Q3 2024 Zscaler Inc Earnings Call
Okay.
Hello, and thank you for standing by welcome to see scale in third quarter 2024 earnings Conference call.
At this time all participants are in a listen only mode.
After the Speakers' presentation, there would be a question and answer session.
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I would now like to turn the call over to Ashwin Cats ready Vice President of Investor Relations and strategic Finance, Sir you may begin.
Good afternoon, everyone and welcome to disease killer third quarter of fiscal year 'twenty 'twenty four earnings conference call on the call with me today are Jay Chaudhry, Chairman and CEO and remote Kennesaw CFO.
Please note we have posted our earnings release, and a supplemental financial schedule to our Investor Relations website.
Unless otherwise noted.
All numbers, we talk about today will be on an adjusted non-GAAP basis.
You will find a reconciliation of GAAP to the non-GAAP financial measures in our earnings release.
I'd like to remind you that today's discussion will contain forward looking statements, including but not limited to the company's anticipated future revenue calculated billings operating performance gross margin operating expenses operating income net.
Net income free cash flow.
Dollar based net retention rate future hiring decisions remaining performance obligations income taxes earnings per share our object Tucson outlook, our customer response to our products and our market share and market opportunity.
These statements and other comments are not guarantees of future performance, but rather are subject to risks and uncertainty.
Which are beyond our control.
These forward looking statements apply as of today.
And you should not rely on them as representing our views in the future.
We undertake no obligation to update these statements after this call.
For a more complete discussion of the risks and uncertainties. Please see our filings with the FCC has allowed in today's earnings release.
I also want to inform you that we'll be attending the bank of America Global Technology Conference in San Francisco on June 5th now.
Now I'll turn the call over to Jay.
Thank you Ashwin, we delivered an outstanding quarter with all metrics exceeding our guidance and I'm very pleased to increase our full year guidance based on our strong performance revenue in Q3 grew by 32% year over ear and billings grew by 30% or $1 million plus era.
Our customers increased 31% year over ear, two 523, and we ended the quarter with over 50 customers with $5 million plus in a at R. R.
Our disciplined approach to growth is reflected in our operating profit, which nearly doubled year over ear and our operating margin reached a record 22%.
I'm also pleased to report that we had our first quarter of GAAP profitability on a net income basis for Q3, our strong performance was driven by continued demand for our zero Trust exchange platform, which we purpose built to secure communication among users what clouds and devices.
We expect demand to remain strong as an increasing number of enterprises are planning to adopt a platform for better cyber and data protection Zero Trust security remains a top initiative for I T teams as legacy Castle and moat flying them all based security is ineffective in the new world.
Cloud and AI are zero Trust exchange processing over 400 billion transactions and preventing billions of security and policy violations per day for wide superior security to our customers. For example, last calendar year, our platform prevented over 2 billion phishing attempts.
Up 60% year over ear, the cyber and data protection capabilities of our platform are resonating with customers and we are accelerating the expansion of our core platform with innovations across multiple pillars. We recently introduced the industry's first AI powered co pilot for CTX.
Our digital experience monitoring solution. This helps simplify and automate detection and resolution of performance issues. We added two significant products to our data protection pillar, one data security posture management, our D. S. P M to discover classify and protect.
Sensitive data in public clouds and to <unk>.
Jenny I apt security to provide deep visibility and granular controls for Jenny I apps, we introduced zero Trust network segmentation, which expands our platform to local area networks inside branches campuses and factories, we expanded our AI cloud solutions by introducing.
<unk> unified vulnerability management to enable customers to proactively identify critical vulnerabilities. We will continue our rapid platform expansion that organic innovations as well as strategic acquisitions.
We recently acquired two early stage innovators Avalon and he had gapped networks Avalanche data fabric, Ingests normalizes and unifies data across enterprise security and business systems to dynamically prioritize vulnerabilities based on holistic risk.
This innovative data fabric will combined data from our 400 billion daily transactions with over 153rd party data sources to add various context do provide better understanding with risk for timely mitigation as a result customers can get real time.
<unk> actionable insights and operational efficiencies improving their overall security posture.
Our securing customer branches campuses in factories, we continued to innovate.
Our Zero Trust branch solution released last year enables each branch office campus and factory to be treated like a Starbucks, which means there is no lack crore type movement as our branches are not on the corporate network and there is no need for firewalls as branches are no longer exposed to.
The internet with the <unk> acquisition, we have taken branch security to the next level as we are introducing the industry's first zero trust segmentation inside branches campuses and factories for servers and Iot Ot devices. This eliminates the need for legacy firewall.
Segmentation for East West traffic, we talked about our 72 billion dollar market opportunity in the past our recent acquisitions and other innovations increase our market opportunity by several billion dollars as they extend our platform into new adjacent markets.
<unk> vulnerability management security operations and branch security moving.
Moving on to an AI innovations, we're developing multiple AI powered applications, including risk 360 business insight unified vulnerability management and more.
We are training our AI security models with a vast amounts of data generated by over 400 billion daily transactions on our platform to deliver superior threat detection, we are leveraging AI to automatically classify data and enforced policies for better data loss prevention, we a delay.
River, Jenny I App security to enable secure use of AI apps by our customers.
Our Gen AI App security delivers one visibility into the AI services used by employees to policy control, which allows different user groups two axis only approved AI services from that thousands of such services and trade enforcement of data protection.
Speaker Change: <unk> policies do prevents sensitive data from leaking too public AI services, we will be showcasing these and other innovations that combine the power of zero Trust with AI at Ares seen it fly user conference in June organizations are relying on Zee scalar to continue to innovate as threat.
<unk> are evolving and posing new challenges by frequently exploiting firewall and VPN based security architecture recently hackers exploited a zero day vulnerability offer leading next gen firewall and viability of our leading V. P N such exploits put organizations at risk as attack.
Can move laterally on the flat networks created by a legacy firewalls. These shortfalls and legacy security you will continue to be exploited until enterprises embrace zero Trust architecture, and phase out firewalls and V. P N V.
These killers Zero Trust architecture eliminates lateral Tac movement, which dramatically improved security posture of organizations, our differentiator to zero Trust and proxy based architecture is foundational to delivering superior security.
Let me give you a few examples.
After experiencing a catastrophic cyber attack last year, a large financial services, new logo customer purchased our C. I, a data protection and CTX pillars for 25000 users and a seven figure S E V multiyear deal.
Speaker Change: This customer wanted zero trust architecture, and hence excluded the current firewall vendors from consideration our superior architecture and strong data protection capabilities, what key to winning this deal as a customer said zee scalar is cast B E D M and OCR technologies are amazing.
Six killer just works in another example, an existing global manufacturing customer after learning about our major VPN vulnerability rollout zee scalar to 100000 devices in just three days subsequently the customer increase their purchase of Zee scalar for users in.
Clothing Z I E Z P. A S E T X and data protection in a seven figure ACB deal increasing their E. R. R by over $5 million. This customer also made an initial purchase of zero Trust, where branch and our advanced privilege to remote access solution, which speaks to customers.
Growing interest in our broader platform custom.
Customers are also purchasing more of a platform to eliminate legacy tech debt and consolidate multiple point products, while simply finding I T operations and improving user experience. Let me highlight two upsell deals that illustrate this after making an initial purchase last year our global.
Speaker Change: 100 financial services customer significantly expanded their purchase of Zee scalar for users in a seven figure ACB deal fought over 64000 users. Despite having years of relationship with the legacy firewall security vendor. They chose the scalar this customer is consolidating multiple <unk>.
<unk> products, including secured web Gateway V P N and V D R.
We work closely with one of our GSI partners on this large project. This deal is an example of US working with GSA partners to expand our market opportunity in another upsell win a large a P. J F based financial services customer signed a seven figure ACB multiyear deal for 10.
Thousand users buying most of our platform services.
In addition to expanding their purchase of Zee scalar for users. They purchased our zero Trust World Workloads Zero Trustful branch and AIE cloud solutions are emerging products contributed nearly a third of the ACB value off the deal.
I'm very pleased to share that we are seeing strong customer interest in our emerging products, which contributed nearly a quarter of a new and upsell business. This quarter here are a few examples in an eight figure ACB deal a fortune 500 technology customer expanded their purchase of Zee scalar for users and made there.
Speaker Change: Fast approaches of zero Trust for workloads, and our AI cloud solutions with this purchase the customers' total <unk> increased over five X do more than $10 million.
This was also our largest workload protection deal to date, representing seven figures and S. E V. I'm thrilled to see our recent innovations in workload protection receiving increased traction.
We closed several deals for our AI cloud solutions, including Chris III, 60, and business insights with customers across multiple verticals, including broadcasting consulting insurance and many more Sis always get inundated with lot social security alerts send signals that don't help them take specific.
Actions based on risk.
Marissa Blyth English 360, as it provides them with the overall risk score of the organizations the factors contributing to risk and the actionable recommendations to reduce risk for zero Trust branch one of the largest retailers in Europe, who initially adopted C. I S E T X and data protection.
Last year expanded the deployment and a seven figure upsell deal to include the full suite of Zee scalar for users and Zero Trust SD Wan.
Zero Trust SD Wan, which will be deployed at the regional locations contributed about a quarter of the ACB value of this deal next.
Next in the federal vertical we are proud to be serving 12 of the 15 cabinet level agencies, and we continue to pursue new and upsell business opportunities across the federal market to help them adopt zero Trust architecture as mandated by the President's Executive order to give you an example.
In a seven figure upsell win and existing cabinet type of agency increased our purchase of Z I a N C. P. A y over 50% significantly increasing the E. R. One of this already $10 million plus customer next let me give you an update on our progress in the department of defense.
D O D segment.
O D has a requirement to implement zero trust with the technologies and solutions that work best for individual military services and departments I'm thrilled to share that we signed a seven figure ACB deal with a D. O D branch this quarter in this land deal the customer made an initial purchase of Zee.
Scalar for users to protect 50000 users without proven zero Trust architecture. This latest D. O D deal demonstrates that we are well positioned to capture the large cyber security opportunity at the D. O D. Next let me give you an update on our go to market organization we.
Speaker Change: We continue to make great progress.
Fast to capture the strong demand for our platform and to scale, our business to $5 billion in Iraq and beyond.
We appointed Mike Rich as a chief revenue officer in Q2, Mike hired key leaders in Q3, and he now has a full management team in place the quality and caliber of Mike's leadership team is exceptional.
I'm very pleased with the progress of our sales hiring, particularly at the leadership level with the right leaders in place. We are now focused on increasing the pace of hiring quota carrying reps.
Second as I mentioned last quarter, we are evolving our sales motion from opportunity centric to account centric.
Eight figure ACB deals with a fortune 500 technology company that I called out earlier is an example of the success of this new sales motion.
We engaged closely with this customer to recommend the best solution, but now and the future. We look forward to working with them as they are fully embracing digital transformation and zero Trust security.
In conclusion, we are on a mission to take our platform everywhere. So customers can benefit from better security simplified I T operations and improved user productivity. We are one of a few vendors that deliver tangible cost savings as we eliminate multiple legacy point products.
The last three decades of the security industry had been centered in on firewalls, which are no longer effective in today's cloud mobile and AI World I believe the next three decades will be defined by Zero Trust architecture, we have the right platform and the right team to delight, our customers and capture.
Our large and growing market opportunity I'm excited about the journey ahead and look forward to sharing at Zenith live OS. These killer is combining the power of zero trust with AI to power the future of secure digital transformation.
No I like to turn over the call to remove for our financial results.
Thank you Jay.
Our Q3 results exceeded our guidance on growth and profitability.
With ongoing customer scrutiny of large deals the changes in our sales organization and higher than expected sales attrition in the quarter.
Revenue was $553 million up 32% year over year and up 5% sequentially.
From a geographic perspective, Americas represented 54% of revenue.
The year was 31% and.
And a P J was 15%.
Our total calculated billings in Q3 grew 30% year over year and remained flat sequentially at $628 million.
Our calculated current billings grew 29% year over year.
Our remaining performance obligations or our P. O grew 27% from a year ago to $3.8 billion to $4 billion.
Current R. P O was approximately 51% of the total ARPA.
We ended Q3 with 523 customers with greater than $1 million and a R. R.
In 2922 customers with over $100000 and are are.
This continued strong growth of large customers speaks to the strategic role we play in our customers' digital transformation journeys.
Our 12 month trailing dollar based net retention rate was 116%.
While good for our business our increased success selling bigger bundles.
Selling multiple pillars from the start and faster upsells 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 Q3 financial performance.
Total gross margin of 81.4% compares to 80.8% in the prior quarter and 80.2% in the year ago quarter.
On a year over year basis gross margins benefited by approximately 60 basis points from a change in the county attributed to the longer useful life of our cloud infrastructure.
As mentioned on our previous earnings call beginning in 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.
Moving on our total operating expenses increased 2% sequentially and 21% year over year to $328 million.
We continue to generate significant leverage in our financial model with operating margin, reaching 22% an increase of approximately 680 basis points year over year.
Our free cash flow margin was 22%, including datacenter capex of approximately 6% of revenue.
We ended the quarter with over $2.2 billion in cash cash equivalents and short term investments.
Moving onto guidance for Q4, and full year fiscal 'twenty 'twenty four as a reminder, these numbers are all non-GAAP.
For the fourth quarter, we expect revenue in the range of $565 billion to $567 million.
Afflicting year over year growth of 24% to 25%.
Gross margins of 80%.
Operating profit in the range of $107 million to $109 million.
Net other income of $17 million.
Income taxes of $11 million.
Earnings per share in the range of 69 cents to 70 cents.
Assuming a 165 million fully diluted shares.
For the full year fiscal 'twenty 'twenty four.
We're increasing our guidance as follows.
Revenue in the range of $2.14 billion to $2.142 billion, reflecting year over year growth of approximately 32%.
Calculated billings in the range of $2.603 billion to $2.606 billion or year over year growth of approximately 28%.
Operating profit in the range of $422 million, the $424 million, which reflects up to 490 basis points of operating margin improvement compared to last year income taxes of approximately $32 million earnings per share in the range of $2.99 to $3 in one sense.
Assuming approximately 161 million fully diluted shares.
We expect our free cash flow margin to be in the low to mid 20% range.
We will give specific fiscal 'twenty five guidance on the next earnings call.
But I'd like to mention that the increased spend on the datacenter Capex, which you had originally planned for fiscal 'twenty. Four is now planned for fiscal 'twenty five.
Q3 was a transitional quarter for our go to market team.
And I believe we did an outstanding job navigating through it.
Although our attrition was higher than we expected as Jay mentioned, we had a strong quarter hiring, particularly at the sales leadership level.
We're now focused on increasing the pace of hiring quota carrying reps.
We believe the combination of our existing sales team with these new hires will result in a much stronger go to market organization.
That said, new hires will take time to ramp to full productivity.
Which we believe will result in a few points of headwind to our total billings growth in fiscal 'twenty five with our customer obsession expanding platform and strike. These sales teams were well positioned to continue to gain share in a large and growing market for us.
With that operator, you may now open the call for questions.
Thank you ladies.
Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and then wait to hear your name announced.
Your question. Please press star one again.
Ask that you limit yourself to one question only.
Please stand by while we compile the Q&A roster.
Our first question comes from the line of Matt Hedberg with RBC capital. Your line is open.
Great. Thanks for taking my questions guys. Congrats on the quarter really really nice to see the results.
And obviously a difficult selling environment I guess, Jay I think one of the questions that we often get from investors is you know.
Around security consolidation and I think you gave a lot of great anecdotal evidence around success of newer products and that sort of traction you're seeing there can you just expand upon that and just talk a little bit more about the zee scalar in broader consolidation because it certainly feels like.
Customers want to do more with less and just how strategically zee scalar in that initiative.
Of course, Matt Thank you.
Do one consolidation and simplification.
Point products.
But they want to do it alone best company platforms. They don't believe in a single vendor offering.
What I might call Garden security platform Okay.
Our customers are moving a bunch up from one product a whole DMZ Damian the mineralized zone.
So we are playing a big role in consolidation could taken out lots of firewalls vpns and that saw lots of savings come that's why they're able to justify that.
The sale of our platform by taking out a lot of products now.
Customers do want to update to you and for security, that's why often see scanner for inline and edr vendor and identity vendor.
But the notion off.
Selling E L. A bundle everything doesn't go well more and more see Ireland Cfos are scrutinizing shelf that's being bought.
Consolidations happening we are playing a big role.
Focused selected consolidation.
Black give me everything pastime.
Thank you.
Please standby for our next question.
Our next question comes from the line of Sakakawea with Barclays. Your line is open.
Okay, Great Hey, guys. Thanks for taking my question here and Echo my congrats on the quarter.
Okay, maybe maybe I'll make my question for you.
I think we all know your views on on firewall based SaaS solutions, but I'm curious, how how you're faring competitively against the smaller competitors here that are maybe more purpose built SaaS solutions and do you feel like the market's view here on pricing is changing at all.
As we see more of those purpose built SaaS competitors enter the market. The results certainly willing to indicate so but just wanted to hear your view on sort of that part of the competitive landscape.
Sure. Thanks, Sarah So, yes small chassis vendors you know as you know.
We play in the large enterprise market.
We don't really see you some of these small SaaS vendors.
So called purpose built purpose built vendors come from.
Firewall as a service into a network together and all that type of stuff.
Speaker Change: You know part of that challenge.
With the SaaS thing is that it's fast SD Wan SFC.
Why customers might see so believe that SD Wan.
Enable backfill that move so weird.
We think SD Wan has to go away.
Zero Trust FTE back that's the new market segment will be up pinery. So we will keep on driving innovation, sometimes investors think that SaaS SSD. The static market. The often asked a question Jay on these guys going to catch up with US of course, they are trying to catch up and do what we did 40 years ago.
But we've done another two years I had two years in the hybrid space.
And we keep on innovating at a faster pace and I don't think smaller SaaS vendors, a firewall vendors will be able to catch up with us.
Thank you.
Please standby for our next question.
Our next question comes from the line of Alex Henderson with Needham Your line is open.
Great. Thank you very much and it's great to see you guys are executing against a tough environment here.
But I will.
Well, it's taken back or buy a little bit of the commentary around.
The higher.
Attrition in your sales organization.
Even as you're bringing in a lot of additional new salespeople and sales leadership. So can you talk a little bit about the mechanics of why that is occurring.
Is that a reflection of a change in policy is it a change in.
The skill sets that are the firm need thinks it needs what has caused that.
Attrition and should we be.
Sanguine, one we're hearing that they are seeing accelerating people departing the firm.
Yeah.
So Alex.
Parcher off our C O we saw client attrition and.
In Q3 than expected.
But we expect it to stabilize in Q4.
It's a combination of factors, including skill set.
But I'm very pleased with how well the TTM transition as progress.
And the hiring of key leaders in Q3, Mike now has all management team.
As you know we have a great brand we are a destination for top talent with the right leaders in place we have accelerated our pace of hiring quota carrying reps in Q4.
At a high caliber leaders, attracting and hiring season traps and they will play a key role in making a successful to take out form two new $5 billion.
Yes, I mean, it's a great question Alex the attrition is you got to keep in mind, it's both voluntary and involuntary attrition.
As Jay mentioned.
With Mike Rich coming on board he's hired his entire leadership.
First quarter here is first of all quarter.
Focus now is going to be increasing the pace of hiring four quota carrying sales reps just to give you some color in the first month, which as of this quarter, which is may.
Higher comparability the same amount of reps that we hired in all of Q3. So would you want to do is you've got to get your leadership in place because that leadership is going to drive. The makeup of the sales and go to market organization as Jay mentioned the go to market organization that we have I feel very very good about it.
I feel outstanding quite frankly.
Speaker Change: <unk>.
Work, that's being done the people that we're bringing on board.
And the direction, we're going but I think it's absolutely outstanding.
And if I may say I think I'm very pleased with that.
The transaction is part of the plan to bring Mike on board to get to.
Account based selling.
Thank you.
Standby for our next question.
Right.
Our next question comes from the line of Brad Zelnick.
With Deutsche Bank. Your line is open.
Great. Thank you guys. So much for taking the question and congrats especially on all the emerging product success that you're having.
Jay I wanted to follow up on <unk> question.
I think some investors are concerned about intensifying competition in your core market not just amongst those specialized sassy players, but some of the bigger ones as well.
And I know Zee scalar has always distinguished itself first and foremost on its architectural advantage zero Trust exchange et cetera, but what can you share with us to help appreciate the durability of that advantage and maybe for Remo.
Pontificated metrics can you share whether its win rates pricing trends sales.
Sales cycle times or anything else that can help us gauge the competitive environment. Thank you.
Okay.
First of all starting with as we have said architecture matters, it's like going from traditional car electric car.
So large vendors are trying to build upon what they have.
We don't believe they ever get there okay. So that's just the architecture.
Number two.
The market functionality in the CDI is not static, it's moving and evolving you'll recall when we went public six years ago, a platform with relatively small market and expand and that's only just port users is a big market for workload you saw a number of things we talked about we have a workload.
He is taking good traction there.
Trillions of Iot Ot devices, we are the right platform expanding in that area. In fact part of the reason we did it again.
The acquisition was to expand into Iot of the inside <unk> inside the plant.
So segmentation, which typically has been done by firewalls and look at the data protection that Edr has exported nobody comes close to doing data protection and well as we do so functionality is number two the third thing I believe.
Will keep US ahead in the long run you speed up innovation Youre seeing haul well innovator holdfast innovated that's for sure. This is not going to slow down.
The last point I'll make in this area.
I'm extremely proud of our own product in any of our financial staff as our net promoter score seven happy customers buy more on should we be wanting an interesting snippet a few months ago I counted <unk> I've worked with.
<unk>.
More than once from US. This is a fortune 1000 companies that number I came with 285.
All of this stuff makes me very confident and problems.
Great.
Yes.
Win rate basis.
And to be very high.
No change in win rates.
Speaker Change: Pricing trends really not seen anything from a pricing trend perspective, it's remained relatively constant.
With that speaks to is basically at the strategic nature of our platform and what we do for our customers.
And also sales cycle, we've talked about our sales cycles for large large deals nine to 12 months, we've mentioned a few quarters ago, Mr. Moving more towards that 12 months really no change there either.
Demand a little bit on the pricing pressure in them.
Of course, there is some pricing pressure, but we are focused on value selling when we are able to go in and say.
Unable to Peco X million dollars Wattup technology and go do it so much in Q1, so much in Q2, so we.
We are able to secure pretty good pricing.
And I want to make the market.
Okay.
Crude names there, but my team is doing a good job and showing value to a customer by eliminating lots of point products.
Thank you.
Please standby for our next question.
Our next question comes from the line of Roger Boyd with UBS. Your line is open.
Okay, great. Thanks for taking the questions.
Raimo I know youre not guiding to fiscal 'twenty five but you did suggest that the attrition you're seeing in the third quarter here would be a few points impactful growth next year.
Think we'll comment on that but I'm wondering alternatively, if you can just talk about your growth versus profitability framework in the past you've talked about biasing towards margin expansion under a certain level of growth, but the messaging right now it sounds like you feel pretty confident about rehiring under the new sales leadership. You are also version on GAAP GAAP profitability, a lot of moving parts, but just any thoughts on how youre thinking.
About that growth versus profitability framework from here would be great. Thank you.
Yeah, all focusing on the growth versus profitability.
The GAAP profit I think that.
Most of your points.
From my perspective.
The scale is critical to perfectly positioned with our platform and its early stages in this emerging market, where we're expanding basically our product base. So from my view and Chase you, we will still continue to invest.
On topline growth.
You saw in Q3.
Our operating profitability on a non-GAAP basis was 22%.
Went public we said our operating profitability target was 20% to 22% we get 22%.
Im not concerned about operating profitability model basically will increase profitability naturally as the business slows down. So there's no reason really to focus on operating profitability and really the name of the game right now is to continue to invest and build that topline growth.
From my perspective also on a GAAP profitability, we got the GAAP profitability in Q3, primarily related to stock based compensation going down to 22% of revenue that 22% of revenue related to a reversal.
Key issues for certain executives that left the company.
Going forward on it.
GAAP profitability, we will get to GAAP profitability, but I don't want to make any projections on when that's going to happen again the focus is on <unk>.
Top line growth.
And also maintained operating profitability for modeling purposes, one of the things I didn't comment on that I'll comment on now think about operating profitability going up slightly in fiscal 'twenty by not a lot again, our focus is growth.
And as long as we feel we're making the right investments to really exploit this market and increase shareholder value. We're going to continue to do that so very very slight increase in operating profitability is what you should think about fiscal 'twenty four versus fiscal 'twenty five.
Investments in two big areas keep on innovating at a faster and faster pace building something that disruptive technologies that vessel crowd all.
Number two keep on investing in go to market.
Thank you.
Please standby for our next question.
Our next question comes from the line of kitchen with Oppenheimer <unk> Company. Your line is open.
Yeah, Hi. Thank you. This is clarke I'm staying on for Tycho.
First of all.
To understand your 14 guidance a little bit if I just go back the last couple of years your growth rate doesn't change a lot from <unk> to <unk>, but there's a significant deceleration in your <unk> guide this time.
Understand is that something that I'm missing outside I'll say, a little bit of conservatism for higher sales attrition.
Maybe people are not thinking about right now.
Thank you for the question number one we'd like being prudent. So that's number one number two is Q3 was a very very strong quarter for us would be basically consensus on a topline basis by 8% and also fourth quarter of fiscal 'twenty three we called out.
We have a large $20 million deal. So it's a tough compare from a billings perspective going into it.
Tough compare for 24 versus 23.
<unk> got the last point the attrition did play into it also.
Thank you.
Please standby for our next question.
Our next question comes from the line of Eric Heath with Keybanc. Your line is open.
Hey, Thanks for taking the question again, just really strong results in acceleration pretty difficult comparison credit to C. J.
I mean look at the macro environment pretty tough so I'd be curious to hear some of your perspective more on the topic and just sure.
What customers' willingness to do transformational projects like SaaS you are at the moment, especially when they are they do seem to be hitting the pause button and other areas.
Yes, yes.
Yes macro remains tough.
We think remains high.
The two things that are helping us.
One CIO C. So that boards.
What are your bond cyber, but all of that and some of our tax. So if you play a critical role in minimizing cyber threats as we do with zero Trust architecture to minimize lateral movement, we get attention and engagement.
But if then you can sure the CX, so that youre going to do this cyber initiative and you're going to say X million dollars do you get more attention. So those two things are helping us build a strong engagement and pipeline.
Even if you do that.
The next hurdle that you need to convince the CFO.
Yeah.
Actually the savings can be done there being more.
Scrutinizing show me your savings quarter by quarter by quarter, we have a strong business value assessment team, we engage with the senior level early on and we saw those benefits think of this as a pulmonary cyber companies out there that can actually show tangible savings you think a firewall company mature savings.
No they want to set protect their firewall. They don't want to do kind of realization. We can cannibalize weekend of equity take on all the firewalls, vpns and NEC and VDI off the wall. So it's a good opportunity if you just want to make sure.
High caliber seasoned salespeople, who can engage with C level and drive all of these initiatives and that's why I'm. So excited about that.
Leadership under Mike in the sales team.
Expanding and growing.
Thank you.
Please standby for our next question.
Our next question comes from the line of Joseph Gallo with Jefferies. Your line is open.
Hey, guys. Thanks for the question and really nice results, especially when looking at broader software how.
How should we think about the sustainability of these growth numbers and then as you look at it in the next 12 months to 18 months, where the biggest upside drivers to the top line model is it the sales force ramping or is it the new products and then congrats on that quarter of new business coming from emerging how should we think about that next year. Thanks.
Certainly the first form of sustainability or what.
Sustainability of growth and what the biggest upside opportunity.
The biggest upside so you mentioned.
Three points there it's kind of interesting one is obviously the sales force.
It makes a big difference so Phil initiative Youre going through with sales force.
Making sure more and more our salespeople are able to engage at the C level associated combined with GSI initiatives is obviously, a big big opportunity for us.
When you talked about.
Net margin products.
They're very good actually.
<unk> been taking.
They're giving us that it is also be more but.
But if you want to ask me, what's going to give us the biggest numbers until our dollar wise when emerging start from small numbers. They don't move the needle what's going to move the needle from a product point of view CPA asset strong growth, we still expect CPA to give strong growth.
<unk> digital experience as growing significantly it will move the needle next year and the data protection portfolio has become significant it's pretty sizable and if you asked me almost every <unk> customer over time should have our own data protection because once we sit in.
Line for traffic inspection, we are the natural vendor to be doing Ddos protection and Thats fine.
Both.
Plenty of product offerings.
The two.
New area that can really change things quite a bit for us seen auto segmentation to the acquisition of <unk>.
It's a new market entering into so far we stand up to the branch we never went inside the branch we left the east to West Firewalls alone. Knowing we are going in there with a better firewall, but without the firewall doing zero trust segmentation and Avalon opens a whole range of opportunities.
Xena apply.
Talk more about that but very very bullish on the product portfolio, but once you combine your amazing portfolio with a great go to market team.
<unk> got excellence.
Thank you.
Please standby for our next question.
Our next question comes from the line of Fatima <unk> with Citi. Your line is open.
Good afternoon, and thanks for taking my question.
Jean Reno I wanted to reconcile the strength and execution this quarter again.
Gary.
Terry around higher than expected sales capacity attrition. So I'm wondering if you've been not back to anything internally.
That helped drive that outperformance on sales execution in spite of.
Sales capacity departure, and maybe specifically if you can update us on how the vertical integration efforts you've instituted in the go to market organization. How it always has been relative to your expectation. Thank you.
So maybe I can start Primo and you come back to it.
So first of all worked equalization.
It's a journey as companies grow they get their companies that are more solution centric they actually need to be more vertical we started up article journey with the federal market and we expanded constrained market and then we recently expanded to healthcare and Youre going to see some more expansion, but more importantly, you're going to see some more focused.
<unk> to accelerate the growth of those markets.
Very well.
Mike <unk> and his team come from.
Previous company, where they actually have gone through the vertical journey, so I'm very comfortable with keep on pursuing it successfully.
To your second question was in spite of attrition good numbers.
<unk> involved.
<unk> is not a point product we are the same.
It all depends upon the sale of FNF CLO.
We have told you all along.
We have some value season, <unk>, who have been former CIO of seasonal cto's copper people need to lock in tax we had talked about business value assessment. When you have a team like this engaged the departure of some number of salespeople.
Has a limited impact and we are doing very well if you saw pharma pharma results.
I mean, just to add on to Jay.
Also confirmed from my perspective.
Speaker Change: The execution.
We had in the quarter was outstanding.
<unk> for the entire sales organization.
As the new salespeople coming onboard in our existing salespeople.
Speaker Change: One of the things.
Our execution and the reason that we did well.
It really speaks to.
Through the strength of the fee scale on our platform and the needs of our customers for our service is.
As Jay talked mentioned relationships matter and.
No company I've ever been in my career.
The relationships with <unk> bin is high and our strategic on a worldwide basis.
Not even close to what we have here at Zscaler fast matters solution architects planners.
Architectural workshops matter there is more.
There is it's really a team that goes into customers with <unk>.
It's really a unique company and when we talked about we were going public is that it's.
It's not a box sale and box sales are more let's say tactical which is call. It tactical this was a strategic sale, which really takes the understanding and companies at the highest level to make these transformational changes. So I think all of that basically played into execution and if one more comment I'll make.
Our customers view us as very strategic and mission critical partner.
That being the case.
Strong engagement and Thats why our <unk>.
Overall retention so high.
Thank you.
Please standby for our next question.
Our next question comes from the lineup Sharron neck Caffari with Baird. Your line is open.
Yeah. Thanks for taking my question congrats on the great quarter.
So Jay you you highlighted a data protection and in the Q&A.
Speaker Change: And we are also hearing about increasing need for kind of very comprehensive data protection.
And a key focus area for it seems like it's starting to pay dividends, it's kind of inflicting up.
So just curious like as Gulf overall AI workloads.
Get bigger and the digital and cloud adoption continues to rise across industries.
How do you feel like Dino verticals and potentially new use cases that could potentially expand your tam.
To drive growth in the next two or like thinking next year and beyond.
Yes, the new use cases new products.
We're actually increasing our Tam in fact, if you look at data protection, what it used to be for DRP in line, there's only a piece of it data fast DNS sitting endpoint data seen in public cloud gate on loss really introduced SaaS EQT supply chain vendors its own expanding DSP.
All of that portfolio and expanded our Tam quite.
Quite a bit.
Interesting, it's increasing the Tam itself, but it's also getting embedded in all products to elaborate AI and data protection quite a bit.
Workload is going very well as you bought it a big any of Tam expansion for us exactly.
Our cost per branch.
This severe.
We believe it's a matter of time in three four years, Anthony what I would say are you using traditional SD Wan are using zero cost as the EBIT.
The only vendor in the market that offered zero trust as the man and coffee gas will try to comment follow up in the next three four years and we're going to move to the next level.
We will talk about.
And probably in coming quarters, but if you asked me to take a guess ashwin and I have been debating a little bit we think somewhere in that $10 billion to $20 billion on top off $72 billion, we've talked about before.
Thank you.
Please standby for our next question.
Okay.
Yes.
Our next question comes from the line of Gray Powell with BTG. Your line is open.
Great. Thanks for taking the question.
Maybe on the go to market side, just anecdotally, we've heard that some of the larger gsi's.
Looks like Accenture, we just.
They are fans of bike rich.
So I'd be curious like like what what can he do better.
There may be Zee scalar was not doing before just how can you improve those relationships and drive more growth.
Speaker Change: Yeah, it's a good point.
Highlighted last quarter.
Three things, we'll be doing as mikes key initiative focus phone opportunity centric to account centric being one.
XI has been two in verticals BDC.
<unk> are making good progress.
<unk>.
At GSI is no doubt value, we bring to the table, we have been doing a number of deals, but as Jay has always impatient and saying not doing enough deals we need to do more so one of the key that's needed for us would be to bring in some more higher caliber leaders in that space.
We have added a number of leaders who will come from having worked with GSI is by extension and working with cloud providers.
Regardless of what the business, so expansion expertise and caliber and that area is going to accelerate our business and we are counting on it.
Thank you.
Please standby for our next question.
Our next question comes from the line of Joshua Tilton with Wolfe Research. Your line is open.
Hey, this is Patrick on for Josh coming.
Coming back to the competition, we've seen several firewall VPN base based vulnerabilities disclose from some of your competitors in recent months.
That offer those solutions can you talk about what impact those have had on demand if any and then anything specific to call out in the federal space there as well thanks.
Yes.
So.
It is true we all have been doing both but one of the better to use coming from some of the leading VPN vendors and some of the firewall vendors out there as well.
Has continued demand.
But off of engagements we have already closed that came from.
VPN vulnerabilities that federal government.
Issued a directive for.
The number of them in the pipeline Im not sure I can give you a quantifiable number but I can tell you.
It's a meaningful number.
Customers know fully.
Stand that whether VPN on Prem VPN Moss as a cloud service.
Virtual machine is still on VPN, and we are replacing a lot of those that becomes a starting point for CPA then they start looking for CCAR segmentation and the like.
In the federal government.
Do you think longer Panther.
Non cemented been public or private sector.
But public sector have decided to eliminate all of those vpns that have been deployed out there. We've got a number of active engagements going on you're seeing outside of our business is going quite well.
Please the progress, we're making and <unk>. Both combination are playing an important role most of our deals they're combined both of them. So any user can access any application from any bear in juneau across fashion.
Thank you.
Please standby for all next question.
Our next question comes from the line of Greg Moscowitz with Mizuho. Your line is open.
Okay. Thank you for taking the questions Jay workload protection has done fairly well overall, but historically speaking the deal sizes have been limited given the success that you sort of called out.
In your prepared remarks do you think we may be at an inflection point for workload protection or does the pipeline suggests that we're still a ways off from that and then a quick clarification for Raimo with high Bay.
You mentioned operating profitability coming up slightly in fiscal 'twenty five does that apply to op margins as well or are you, saying that we certainly expect operating profit to go up slightly.
Yeah.
Sure.
Protection.
And the problem golfers.
Nobody in the market talks for Zero Trust communication workflows that we do my gosh, we like to be pioneers out there need to evangelize the debt market is taking off it has to pay a call.
In science and technology type of companies are getting bigger the deal size and traditional companies are still smaller because the workflows and production are still coming up but not as fast so I do believe.
It's a matter of time and almost all of these customers will be buying our workload product.
Bringing a big market opportunities, but.
I think a number of other products at a party growing faster than this I don't want to say, it's not going to be it is very strategic for us working with customers.
It's a matter of time as that revenue starts growing at a faster pace.
And Greg I was referring to operating profit margin percent.
Hi.
Thank you.
Please standby for our next question.
Our next question comes from the line of Tal <unk> with Bank of America. Your line is open.
Hi, guys. Thanks.
Tal Liani: My question is on <unk>, you talked a lot about upsell.
And.
New products and the ability to expand but youre NR has declined from 120% to $1 17 to $1 16 in the last three quarters.
How do you connect it to your comments on.
New products and on the flip side.
The contribution of new customers went up to 50% of your growth this quarter.
Can you give us a little bit details on the profile that you go to different verticals downmarket to SMB is there any.
Any color into this growth with new customers.
Yes.
Our <unk> I think is outstanding.
The things that influenced and R. R.
<unk> talked about many times with our users basically we're trying to sell.
User platform to our customers and that that includes CIA CJ CBS. So that is going to influence NR also customers buying within a year doesn't get captured <unk> basically.
This year versus a year later, but if they buy within the year.
And our.
Having said all of that 116.
It's a really good number from our perspective.
And we've said over the past many years.
Faster yourselves.
The bigger bundle you felt the lower so we look at it as a factor.
The most important factor we track.
Thank you.
Ladies and gentlemen, due to the interest of time I'll final question will come from the line of Adam Borg with Stifel.
Your line is open Adam.
Awesome, Adam Borg with Stifel. Thanks for taking the question.
Maybe for Jay on the Baskin plus bundle.
I know this is a newer offering.
That you talked about a few quarters back.
The pricing uplift given some of the new <unk> capabilities and I was just curious if you could talk more about how that advanced plus bundles resonating and kind of what percent of the installed base. Do you think this is really addressable through over time. Thanks. So much.
Yeah.
Overall, our customers are buying bigger and bigger bundle, that's why our pricing audio IATA is going up.
Because the bigger bundles can take on more product and given the functionality I'm not sure I don't have any quantitative data to provide you but practically speaking.
Bigger and bigger bundles are happening if you.
As you listen to our prepared remarks, it is no longer debt buying bundles for users along with users we are selling platform selling data protection and quite often all of your big themselves.
My solution like <unk> and the like as well.
Thank you.
At this time I would like to turn the call back over to Jay for closing remarks.
Well. Thank you for your interest in <unk>.
We look forward to seeing you at some of the upcoming conferences.
Thank you.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
Uh huh.
Okay.
No.
Okay.
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