Q2 2025 Zscaler Inc Earnings Call
Music
Good day, and thank you for standing by. Welcome to the Zscaler 2nd quarter, 2025 earnings call. At this time, all participants are in a listen only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question, please press star 1-1 on your telephone, and wait for your name to be announced. To withdraw your question, please press star 1-1 again. I would now like to hand the conference over to your speaker today. Ashwin Keser.
Vice President, Investor Relations and Strategic Finance.
Speaker Change: Good afternoon everyone, and welcome to the Zscaler, Second Quarter, Fiscal Year 2025, Earnings Conference Call. On the call with me today, are Jay Chaudhry, Chairman and CEO .
and Remo Canessa, CFO . Please note we have posted our earnings release and a supplemental financial schedule to our investor relations website.
Speaker Change: Unless otherwise noted, all numbers we talk about today will be on an adjusted, non-GAAP basis. You will find the reconciliation of GAAP to the non-GAAP financial measures in our earnings release.
Speaker Change: I would like to remind you that today's discussion will contain forward-looking statements, including but not limited to the company's anticipated future revenue annual recurring revenue, calculated billings, operating performance. Thank you very much.
Cross Margin, Operating Expenses,
operating income, net income
Free cash flow, Dollar-based net retention rate,
Future Hiring Decisions,
Speaker Change: 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.
Speaker Change: 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. [inaudible]
Speaker Change: 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.
Speaker Change: For a more complete discussion of the risks and uncertainties, please see our filings with the SEC as well as in today's earnings release.
Speaker Change: I also want to inform you that, will be attending the following conferences. Morgan Stanley , TMT Conference on March 6th. [inaudible]
Susquehanna, Travel, Take, plus Gambling Forum on March 7th.
Loop Capital Markets, Investor Conference on March 10th.
Speaker Change: Stifle Technology Conference on March 11th, Cantor Global Technology Conference on March 12th.
Now, I'll turn the call over to Jay.
Jay Chaudhry: Thank you, Ashwin. Our outstanding Q2 results demonstrate the improvements in our go-to market execution against a backdrop of growing customer demand for our platform.
Jay Chaudhry: Billings accelerated in Q2 and revenue grew by 23% year over year, with both matrix coming in above the high end offer guidance.
Jay Chaudhry: Argo to market investments are resulting in increased sales productivity, double digit new and upsell business growth, and lower sales attrition. .
Jay Chaudhry: I expect sales productivity to continue growth in the second half driven by ongoing success of our go-to market initiatives and growing number of ramp sales reps. [inaudible]
Jay Chaudhry: Our annual recurring revenue, or ARR, grew 23% year-over-year, in Q2, 2 over 2.7 billion dollars, and our net retention rate, or NRR, improved to 115%.
Jay Chaudhry: Without growing pipeline and better sales productivity, I expect us to achieve $3 billion or more in ARR by the end of the fiscal year.
Jay Chaudhry: Q2 was also a strong quarter for profitability with 36% growth in operating profit, driving two percentage points improvement in operating margin to nearly 22%.
Jay Chaudhry: Free Casual Margin was also a Q2 record of 22 percent. [inaudible]
Jay Chaudhry: Ribbon by strong revenue growth, and free cash for margin, we operated above the rule of 45, placing us in the ratified category of large publicly traded SaaS companies that are growing rapidly at scale. [inaudible]
Jay Chaudhry: Zscaler, Pioneered, Zero Cross Architecture, which enables our customers' workforces to securely access applications wherever they desire it.
Jay Chaudhry: Prior to Zscaler, Enterprises relied on firewall and VPN-based security, which allowed attackers to exploit their vulnerabilities, and move unchecked across corporate networks. [inaudible]
Jay Chaudhry: Many vendors are marketing sassy, built on SD vans, which only versions the growing issue of ransomware attacks. [inaudible]
Jay Chaudhry: We have gone far beyond Sassy, while pioneering our zero-trust exchange built on true zero-trust architecture, which eliminates lateral propagation of threats and dramatically reduces attack surface. [inaudible]
Jay Chaudhry: Building upon our success in securing users, we expanded our platform to secure workloads, IoT, OT devices, B2B users, B2B systems and more. [inaudible]
Jay Chaudhry: Today, we are elevating the concept of Zero Trust, the new standard that we call Zero Trust Everywhere. This is the new standard for Zero Trust Everywhere.
Jay Chaudhry: For a customer to be zero trust everywhere, they need zero trust users where users are untrusted and never put on the corporate network. [inaudible]
Jay Chaudhry: Zero Trust Cloud, where workloads are untrusted and can communicate only through our exchange, and Zero Trust branch, where branches, factories, warehouses, or IoT, OT devices are islands of their own. [inaudible]
Our mission is to create a Zero Trust Everywhere World.
Jay Chaudhry: With the upcoming hardware or fresh cycle, CXOs are increasingly looking for ways to eliminate the legacy's security stack, including firewalls, VPNs, SDVans, and more. [inaudible]
Jay Chaudhry: We are leaning into the opportunity presented by the refresh cycle with surgical field campaigns to educate our customers on how they can leave frog to zero trust everywhere, and free themselves from firewalls and other legacy appliances forever. Thank you for your time, and I'll see you in the next video.
Jay Chaudhry: I'm happy to share that we are seeing initial success from these campaigns.
Jay Chaudhry: As of the end of Q2, we surpassed 130 enterprises that have become zero trust everywhere. And my mandate to our teams is to cripple that number in the next 18 months. [inaudible]
Jay Chaudhry: One of the core solutions of Zero Trust Every Viewer is Zero Trust Branch, which is seeing tremendous customer interest. [inaudible]
Let me share a customer example. [inaudible]
Jay Chaudhry: An existing global 2000 manufacturing customer purchased our zero-trust branch in a seven-figure deal, adding to their ZIA and CPA commitments.
Jay Chaudhry: This customer is leveraging Zscaler to secure all their critical manufacturing sites, eliminating the need for firewalls, knacks, expensive switches, and road crews at these sites.
Jay Chaudhry: Next, we are working with this customer to upsell zero-trust cloud to put them on the path to become zero-trust everywhere.
Jay Chaudhry: In another example, a large communications equipment company purchased our zero-plus branch to phase out their existing SDVAN. We are excited to work with this customer to help them realize better security and operational simplicity of our platform. [inaudible]
Jay Chaudhry: Zedotras Braunch is also helping us win new logo customers. [inaudible]
Jay Chaudhry: In Q2, 57% of customers who purchase zero-trust branch are new logo customers. [inaudible]
Jay Chaudhry: Moving on to large customer metrics, a $1 million plus ARR customer count, again grew 25% year-over-year.
In one large customer win. [inaudible]
Jay Chaudhry: A new logo of Fortune 50 Energy Company, adopter R-Zero Trust Platform to secure 25,000 users.
Jay Chaudhry: with CIA and ZPA, and made initial purchases of both, Zerotus Branch and Zerotus Cloud in a seven-figure deal.
Jay Chaudhry: By embracing Zscaler as the platform of choice for the security transformation, the cost more is eliminating firewalls, SDVans, legacy security upgrades, VPNs and more, thus improving the security while lowering cost and complexity. [inaudible]
Jay Chaudhry: I am also pleased with the momentum in our data protection pillar which experienced over 40% year-over-year growth in net new ACV. We see two key drivers of this trend.
Jay Chaudhry: One, consolidation of point products and operational simplicity of data protection. [inaudible]
Jay Chaudhry: We have the most comprehensive data protection platform which secures all types of data, weather structure or unstructured. [inaudible]
Jay Chaudhry: Data in motion, or data at rest, and data across all channels, including web, email, endpoints, SaaS, cloud workloads, and more.
Jay Chaudhry: These capabilities are packaged as various modules to provide flexibility to customers to adopt at their own pace.
To give you an example. [inaudible]
Jay Chaudhry: A global 2000 retail company that had three data protection modules in the last fiscal year. [inaudible]
Jay Chaudhry: Adopted three new additional modules in Q1 of this fiscal year, and significantly expanded data protection to all users across all their six modules in Q2.
Jay Chaudhry: This seven figure upsell deal nearly tripled the annual spend of this already million dollar plus ARR customer.
Jay Chaudhry: The customer chose Zscaler to drive what in the words is the most significant transformation project in the network and security history. [inaudible]
With too many data protection point products in their environments. [inaudible]
Jay Chaudhry: Customers are forced to manage multiple policies from multiple products in contrast. [inaudible]
Jay Chaudhry: Zscaler customers use a common set of policies that can be seamlessly implemented across all data protection modules, resulting in rapid deployment and lower operational overhead.
Jay Chaudhry: For example, in a seven-figure upsell deal, an existing global 2000 financial services customer, significantly expanded the data protection purchases for 100,000 users. [inaudible]
Jay Chaudhry: This upsell drove a 65% increase in the annual spend of this already million dollar plus ARR customer.
Jay Chaudhry: As of the end of Q2, over 85% of a $1 million plus ARR customers have two or more data protection modules, and 65% have three or more modules. This is the end of Q2, the end of Q2, the end of Q2, the end of Q2,
We expect this module adoption to continue to grow. [inaudible]
Jay Chaudhry: The second key driver for data protection growth is the increasing adoption of Gen-AI.
Jay Chaudhry: With the widespread use of JAN AI, all enterprises in all industries are confronting the risk of data loss to public AI apps, such as Microsoft 365 Copilot, Deepsea, ChatGPT, and more.
Jay Chaudhry: This is elevating the importance of data protection across all customers and customers are purchasing our solution to gain visibility into public AI apps and prevent data loss. [inaudible]
Jay Chaudhry: For example, in Q2, many customers purchased data protection to securely adopt public AI, including a global 2000 hospitality company, a global 2000 technology company, a global 2000 manufacturing company and more. [inaudible]
Jay Chaudhry: In addition to securing the use of public AI apps, we are investing to deliver solutions to secure customers' private AI apps, such as LLM and SLM models.
Jay Chaudhry: Chad Boats, and Infurance Entrance. We are expanding the functionality of our zero plus exchange with an LLM proxy to analyze prompt queries and results in real time to detect and prevent prompt rejections and other malicious activities. [inaudible]
Jay Chaudhry: We are also utilizing AI to make our products even better, and deliver more value to customers.
Jay Chaudhry: Less than a year ago, we introduced ZDX co-pilot, which leverages popular AI models like Gemini to deliver operational efficiency and faster resolution of end-to-end user performance issues. We offer ZDX co-pilot in our ZDX Advanced Plus package. We offer ZDX co-pilot in our ZDX Advanced Plus package. We offer ZDX co-pilot in our ZDX Advanced Plus package.
Jay Chaudhry: Following the launch of ZDX co-pilot, bookings for ZDX Advance Plus grew by over 45% to nearly $15 million, demonstrating the growth potential of AI-powered products.
Jay Chaudhry: Building on the success, we are taking ZRX to the next level by leveraging ZRX's Hygienetic AI technology to automate root cause analysis and expand IT workflow integrations for faster remediation and reduce resolution times.
Jay Chaudhry: We are also leveraging AI in many other areas, including automated data classification, image classification, zero-devolvability use detection and prevention, app segmentation, IoTOT device discovery, and more. [inaudible]
Jay Chaudhry: Our newly introduced AI analytics solutions, including risk 360, unified vulnerability management, business insights, and others continue to drive strong growth. [inaudible]
Jay Chaudhry: and ACV from AI Analytics, nearly doubled year over year. To further accelerate the development of our AI solutions, we recently hired Quilti as our EVP of AI innovations.
Jay Chaudhry: Phil was the co-founder of an AI driven enterprise software company that provided intelligent monitoring solutions for DevOps and ITObs. [inaudible]
Jay Chaudhry: In his role, Philville Lee, an incubation group, focusing on AI innovations to drive cutting-edge advancements in a Chantig AI to further transform our business and accelerate growth. [inaudible]
Speaker Change: AI is everywhere around us. The release of deep seek are one highlights, advancements in model training, which can make Jenny AI capabilities more widely available.
Speaker Change: Someone called it Javon's Paradox, which I agree with. In fact, I think this is the internet moment of AI, which will drive rapid adoption of AI in every aspect of our lives and will create a greater need for better security. I'm sorry. I'm sorry. I'm sorry. I'm sorry. I'm sorry.
Zscaler is very well positioned to protect our customers. [inaudible]
Speaker Change: At the World Economic Forum in Davos, I met CEOs of several global system integrators or GSI's.
Speaker Change: We're seeing a sea change in GSI engagements compared to a year ago, as an increasing number of them are embedding Zscaler into the network and security transformation practices. [inaudible]
Speaker Change: Several GSI's and strategic national partners, not considered Zscaler as one of their top strategic partners, just like Microsoft and Salesforce.
Speaker Change: In Q2, GSI's played a critical role in helping us close several deals. [inaudible]
For example,
Repartner with Covisant,
Speaker Change: To close a seven-figure new logo deal with a global 2000 insurance customer who purchased Zscaler for users for 23,000 employees.
Speaker Change: In another example, a large GSI helped us close a seven-figured deal with an existing million-dollar-plus Fortune 500 healthcare customer.
Speaker Change: I am pleased to see that GSIs are leaning in, working closely with Zscaler, and dedicating resources to drive growth.
Speaker Change: Next, let me highlight the progress in our federal vertical. All of you are aware of the highly publicized efficiency measures taking place under the new administration in the United States.
Speaker Change: Inc. Security vendors cannot save costs for a government, but Zscaler can, and does by eliminating multiple legacy security products, including firewalls, VPNs, NACs, DLP, VDI, and more. [inaudible]
Speaker Change: Simply put, we offer better security at lower cost. Having landed in nearly all the cabinet-level federal agencies and with significant upsell opportunities still remaining, we are well positioned to benefit from the government's efficiency measures. Thank you very much.
Speaker Change: Outside the U.S., we continue to make investments to grow our public sector practice, and we are seeing results.
Speaker Change: For example, in an eight-figured PCV deal, a national government purchased Zscaler for users to secure the entire government workforce.
Speaker Change: This is a monumental win for Zscaler and on APJ sales team, and I'm humbled by the trust this nation's government has put in us.
Speaker Change: In conclusion, we are entering the second half of the fiscal year with three key drivers.
Speaker Change: First, our increasing sales productivity. Sales productivity increased in Q2 driven by strong demand, and I expect productivity to continue to improve in the second half. [inaudible]
Second, the driving zero-trust every viewer in our customers. [inaudible]
Speaker Change: We have launched targeted campaigns to educate our customers on how they can become zero trust everywhere, and escape that a fresh cycle for appliances. [inaudible]
Speaker Change: Third, the growing adoption of AI's driving demand across multiple dimensions, including data protection and our AI-powered security products. I fully expect to benefit from these tailwinds. [inaudible]
Speaker Change: As I mentioned earlier, with strong demand for our platform and growing innovations, I expect us to achieve $3 billion or more in ARR by the end of the fiscal year. I look forward to sharing more about our innovations and platform strategy at Xenoph Live in June .
Remo Canessa: No, I'd like to turn over the call to remove for our financial results.
Remo Canessa: Thank you, Jay. Our Q2 results exceeded our guidance on growth and profitability, even with ongoing customer scrutiny of large deals.
Remo Canessa: Revenue with $648 million, up 23% year-over-year, and up 3% sequentially.
Remo Canessa: From a geographic perspective, America's represented 54% of revenue, and Mia was 30% and APJ was 16%. Our annual recurring revenue, or ARR, exiting Q2, surpassed $2.7 billion.
Remo Canessa: ARR Growth was approximately 23% year-over-year, remaining performance obligations for RPO through 28% from a year ago, to $4.615 billion. $1.2 million.
Remo Canessa: Current RPO was approximately 49% of the total RPO. Total calculated Billings grew 18% over year to $743 million. Our unscheduled Billings comprised of new, upsell and renewal Billings grew over 25% over year. .
Remo Canessa: Our calculated current billings grew 19% year over year. We ended Q2 with 620 customers with over $1 million in ARR, and 3,291 customers with over $100,000 in ARR. [inaudible]
Remo Canessa: This continued strong growth of large customers speaks to the strategic role we play in our customers' digital transformation journeys.
Remo Canessa: Our 12 month trailing dollar-based net retention rate was 115%. While good for our business, our increased success in 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. Thank you.
Remo Canessa: There could be variability in this metric on a quarterly basis due to the factors I just mentioned. [inaudible]
Turning to the rest of our Q2 financial performance.
Remo Canessa: Total gross margin of 80.4% compares to 80.8% in the year-go quarter. [inaudible]
Remo Canessa: Our total operating expenses increased 2% sequentially, and 19% year-over-year to $380 million. $2.
Remo Canessa: We continue to generate significant leverage in our financial model, with operating margin of approximately 22 percent. [inaudible]
Remo Canessa: An increase of about 200 basis points year-over-year. Our free cash flow margin was 22%, including data center cat-backs at 2% of revenue. We ended the query with approximately $2.9 billion in cash, cash equivalence, and shorter investments. [inaudible]
Remo Canessa: Next, let me provide our guidance for Q3 and full-year fiscal 2025.
As a reminder, these numbers are all non-GAAP . [inaudible]
Remo Canessa: For the third quarter, we expect revenue in the range of $665 million to $667 million, reflecting year-over-year growth of 20 to 21%. Gross margins of approximately 80%. [inaudible]
Remo Canessa: I would like to remind investors that we're introducing new products that are experiencing strong growth and are optimized for faster go-to-market rather than margins.
This will continue to influence our gross margins.
Remo Canessa: We plan to optimize new products for margins over time as they scale, operating profit in the range of $140 million to $142 million.
Remo Canessa: Net Other Income of $18 million, earnings per share in the range of $0.75 to $0.76, assuming a 23% tax rate in 163 million fully diluted shares.
Remo Canessa: For the full year fiscal 2025, we expect billions in the range of $3.153 billion to $3.168 billion. Reflecting the year-over-year growth of approximately 20 to 21%. For Q3, we expect billions growth to continue to improve. For Q3, we expect billions growth to continue to improve. For Q3, we expect billions growth to continue to improve.
Operating profit in the range of $562 million. $50 million.
Remo Canessa: to $572 million. Arunis per share in the range of $3.04 to $3.09, assuming a 23% tax rate and approximately 163.5 million fully-duted shares.
Remo Canessa: We expect our free cash flow margin to be approximately 24.5% to 25%.
Remo Canessa: With a large market opportunity and customers increasingly adopting the broader platform, we will invest aggressively to position us for long term growth and profitability, with that operator you may now open the call for questions.
Thank you for watching. I'll see you next time.
Speaker Change: Thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please limit yourself to one question in the interest of time. One moment for questions.
Speaker Change: Our first question comes from Saket Kalia with Barclays, you may proceed.
Saket Khalil: Okay, great, hey guys, thanks for taking my questions here and good quarter. [inaudible]
Thank you.
Speaker Change: Jay, maybe for you. You dug into a couple products in your prepared remarks that are clearly doing well like data protection. Thank you very much.
Speaker Change: But maybe the higher level question is, how much of your business is kind of coming from CIA and secure web gateway replacements? [inaudible]
Speaker Change: Versus broader platform products in aggregate. Again, I know we've talked about certain products and we've gotten data points on how they're performing, but curious if you could talk about how the business is looking from that perspective of sort of ZIA and everything else, you know, everything else that sort of forms the platform. [inaudible]
Jay Chaudhry: Sure, as you know, Saket, CIA with the starting points, we start taking out blue code and other black gateways.
Speaker Change: There's still a lot of people left out there, but when we start, we quite often start with a platform that includes ZIA, CPA, and CDX. [inaudible]
Speaker Change: So, starting from maybe coming from VPN Blastment or Blue Code, platform becomes the more common thing. In fact, recently the zero to branch is becoming an important area at the starting point. [inaudible]
Speaker Change: The interesting number of this quarter was that 57, 57 personal customers who bought our zero plus branch are new logo customers. So expanded platform is a wonderful thing.
Speaker Change: Blue Code, Proxy, the starting point, VPN is the starting point, we are taking zero trust every year, users, branches, and the cloud. [inaudible]
Got it, very helpful, thank you.
Thank you.
and Jay Chaudhry.
Moderator: Alex Washington comes from Brad Zelnick with Deutsche Bank, you may proceed. Thank you very much.
Brad Zelnick: Great. Thanks so much for taking my question. Jay, it's good to see the go-to-back market transformation coming to life.
Brad Zelnick: And I think we see it in the strength in a million dollar plus customers, an emerging product, they are our growth. And Jay, I know you're not someone who's easily satisfied. What do you see that proves out that they go to market changes, or making a difference, and that those changes are durable. Thank you.
Thank you.
So, so Brad Fusterfall, Paul,
Brad Zelnick: The Strength of Pipeline, which is leading indicator, that isn't going, that good quality pipeline is going. . . . . . . . . . . . . .
Number two, our new ACV is up double digits. [inaudible]
Brad Zelnick: That's very important, and then other matrix across the board, data protection is growing over 40% and so on and so forth. It's very good, and the quantity of engagements with sea level in large enterprises. [inaudible]
Brad Zelnick: Is getting stronger because the newer sales team, the leadership, is very good in town relationships and expanding those accounts. [inaudible]
Speaker Change: That's helpful. Maybe a quick follow up for you, Remo. I think you're commentary. Thank you very much.
Just curious if there's been any change to the assumptions.
Speaker Change: around scheduled versus on-scheduled billings timing in the back half. Thanks again, guys. Great job. Thank you.
Speaker Change: Thank you, Brad. No changes. We called out before with scheduled billing. We expected 7% in the first half and 23% the second half. That is unchanged.
Speaker Change: And also on the unscheduled piece, you know, it, you know, virtually remains unchanged also you can see that we basically raised our guidance, so, you know, feel a little bit more bullish.
Speaker Change: And we did before. You know, it's based on our pipeline and our visibility, you know, as Jay mentioned, you know, things are going well, we're well positioned and we feel good. Thank you very much.
Awesome, thanks again.
Thank you.
Speaker Change: Ardaq's question comes from Mike Cikos with Needham, you may proceed. You may proceed.
Speaker Change: Hey guys, thanks for taking the questions here. If I could just build a little of Brad's question on the go to market, it's great to see the number of million dollar customers that you guys added this quarter.
Speaker Change: Maybe color the million dollar cohort that you have in light of some of these go-to-market initiatives that you guys have been working on now.
Yes, so...
Speaker Change: Two biggest things with the Sales Transformation War, one was the Account Centric Sales Process.
Speaker Change: And then those are good results. We already talked about them. The second big thing was global system integrators playing an important role. [inaudible]
Speaker Change: And that's happening. We see that. You saw me in highlighting a couple of deals in my learning script with GSI Planner. Very active role to help us drive that business.
Speaker Change: They are embedding us into more and more of their platform. [inaudible]
Speaker Change: They're getting more and more people trained as well. And what we're seeing is, if you really think about it.
Speaker Change: The two G2K companies, they have both big opportunities for us. [inaudible]
and there are still.
A 6X upsale opportunity for us.
And I installed this itself.
Deployed.
Speaker Change: They want to remove all the legacy stuff, firewalls, VPN, all that kind of stuff, and these GSI's are playing an important role to help us. In fact, there's a large fortune, I would say 50 company, where ZIS-ZPA, ZDX was sold, and then a GSI comes in. [inaudible]
Excellent. Thank you.
Speaker Change: Our next question comes from Fennik Kothari with Baird, you may proceed. Thank you very much.
Srenik Kothari: Can you talk about is that going to be our anchor buying tons up see how conversations are looking to replace that.
Speaker Change: In fact.
Speaker Change: Talk about the cross sell.
Speaker Change: The customers who are rolling off.
Speaker Change: No.
Speaker Change: I can get back to work.
Speaker Change: Paul Fremont.
Speaker Change: Yes.
Speaker Change: So our customers have been telling us for quite some time that your zero change is wonderful, but your bonds still need somehow I got some firewalls routers from SD van sitting in the branch, creating complexity. So on SEDAR Trust branch initiative is to simplify it.
Speaker Change: <unk> simple implants moves everything that branch goes dark from the Internet can be discovered cannot be attack and the cost to income tax equals fault.
Speaker Change: There was a CSO exchange summit, we had.
Speaker Change: Recently.
Speaker Change: And we asked a great question 100 attendees.
Speaker Change: And the question was are you ready to embrace zero Trust branch, which becomes like a cafe without any firewall and.
Speaker Change: Any of the staff.
Speaker Change: 96% up Paul <unk> shutdown Eddie to embrace it.
Speaker Change: <unk> actually exceeded all of my expectations. So.
Speaker Change: The combination of Zero Trust branch zero touch user that Premier Zero Trust cloud becomes a very good story, our customers love it.
Dan: Thanks, Dan.
Speaker Change: There are going to hire for green brick had.
Dan: Brian.
Dan: Uniontown to increase number of rap.
Dan: Rockford and pooling theyre.
Dan: Talking about the ankle and the landing workers.
Dan: Expansion of velocity.
Dan: And Mike from either an upfront fee and private versus more longer.
Dan: And harder to Danaher.
Dan: When partner.
Dan: Yes, we don't guide on <unk>.
Dan: But all the things you mentioned all come into play deals are getting bigger.
Dan: Our upsell.
Dan: As we've talked about before we expected over 65% upsell.
Dan: This year and Thats basically came in at <unk> during the quarter.
Dan: We are landing bigger deals you can see with the large customer emphasis.
Dan: Company is greater than $1 million. So all those factors and also the emerging products and new products expanding platform. They all come into play.
Dan: The 115% is an outstanding metric, but again, it's something that we've talked about before really don't look at other than on this call.
Dan: We try to drive our topline basically on new ACD, whether its upsell or NIM.
Speaker Change: Thank you.
Speaker Change: Got it.
Speaker Change: Thank you Anna.
Speaker Change: As a reminder, please limit yourself to one question in the interest of time.
Speaker Change: Our next question comes from Roger Boyd with UBS you May proceed.
Roger Boyd: Awesome. Thanks for taking the questions Jay I wanted to go back to the eight figure APAC government deal I think you talked about kind of them going wall to wall with the Zee scalar for users that I'd love to hear any specifics specifics you can give on the ROI with this customer are kind of the scale of the upsell there and what you're replacing and then as you think about the <unk>.
Roger Boyd: Pipeline for global government deals that this feels like kind of a landmark deal for you guys just would love any color on how youre thinking about the opportunity with other government. Thanks.
Roger Boyd: Yes, you said it right. It was a landmark deal for us.
Roger Boyd: Zero Trust is very important for governments.
Roger Boyd: And by the way this deal wasn't driven by auto why this was driven by cyber security, having better protection.
Roger Boyd: And what I mean inflation is deal includes zero trust access users whether that at.
Roger Boyd: Or in the office, whether they actually internet SaaS applications or their internal applications. So essentially a critical part of our.
Roger Boyd: Platform.
Roger Boyd: That is the entirety of our own work.
Roger Boyd: For switches, we are very proud of all we are.
Roger Boyd: On engagement several other <unk>.
Speaker Change: Friendly countries to pursue this thing, but some of these government deals can take longer but it is good to see that we're getting traction and we've done a lot of work in the U S government as well, which I shouldnt forget about.
Speaker Change: So we see good opportunities, but government needs can be a little bit.
Speaker Change: What do you call it bulk.
Speaker Change: Lumpy.
Speaker Change: And can take time, but it's pretty unique for us we have anybody product.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Brian Essex with Jpmorgan you May proceed.
Speaker Change: Hi, good afternoon, and thank you for taking the question.
Speaker Change: Hey, I was wondering if I can dig into maybe the comments that you had on pdx and would love to know how youre seeing customers approach.
Speaker Change: Agenda protection and on the data on the data protection side is is your platform obviating the need for data discovery and classification or you're coming in on top of that how our enterprises viewing getting their data has stayed in order before they stay pursue.
Speaker Change: Sure.
Jack take utilization thank you.
Speaker Change: Sure.
Speaker Change: It's a very good question.
Speaker Change: Often we like to give customers.
Speaker Change: <unk> and choice, where they can data classification is a hard problem.
Speaker Change: Actually is helping a lot into India a classification. So we do use gen AI technology for classification quite a bit and track for quite some time as your traffic goes out to the internet owned apply add ons.
Speaker Change: We have been doing classification of our customers.
Speaker Change: What's the enforcement, but also.
Speaker Change: Scan data offsetting and onedrive sharepoint wherever else, maybe and can do classification.
Speaker Change: Technology, having said that we also work along with data classification that maybe done by other providers. So we can take the classification of tax and applied a policy enforcement because we are sitting in the traffic that the only way that can leak out.
Speaker Change: If it goes through us and we are the natural policy enforcement point, our data protection.
Speaker Change: Solution has been growing very nicely.
Speaker Change: ACB for example.
Speaker Change: <unk> growing 40% year over year, so it's a good opportunity and it's no longer not only data line doing data <unk> SaaS application Youre doing DSP and for data in the cloud Youre doing data security and endpoint data is skewed for email using single policy engine.
Speaker Change: <unk>, which is what customers like us because they were Adam rather not by five at some point products.
Speaker Change: Got it Super helpful and great to see the better sales productivity I appreciate it.
Thank you.
Speaker Change: Our next question comes from Gregg Moskowitz with Mizuho you May proceed.
Speaker Change: Thank you very much for taking the question.
Speaker Change: Zero Trust everywhere campaign appears to be a very good start I realize it's early but I was curious if youre seeing more adoption. Thus far are small mid sized or larger enterprises and then also.
Speaker Change: Sure.
Speaker Change: So far how does the size of zero Trust everywhere. It lands, how does that compare to the scalar is typical net new logo.
Speaker Change: So first of all our focus remains larger enterprises datasets natural growth happening at the lower end of the business, which keeps on going but primary focus has not changed.
Speaker Change: Very happy to see that or 130 enterprises were going in with zero Trust everywhere and in that case via essentially you'd like to say, yes users zero Trust no matter, where the sitting at.
Speaker Change: At home or coffee shop or at your headquarters branches Zero Trust Clouded Zero trust that surely the absence of zero Trust every bear no answer.
Speaker Change: We are bullish we think we can triple this number in the next 18 months and.
Speaker Change: And Thats based on customer feedback and reception we are getting.
Speaker Change: So we think we have a new make a big difference in the branch area I'm excited for the refresh opportunity our CIO I was talking to stack.
Speaker Change: Glad you're moving forward because I do not want to go through a refresh cycle the firewall it one more time.
Speaker Change: Very helpful. Thanks, Jay.
Speaker Change: Thank you.
Speaker Change: Our next question goes from Fatima <unk>.
Speaker Change: <unk> with Citi You May proceed.
Speaker Change: Well good afternoon, and thank you for taking my question.
Speaker Change: Raimo you made specific reference to the fact that there is ongoing scrutiny on large deal. So I wanted to ask you both actually very stratospheric question.
Speaker Change: The entire business and the business model in the pipeline.
Speaker Change: Becoming more tethered in index to larger deals you are talking about scrutiny and then you layer on the stock that there are segments of the economy and maybe the global economy that has been a little bit influx by virtue of trade wars, and tariffs and things like that I wanted to get your perspective on how that's maybe helping accelerate.
Speaker Change: The conversation for you.
Speaker Change: Is it all just kind of getting that.
Speaker Change: That could have implications for how.
Sector to be how do we think about transforming.
Speaker Change: There are networks and their security architecture.
Speaker Change: And any kind of anecdotal feedback or color you got actually from your <unk> that you referenced earlier I would like to kind of get.
Real time feedback from how customers are internalizing some of this with their budgetary.
Speaker Change: Aspirations and expectations. Thank you.
Tim: So Tim I'll, let me start.
Speaker Change: Yes from what we know so far we expect limited direct impact on cabinets to our business.
Speaker Change: As we said in our remarks macro is still tight yes. This large deal scrutiny.
Speaker Change: <unk> four <unk>.
Speaker Change: Hi.
Speaker Change: And in general, but non first cycle.
Speaker Change: If I can go to <unk>.
Speaker Change: <unk>, so and talk about zero Trust cyber security.
Speaker Change: Trusted, but then if I can say, we will do this and reduce cost for you.
Speaker Change: Interest becomes double so these two things together on actually driving our pipeline.
Speaker Change: If we didn't have these two factors the pipeline will struggle.
Speaker Change: But then it takes a lot more to close the pipeline.
Speaker Change: We closed our pipeline they actually want to see cost savings and we have been refining and refining business value assessment to create business savvy cases for CF approval.
Speaker Change: And that stuff is helping us so when we go in and say we are going to help you with zero Trust everywhere that really means a bigger part of the platform. The fascinating thing is the more savings there on the bigger part of our platform they need to buy okay. It becomes an interesting combination and if you can see that show up in <unk>.
Speaker Change: And tell them in one quarter. This goes all within two quarters and this goes to the core of this close out.
Speaker Change: <unk> has become essentially on champion and their push to get deals done and that's really what we're seeing is it is helping us and and GSI is also helping us because they comment August partners to really drive that transformation and someone has to do with that work and are good partners for us.
Speaker Change: Yes, I mean, just to follow on some of the Jays comments I mean, you take a look at our guide for the second half.
Speaker Change: Good pipeline strong pipeline Jay called out.
Speaker Change: Stronger sales productivity, which we're seeing.
Demand for the product, we're not baking in a strong or banking on a strong federal in the second half with the uncertainties, but they are currently going on.
Speaker Change: He said that we're very well positioned we are in 2014 of the 15 Catherine agencies.
Speaker Change: And we feel that.
Speaker Change: Our product platform and are related to the efficiencies and cost and security I believe we're well positioned but again as Jay mentioned those types of deals are lumpy.
Speaker Change: The negatives.
Speaker Change: We call about you all called out the macro overall macro.
Speaker Change: Deal.
Speaker Change: Certainly.
Speaker Change: J code that also tariffs.
Speaker Change: We're a service company. So we don't believe tariffs will have an impact on us or any significant impact at this point when things change.
Speaker Change: So we're.
Speaker Change: We're well positioned but those are kind of the pluses and minuses.
Speaker Change: Weighted to our guidance for the second half going forward.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Our next question comes from Joseph <unk> with Jefferies. You May proceed.
Speaker Change: Hey, guys. Thanks for the question.
Speaker Change: As a follow up to your earlier scheduled billings comments does that acceleration peak in <unk> or how should we think about that piece of the business as we move into fiscal 'twenty six thank you.
Speaker Change: So we're not making a comment for fiscal 'twenty six but it does increase.
Speaker Change: Sure.
Speaker Change: Okay. Thanks.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Matt Hedberg with RBC you May proceed.
Speaker Change: Alright, Thanks for taking my question guys. Congrats on the results.
Speaker Change: Jay I Wonder if you go back to your comments about Gen Pickens Eds, and I guess I'm curious it feels like a natural fit there, but I guess im wondering like as customers rollout agents right I think a lot of people think identity, they might think aspects of cloud security.
Whats Zee scalar has a role in protecting customers agents.
Speaker Change: It seems like Thats, obviously that.
Speaker Change: A massive trend that is very early.
Speaker Change: That's correct.
Speaker Change: So the question often gets asked is.
Speaker Change: If agents are used the head count comes down.
Speaker Change: Impact on our fee based model if that's what your question is.
Speaker Change: We haven't seen any big changes, yet, but I do believe some of those changes are coming.
Speaker Change: No matter what happens to users.
Speaker Change: Be more communication among users machines workloads and in the future more of an AI agents <unk>.
Speaker Change: AIA agents as just another entity for US we are in the zero Trust exchange to enforce policy for all communications more communication means more traffic that means more value delivered to our customers, we expect our pricing to evolve as agents traffic.
Gross asphalt.
Speaker Change: In the past, we have seen customer head count reduction from time to time and in most cases, they are able to keep up our growth by up selling additional modules. We think we have an active role to play to secure agent communication, but also using AI agent technology.
Speaker Change: <unk> and <unk> and data protection to help our customers and for that we can charge additional dollars as well and we have been charging for example, CTX.
Speaker Change: We started selling coal product nor are we are moving to agent and able to charge higher prices for those products. That's each caller asked.
Jay: Thanks Jay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Our next question comes from Joshua Tilton with Wolfe Research you May proceed.
Joshua Tilton: Hey, guys. Thanks for sneaking me in here and I'll Echo my congrats on a solid quarter as well.
Joshua Tilton: I have a two parter, but it's along the lines of the sales productivity comments good to see the improvements this quarter I guess, what I'm trying to understand is is the sales productivity that you saw in the quarter kind of ahead of what you were expecting as we entered this year and then if I look to the balance of the year like where the sales productivity has to go from here.
Joshua Tilton: Here in order to hit the updated billings guidance that you gave us for the year today.
Joshua Tilton: Yes, I mean thats expected basically.
Joshua Tilton: Called out on our calls before is that we.
Joshua Tilton: We expected sales Brexit.
Joshua Tilton: Kris throughout the year and we did see that.
Joshua Tilton: Q2.
Joshua Tilton: All I can say about the sales productivity I would expect it to continue to go up I don't want to give any more color than that other than the sales productivity.
Joshua Tilton: Our guidance and we feel our guidance is prudent.
Joshua Tilton: Thank you.
Joshua Tilton: Thank you.
Speaker Change: Our next question comes from Gray Powell with BTG you May proceed.
Speaker Change: Alright, great. Thanks for taking the question just wanted to say congrats on the good results.
Speaker Change: But yes, so I wanted to follow up I think it was greg's earlier question about the firewall refresh.
Speaker Change: Can you talk about some of the targeted marketing.
Speaker Change: Youre doing with existing customers to get in front of the firewall refresh.
Speaker Change: And then just how should we think about sizing the opportunity and I know it's early days.
Speaker Change: But when should we actually start to see it materialize in the results in a more meaningful way I'm guessing it's really sometime next year, but just wanted to get some general thoughts around that.
Speaker Change: Right so.
Speaker Change: First of all.
Speaker Change: So the branch so let me Shouldnt, we launched zero Trust broad.
Speaker Change: Is the underpinning of our driver going in place firewall. So we aren't really focused on the data center inside the data center, but we have large large enterprises take hundreds of thousands of branches out there most of them are asking for how do I make my branch like a cafe.
Speaker Change: Brian should be no more complicated than you sitting at home and being able to access applications.
Speaker Change: Surely that disruptive and simply about technology, we're bringing to the table so our customers.
Speaker Change: <unk> customers today have some kind of a firewall or some kind of outflows of some kind of SD bandwidth firewalls, sending out there and they are looking for us.
Speaker Change: So we become a single point to collect data and get it to what exchange and take care of it that is really what's driving so.
Speaker Change: Firewalls that are sitting in the branch office or on a primary target campus become for next natural thing for US what are we doing to reach our customers.
Speaker Change: We don't have.
Speaker Change: 200000 SMB customers.
Speaker Change: Dealing with eight to 9000 customers and the top.
Speaker Change: Essentially 30% 40% of them are good.
Speaker Change: Large enterprise size and we have these.
Speaker Change: Account based teams. These teams are in touch with that customer and give them marketing material collateral benefits and to some marketing campaigns to reach out to our customers right now on some of these <unk> we are doing.
Speaker Change: A number of ways to engage with them get their feedback and get them moving off a new solution. So.
Speaker Change: It's working well can you talk about 57% of all customers, who bought zero Trust branch of our new customers. That's exciting for US what's telling me is that our zero Trust, Brian just helping us grow our new customer logo base.
Speaker Change: Okay, that's very helpful.
Speaker Change: Thank you.
Speaker Change: Our next question comes from <unk> with Bank of America, You May proceed.
Speaker Change: Yes.
Speaker Change: Your line is now open.
Speaker Change: Okay.
Speaker Change: Hey, guys, sorry, I was amused I was talking to myself can you hear me now.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Thank you guys.
Speaker Change: I wanted to understand the concept of zero Trust what it means for you meaning.
Speaker Change: We are adjusting the concept and I'm trying to break it down to product. So when you talk about zero Trust and Brown and talk about zero Trust. The cloud practically what does it mean, what are you selling to the customers and second how does it change the competitive landscape, meaning if someone is in the branch and someone is in the cloud and they're competitive.
Speaker Change: <unk> solutions.
Speaker Change: Rewind back two years you competed on.
Speaker Change: On SaaS.
Does it change the competitive landscape when you focus on zero Trust.
Speaker Change: So to start with by the way SaaS is not zero Trust SaaS secure access based on SD ban any one falls under our SaaS every firewall VPN any network is essentially this assay in our meeting zero Trust to Oxford, no not being on the network not <unk>.
Speaker Change: Having lateral movement left and right till our zero Trust branch custom.
Speaker Change: <unk> had a branch they had SD ban or mpls connection and inside the branch they have either been answered the segmentation or east West firewalls, we eliminate all of that using air gap Technology V go through acquisition doing segmentation inside of the branch and Zero Trust.
Speaker Change: Without firewalls without relapse from the branch.
Speaker Change: The wide area network or internet or zero to suppliers.
Speaker Change: We don't just connection means no lateral movement no SD Wan given in part D and the branch gets connected to an application through honest Euro exchange, a switchboard or lack of movement. That's the beauty of Zero Trust branch Zero Trust cloud means entity sitting in the cloud can talk to each other without.
Speaker Change: Moving laterally on the network. So our switchboard on exchange is sitting in the cloud you can say workloads in BPA can only talk to workflows in the PCB not on the east North South or east West firewalls needed in the cloud as well that's the exciting part of that it makes sense.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: And when you focus on that.
Speaker Change: Part of my question was.
Speaker Change: What's your competition, who do you meet that provides the same kind of value and you have to compete with them.
Speaker Change: Our competition is legacy firewall vendors in some cases branch knack vendors.
Speaker Change: Vlan vendors don't know if that is needed legacy versus the new zero Trust, we are doing stuff.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Peter <unk> with Bernstein, You May proceed.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Glad to hear the continued.
Speaker Change: The address, particularly with Upsells, obviously, MLR expanding is pretty exciting.
Speaker Change: Probably a good signal around the sales performance.
Speaker Change: The one thing though is that at.
Speaker Change: Also does seem to indicate.
Is the contribution from net new customers has been declining.
Speaker Change: Should we think about that looking forward is that a short term.
Speaker Change: Acceleration.
Speaker Change: It would pick back up and so when you put those two things together.
Speaker Change: We could get even stronger growth or.
Speaker Change: Should we be expecting lower contribution from net new customers looking forward.
Speaker Change: Right. So if you think about it.
Speaker Change: Young company you are very few customers you have to have new logos as you.
Speaker Change: We grow when we got 45 plus percent of Fortune 500 companies and have a very big platform.
Speaker Change: Tons of upsell opportunity and for internally anymore in our Seattle, We debate do we give special pushed our new versus upsell community, one new SUV coming from upsell of our new logos. So.
Speaker Change: Today with a large customer base upsell is sitting about two thirds remote right new logos smaller and over the years I would expect upsell to keep on going up from there onwards, because we'll have a large installed base of customers.
Speaker Change: I think it's a good thing having said that we do have a sizable customer base customers to go after.
Speaker Change: There are about 55% of fortune 500 companies, who on customers yet are an opportunity for us when you go to the next level of customers you added <unk> about two third of that.
Speaker Change: Good for us so we see opportunities, both new logos and Azbell upsell in the platform keeps on growing underground.
Speaker Change: The only thing that I want to add.
Speaker Change: We chased mentioning is that.
Speaker Change: We have a six X opportunity.
Speaker Change: In.
Speaker Change: Our existing base on the easier side, only not including the lead customers. Our focus if you take a look at it.
Speaker Change: For the global 2000 penetration over 35% currently.
Speaker Change: And for the Fortune 500 over 45%.
Speaker Change: The hard part is landing these customers, but once you're in and you build their trust.
Speaker Change: You have the ability to upsell.
Speaker Change: No.
Speaker Change: Jason 100% correct as you go forward.
Speaker Change: As we go forward as a company and currently we said we'd have 65% up sell in.
Speaker Change: This fiscal year, I would expect that percentage to increase.
Speaker Change: Our penetration.
Speaker Change: And these and the GTK and Fortune 500 is very very important and continued product introduction.
Speaker Change: And selling across our platform really bodes well for Zee scalar.
Speaker Change: I think we're just in a great position and you take a look at our penetration into the GTK and Fortune 500, it's quite impressive.
Speaker Change: But does it.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Yes.
And our last question comes from Keith Bachman with BMO you May proceed.
Keith Bachman: Hi, Thank you very much Jay I wanted to direct this to you and at a high level wanted to dig a bit deeper on how you think AI changes your competitive positioning versus some of it is.
Keith Bachman: The landscape out there and if I change the question around a little bit.
Keith Bachman: You have in your slide deck a.
Keith Bachman: AI and analytics solution as a $2 billion Tam relative to 96 days. So it's a relatively small part of our data protection. We could argue as part of that as well, which is much more meaningful but if I break the question down again into two parts.
Speaker Change: I just want to understand from a technology perspective, how do you change your solutions to capture the benefits of AI and is that embedding into existing products or is it offering new products downstream or both thank you.
Keith Bachman: Okay.
Keith Bachman: Very good question, Yes top point you made.
Keith Bachman: It's a small piece about a couple of products that are already out there that growing nicely that was a starting point, but if you think about AI.
Keith Bachman: AI is only as good as the data power switch with Zero Trust zero tax exchange platform as it getting over 5 billion transaction logs a day, that's the largest security cloud any of it.
Keith Bachman: So thats a one northstar now taking that data and building products around it becomes our next big North Star for US, we acquired <unk>, which has become the data fabric technology for us to take all that data and harmonize it synthesize it Dave and Bill.
Keith Bachman: <unk> value around it what is the value that can be built around it.
Keith Bachman: Already launched things like unified wallet management be just launched asset risk management, there are more and more products that are going to come I don't.
Breach prediction security operations alike. So you see a number of products unfolding that are powered by AI engine to do that part that's one part the second part ends up taking.
Keith Bachman: Taking batesville experienced in using more data.
Keith Bachman: Pic technology to make it more powerful <unk> is already a pretty sizable business, but it will get accelerated because of AI.
Keith Bachman: Third area is data protection, we have been doing some very good data classification R&D, but in addition to that the number one question <unk> ask US is my company is using AI public AI, such as chat GPT chairman.
Keith Bachman: Are others, how do we make sure my data doesn't leak, we are sitting in the traffic faster internet. They are using our DLP to make sure. They can use it safely then customers are using private AI application of building their own LLM models. We are building, an LNG proxy to be able to inspect and enforce policy.
Keith Bachman: So several opportunities for us what we believe is the combination of zero exchange to secure customers and generate all the logs and then use AI to power it becomes an EBIT that.
Keith Bachman: Most compelling combination.
Keith Bachman: Perfect. Thank you Jay.
Keith Bachman: Thank you.
Speaker Change: Thank you I would now like to turn the call back over to Jay Chaudhry for any closing remarks.
Speaker Change: Well. Thank you all for joining us for this call and look forward to seeing you in one of the many investor conferences, we plan to attend thank you again, thank you goodbye.
Speaker Change: Thank you. This concludes the conference. Thank you for your participation you may now disconnect.
Speaker Change: Okay.
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