zee scalar releases every time, we meet is extremely impressive.

Jay Chaudhry: Our comprehensive platform protects not just users but also workloads and IoT devices. While still early, we're seeing growing traction in our emerging platform solutions, including Zero Trust for Workloads, Zero Trust for Branch, and Zero Trust for B2B, as well as our AIML-powered solutions. Zero Trust for Workloads continues to gain wider adoption. For example, in an upsell win, a financial technology company purchased Zero Trust for Workloads for 25,000 workloads, which contributed to nearly doubling their annual spend with us to over $1 million. A large aerospace company more than tripled their Zero Trust for Workloads purchase, contributing to a 60% increase in their annual spend with us to over $1 million. In January, we launched Zero Trust for Branch, which enables one-to-one connectivity between branch devices and applications, thus securing branch IoT devices and eliminating the risk of lateral tech movement. Our Zscaler plug-and-play appliance would be the only solution customers will need at the branch, as it eliminates the need for legacy SD-WAN appliances, routers, and firewalls, thus dramatically simplifying branch networking and security. Zero Trust for branch is a key component of our Zero Trust SASE solution, which is the industry's first single-vendor SASE solution built on Zero Trust.

Our comprehensive platform protects not just users, but also what clubs and Iot Ot devices, while still early we're seeing growing traction in our emerging platform solutions, including Zero Trust for workloads SEDAR Trustful branch.

And zero trust with B to B as well as our AI ml powered solutions Sito Trustful workloads continues to gain wider adoption for example in an up sell when a financial technology Company purchased zero Trust for workloads for 25000, workloads, which contributed to nearly doubling that.

Speaker Change: Annual spend with us to over $1 million, a large aerospace company more than tripled the zero trust or what Claus purchase contributing to a 60% increase in their annual spend with us to over $1 million in January we launched zero Trust for branch, which enables one to one connect.

Speaker Change: <unk> between branch devices and applications, thus securing branch Iot Ot devices, and eliminating the risk of lateral type moment.

Speaker Change: Our zee scalar plug and play appliance would be the only solution customers will need at the branch as it eliminates the need for legacy SD Wan appliances, routers and firewalls, thus dramatically simplifying branch networking and security Zero Trust for branch is a key component of.

Speaker Change: Our zero Trust sassy solution, which is the industry's first single vendor sassy solution built on zero Trust.

Jay Chaudhry: Zero Trust SSE pairs Zscaler's leading SSE with our new Zero Trust SD band. We have seen early adoption of our Zero Trust SASE from customers across a range of industries, including A U.S.-based energy and retail company, a Europe-based Fortune 500 manufacturing company, a U.S.-based financial services company, and many more are moving to our AI Cloud. Within this portfolio, our newest products, RISC-360 and Business Insights, are growing rapidly. Business Insights is helping CIOs and CFOs optimize the cost of SaaS applications, office locations, and more.

Speaker Change: <unk> Trust sassy peers see scanners, leading S. S E with our news Zero Trust SD Wan.

Speaker Change: We have seen early adoption of our zero trust sassy from customers across a range of industries, including.

Speaker Change: Our U S based energy and retail company, a Europe based Fortune 500 manufacturing company a U S based financial services company and many more.

Speaker Change: Moving to our AI cloud.

Speaker Change: Within this portfolio, our newest products <unk> hundred 60 and business insights are growing rapidly.

Speaker Change: Business insights is helping CIO and CFO is optimized cost off the SaaS applications office locations and more for example, an existing global 2000 consumer products customer purchased business insights for 97000 users to replace their homegrown solution that.

Jay Chaudhry: For example, an existing Global 2000 Consumer Products customer purchased Business Insights for 97,000 users to replace their homegrown solution that cost over half a million dollars annually. Recently adopted SEC disclosure requirements and board-level interest in understanding cyber risk are driving demand for RISC-360. For example, a Global 2000 Manufacturing customer purchased RISC-360 for nearly 16,000 users to automate the process of risk quantification and take proactive measures to reduce cyber risk. We have already delivered several AI innovations, including ML-based data classification, ML-based policy recommendations, RISC-360 Business Insights, and more. In addition, one of the AI products I am particularly excited about is Breach Predictor. Breach Predictor is our vision to leverage the power of our platform to predict breaches before customers get breached.

Speaker Change: Cost over half a million dollars annually recently adopted FCC disclosure requirements and board level interest in understanding cyber risk are driving demand for our risk <unk> 60. For example, a global 2000 manufacturing customer purchase, let's say 64, nearly 16000 years.

Speaker Change: Others to automate the process of risk quantification and take proactive measures to reduce cyber risk. We have already delivered several innovations, including ml based data classification ml based policy recommendations Christy 60 business insights and more in addition, one of the.

Speaker Change: AI products I am, particularly excited about is beach predictor Grace.

Speaker Change: <unk> predictor is our vision to leverage the power of our platform to predict breaches before customers get breached we're working relentlessly to bring this and more industry, leading AI innovations to our customers. This year without innovation engine, humming and delivering cutting edge products and <unk>.

Jay Chaudhry: We're working relentlessly to bring this and more industry-leading AI innovations to our customers this year. With our innovation engine humming and delivering cutting-edge products, and our go-to market organization focused on scaling and growth, I am more excited than ever about the opportunities ahead of us and our ability to capitalize on those opportunities. Now, I'd like to turn the call over to Remo for our financial results. Thank you, Jake.

Speaker Change: Go to market organization focus on scaling and growth I am more excited than ever about the opportunities ahead of us and our ability to capitalize on those opportunities.

Remain: So I like to turn over the call to remain for our financial results. Thank.

Remo E. Canessa: Our Q2 results exceeded our guidance on growth and profitability, even with ongoing customer scrutiny of large deals. Revenue was $525 million, up 35% year over year and up 6% sequentially. From a geographic perspective, Americas represented 54% of revenue, EMEA was 31%, and APJ was 15%.

Remain: Thank you Jake our Q2 results exceeded our guidance on growth and profitability.

Romain: Even with ongoing customer scrutiny of large deals.

Remain: Revenue was $525 million up 35% year over year and up 6% sequentially.

Remain: From a geographic perspective Americas represented 54% of revenue EMEA was 31%.

Speaker Change: And a P. Jake was 15%.

Remo E. Canessa: Our total calculated billings in Q2 grew 27% year-over-year to $628 million. On a sequential basis, total billings increased 37% quarter over quarter. Our calculated current billings grew 26% year over year. Our remaining performance obligations, or RPO, grew 29% from a year ago to $3.613 billion. The current RPO is approximately 51% of the total RPO. We ended Q2 with 497 customers with greater than $1 million in ARR, adding 29 such customers in the quarter.

Speaker Change: Our total calculated billings in Q2 grew 27% year over year to $628 million.

Speaker Change: Sequential basis, total billings increased 37% quarter over quarter or.

Speaker Change: Calculated current billings grew 26% year over year.

Speaker Change: Our remaining performance obligations or our P. O grew 29% from a year ago.

Speaker Change: Two $3.613 billion.

Speaker Change: The current R. P. O is approximately 51% of the total RPE O.

Speaker Change: We ended Q2 with 497 customers with greater than $1 million in horror.

Speaker Change: Adding 29th such customers in the quarter. We also saw strength in 100000 dollar a our customers this quarter, which grew to 2820, adding 112 customers sequentially.

Remo E. Canessa: We also saw strength in $100,000 ARR customers this quarter, which grew to 2,820, adding 112 customers sequentially. This continued strong growth of large customers speaks to the strategic role we play in our customers' digital transformation initiatives. Our 12-month trailing dollar-based net retention rate was 117%.

This continued strong growth of large customers speaks to the strategic role we play in our customers' digital transformation initiatives.

Our 12 month trailing dollar based net retention rate was 117%.

Remo E. Canessa: While good for our business, our increased success in selling bigger bundles, selling multiple pillars from the start, and faster growth within a year can reduce our dollar-based net retention rate in the future. There could be variability in this metric on a quarterly basis due to the factors I just mentioned. Turning to the rest of our Q2 financial performance, total gross margin of 80.8% compares to 80.7% in the prior quarter and 80.4% in the year-ago quarter.

Speaker Change: While good for our business our increased success in selling bigger bundles, Sally multiple pillars from the start and faster upsells within a year can reduce our dollar based net retention rate in the future.

Speaker Change: There could be variability in this metric on a quarterly basis due to the factors I just mentioned.

Speaker Change: Turning to the rest of our Q2 financial performance total gross margin of 80.8% compares to 80.7% in the prior quarter and 84% in the year ago quarter.

Remo E. Canessa: On a year-over-year basis, gross margin benefited by approximately 60 basis points from a change in accounting attributed to the longer useful life of our cloud infrastructure. As mentioned on our previous earnings call, beginning fiscal 2024, we extended the depreciable useful life of our servers and network equipment in our cloud infrastructure from four to five years. Moving on, our total operating expenses increased 3% sequentially and 22% year-over-year to $321 million.

On a year over year basis gross margin benefited by approximately 60 basis points from a change in accounting attributed to the longer useful life of our cloud infrastructure.

As mentioned on our previous earnings call beginning fiscal 'twenty 'twenty four we extended the depreciable useful life of our servers and network equipment and our cloud infrastructure for four to five years.

Speaker Change: Moving on our total operating expenses increased 3% sequentially and 22% year over year to $321 million, we continued to generate significant leverage in our financial model.

Remo E. Canessa: We continue to generate significant leverage in our financial model, with operating margin reaching 19.6%, an increase of approximately 700 basis points year-over-year. Our free cash flow margin was 19 percent, including data center CapEx of approximately 6% of revenue. We ended the quarter with over $2.4 billion in cash, cash equivalents, and short-term investments.

Speaker Change: With operating margin, reaching 19.6% an increase of approximately 700 basis points year over year.

Speaker Change: Our free cash flow margin was 19%.

Speaker Change: Including datacenter capex of approximately 6% of revenue.

Speaker Change: We ended the quarter with over $2.4 billion in cash cash equivalents and short term investments.

Remo E. Canessa: Next, let me share some observations about the macro environment and our framework for guidance for the rest of the fiscal year. We believe we are still operating in a challenging macro environment, and customers continue to scrutinize large deals. Customer interest in our platform remains strong, and we're adding experienced sales leaders to our already strong sales team to position us well for sustainable growth in the long term. In our outlook for fiscal 2024, we're balancing our business optimism with ongoing macroeconomic uncertainties and sales leadership changes. Moving on to guidance for Q3 and full year fiscal 2024. As a reminder, these numbers are all non-GAAP. For the third quarter, we expect revenue in the range of $534 million to $536 million, reflecting year-over-year growth of approximately 28%.

Speaker Change: Next let me share some observations about the macro environment and our framework for guidance for the rest of the fiscal year.

Speaker Change: We believe we are still operating in a challenging macro environment and customers continue to scrutinize large deals come.

Speaker Change: Customer interest in our platform remains strong and we're adding experienced sales leaders to our already strong sales team to position us well for sustainable growth in the long term.

Speaker Change: In our outlook for fiscal 'twenty 'twenty, four we're balancing our business optimism with ongoing macro economic uncertainties and sales leadership changes moving onto guidance for Q3 and full year fiscal 'twenty 'twenty four as a reminder, these numbers are all non-GAAP.

Speaker Change: For the third quarter, we expect revenue in the range of $534 million, the $536 million, reflecting a year over year growth of approximately 28%.

Remo E. Canessa: Gross margins of 80%. I would like to remind investors that a number of our emerging products, including the newer products like ZDX and Zscaler for Workloads, will initially have lower gross margins than our core products. We're currently managing the emerging products for time to market and growth, not optimizing them for gross margins. Operating profit is in the range of $98 million to $100 million. Net other income of $15 million, income taxes of $10 million, and earnings per share in the range of $0.64 to $0.65, assuming 161 million fully diluted shares.

Speaker Change: Gross margins of 80% I would like to remind investors that a number of our emerging products, including the newer products like Z D X and Z scaled for workloads will initially have lower gross margins than our core products. We're currently managing the emerging products for time to market and growth not optimizing them for gross margins.

Speaker Change: Operating profit in the range of $98 million to $100 million.

Speaker Change: Net other income of $15 million.

Speaker Change: Income taxes of $10 million.

Speaker Change: Earnings per share in the range of 64 to 65.

Speaker Change: Assuming 161 million fully diluted shares.

Remo E. Canessa: For the fiscal year 2024, we're increasing our guidance as follows: revenue in the range of $2.118 billion to $2.122 billion, reflecting year-over-year growth of approximately 31 percent. Calculated billings in the range of $2.55 billion to $2.57 billion, or year-over-year growth of 25 to 26 percent. From a modeling perspective, Q3 is typically our seasonally weaker quarter. Consistent with our historical seasonal patterns, we expect billings to decline sequentially by approximately 7 percent in Q3. Operating profit in the range of $395 million to $400 million, which reflects up to 400 basis points of operating margin improvement compared to last year. Income taxes of approximately $35 million, and earnings per share in the range of $2.73 to $2.77, assuming approximately 161 million fully diluted shares.

Speaker Change: For the fiscal year 'twenty 'twenty four we're increasing our guidance as follows.

Speaker Change: Revenue in the range of $2.118 billion to $2.1 billion to $2 billion, reflecting year over year growth of approximately 31%.

Speaker Change: Calculated billings in the range of $2.55 billion to $2.57 billion or year over year growth of 25% to 26% from a modeling perspective Q3 is typically our seasonally weaker quarter consistent with our historical seasonal patterns, we expect billings to decline sequentially.

Speaker Change: By approximately 7% in Q3.

Speaker Change: Operating profit in the range of $395 million to $40 million.

Speaker Change: Which reflects up to 400 basis points of operating margin improvement compared to last year.

Speaker Change: Income taxes of approximately $35 million.

Speaker Change: Earnings per share in the range with $2 73 to.

Speaker Change: The $2.77, assuming approximately 161 million fully diluted shares we expect our free cash flow margin to be up year over year and in the low 20% range.

Speaker Change: We continue to expect our datacenter capex to be high single digit percentage of revenue for the full year.

Remo E. Canessa: We expect our free cash flow margin to be up year over year and in the low 20% range. We continue to expect our data center CapEx to be a high single-digit percentage of revenue for the full year, reflecting the three percentage points to four percentage points of headwind to free cash flow margins. We expect the timing of CapEx spend to be more towards the latter part of the second half of the year as we invest in upgrades to our cloud and AI infrastructure.

Reflecting the three percentage points to four percentage points of headwind to free cash flow margins.

Speaker Change: We expect the timing of Capex spend to be more towards the later part of the second half of the year as we invest in upgrades to our cloud and AI infrastructure.

Speaker Change: With a large market opportunity and customers increasingly adopting the broader platform. We plan to continue to invest significantly to drive long term growth, while increasing profitability.

Remo E. Canessa: With a large market opportunity and customers increasingly adopting the broader platform, we plan to continue to invest significantly to drive long-term growth while increasing profitability. Before moving on to Q&A, I would like to note that Bill Choi, our Senior Vice President of Strategic Finance and Investor Relations, will be leaving us in a couple weeks. This is a bittersweet moment for me.

Speaker Change: Before moving on to Q&A I would like to note that Bill Choi, our senior Vice President of strategic Finance and Investor Relations will be leaving us in a couple of weeks.

Bill Choi: This is a bittersweet moment for me.

Bill Choi: As Bill has been instrumental in building the finance practice here.

Bill Choi: But happy for him as he is moving to pursue his first CFO opportunity and an AI networking company we.

Bill Choi: We wish him great success in his next endeavor.

Speaker Change: With that operator, you may now open the call for questions.

Speaker Change: Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star. One again, we ask that you limit yourself to one question and return to the queue for any follow up.

Remo E. Canessa: As Bill has been instrumental in building the finance practice here, I'm happy for him as he's moving to pursue his first CFO opportunity at an AI networking company. We wish him great success in his next endeavor. With that, Operator, you may now open the call for questions. Thank you. At this time, we'll conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced.

Speaker Change: Up.

Speaker Change: One that will be compile the Q&A roster.

Speaker Change: Yeah.

Speaker Change: Our first question comes from Alex Henderson with Needham Your line is open.

Alex Henderson: Well first off I've got to say Bill It was great working with you and congratulations on.

Operator: To withdraw your question, please press star 11 again. We ask that you limit yourself to one question and return to the queue for any follow-up. One moment while we compile the Q&A roster. Our first question comes from Alex Henderson on Needham. Your line is open. Well, first off, I've got to say, Bill, it was great working with you, and congratulations on progression in your career. As for you guys on Zscaler, nice quarter. Thanks for a good print.

Alex Henderson: Progression in your career.

Alex Henderson: As for you guys.

Speaker Change: Zee scalar nice quarter, thanks for a good print.

The first question I have for you is really against the backdrop of already expected.

Speaker Change: Difficult.

Decision, making environment.

Speaker Change: Has there been any change.

Speaker Change: In deal size and deal process time closure rates when rates over the last quarter.

Unknown Speaker: The first question I have for you is really against the backdrop of already expected, difficult, Transcripts provided by Transcription Outsourcing, LLC. Alex, thank you for the question. The short answer is we haven't seen any meaningful change on a number of things you mentioned. Take, for example, macro.

Speaker Change: Might show some incremental improvement versus where we were in the prior quarter are there any green shoots evidence.

Speaker Change: And those key metrics.

Alex Thank you for the question.

Alex Henderson: The short answer is we haven't seen any meaningful change.

Speaker Change: For a number of things you mentioned take for example macro.

Jay Chaudhry: Pretty much a similar environment. Keep growing. We are doing large deals. So there's no big, significant pressure on deals. We do see demand for cybersecurity products remaining strong. Customers do have budgets for cyber, even though they may be tightening their budget for IT overall. And this is because zero trust is a top priority.

Speaker Change: Pretty much a similar environment.

Speaker Change: Our deals.

Speaker Change: Keep on growing we are doing large deals. So there is no significant pressure on deals we do see demand for cyber security products.

Speaker Change: The remaining strong.

Speaker Change: Customers do have budget for cyber even though they maybe tightening budget for it overall.

Speaker Change: And this is because.

Speaker Change: Zero Trust is a top priority.

Jay Chaudhry: But it boils down to two things when I talk to lots of CIOs. They do want to take care of cyber, but if you can fix cyber and reduce costs at the same time, it becomes a much better situation. Zscaler happens to be in a position where we do it extremely well. If you look at most products out there, they don't save money.

But it boils down to two things when I talked to lots of Cio's.

Speaker Change: They do want to take care of cyber, but if you can fix cycle and reduce cost at the same time it becomes a much better situation. Please.

Speaker Change: <unk> happens to be in a position, where we do it extremely well if you look at most products out there.

Speaker Change: They don't save money in fact security generally is a cost.

Jay Chaudhry: In fact, security generally is a cost. We replace a number of point products, save money, and give far better security as we are sitting pretty. Great, thanks. One moment for our next question. Our next question comes from Brad Zelnick with Deutsche Bank. Your line is open.

<unk> replaced a number of point products save money, if you find a better security and as we are sitting in pretty good shape.

Great. Thanks.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from Brad Zelnick with Deutsche Bank. Your line is open.

Unknown Speaker: And congrats to you, Bill. It's been a fun ride since the IPO. Jay, just following the last question, I appreciate your comments on the environment.

Brad Zelnick: Great. Thanks, so much.

Brad Zelnick: Congrats to you Bill.

Brad Zelnick: It's been it's been a fun ride since the IPO.

Brad Zelnick: Jay just following the last question I appreciate your comments on the environment. You, obviously had one of your key competitors last week.

Jay Chaudhry: You obviously had one of your key competitors last week talking of customer fatigue, and you guys are, at least in the federal market, telling us a little bit of a different story, but can you specifically share thoughts about competitors giving away free product and the impact it can or is already having on Zscaler and maybe the extent to which you're factoring that into your outlook ahead? Yeah. Thank you, Brad. We really do not see any cyber spending fatigue among our customers.

Brad Zelnick: A customer for tea and you guys are at least in the federal market Youre, telling us a little bit of a different story.

Brad Zelnick: But can you specifically share thoughts about competitors, giving away free product.

Brad Zelnick: And the impact it can or is already having a zee scalar and maybe the extent to which you're factoring.

Brad Zelnick: Into your outlook ahead.

Brad Zelnick: Yeah.

Speaker Change: Thank you Brad.

Speaker Change: We really do not see any cyber spending fatigue, among our customers.

Jay Chaudhry: In fact, many of the CIOs have told me that cyber is a priority for Spence. But they do have ELA fatigue because a lot of stuff has been becoming shelfware, and it's being scrutinized. Regarding free stuff. Many vendors have been trying to give them away for a while, and we have been successfully winning against this strategy for a long time. I mean, look at the retention rate. It used to be in the 90s at IPO. Now it's in the high 90s.

Speaker Change: In fact, many of the CIO had told me.

Speaker Change: Cyber is a priority for Spain.

Speaker Change: But they do have E. L F. A peak because a lot of stuff has been becoming shelf.

Speaker Change: And it's being scrutinized.

Speaker Change: Regarding free stuff.

Speaker Change: Many vendors have been trying to give it away for a while.

Speaker Change: And we have been successfully winning against this strategy for a long time.

Speaker Change: I mean look at our retention rate it used to be mid nineties at IPO by.

Speaker Change: Nineties.

Jay Chaudhry: And fundamentally, cyber is so mission critical that customers will invest in the industry's leading solution rather than rely on cheaper and less effective products that are included as a part of an ELA bundle. Look, we are really dealing with a secular trend here. Just like the role of the data center diminished and public cloud took off, similarly, the role of firewalls is diminishing, and the demand for zero security is growing.

Speaker Change: And fundamentally cyber as sole mission critical that customers will invest in the industry's leading solution rather than rely on cheaper and less effective products that are included as a part of any other bundle.

Speaker Change: Well, we are really dealing with the secular trend here.

Speaker Change: Just like the roll off data center diminished in public cloud to call <unk>.

Speaker Change: But all our firewalls is diminishing and the demand for our zero Trust security is growing.

Jay Chaudhry: And this is bound to impact sales of firewall vendors. And this naturally puts the legacy vendors in a defensive position, and they're trying to give away product.

Speaker Change: And this is bound to impact sales of firewall vendors and this naturally puts the legacy vendors in a defensive position and they're trying to cover ever gateway products as bundles, which end up becoming shelf and this strategy starts to unravel overtime, we will stick to our strategy.

Jay Chaudhry: As bundles end up becoming shelfier, and this strategy starts to unravel over time, we'll stick to our strategy. Thanks, Jay. Maybe just a quick follow-up one for Remo.

Speaker Change: Thanks, Jay maybe just a quick follow up one for remote remote on the back half billing seasonality that you've set up now for US can you just maybe speak to any factors, we may want to consider and what it is that drives your confidence in now it looks like a pretty big sequential Q4 as <unk>.

Remo E. Canessa: Remo, on the back half billing seasonality that you've set up now for us, can you just maybe speak to any factors we may want to consider and what it is that drives your confidence in what now looks like a pretty big sequential Q4 as you've set it up for us? Yeah, I mean, we made a go-to-market change during the quarter, as you're aware. Mike Rich has hit the ground running and is doing an outstanding job, balancing the strength that we've got with our sales organization, as well as bringing new leadership in. If you take a look at our guide for the year, you know, it is slightly higher, you know; we're being prudent.

Speaker Change: Set it up for us thank you.

Jay: Yeah, I mean, we made a go to market changed during the quarter as you're aware Mike rich.

Jay: Mike has hit the ground running and is doing an outstanding job.

Jay: Balancing the strength, we've got with our sales organization as well as bringing new leadership in.

Jay: Could you take a look at our.

Jay: Guidance for the year it is slightly up.

Remo E. Canessa: You know, the key thing, I think, for our investors to recognize and what Jay said, This is a big market opportunity. It's a huge market opportunity. And when it's a huge market opportunity, you know, when you look at companies giving away things for free, especially security, that's one area that basically I wouldn't shortchange.

Jay: Being prudent.

Jay: Key thing I think for our investors to recognize what Jay said.

This is a large market opportunity, it's a huge market opportunity and when does the huge market opportunity.

Jay: When you look at companies, giving away things for free, especially in security, that's one area that basically I Wouldnt shortchange.

Remo E. Canessa: So what we're seeing, you know, with the market opportunity, our engagement with our customers. With Mike Rich on board, you know, we feel good about our guidance going forward. Great, thank you so much.

So what we're seeing.

Jay: With the market opportunity our engagement with our customers with Mike Rich onboard.

Jay: We feel good about our guidance going forward.

Speaker Change: Great. Thank you so much.

Operator: One moment for our next question. Our next question comes from Andrew Nowinski with Wells Fargo. Your line is open.

Speaker Change: One moment for our next question.

Speaker Change: Okay.

Speaker Change: Our next question comes from Andrew Nowinski with Wells Fargo. Your line is open.

Unknown Speaker: Great. Thank you, Bill. I'm certainly going to miss you. Can't wait to see where you land next.

Andrew James Nowinski: Great. Thank you Bill certainly going to Miss you can't.

Jay Chaudhry: And then, you know, overall, just a great quarter. Congrats on another strong execution. I wanted to ask you guys about the US federal sector. It sounds like you had some strong upsells, and the US Fed may have contributed to some of your upside this quarter. Do you think some of these agencies that you mentioned that are really under penetrated might serve as a role model to other agencies in the US government, which could help you, you know, continue your growth there?

Andrew James Nowinski: Can't wait to see where you land next.

Speaker Change: And then.

Andrew James Nowinski: Overall, just just great quarter. Congrats on another strong execution I wanted to ask you guys about the U S. Federal sector. It sounds like you had some strong upsell them in the U S. Fed may have contributed to some of your upside. This quarter do you think some of these agencies that you mentioned that are really underpenetrated they might serve as a role model to two other.

Andrew James Nowinski: Our agencies in the U S government, which could help you continue your growth there.

Jay Chaudhry: And how does your pipeline look in the US Federal market over the next few quarters? As you know, we have been investing in the federal market for quite some time. We got the highest level of certification. And we're doing very well. In fact, we are heavily engaged with all federal agencies, including DOD, 12 of the 15 agencies on our custom.

Andrew James Nowinski: How does your pipeline look in the U S fed over the next few quarters.

Speaker Change: Thank you.

Speaker Change: As you know we have been investing in the federal market for quite some time, we got the highest certification.

Speaker Change: And we are doing very well in fact, we are.

Speaker Change: Are heavily engaged with all federal agencies, including call.

Speaker Change: 12 of the 15 agencies on our customers and my prepared remarks, I talked about that would be double the number of users and we doubled our IRR to approximately $5 million and with.

Jay Chaudhry: In my prepared remarks, I talked about a federal deal that would be double the number of years, and we doubled our ARR to approximately $5 million. And with this, we are less than 15% penetrated in the agency in terms of the number of users, which means there's an 85% wide space to go up there. We feel good. We will keep on investing in it. And I think it's a strong area for us, well positioned.

Speaker Change: With this we are less than 15% penetrated in the agency in terms of number of users, which means theres, 85% white space to go up there.

Speaker Change: We feel good we keep on investing in it and I think it's a strong area for us.

Remo E. Canessa: And as Jay mentioned, 12 to 15 basically agencies that we're in. I'm, These are big deals, you know, that, you know, in federal, it's hard to predict when these deals are going to close. From our perspective, we're well positioned. Very well positioned going forward. We've made significant investments in our certifications, and also our team, which we feel is outstanding.

Speaker Change: Well positioned.

Speaker Change: As Jay mentioned 12 to 15 basically agencies that were in.

Speaker Change: These are big deals.

Speaker Change: And federal it's hard to predict when these deals are going to close.

Speaker Change: From our perspective, we're well positioned.

Speaker Change: Very well positioned going forward.

Speaker Change: We've made significant investments with their certifications.

Speaker Change: And also our team, which we feel is outstanding.

Remo E. Canessa: So, you know, the answer to your question, Andy, is we feel good about federal, but again, bigger-type deals, hard to forecast. But we feel good. Thanks, guys. Keep up the good work.

Speaker Change: So.

To answer your question Andy.

Speaker Change: We feel good about federal but again bigger type deals.

Speaker Change: Hard to forecast.

Speaker Change: So we feel good.

Andy: Thanks, guys good work.

Operator: One moment for our next question. Our next question comes from Tal Liani with Bank of America. Your line is open.

Andy: One moment our next question.

Andy: Our next question comes from Tal Leone with Bank of America. Your line is open.

Unknown Speaker: Hi Guys, I have a small question and a big question. The small one is about billing. You guide it down 7% sequentially and then guide it up 53% if I take the implied for, which is the highest growth in billing. You had the same problem last time.

Tal Liani: Hi, guys I have a small question and a big question.

Tal Liani: The small one is about bidding you guided down 7% sequentially and then guided up 53% if I take the implied <unk>, which is the highest growth in billing you had the same problem last year.

Unknown Speaker: What's the meaning of it? What's the meaning of billing being weak and then billing being so strong in the fourth quarter? What needs to happen for that to happen?

Tal Liani: What's the meaning of it what's the meaning of billing being weak and then billing being so strong in the fourth quarter what needs to happen for it to materialize. So that's a small one.

Tal Liani: The bigger one the bigger one Jay maybe you wanted me to take it one at a time, where you wanted just to ask both.

Unknown Speaker: Transcribed by https://otter.ai Now go ahead. Jay, the second one is a bigger question...

Jay: No go ahead.

Jay: The second one is is a bigger question.

Jay:

Unknown Speaker: SASE used to be a very secure, very safe market for you because there were only two players and maybe two and a half players. Now we're seeing tons of competition coming in, and competition is coming at very low prices. And Fortinet is talking about 1 third of your price.

Speaker Change: The SaaS is.

Speaker Change: Is used to be a very secure very safe market for you because there were only two players and maybe two and a half players and now we're seeing tons of competition coming in and the competition is coming at very low pricing.

Speaker Change: Fortinet is talking about one third of your price.

Jay Chaudhry: And the newcomers are coming either through bundling, which enables them to reduce price, or as an add-on to a firewall, which again enables them to bundle and reduce price. And if I ask the question provocatively, I'll ask it, what prevents this market from turning into what happened to FireEye and what happened to sandboxing, where when competition started, pricing collapsed in the market? Yep.

Speaker Change: And then the newcomers are coming.

Speaker Change: Either through bundling, which enables them to reduce price or.

Speaker Change: Or as an add on to our firewall, which again enables them to bundle and reduce price.

Speaker Change: And if I ask the question in a provocative way I'll ask it.

Speaker Change: What prevents this market from turning into what happened to Fireeye and what happened to sand boxing that when competition started pricing collapsed in the market.

Speaker Change: Yep so.

Remo E. Canessa: Yeah. So, the things that we've got going on in the third or, you know, first of all, this is our normal range sequential decline over the last five years, from Q2 to Q3. I talked about in a prior question the changes that we've made, you know, that certainly play into things related to the back half of the fourth quarter, with the, you know, implied increase, you know, basically in billings, it's related to pipeline close rates, you know, and the forecast that, from our perspective, our team has come up with. Again, from our perspective, we feel it's prudent guidance. We feel good about it.

Speaker Change: Lima stock thank you.

Speaker Change: Yes.

Speaker Change: So.

Speaker Change: The.

Speaker Change: Things that we've got going on in the third order.

Speaker Change: First of all this is our normal range sequential decline over the last five years from Q2 to Q3.

Speaker Change: I talked about on a prior question the go to market changes that we've made.

Speaker Change: Certainly plays into things relate.

Speaker Change: Related to the back half in.

Speaker Change: The fourth quarter with the implied increase.

Speaker Change: Basically in billings, it's related to pipeline close rates.

Speaker Change: And the forecast that are.

Speaker Change: Teams come up with.

Speaker Change: Again from our perspective, we feel it's prudent guidance, we feel good about it.

Remo E. Canessa: And we feel that we are in a great position to go forward, you know, with the team that we have and will build in our sales organization. Okay, regarding your bigger question, the SASE, the market, and the competition, let me put it this way. Get our point product, and the platform. You absorb foreign products into plants.

Speaker Change: And we feel that we're in a great position to go forward with the.

Speaker Change: Team that we have.

Speaker Change: And we will build.

Speaker Change: In our sales organization.

Speaker Change: Yes.

Speaker Change: Okay regarding your question.

Speaker Change: ASC market competition.

Speaker Change: Okay.

Speaker Change: Right.

Speaker Change: They don't point products and platforms.

Speaker Change: You absorbed point products into platforms, and then prana.

Jay Chaudhry: And then the products that are mission critical, the products that are not. FireEye, Sandbox, Goss, features from day one. There's not a lot of barriers to building and adding it into the main platform. Caspi was a point product all in all, and came that way. Cloud Security Posture Management. Coin Plotter gets bundled with something.

Products that are mission critical products that are not mission.

Speaker Change: Finally sandbox.

Speaker Change: Vijay from day one.

Speaker Change: Not in much barrier to entry everyone quick build and add added into the main platform.

Speaker Change: <unk> was a point product all in all he came back Bay cloud security posture management.

Speaker Change: A point product gets bundled with something.

Jay Chaudhry: And then there's something called a platform. For example, the core of a platform, zero trust architecture, proxy-based, sitting in line, inspecting traffic, and you add things to it. So it's almost like an ERP. You know, you see lots of products going out in many areas. Customers don't remove and put in an ERP from vendor A or vendor B because somebody feels like they need to enter the ERP space. I think the SASE market is almost like that. This is so mission critical. All traffic goes through us.

Speaker Change: And then there's something called platform for example, our core of our platform SEDAR architecture proxy based setting online inspecting traffic and you add things to it.

Speaker Change: So.

Speaker Change: It's almost like.

Speaker Change: You see lots of product going off in many areas customers don't.

Speaker Change: I move and put in an ERP vendor vendor b, because somebody feel like I need to answer the ERP space.

Speaker Change: <unk> chassis market is almost like that.

Speaker Change: This is so mission critical.

Jay Chaudhry: In fact, a CIO told me, Jay, Zscaler is more mission critical than Microsoft Office 365 because you must work all the time. So with that in mind, when our customers look at this thing, price is a secondary factor; reliability, availability, and effectiveness for doing cyber protection are important factors. My customers also tell me that they have so many firewalls, so many VPNs, and the threats are growing, so the credibility of firewall vendors overall is lower.

Speaker Change: All traffic goes through us in fact, our CIO told me Jay Z scale is more mission critical than Microsoft Office 365.

Speaker Change: You must work all the time.

Speaker Change: So with that in mind on customers when I look at this thing price is a secondary factor reliability availability and effectiveness of doing cyber protection is important factor.

Speaker Change: My customers also tell me that.

Speaker Change: There are so many firewall so many vps and attacks are growing so the credibility of firewall vendors overall is less.

Jay Chaudhry: Maybe I can use my other knowledge. You want to buy a pacemaker, don't try to cut corners and buy one at a sale price. You want to buy something else? Yes, you may be able to do so.

Speaker Change: Maybe I can use that analogy.

Speaker Change: You want to buy a pacemaker.

Speaker Change: Ill try to cut corners by one <unk>.

Speaker Change: Want to buy something else, yes, you may be able to do so yes competition is coming we see that but I can tell you some of that new firewall vendors that announced.

Jay Chaudhry: Yes, competition is coming. We see that. But I can tell you some of the new firewall vendors that announced the SASE entrance haven't come across them in recent months, as I've seen out there.

Speaker Change: And trends.

Speaker Change: Haven't come across them in the recent months as I've seen out there.

Jay Chaudhry: I think the platform keeps on going. We started with outbound traffic, and now inbound traffic. The platform must have the most comprehensive data protection. None of these firewall vendors can do a lot of data protection.

Speaker Change: <unk> keeps them going we started with outbound traffic inbound traffic now platform must have the most comprehensive data protection not on these firewall vendors can do a lot of data protection data protection Star starts.

Jay Chaudhry: Data protection starts with a proper SASE architecture. Then we moved on to expand to workloads, to IoT OT, and on to B2B. And the pace of innovation is going to keep on going. I'm very comfortable with our platform story. We need to keep on focusing on go-to-market to keep on growing faster and faster. I hope that helps.

Speaker Change: It starts with a proper SaaS architecture.

Speaker Change: We moved on to expand two workloads to Iot Ot and <unk> and our pace of innovation is keep on going.

I'm very comfortable on our platform story.

We need to keep on focusing on go to market to keep on growing faster and faster.

Operator: Thank you, Jay. One moment for our next question. Our next question comes from Rob Owens with Piper Sandler.

Speaker Change: I hope that helps.

Speaker Change: Thank you Jay.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from Rob Owens with Piper Sandler Your line is open.

Unknown Speaker: Your line is open. Great, thanks for taking my question this afternoon. Touch a little bit more on your vertical selling motion and maybe some of those new markets that you will have special overlays for, and I would love a little more commentary around your success with your IOT. Yes, so let's start with vertical markets. About five or six years ago, we started with the first article that was a public sector.

Robbie David Owens: Great. Thanks for taking my question. This afternoon could you touch a little bit more on your vertical selling motion and maybe some of those new markets that you will have spur.

Robbie David Owens: Special overlays for and I would love a little more commentary around your success with your Iot Ot solution.

Robbie David Owens: Okay.

Robbie David Owens: Yes, so let's start with vertical markets fast, but five or six years ago. We started with the first vertical that was a public sector.

Jay Chaudhry: And then within that vertical, we expanded into federal government and state government education and the like. And those things have been very successful for us. For a year ago, we expanded to help your boarding class, and now we want to expand to a couple of more words. You know, when a company gets to a certain level, you can actually afford to go vertical because vertical requires a decent amount of footprint, and it requires some expertise in those areas. For example, we have hired some people who come from very good backgrounds, who have spent time in those vertical markets. So we think it's a good natural area for us to expand, and it's not new, something totally new for us. We've been there, done that. We need to know more.

Robbie David Owens: And then within that vertical we expanded into.

Robbie David Owens: Our federal government and state government education and the like.

Robbie David Owens: And those things have been very successful for us about a year ago, we expanded to healthcare Wordpress.

Robbie David Owens: And then no we want to expand to a couple of more verticals.

Robbie David Owens: Company gets to a certain level you can actually afford to go vertical because supporting to call requires a decent amount of footprint.

Robbie David Owens: Article requires some of the expertise in those areas. For example, we have hired some people who come from very good spec background, who have spent time in those vertical markets.

Robbie David Owens: So we think it's a good natural AVR for us to expand and install a new <unk>.

Robbie David Owens: Something totally new for us we've been there done it we need to know we need to learn how to expand it.

Jay Chaudhry: We need to learn how to expand it. For example, finance is a strong market for us. It's almost like a vertical today, though it's not a formal vertical.

Robbie David Owens: For example, financial is a strong market for us it's almost like award Eagle today, though it's not a formal warnaco, so we'll see <unk> expanding and more rewarding those that are.

Unknown Speaker: So we'll see. You'll see us expanding into more verticals. That was the first part. The second part of the question. So that's good. Okay, Rob, thank you.

Robbie David Owens: The first part the second part of that question.

Robbie David Owens: Paul.

Paul: That's great Okay. Thank you.

Operator: Thank you. One moment for our next question. Our next question comes from Matthew Hedberg with RBC. Your line is open. Yeah, thank you. This is actually Matt Swanson.

Speaker Change: Thank you.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from Matthew Hedberg with RBC. Your line is open.

Matthew George Hedberg: Yes. Thank you. This is actually Max one kilometer Matt Hedberg I wanted to follow up on Andy's earlier question on the federal vertical.

Unknown Speaker: I'm Matt Hedberg. I wanted to follow up on Andy's earlier question on the federal vertical. Yeah, it's been a place that's been a little bit mixed among your peers because of the strong results. Does anything change from your perspective from a competitive standpoint? You mentioned the zero trust mandates. Are there things that are changing in the federal government that are leaving Zscaler better positioned? relative to some of your peers, I've seen a little weakness in that version.

Matthew George Hedberg: In a place that's been a little bit mixed among your peers and the strong results.

Matthew George Hedberg: Has anything changed from your perspective from a competitive standpoint, or you mentioned the zero Trust mandates are there things that are changing the federal government that are leaving the scalar better positioned relative to some of your peers that maybe you have seen weakness in that vertical.

Jay Chaudhry: We have seen no weakness, and no slowdown in the federal market. In fact, the adoption of zero trust keeps on going, especially under a president's mandate. So all agencies, whether federal government, civilian side, or defense side, we get strong engagements, and we feel very good about it. But, as Remo said, some of these deals can be big and lumpy. But we are in good shape, and the certification we got at the highest level for all products puts us in an especially very good position, and our strong sales team is in place. Please take one moment for our next question. Our next question comes from Fatima Boolani. With Citi, your line is open. Hello, this is Mark on behalf of Fatima.

Matthew George Hedberg: We have seen no weakness no slow down in the federal market adoption.

Matthew George Hedberg: Adoption of SEDAR trust keeps on growing, especially under a president's mandate.

So all agencies, whether the federal government on the civilian side.

Matthew George Hedberg: Fence side.

Strong engagements and we feel very good about it but as <unk> said some of these deals can be big and.

Matthew George Hedberg: Pete.

Matthew George Hedberg: We are in good shape and the certification of the guard at the highest level for all products puts us in a specialty very good position and our strong sales team in place.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from Panama Fulani.

Panama Fulani: With Citi. Your line is open.

Panama Fulani: Yes.

Panama Fulani: Hello, This is mark Roth perfectly, Nevada, thanks for taking our questions.

Unknown Speaker: Thanks for taking our questions. Um, can you maybe just speak up a little bit more on the leverage you guys recognize in this quarter and then really the meaningful part of the on-bargain expansion, even though, you know, there's a pretty long roster of initiatives you guys are looking to implement, such as, you know, verticalization. So any sort of, you know, leverage performance this quarter, and how does your investment stance or philosophy differ today versus maybe three months ago? Thank you. Thank you. Mark, it's actually very hard to hear you.

Mark Roth: Can you maybe just speak a little bit more deleverage you guys recognized this quarter and then going to vehicles.

Mark Roth: Expansion.

Mark Roth: Even though there's a lot of pretty.

Mark Roth: Pretty long roster of initiatives you guys are looking to implement such as.

Mark Roth: Vertical location so.

Mark Roth: So any thoughts of luggage performance this quarter and how thats sort of your investment stance or philosophy different today versus maybe three months ago. Thank you.

Speaker Change: Good morning, it's actually very hard to hear you. So when I picked up what youre asking about a little more information about our vertical approach.

Remo E. Canessa: So I picked up what you're asking about a little more information about our vertical approach. Is that correct? Um, can you hear me now?

Speaker Change: Correct.

Speaker Change: Can you hear me now.

Unknown Speaker: A little better. A little better. Yeah. Okay, great. I'm sorry about that.

Speaker Change: A little better a little better yes.

Speaker Change: Okay Greg.

Unknown Speaker: So we're just wondering, you know, can you maybe speak a little bit more on the leverage you guys recognized this quarter and then maybe the meaningful pivot on the margin expansion? We know that there are a lot of initiatives you guys are looking to implement, such as verticalization. So we just wanted to get a sense of, you know, the source of leverage performance this quarter and how your investment philosophy basically differs today versus three months ago and going forward. Thank you. So I'll take that. I believe, Mark, you're talking about operating leverage. And so, you know, we exceeded in revenue, our gross margins were higher, and our operating expenses came were lower.

Speaker Change: Sorry about that so we're just more so wondering.

Greg: Can you maybe speak a little bit more on the leverage you guys recognized this quarter and then maybe it's a meaningful pivot.

Greg: The margin expansion, we note that there.

Greg: The initiatives you guys are looking to implement such as further colocation.

Greg: We just wanted to kill it sounds like the other source of leverage performance this quarter and how does your investment philosophy.

Greg: It differs today versus three months ago I'm going forward. Thank you.

Speaker Change: So I'll take that I believe mark Youre talking about operating leverage so we exceeded in revenue our gross margins were higher and our operating expenses came lower.

Remo E. Canessa: Having said that, you know, we did hire significantly during the quarter. And we'll continue to hire as we go forward. The key thing, I think, to really think about Zscaler is that we are early in this market. We have a model that we've talked about in the past that we can leverage related to operating profitability and free cash flow. We've shown a 700 basis points increase in operating profitability on a year-over-year basis. You know, in one way, that's great.

Speaker Change: Having said that.

Speaker Change: We did hire significantly during the quarter.

Speaker Change: And we will continue to hire as we go forward.

Speaker Change: The key thing I think to really think about Zee scalar is that we are early in this market. We have a model, which we've talked about in the past that we can leverage related to operating profitability and free cash flow. We've shown 700 basis points increase in operating profitability on a year over year basis.

Speaker Change: And one way that's great and another way is we need to continue to invest.

Remo E. Canessa: And another way is that we need to continue to invest. So our focus is still growth. We'll be mindful and manage your operating profitability and free cash flow. But this is a huge market opportunity. And, you know, quite frankly, with Mike Rich on board, and our focus that we're going to have towards large accounts and penetrating large accounts, what we talked about is that we have a six x opportunity in our existing and install-based upsell of new products. And also, when you take a look at the penetration of the market, you know, it's probably in the teens, the Zscalers.

Speaker Change: So our focus is still grow will be mindful and manager operating profitability and free cash flow, but this is a huge market opportunity and.

Speaker Change: Quite frankly.

Speaker Change: Mike Rich onboard.

Speaker Change: And our focus that we're going to have towards large accounts in penetrating large accounts. We talked about is we have a six X opportunity.

Our existing installed base to upsell.

Speaker Change: New products.

Speaker Change: And also when you take a look at the penetration of the market.

The teens, probably zee scalar has so large market opportunity.

Remo E. Canessa: So, large market opportunity, you know, the ability to leverage, you know, upwards profitability and free cash flow. When you take a look at our contribution margin, you know, in years two and three, it's, you know, over 60%. A lot of levers we can pull.

Speaker Change: The ability to leverage.

Upwards.

Speaker Change: Profitability and free cash flow when you take a look at our contribution margin in years, two and three.

Speaker Change: Over 60%.

Speaker Change: A lot of levers we can pull.

Jay Chaudhry: And so we feel good about where we are; we're going to continue to invest, and we will, you know, manage our operating profitability, but, Again, I'm not concerned about hitting our operating profit lead targets or free cash flow. Our model is well built, especially with 80% gross margin, to do that. Jay, anything to contribute? No, I ain't clear.

Speaker Change: And so we feel good about where we are we're going to continue to invest and we will manage our operating profitability but.

Speaker Change: Again, I'm not concerned about hitting our operating profitably targets, our free cash flow.

Speaker Change: Our model is well bill, especially with 80% gross margins.

Speaker Change: To do that.

Speaker Change: Anything to contribute right.

Speaker Change: Sure.

Operator: Thank you. One moment for our next question. Our next question comes from Roger Boyd with EBS. Your line is open.

Speaker Change: Thank you.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from Raj <unk> with UBS. Your line is open.

Unknown Speaker: Great, thanks for taking the questions. And Bill, first off, congrats. I think Remo summarized it best when he called it a bittersweet moment.

Raj: Great. Thanks for taking the questions and Bill first off congrats it's I think pretty much summarized it perhaps maybe call it a bittersweet moment.

Raj: Jay I was wondering if you could expand on how youre approaching the SD Wan and single vendor SaaS market really how that approach differs from traditional vendors there and how you see this changing your competitive standpoint in the market for security edge in general Thanks.

Unknown Speaker: But Jay, I was wondering if you could expand on how you're approaching the SD-WAN and single vendor SASE market, really how that approach differs from traditional vendors there, and how you see this changing your competitive standpoint in the market for security edge in general. Thanks. Yeah. So, you know. We have always wanted to make sure we deliver zero translation. SD-WAN was a good technology because it was cheap, but S. D. Venn did nothing for security.

Raj: Yeah.

Raj: So.

Jay: We have always.

Speaker Change: Wanted to make sure we deliver on SEDAR transfusions.

Speaker Change: SD Wan was a good technology because it was cheaper.

Speaker Change: SD Wan did nothing for security SD Wan enabled same lateral movement.

Speaker Change: At the previous networks did so.

Jay Chaudhry: S. D. Venn enabled the same lateral movement that the previous networks did, so but our customers do want to simplify branches, so they've been talking to us. We launched our zero trust for bronze solution a few months ago, and then actually there was a January second release of that.

Speaker Change: But our customers do want to simply thought Brian So they have been talking to US we launched our zero Trust solution.

Speaker Change: Few months ago, and then actually there was a January the second lease with that so.

Speaker Change: Would that be actually on making available.

Jay Chaudhry: So with that, we actually aren't making available the plug and play appliance that you simply ship, you drop in the branch, you plug in the internet, and it auto discovers itself. And in 15 minutes, it's up and running, no round tables to manage, no zero trust architecture, which makes it wonderful. So our customers are very excited about it. So really, that is our zero trust SD-WAN. It's not traditional SD-WAN.

Speaker Change: Plug and play appliance that you simply ship you dropped in the branch flagged on the Internet.

Speaker Change: <unk> discovers and in 15 minutes is up and running no payments to manage knows.

Speaker Change: Architecture makes it a wonderful so our customers are very excited about it so.

Speaker Change: That is our CMO across SD Wan, it's not traditional SD Wan, so combined with us SFC and zero Trust. So we are actually offering a full SaaS solutions for the fast time to market Zero Trust NFC solution I can tell you the number of customers.

Jay Chaudhry: So combined with our SSE and zero trust, we are actually offering a full SASE solution for the first time in the market. And I can tell you the number of customers who are eager and ready to roll it out is very large. We are already working with a number of customers, but in the coming quarter, I'm very bullish on the success of this new office. And it has the full potential to disrupt traditional SD events and traditional SSDs as well.

Speaker Change: Ready to roll it out.

Speaker Change: Is fairly large already working with a number of customers.

Speaker Change: Over the coming quarters.

Speaker Change: Many bullish about the success of this new offering and it has the full potential to disrupt traditional fts and traditional SaaS seats asphalt.

Speaker Change: Okay.

Speaker Change: One moment our next question.

Speaker Change: Our next question comes from Brian Essex with J P. Morgan Your line is open.

Speaker Change: Yes.

Brian Lee Essex: Great. Good afternoon, and thank you for taking the question first of all Bill Congratulations from me as well that's great to see your success.

Operator: One moment for our next question. Our next question comes from Brian Essex on behalf of J.P. Morgan. Your line is open.

Brian Lee Essex: Maybe maybe Jason sure maybe maybe Jay for you.

Brian Lee Essex: We've seen a little bit of executive turnover here as we watched the story from the sidelines and would love to get your sense of and obviously some of these make a lot of sex right people come as a team to compete as a team there a relationship there and you did a great job.

Unknown Speaker: Great, good afternoon, and thank you for taking the question. First of all, Bill, congratulations from me as well. It's great to see your success.

Brian Lee Essex: Previously, calling it out as being a factor of conservatism in your outlook.

Jay Chaudhry: Maybe, maybe, Jay, sure, maybe, maybe, Jay, for you, we've seen a little bit of executive turnover here as we watch the story from the sidelines, and would love to get your sense of, and obviously, some of these make a lot of sense, right? People come as a team, people leave as a team, there are relationships there, and you did a great job previously calling it out as being a factor of conservatism in your outlook. So maybe a two-parter for me, one, has turnover been what you expected it to be, you know, particularly given what you've kind of like folded into your guidance, and then two, maybe frame out what kind of, or how deep and meaningful some organizational changes that, you know, Mike Rich might be driving within the organization. Thank you. Okay, good. So, starting with our sales, attrition is down in the. And second, when leaders leave, it's natural for some people to follow.

Brian Lee Essex: So two parter for me one is turnover than what you expected it to be particularly given what you've kind of like folded into your guidance and then two maybe frame out what kind of how deep.

Brian Lee Essex: A meaningful some organizational changes that.

Speaker Change: Mike which might be driving within the organization. Thank you.

Speaker Change: Okay.

Speaker Change: So starting with our sales attrition is down in the quarter.

Speaker Change: And second when leaders leave it's natural for some people to fall.

Mike Rich: But as you know <unk> kind of has become a very big brand, we have become a top destination for top talent.

Mike Rich: And we have no shortage in attracting some of the best and brightest sales leader and account managers in the market.

Mike Rich: Mike has built and it continues to build a strong team there.

Mike Rich: It includes many many.

Mike Rich: Good leaders.

Mike Rich: When it comes to.

Mike Rich: Each of our organization changes.

Mike Rich: As we mentioned last time, we are evolving our sales model is no our wholesales any meaning significant change.

Jay Chaudhry: But as you know, Zscaler has become a very big brand. We have become a top destination for top talent, and we are no short of attracting some of the best and the brightest sales leaders and account managers in the market. Mike has built, and he continues to build, a strong team that includes many, many good leaders.

Mike Rich: Years ago, we had to move to.

Mike Rich: Don Conference, it's selling at the C level, because that's what drives transformation remember I started when I used to go and sell to box Huggers.

Mike Rich: Please go away so.

Jay Chaudhry: Now, when it comes to, These are organizational changes. As we mentioned last time, we are evolving our sales model. There's no wholesale, any meaningful significant change. We had to move to, Okay.

Mike Rich: Our process has been talked down it has been a strategic is aligned with the background might broadcom. So we have been doing a lot of that stuff the business value assessment and topic Allan stopper staff. So these aren't evolutionary changes and cannot really.

Jay Chaudhry: All right. So, we're going to go through some of the things that we've learned from the past. So, I'm going to go through the things that we've learned from the past. We've learned that the process has been top-down, constantly selling at the sea level because that's what drives transformation. Remember, I said when I used to go and sell two-box huggers, they would kind of say, "please go away

Mike Rich: Large basket changes across so we are pretty comfortable in the evolving.

Mike Rich: From where we are to get to where we need to go.

Mike Rich: Yes.

Speaker Change: Very helpful. Thank you.

Speaker Change: Thank you just one moment, Sir our next question.

Speaker Change: Our next question comes from Peter Levine with Evercore ISI. Your line is open.

Jay Chaudhry: So, our process has been top-down. It has been strategic. It's aligned with the background, white, broad foam.

Peter Levine: Great. Thank you for taking my question and Bill Congrats on where we are.

Peter Levine: Or opportunity.

Yes.

Peter Levine: Two parts one can you maybe help us understand where <unk>, maybe troughs out where you see that trending throughout 'twenty four perhaps into fiscal 'twenty five and then Jay comments piggyback off the last question operator.

Jay Chaudhry: So, we have been doing a lot of that stuff, the business value assessment and top accounts type of stuff. So, these are evolutionary changes, and they're not really, they're no large, massive changes across. So, we're pretty comfortable with evolving from where we are to get to where we need to be. Very helpful. Thank you. Thank you. One moment for our next question. The next question comes from Peter Levine with Evercore ISI. Your line is open. Great, thank you.

Peter Levine: Opportunity centric to more of a an account centric sales motion maybe explain to us what that means who kind of did that change.

Speaker Change: Yes, I'll answer the <unk> question and Jay can answer the <unk>.

Speaker Change: I appreciate the question. So we don't guide to NR and quite frankly, we only look at <unk> at the end of each quarter. So we're not providing any guidance senator or.

Remo E. Canessa: Take my question and Bill, congrats on the opportunity. You know, two parts. One, Remo, can you maybe help us understand where NRR maybe troughs out, where you see that trending, you know, throughout 24, perhaps into fiscal 25? And then, you know, Jay, your comments and maybe piggyback off the last question on, you know, opportunity-centric to more of an account-centric sales motion. Maybe explain to us really what that means and who kind of somewhat initiated it. Yeah, I'll answer the NRR question, and Jake can answer the opportunity question. So we don't guide the NRR.

Speaker Change: It can be impacted because we called out on the script related to large deals are more being bought upfront.

Speaker Change: Customers buying within the quarter. So it is a metric that's.

Speaker Change: It's going to move around but again, we do not provide any guidance on <unk>.

Speaker Change: Okay.

Speaker Change: Second part opportunities Centurylink forces account centric.

Speaker Change: An opportunity center model.

Speaker Change: Normally engages on a tactical basis customers the golf being greatest may opportunity visit deal.

Remo E. Canessa: And quite frankly, you know, we only look at NRR at the end of each quarter. So we know we're not providing any, any guidance on NRR. You know, it can be impacted, as we called out on the script related to, you know, large deals or more being bought up front, you know, customers buying within the quarter. So it is a metric that's, you know, it's going to move around. But again, we do not provide any guidance on NRR.

Speaker Change: Thank you.

Speaker Change: And the account centric sale, we create account plans, we focus on growing that counts.

Speaker Change: Now when you are a young company you don't have that many customers actually are opportunity centric and it serves you well.

Speaker Change: And our staff will be a large number of customers. It is important for us to move.

Speaker Change: Towards being account centric, we have a large platform T cell. So once we land what came of that count, creating a joint plan can expand becomes far more effective and as we scale to $5 billion and beyond.

Remo E. Canessa: Okay, the second part, Opportunity-Centered vs. Account-Centered. In opportunity-centered models, the rep normally engages on a tactical basis with customers, the goal being, "where is my opportunity? Where's the deal?"

Speaker Change: Evolving to really become.

Speaker Change: Long term strategic partner with our customers, we have been doing it at a small scale in some pockets of the business knowing we want to take it across at a larger scale.

Jay Chaudhry: Let me plot the deal. In the account-centric sale, we create account plans, and we focus on growing the account. Now, when you are a young company, you don't have that many customers. You naturally are opportunity-centric, and it serves you well.

Speaker Change: Thank you.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from Gregg Moskowitz with Mizuho. Your line is open.

Jay Chaudhry: At our stage, there will be a large number of customers. It is important for us to move. And as we scale to $5 billion ARR and beyond, so we're evolving to really become. Long-term strategic partner. We have been doing this at a small scale in some pockets of the business. Now we want to take this message across at a larger scale. One moment for our next question. Our next question comes from Gregg Moskowitz with Mizzou. Your line is open. Thank you very much, Bill. Congratulations! It's been a pleasure. I have a question for either Jay or Remo.

Gregg Steven Moskowitz: Okay. Thank you very much bill congrats to you it's been a pleasure.

Gregg Steven Moskowitz: A question for either Jay or remote some investors are harping, just a bit on short term billing slowing down a little this quarter, but Conversely based on my numbers, both RP or bookings and <unk> bookings actually accelerated this quarter, which is impressive so just to level set for all of us because we know that these metrics can sometimes be a little noisy.

Is there any incremental slowdown that you have observed in any facet into Q2 or any change in the level of execution. Thank you.

Speaker Change: First of all.

Unknown Speaker: Some investors are harping just a bit on short-term billing slowing down a little this quarter, but conversely, based on my numbers, both RPO bookings and CRPO bookings actually accelerated this quarter, which is impressive. So just to level set for all of us, because we know that these metrics can sometimes be a little noisy, is there any incremental slowdown that you have observed in any facet of Q2 or any change in the level of execution? You know, first of all, you know, CRPO is based on contracted value. And again, those did very well. Billing is actually what's being billed. So there's always going to be, you know, differences between CRPO and RPO versus, you know, short-term billings, the end in billings, you know, as the company gets bigger, you know, it's just, you know, the numbers are growing. But, you know, the numbers are, you know, it's, you're not going to get the type of growth rates when, you know, four or five years.

Speaker Change: <unk> is based on contracted value and again those did very well billings is actually what's being built so there's always going to be differences between <unk>.

Speaker Change: In <unk> versus <unk>.

Speaker Change: Short term billings.

Speaker Change: And then billings.

Speaker Change: As the company gets bigger.

Speaker Change: It's just the numbers are growing but.

Speaker Change: The numbers that you.

Speaker Change: Youre not going to get the type of growth rates, when four or five years ago, but again from my perspective.

Speaker Change: Short term billings growth rate of 26%.

Speaker Change: Very good Thats outstanding.

Speaker Change: Thanks Rina.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from Keith Bachman with BMO. Your line is open.

Speaker Change: Yeah.

Keith Bachman: Hi, many thanks, good evening I wanted to start with you if I could.

Keith Bachman: Wanted to turn the federal comments around a little bit your federal business has been very strong for a number of different quarters.

Remo E. Canessa: But again, from my perspective, you know, the short-term building's growth rate of 26 percent is very good. That's outstanding. Thank you. Please take a moment for our next question. Our next question comes from Keith Bachman with BMO. Your line is open. Hi, many thanks.

Keith Bachman: And in the past you've actually provided some context of growth on the federal Standalone and I just wanted to see if you could revisit that and the lens that I'm putting on the question is theres been some investor concern that your federal business has been outstanding and yet that would suggest that there has been a more.

Keith Bachman: Greater slowdown if you will on the corporate business. So I just wanted to see if you could provide any context for that and then Jay perhaps for you is.

Keith Bachman: Good evening, Remo. I wanted to start with you if I could. I wanted to turn the federal comments around a little bit. Your federal business has been very strong in a number of different quarters. And in the past, you've actually provided some context of growth on the federal standalone, and I just wanted to see if you could revisit that. And the lens that I'm putting on the question is that there's been some investor concern that your federal business has been outstanding. And yet, you know, that would suggest that there's been a more, a greater slowdown, if you will, in the corporate business. So I just wanted to see if you could provide any context for that.

Keith Bachman: You actually in your prepared remarks talked about.

Keith Bachman: Thank you said one half of your net new bookings were from new logos. If I heard you correctly, which is a very strong.

Jay: Metric and I just wondered if you could characterize how you see that unfolding new logos in particular as you look out over the next number of quarters. Thank you very much and congrats to bill.

Speaker Change: Keith I'll start.

Keith Bachman: The federal business has been good for us.

Remo E. Canessa: And Jay, perhaps for you, is you actually talked about, I think you said one half of your net new bookings were from new logos, if I heard you correctly, which is a very strong metric. And I just wondered if you could characterize how you see that unfolding, you know, new logos in particular, as you look out over the next number of quarters. Thank you very much. And congratulations to Bill. Keith, I'll start.

As I mentioned, we are well positioned.

Speaker Change: We will provide color on the contribution of federal on an annual basis.

Speaker Change: Okay.

Speaker Change: Having said that ill go out put my neck out which.

Speaker Change: Maybe I should.

Speaker Change: Yes.

Speaker Change: Let me Bill is leaving.

Speaker Change: Yes.

We still believe that's right it is picking up.

Speaker Change: We're well positioned in federal.

Speaker Change: It really comes down to execution.

Speaker Change: Let the numbers play the way they play and we'll see how it plays through but we feel good about our federal business.

Speaker Change: It's been strong I.

Jay Chaudhry: The federal business has been good for us because, as I mentioned, we're well-positioned. We'll provide color on the contribution of federal funds on an annual basis. Okay, you know, I haven't said that I'll go out, put my neck out, which maybe I should, but let me know Bill's leaving. So it's safe.

I would not safe to carrying us.

Speaker Change: That's the key comment, but it is a basically a vertical.

Speaker Change: But we have a lot of potential we just need to execute and non factor is pretty good too. So I mean, we are bullish about both sides of the business.

Speaker Change: Moving on the second part.

Remo E. Canessa: Bill's leaving. That's right. He keeps picking at the end of the table.

Speaker Change: Yes.

Speaker Change: Strong business coming from net new logos.

Remo E. Canessa: We're well positioned in federal, you know, because it really comes down to executions. You know, let the numbers play the way they play. We'll see how it plays out, but we feel good about our federal business. It's been strong. I would not say concariness, that's the key comment, but it is basically a vertical that I see that we have a lot of potential; we just need to execute. And non-fatal is pretty good too, so we are bullish on both sides of the argument. Moving on to the second part, yes, business is a strong business coming from Matthew Logos. It's good.

Speaker Change: It's good.

In terms of future.

Speaker Change: As our customer base is getting bigger and bigger and we have lots of platform to sell.

Speaker Change: From <unk> point of view I think we have been.

Speaker Change: Planning.

Speaker Change: The up sell being in whatever 60%, 65% range somewhere else and remodel and new logo that asked.

Speaker Change: So I think that's really all we see us moving towards now part of the thing Thats. All Im excited about is we are seeing more and more million dollar customers being onboard the number is.

Speaker Change: Almost.

Speaker Change: 500 customers that $1 million then they are trying to get to $5 billion and $10 million. So we are all getting towards getting more and more customers.

Jay Chaudhry: In terms of the future, and our customer base is getting bigger and bigger, and we have lots of platforms to sell. From Bradshaw's point of view, I think we have been planning, upsell being in the whatever 60-65% range somewhere else there, Remo. A new logo, the rest.

Speaker Change: Two 5% to $10 million, that's probably the bigger targets on trying to get lots of new logos by count.

Speaker Change: Okay.

Speaker Change: Got it okay. Many thanks.

Speaker Change: Thank you.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from Josh Tilton with Wolfe Research Your line is open.

Joshua Alexander Tilton: Hey, guys can you hear me.

Jay Chaudhry: So I think that that's really how we see us moving forward. Now, part of the thing that I'm excited about is that we are seeing more and more million-dollar customers being on board. The number is, folks. Almost.

Joshua Alexander Tilton: Yes, yes.

Joshua Alexander Tilton: Congrats Bill and I apologize for the amazing Cathay music in the background.

Joshua Alexander Tilton: But the one question I have it's been on my mind.

Speaker Change: None of what you guys are talking about.

Jay Chaudhry: 500 customers that are million dollars, then they are trying to get to 5 billion and 10 million. So we are targeting towards getting more and more customers, million to five to 10 million. That's probably the bigger targets and trying to get lots of new logos by count of. Got it. Okay. Many thanks.

Speaker Change: What kind of happens overnight. So I guess for these sales changes factored into the initial guidance that you gave back in Q4 are you or are you actually embedding incremental conservatism related to these changes in the outlook going forward.

Speaker Change: Ill.

I'll speak to.

Speaker Change: <unk>.

Speaker Change: Basically both Q2 and Q3.

Unknown Speaker: One moment for our next question. Our next question comes from Josh Tilton with Wolf Research. Your line is open. Hey guys, can you hear me?

Speaker Change: In Q2, we said we were expecting close rates to be slightly worse.

Unknown Speaker: Yes, yep. Congratulations, Bill, and I apologize for the amazing cafe music in the background. But the one question I have that's been on my mind is, none of what you guys are talking about tonight, you know, kind of happens overnight. So I guess, were these sales changes factored into the initial guidance that you gave back in Q4? Or are you actually embedding incrementals and services that are related to these changes in the outlook going forward? You know, I'll speak to basically both Q2 and Q3. In Q2, we said we were expecting a close race to be slightly worse. You know, things came in pretty much as we thought they would. 4Q3, in our assumption also, there's a level of conservatism, slight again, 4Q3, never related or close.

Speaker Change: Things came in pretty much as we thought they would.

Speaker Change: For Q3, our assumption also theres a level of conservatism slight again for Q3.

Speaker Change: Related to close rates.

Speaker Change: Okay.

Speaker Change: One moment fine next question.

Speaker Change: And we will have our last question from the line of Peter We'd with AB Bernstein. Your line is open.

Peter Levine: Thank you.

Peter Levine: I guess following up maybe a couple of questions that we've had here I mean.

Peter Levine: I will agree impressive to see the continued acceleration in new customer contribution I think that had been a worry maybe a year ago, whether or not that was going to continue.

Peter Levine: And obviously, you've talked a little bit about.

Peter Levine: Expansion coming down.

Peter Levine: Landing.

Peter Levine: The larger deals upfront.

Peter Levine: A little bit less upsell cross sell opportunity maybe.

Remo E. Canessa: One moment for our next question, and we'll have our last question from the line of Peter Weed with A.B. Bernstein.

Peter Levine: Break down a couple of things one is.

Peter Levine: With a lot more new customers landing in the short term would this be a good signal for kind of a year from now and in the short term getting.

Unknown Speaker: Your line is open. Thank you. And I guess following up, maybe a couple of questions that we've had here. I mean, it is impressive to see the continued acceleration and new customer contribution. I think that had been a worry maybe a year ago, whether or not that was going to continue. And obviously, you've talked a little bit about, you know, expansion coming down with, you know, landing larger deals up front, you know, leaving a little bit less upsell and cross-sell opportunity. Maybe I can help break down a couple of things.

Peter Levine: Some lift just because newer customers expand more and secondly, how would you think about.

Peter Levine: The opportunity.

Peter Levine: Around expansion like what are the things that you think you can do to.

Peter Levine: Gross.

Peter Levine: The upsell opportunity, even though customers are landing larger today.

Peter Levine: What are you going to be doing to kind of.

Create some lifts there with expansion in the future.

Speaker Change: Yes so.

Speaker Change: If you think about what we've done over the past several years since our IPO.

Jay Chaudhry: One is, you know, with a lot more new customers landing in the short term, would this be a good signal for kind of a year from now and in the short term getting, you know, some lift just because newer customers expand more? And secondly, how would you think about the opportunity around expansion? Like, what are the things that you think you can do to grow the upsell opportunity even though customers are landing larger today? What are you going to be doing to kind of, you know, create some lift there with expansion in the future? Yes, so, If you think about what we've done over the past several years since our IPO, we essentially used to start with, in fact, CIA, mostly business. They would ask, "Oh, what about transformation? Then what about next?

Speaker Change: Essentially.

Speaker Change: To start with in fact, mostly business would ask kind of what I'm on transformation and what about next in GPA came at great expansion <unk> came in a number of new products have been coming in so we are actually able to expand quite a bit in fact, even today as we said in our current customer base.

We can literally take an IRR by <unk>, if we sold all of these growth user products to our customers. So.

Even I would even say we have no lack of product to sell and customers are embracing broader and broader platform.

Speaker Change: Look at all that <unk> talked about.

Speaker Change: Reading the script and say, Tom <unk> and data protection and so it is becoming pretty significant so we have a big big option opportunities things like data protection.

Jay Chaudhry: And JPA came in, great expansion, ZDX came in, a number of new products have been coming in. So we are actually able to expand quite a bit. In fact, even today, as we said, in our current customer base, we could literally take our ARR by 6x if we sold all Zscaler user products to our customers.

Speaker Change: They don't want to go with someone else to do data protection and the traffic is going through our platforms. So thats one piece and the second piece is everyone is talking about only users when they talk about <unk>.

Jay Chaudhry: So even I would even say we have no lack of product to sell, and customers are embracing a broader and broader platform. If you look at all the deals that, as I read the script and say, hum, GIS, DPS, CDX, and data protection.

Speaker Change: Zero Trust SaaS fee or they talk but whatever sassy that's.

Speaker Change: That's only one piece and then you talk about how about workloads that should be a good opportunity Iot Ot is seeking the opportunity to be where your customer suppliers and partners need to access information through our <unk> platform.

Jay Chaudhry: And so it is it's becoming pretty significant. So we have big, big upsell opportunities, things like data protection. They don't want to go with someone else to do data protection if the traffic is going through our platforms.

Speaker Change: Yeah.

Speaker Change: Big opportunity on the product side on the sales side, we keep on learning and refining some of the stuff we do have some of them.

Jay Chaudhry: So that's one piece. And the second piece is that everyone is talking about only users when they talk about Zero Trust SASE, or they talk about whatever SASE. So that's just one piece.

Speaker Change: Overlay specialist, we don't do overlay sales per se, but there are specialists in certain areas because you need to be able to go deeper. So we are definitely taking advantage of that we are pleased with the results, but we will keep on tweaking and refining to get better and better results.

Jay Chaudhry: Then you talk about workloads; that's a bigger opportunity. IoT is a significant opportunity. B2B, where your customers, suppliers, and partners need to access information through our Zero Trust platform. So I think there's a big opportunity on the product side. On the sales side, we keep on learning and refining some of the stuff. We do have some of the Overlay specialists. We don't do overlay sales per se, but there are specialists in certain areas because you need to be able to go deeper.

Speaker Change: And the new customer success that you've been having do you anticipate that provides some additional lift kind of looking out a year or so just to some mix of new customers has increased.

Speaker Change: We don't wait for your careers water contract. We are in the process. All we felt we go we saw literally it's an ongoing engagement with our customers. So youre not going to see lumpy things from us like people said, hey offer Colgate, what's going to happen after three years when seniors came in.

Jay Chaudhry: So we are definitely taking advantage of that. We are pleased with the results, but we'll keep on tweaking and refining to get better and better results. And the new customer success that you've been having, do you anticipate that provides some additional lift in a year or so, just as the mix of new customers has increased? You know, we don't wait for a year or two for the contract. We are in the process of selling, we go, we talk, literally, it's an ongoing engagement with our customers. So you're not going to see lumpy things from us. Like people have said, hey, after COVID, what's going to happen after three years? You know, when three years came in, most of our customers had done an upsell or two with us.

Speaker Change: And most of our customers that Don and up sell our two with us.

Thank you.

Speaker Change: Okay.

Speaker Change: That concludes the question and answer session. At this time I would like to turn it back to Jay cadre for closing remarks.

Jay Chaudhry: Thank you for your interest in <unk>, we look forward to seeing you at <unk> Investor Conference.

Jay Chaudhry: Thank you. Thank you.

Jay Chaudhry: Thank you for your participation in today's conference. This does conclude the program goodbye disconnect.

Jay Chaudhry: Yeah.

Jay Chaudhry: [music].

Jay Chaudhry: Okay.

Jay Chaudhry: Okay.

Jay Chaudhry: Yes.

[music].

Jay Chaudhry: Okay.

Jay Chaudhry: Okay.

Jay Chaudhry: [music].

Jay Chaudhry: Thank you. That concludes the question and answer session. At this time, I would like to turn it back to Jay Chaudhry for closing remarks. Well, thank you for your interest in Zscaler.

Jay Chaudhry: Okay.

Jay Chaudhry: [music].

Jay Chaudhry: Okay.

Jay Chaudhry: [music].

Jay Chaudhry: We look forward to seeing you at one of our investor conferences. Thanks. Thank you. Thank you for your participation in today's conference. This does conclude the program. Goodbye. You may now disconnect.

Jay Chaudhry: Yes.

Jay Chaudhry: Okay.

Jay Chaudhry: Hum.

Jay Chaudhry: [music].

Operator: .......

Jay Chaudhry: Okay.

Jay Chaudhry: [music].

Jay Chaudhry: Okay.

Jay Chaudhry: Yeah.

Jay Chaudhry: Okay.

Jay Chaudhry: [music].

Jay Chaudhry: Okay.

Jay Chaudhry: Hum.

Jay Chaudhry: [music].