Zscaler, Inc. (ZS) This autumn 2024 Earnings Name Transcript

Zscaler, Inc. (NASDAQ:ZS) This autumn 2024 Earnings Convention Name September 3, 2024 4:30 PM ET

Firm Contributors

Ashwin Kesireddy – Vice President, Investor Relations and Strategic Finance
Jay Chaudhry – Chairman and Chief Govt Officer
Remo Canessa – Chief Monetary Officer

Convention Name Contributors

Saket Kalia – Barclays
Brad Zelnick – Deutsche Financial institution
Roger Boyd – UBS
Joseph Gallo – Jefferies
Ittai Kidron – Oppenheimer
Brian Essex – JPMorgan
Matt Hedberg – RBC Capital Markets
Shrenik Kothari – Baird
Patrick Colville – Scotiabank
Adam Borg – Stifel
Hamza Fodderwala – Morgan Stanley

Operator

Good day, everybody, and thanks for standing by. Welcome to Zscaler Fourth Quarter 2024 Earnings Name. At the moment, all contributors are in a listen-only mode. After the audio system’ presentation, there might be a question-and-answer session. [Operator Instructions]

Now, I’ll go the decision over to the Vice President, Investor Relations and Strategic Finance, Ashwin Kesireddy. Please go forward.

Ashwin Kesireddy

Good afternoon, everybody, and welcome to the Zscaler Fourth Quarter Fiscal Yr 2024 Earnings Convention Name. On the decision with me immediately are Jay Chaudhry, Chairman and CEO; and Remo Canessa, CFO. Please be aware, now we have posted our earnings launch and a supplemental monetary schedule to our Investor Relations web site.

Until in any other case famous, all numbers we discuss immediately might be on an adjusted non-GAAP foundation. You can see the reconciliation of GAAP to the non-GAAP monetary measures in our earnings launch.

I would wish to remind you that immediately’s dialogue will include forward-looking statements, together with, however not restricted to the corporate’s anticipated future income, calculated billings, working efficiency, gross margin, working bills, working revenue, internet revenue, free money circulate, dollar-based internet retention charge, future hiring selections, remaining efficiency obligations, revenue taxes, earnings per share, our aims and outlook, our buyer response to our merchandise, and our market-share and market alternative. These statements and different feedback aren’t ensures of future efficiency, however somewhat are topic to dangers and uncertainty, a few of that are past our management.

These forward-looking statements apply as of immediately, and you shouldn’t depend on them as representing our views sooner or later. We undertake no obligation to replace these statements after this name. For a extra full dialogue of the dangers and uncertainties, please see our filings with the SEC, in addition to in immediately’s earnings launch. I additionally wish to inform you that we’ll be attending the next conferences: Citi World TMT Convention in New York Metropolis on September fifth, Goldman Sachs Communacopia and Know-how Convention in San Francisco on September 11, Wolfe Analysis TMT Convention in San Francisco on September 11.

Now, I will flip the decision over to Jay.

Jay Chaudhry

Thanks, Ashwin. We delivered a robust This autumn with all metrics exceeding the high-end of our steering. Income grew 30% year-over-year. Billings grew 27% and profitability reached new data with working margins of roughly 22% and free money circulate margin of 23%. We additionally achieved a brand new milestone of $1 billion in quarterly bookings in This autumn, pushed by an acceleration in new and upsell enterprise within the quarter.

For the full-year, income grew 34% and free money circulate grew 75%, leading to free money circulate margin of 27%, a brand new file for the corporate. With one other yr of robust prime and bottom-line efficiency, we exceeded the Rule of 60 for the fourth consecutive yr. Regardless of the latest adjustments in our go-to-market group, we delivered these excellent outcomes, pushed by robust buyer demand for our Zero Belief Alternate platform.

I am more than happy with the progress we’re making in go-to-market execution, the tempo of innovation and buyer adoption of our expanded platform. I am additionally happy to share we crossed $2.5 billion in ARR in This autumn, and we count on to attain a brand new milestone of $3 billion or extra in ARR in fiscal ’25.

Earlier than entering into additional particulars of the quarter, let me share a couple of observations on the demand surroundings. First, buyer adoption Zero Belief Platforms is stronger than ever, with This autumn setting a file for brand spanking new and upsell enterprise. Our platform secures 47 million customers throughout almost 8,700 prospects. Whereas different distributors are nonetheless struggling to ship cloud safety for customers, we expanded our platform past customers to ship Zero Belief safety for functions, workloads and, IoT/OT gadgets. Clients are consolidating their disjointed legacy safety merchandise by adopting our complete platform.

Second, the rising use of AI is creating new avenues of development for us. For instance, the rising adoption of Gen AI is exposing new gaps in organizations’ safety posture. To assist our prospects deal with these dangers, earlier this yr, we launched Gen AI Safety, which allows prospects to comprehend the productiveness advantages of Gen AI with out compromising information safety. Utilizing our Gen AI safety, prospects can acquire visibility, apply entry management and implement information safety insurance policies to forestall their delicate information from leaking.

Third, I am thrilled to share that now we have achieved a serious milestone with our cloud platform, surpassing over $0.5 trillion transactions every day, that’s T as in trillion. This additional demonstrates our widening market management place. These transactions generate an enormous amount of proprietary loans that feed our large information lake. These aren’t firewall logs that always cannot examine SSL visitors for cyber menace detection. These are full logs which have structured and unstructured information, together with the complete URL. We leverage this proprietary information to coach AI fashions that energy improvements all through our platform.

Our AI analytics answer, together with unified vulnerability administration, Risk360, Enterprise Insights are seeing robust traction. AI analytics contributed almost 3 factors to new and upsell enterprise development in This autumn and a couple of factors for your entire fiscal ’24, though a few of these merchandise had been solely accessible for part of the yr. I’m happy with the contribution of AI analytics in fiscal ’24 and with continued growth of this answer, I count on its contribution to proceed to develop.

With an addressable market of $96 billion, we imagine we’re within the very early levels of alternative with Zero Belief and AI. The cyber menace surroundings continues to worsen as the restrictions of firewall and VPN-based structure are exploited by menace actors to launch an rising quantity of subtle assaults. Over the past yr, we noticed an 18% improve in ransomware assaults blocked by the Zscaler cloud.

Our season menace analysis crew is monitoring 391 of probably the most subtle ransomware households, together with many who had been uncovered by Zscaler previously yr. Pushed by the elevated variety of cyber breaches, extra prospects are adopting our Zero Belief platform. For instance, in a brand new brand win, a Prime 10 Fortune 500 trade equipment firm bought Zscaler for customers for 100,000 customers in a multi-year seven-figure ACV deal.

The shopper beforehand bought a firewall-based SASE answer to consolidate firewall, safe net gateways, and MPLS community spend. Subsequently, they realized the so-called SASE answer permits lateral tech motion and doesn’t ship Zero Belief Safety. They selected Zscaler to exchange their firewall-based SASE.

Our purpose-built proxy-based cloud platform makes our prospects’ branches and information facilities invisible to such actors, therefore they can not be found and so they cannot be attacked. Along with touchdown new brand platform purchases, we’re additionally upselling our platform. Our land and increase movement creates a flywheel of steady engagement and upsell. To offer you an instance, in a seven-figure upsell deal, a Fortune 200 monetary providers buyer purchased ZPA and ZDX after their profitable ZIA deployment for 68,000 customers.

After securing Web and SaaS entry with Zscaler, it was pure for them to increase to our broader platform. ZPA for Zero Belief entry to non-public functions, aimed for user-to-application segmentation to get rid of lateral sort propagation, and ZDX to rapidly establish and resolve end-to-end efficiency points. With this buy, the shopper’s ARR greater than doubled to just about $10 million.

Subsequent, I’m joyful to share that prospects proceed to undertake superior options of our information safety pillar, making it one in every of our fastest-growing pillars. For instance, in a brand new brand win, an American healthcare supplier bought a number of pillars of our platform, together with ZIA transformation, information safety superior, and ZDX for 124,000 customers in a multi-year eight-figure TCV deal.

Our information safety pillar was essential to this win as a result of its complete capabilities, which embody securing all varieties of information whether or not structured or unstructured. Information in movement or information addressed and information throughout all channels, together with net, e-mail, endpoint, SaaS, cloud workloads and extra.

Subsequent, let me focus on our rising merchandise, together with ZDX, Zero Belief for Department and cloud, and AI analytics. I am delighted to share that rising merchandise contributed roughly 22% of recent and upsell enterprise in fiscal ’24, up from 18% in fiscal ’23. We count on this contribution to develop to mid-20s in fiscal ’25. Our Zero Belief for department and cloud answer, together with Zero Belief for workflows, Zero Belief SD-WAN, and Zero Belief segmentation is driving an increasing number of significant wins.

Let me share two examples, in an upsell win, a Fortune 500 monetary providers buyer bought Zero Belief for workloads to guard their on-prem functions. Zero Belief for workloads contributed roughly one-third of the seven-figure upsell ACV deal, which doubled the annual spend of this present $1 million greenback ARR buyer.

In one other upsell win, a Prime 10 pharmaceutical firm bought our Zero Belief SD-WAN answer to guard over 30 manufacturing websites, eliminating the necessity for firewalls and making every website like a Starbucks. Zero Belief SD-WAN was almost 50% off the seven-figure ACV deal. Our increasing portfolio of rising merchandise additional strengthened by our acquisition of Avalor and Airgap is opening doorways for gross sales to new prospects.

With the addition of Airgap, Zscaler is increasing to offer Zero Belief Safety inside branches, factories, and campuses, the place prospects historically relied on East-West firewalls and community entry management on NAP. By combining Airgap with our Zero Belief SD-WAN, we cannot solely exchange firewalls on the edge, but additionally get rid of firewalls inside these websites.

We’re additionally seeing robust traction for the unified vulnerability administration answer we acquired by means of Avalor. By combining our prospects’ enterprise safety and enterprise system information with our proprietary legislation information from half a trillion every day transactions, Avalor delivers real-time actionable insights and operational efficiencies for purchasers to enhance their total safety posture. We count on new brand conversations that begin with Airgap or Avalor or different rising merchandise to increase into broader platform alternatives. We’ll proceed to spend money on our platform growth.

Shifting to the federal vertical, I’m excited to share we landed a brand new cabinet-level company, rising our rely of cabinet-level companies to 13. In a seven-figure ACV deal, this buyer bought Zscaler for customers for five,000 customers. With over 100,000 staff, this buyer presents a major 20x upsell alternative. Having landed 13 of the 15 cabinet-level companies, together with the DoD, we see giant upsell alternatives within the federal vertical with the rising adoption of Zero Belief.

Constructing upon our success within the U.S., we’re accelerating our public sector go-to-market investments in different nations which are modeling the Zero Belief safety initiatives equally to the U.S. It is a giant alternative for us, however like many authorities initiatives, this may take time.

Now let me share some updates on our gross sales group. First, we had lower-than-expected attrition and we had a robust hiring quarter. In fiscal ’25, we plan to proceed hiring reps at a robust tempo and count on attrition to additional enhance.

Second, I am happy to report that gross sales productiveness was better-than-expected throughout the quarter, pushed by acceleration in new and upsell enterprise. In fiscal ’25, we count on gross sales productiveness to proceed to enhance with the second-half stronger than the primary.

Third, we elevated funding within the World System Integrators or GSI channel by hiring leaders skilled in constructing GSI applications for giant enterprises. These hires are driving important progress in creating mutual go-to-market plans with GSIs that combine the Zscaler platform with their prospects’ digital transformation initiatives.

Most giant GSIs are already Zscaler prospects and that permits them to showcase to their prospects the worth Zscaler Zero Belief platform delivers. This quarter, we added one other giant GSI Finish-Consumer buyer, making eight of the top-10 GSIs by income Zscaler prospects. This GSI bought Zscaler for customers for over 300,000 customers, in our largest-ever TCV deal within the providers vertical. This GSI is consolidating a number of level merchandise, together with safe net gateways, load balancers, VPNs, firewalls, and MPLS community, which is anticipated to ship 200% ROI to this buyer.

I’m happy with the progress we’re making in reworking our go-to-market engine to an account-centric gross sales movement, which is contributing to development of our giant prospects. We added almost double the variety of international 2000 logos in fiscal ’24 as in comparison with fiscal ’23. We ended fiscal ’24 with roughly 35% of world 2000 firms and greater than 40% of Fortune 500 firms as our prospects. Our buyer base spending $1 million plus yearly grew by 26% year-over-year to $567 million and we ended the quarter with over 60 prospects spending $5 million plus yearly. We count on this massive buyer momentum to proceed in fiscal ’25.

Lastly, I wish to deal with the subject of cloud resilience that has come to the forefront as a result of latest cloud outages of Microsoft and CrowdStrike. When prospects depend on a mission-critical cybersecurity service, there is not any room for service interruptions. From inception, Zscaler has constructed a cloud safety platform that has been seamlessly scaling with high-reliability and resilience. Working such a service is not any trivial job and requires years of expertise.

Unproven distributors, together with new entrants and legacy firewall firms, would not have this expertise. By working the world’s largest safety cloud with superior resilience for over a decade, now we have earned the belief of the biggest enterprises. It is a clear differentiator for us and is driving the expansion of our enterprise. As an innovator and a market chief, in January 2023, we grew to become the primary cloud safety firm to introduce a enterprise continuity service that permits prospects to proceed their operations even throughout catastrophic occasions.

In conclusion, we’re uniquely positioned to learn from the confluence of two giant secular development drivers, Zero Belief safety and AI. We enter fiscal ’25 with a stronger go-to-market machine, elevated tempo of R&D innovation, robust adoption of our rising merchandise, and excessive ranges of buyer satisfaction with an NPS rating of over 70. With our buyer obsession, increasing platform, and a big addressable market, I count on one other robust yr, which can transfer us nearer to our purpose of $5 billion in ARR.

Now, I would like to show over the decision to Remo for our monetary outcomes.

Remo Canessa

Thanks, Jay. Our This autumn outcomes exceeded our steering on development and profitability, even with ongoing buyer scrutiny of enormous offers. Income was $593 million, up 30% year-over-year and up 7% sequentially. From a geographic perspective, Americas represented 55% of income, EMEA was 30%, and APJ was 15%.

For the full-year, income was $2.17 billion, up 34% year-over-year. Our complete calculated billings in This autumn grew 27% year-over-year and 45% sequentially to $911 million. Our calculated present billings grew 27% year-over-year. Like final yr, some prospects paid us upfront on multiyear offers and the proportion of complete calculated billings coming from such upfront funds was comparatively unchanged year-over-year.

Our remaining efficiency obligations or RPO grew 26% from a yr in the past to $4.418 billion. The present RPO was roughly 48% of the full RPO. We ended This autumn with 567 prospects with over $1 million in ARR and three,100 prospects with over $100,000 in ARR. This continued robust development of enormous prospects speaks to the strategic function we play in our buyer’s digital transformation journeys.

Our 12-month trailing dollar-based internet retention charge was 115%. Whereas good for our enterprise, our elevated success in promoting greater bundles, promoting a number of pillars from the beginning, and sooner upsells inside a yr can scale back our dollar-based internet retention charge sooner or later. There could possibly be variability on this metric on a quarterly foundation as a result of components I simply talked about.

Turning to the remainder of our This autumn monetary efficiency, the full gross margin of 81.1% in comparison with 81.4% within the prior quarter and 80.7% within the year-ago quarter. On a year-over-year foundation, gross margin benefited by roughly 60 foundation factors from a change in our accounting attributed to the longer helpful lifetime of our cloud infrastructure.

Shifting on, our complete working bills elevated 8% sequentially and 26% year-over-year to $353 million. We proceed to generate important leverage in our monetary mannequin with an working margin of roughly 22%, a rise of about 260 foundation factors year-over-year. Our free money circulate margin was 23%, together with information middle CapEx of roughly 8% of income.

We ended the quarter with over $2.4 billion in money, money equivalents, and short-term investments. Earlier than attending to the small print of Q1 and full-year fiscal 2025 steering, I wished to share extra context about our framework for billing steering. We count on full-year fiscal ’25 calculated billings of $3.110 billion to $3.135 billion or year-over-year development of roughly 19% to twenty%.

We count on first-half billings to be within the vary of 39% to 39.5% of full-year billings information with Q1 to be roughly 16.2% of full-year billings information. The midpoint of our steering implies year-over-year billings development of roughly 13% within the first-half, accelerating to 23% development within the second-half.

In no explicit order, I would wish to share three key components which are driving this acceleration. One, as Jay talked about, we count on gross sales productiveness to proceed to enhance with the second-half stronger than the primary. We count on this to contribute to robust new upsell and renewal exercise within the yr; two, our robust and rising pipeline helps second-half acceleration; and three, from a timing perspective, our contracted non-cancelable billings from prior yr’s lively contracts are scheduled to develop 7% within the first-half and 23% within the second-half. This naturally implies a stronger second-half in billings development, giving a robust visibility into complete billings development within the second-half.

Shifting on to taxes, please be aware that we count on to proceed to be a modest money taxpayer in fiscal 2025 with an estimated money tax of roughly $45 million to $50 million. For non-GAAP P&L reporting, I would wish to name your consideration to a change we’re making to our non-GAAP tax calculations.

Beginning fiscal 2025 and going ahead, we’re establishing a non-GAAP tax charge of 23%, which is mirrored in our non-GAAP earnings per share steering for fiscal 2025. Please check with our earnings launch and monetary supplemental for fiscal ’23 and monetary ’24 comparisons reflecting this new non-GAAP tax charge.

Turning to the remainder of steering, as a reminder, these numbers are all non-GAAP. For the primary quarter, we count on income within the vary of $604 million to $606 million, reflecting a year-over-year development of roughly 22%, gross margins of 80%. I’d additionally wish to remind traders that numerous our rising merchandise, together with newer merchandise like ZDX, Zero Belief Department and cloud and AI analytics will initially have decrease gross margins than our core merchandise. We’re presently managing the rising merchandise for time-to-market and development, not optimizing them for gross margins. As well as, we’ll proceed to spend money on our cloud and AI infrastructure to scale with the rising demand.

Working revenue within the vary of $114 million to $116 million, internet different revenue of $18 million, revenue taxes of $31 million. Earnings per share within the vary of $0.62 to $0.63, assuming 164 million totally diluted shares. For the full-year fiscal 2025, income within the vary of $2.6 billion to $2.62 billion, reflecting a year-over-year development of 20% to 21%.

Working revenue within the vary of $530 million to $540 million, revenue taxes of roughly $140 million, and earnings per share within the vary of $2.81 to $2.87, assuming roughly 164 million totally diluted shares. We count on our free money circulate margin to be roughly 23.5% to 24%, together with greater CapEx this yr.

We count on our information middle CapEx to be roughly 3 factors greater as a % of income in comparison with fiscal 2024, as we spend money on upgrades to our cloud and AI infrastructure. With a big market alternative and prospects more and more adopting the broader platform, we’ll make investments aggressively to place us for long-term development and profitability.

With that, operator, you might now open the decision for questions.

Query-and-Reply Session

Operator

Thanks. [Operator Instructions] Please standby for our first query thanks. And it comes from the road of Saket Kalia with Barclays. Please proceed.

Saket Kalia

Okay, nice. Hey, guys. Thanks for taking my query right here and a pleasant quarter on the billings and on subsequent yr’s billings information. Possibly if I give it to at least one query, Jay, perhaps I will make it for you. Are you able to [Technical Difficulty] drop slightly bit there? I believe everyone knows your views on firewall-based options, however perhaps out of curiosity, how about a number of the newer gamers in SASE which are perhaps attacking this with an identical sort of pure-play cloud strategy as Zscaler? Thanks.

Jay Chaudhry

Saket, thanks. We have now not seen any significant change on the aggressive panorama. In actual fact, if I’d say, because the market is in search of a broader platform that is built-in and it is in search of confirmed vendor as a result of the resilience has turn into a vital factor our model has gotten higher. On the high-end of the market, we truly really feel like we’re superb. We talked about in regards to the variety of new logos. Final yr, we added basically doubled in ’24 over ’25. We have seen whether or not the firewall distributors or another distributors, both they lack the proxy structure or they lack a multi-tenant structure.

Structure is essential for win and that is a giant benefit for us. Even for those who construct the structure the time and expertise it takes to construct a extremely dependable, extremely resilient cloud is huge. After which these giant enterprises need to belief you. It took us a very long time to earn the belief of those prospects. So we really feel we’re in a superb place. We carry on innovating the hole between our providing and what I name so could be opponents is rising greater and larger. So I really feel very bullish and cozy for the platform and the hole we’re creating with different opponents.

Saket Kalia

Very useful. Thanks.

Operator

Thanks. One second for our subsequent query. And it comes from the road of Brad Zelnick with Deutsche Financial institution. Please proceed.

Brad Zelnick

Nice. Thanks a lot. And I will echo my congrats on an actual robust end to the yr. Jay, I respect your feedback in regards to the Microsoft and CrowdStrike associated outage in July and why Zscaler is designed in a manner that is extremely accessible and albeit relied upon by prospects as an in-line answer. However I am questioning if that occasion in any manner from what you possibly can inform has modified the way in which prospects are fascinated about their cyber methods and Zscaler’s place inside that? Thanks.

Jay Chaudhry

Sure. Brad, It is a good query after the CrowdStrike out, prospects are extra targeted on resilience, which is our energy. In actual fact, I personally bought heaps and many calls proper after the incident. They wished to find out about what we’re doing about it, that we ended up personally inviting truly large invitation briefing to 1,000 or so our largest prospects. I used to be shocked to see that inside a matter of per week or so, about 700 prospects registered for the briefings, we ended up doing a number of of them.

The principle query was, that is mission-critical service and the way are we protected? The nice factor is Zscaler ship enterprise continuity plan or DR service in Jan 2023, the primary vendor to ship it, the one vendor that has a real BCP. So the significance of mission criticality has gone up considerably for the reason that outage that was attributable to CrowdStrike. In actual fact, about 40% of Zscalers giant prospects have already deployed BCP for ZIA.

So whereas our prospects need resilience, additionally they do need consolidation, however they don’t want consolidation such that it makes them depending on a single vendor, particularly single vendor for functions and safety. This sentiment has turn into even stronger after the Midnight Blizzard of Microsoft points. So I believe we’re well-positioned. We did a superb job in constructing mission verticality. And I believe it is vital and our prospects are working completely with us.

Brad Zelnick

Very useful, Jay. Thanks.

Operator

Thanks. One second for our subsequent query, please. And it comes from the road of Roger Boyd with UBS. Please proceed.

Roger Boyd

Nice. Thanks for taking my questions. Remo, I wished to ask you in regards to the billings information and for those who may simply converse to the overall degree of conservatism there. You have been fairly clear even earlier than this quarter in regards to the anticipated headwind popping out of the go-to-market transition, however it does sound like gross sales productiveness was higher than anticipated in each 3Q and 4Q this yr. So simply past that, the rest providing you with extra pause or tempering your expectations across the broader macro surroundings, gross sales cycles, or the rest? Thanks.

Remo Canessa

Sure, nice query. So I imply, billings information actually displays, once more, we broke out the first-half versus second-half. And you understand, as we talked about within the gross sales group, we had greater attrition than we anticipated in Q3 and that attrition has stabilized in This autumn. Hiring these account reps, this might to take time for these account reps to mainly get to full productiveness. We count on them to get to robust productiveness within the second-half, our pipeline helps our steering. And as we referred to as out additionally, if you check out billings, billings is made up of recent and upsell renewals and contracted billings.

And one of many issues we referred to as out on the script is contracted billings are scheduled billings up from prior yr contracts. So these are what we’re seeing, we’re seeing that due to the enterprise is getting extra second-half weighted, we’re seeing that this — our information displays that. And as we referred to as out, within the first-half, contracted billings is anticipated to extend on a year-over-year foundation 7% and within the second-half 23%.

What I can say is also that from my perspective, being right here at Zscaler for nearly eight years, there is a change in our gross sales group. You already know, the change is mainly it is a extra mature, very robust management and likewise a corporation that I really feel goes to have the ability to promote deeper into accounts and actually promote to the worth of Zscaler. So the places and takes are from my perspective is that robust demand for Zero Belief, we’ll proceed to increase within the G2K, which represents round 35% within the Fortune 500 prospects.

However the important thing factor with Zscaler is also that we’re innovating. So that you have a look at our rising merchandise, they represented 22% of our complete new and upsell in fiscal ’24, we count on that to go as much as 25%. In order that’s going to be our continued focus. It is not solely promoting our present core merchandise, but additionally innovating.

As I discussed, robust momentum within the go-to-market crew. We simply had our SKO and the suggestions from everyone who went there was simply very, very optimistic. I simply actually be ok with the place we’re at. I imply, having stated that, the backdrop, it is nonetheless a difficult spending surroundings. However I really feel that Zscaler with our platform with what we’re constructing our go-to-market, I simply suppose we’re simply very, very well-positioned. Jay? something.

Jay Chaudhry

No, it is good. I believe the final remark I discussed is, in immediately’s surroundings, CIOs do need ROI value financial savings, value takeout. We’re in a novel place to take away numerous level merchandise that assist justify closing our offers.

Roger Boyd

Nice.

Operator

Thanks. One second for our subsequent query, please. And it comes from the road of Joseph Gallo with Jefferies. Please proceed.

Joseph Gallo

Hey guys, thanks for the query. Jay, I wish to comply with up on that final query. I imply, you have clearly began the department out very efficiently past ZIA and ZPA evidenced by AI and information safety success. Nonetheless, publish the CrowdStrike incident, we have heard prospects do not wish to put all their eggs in a single basket. Does this hinder your potential to promote incremental merchandise? After which Remo, perhaps you possibly can simply elaborate on the way you’re fascinated about NRR in your fiscal ’25 billings information? Thanks.

Jay Chaudhry

So it is an excellent query. So now CrowdStrike wasn’t actually a problem of placing all your eggs in a single basket. CrowdStrike was one of many level merchandise. Every product should work properly. So on one aspect, prospects do need consolidation. Should you bought two dozen merchandise, they wish to carry it right down to a handful of key platform suppliers, however they don’t wish to go to the intense of going with a single vendor that desires to promote all safety merchandise or a single vendor that desires to promote you all of the functions and safety merchandise.

In actual fact, a lot of the CIOs, I wish to, they’ve been standardizing in-line entry to a few suppliers, one for EDR, one for id, and one for Zero Belief actions. I believe that is a superb mixture as a result of you find yourself getting a few additional layers, however you continue to have separation. So on this surroundings, our prospects aren’t actually pushing again on us as a result of we inform them do not buy every little thing by means of Zscaler. You have bought an EDR supplier, you have bought an id supplier and we’ll do the remainder of Zero Belief on exercise. And that is how we fastidiously select the markets we get into. So we really feel comfy and good in regards to the growth and choice of areas, the place we wish to compete in.

Remo Canessa

From an NRR perspective, Joseph, 115% I imagine is excellent. We’re not guiding to NRR. The one time we actually have a look at it’s, as we talked about earlier than on these calls, actually the important thing for me is simply driving top-line enterprise, whether or not it comes from present prospects or new prospects, however 115% at our scale, I believe is excellent.

Joseph Gallo

Thanks.

Operator

Thanks. One second for our subsequent query, please. And it comes from the road of Ittai Kidron with Oppenheimer. Please proceed.

Ittai Kidron

Thanks guys. Nice strong end for the yr. Remo, I am sorry, I’ll need to try to beat the useless horse right here once more on the billings. Simply wish to ensure I perceive this proper. I imply, in ’24, you did not have any uncommon seasonality within the first-half, second-half on year-over-year patterns. They had been fairly comparable in billings. So what’s it that is driving the 7% and 23% variations within the first and the second-half? Are issues being pushed out?

Do you simply count on offers to push out, therefore you count on to shut extra or renew extra within the second-half? Is {that a} macro remark? Was there one thing that occurred two, three years in the past, lumpsum that one way or the other comes again into play right here? Something that you are able to do to dig in just a bit bit extra on that might be significantly appreciated?

Remo Canessa

Sure. So it is actually — for those who check out the call-out is scheduled billings. And scheduled billings development within the first-half was 7% and scheduled billings development on a year-over-year foundation, we see a 23% for this yr. So then the query is step-back and what creates that? So we signed three-year contracts. Within the three-year contracts, they’re scheduled billings. So now we have these scheduled billings. These billings are coming by means of.

Now, for those who have a look and return into fiscal ’23 first-half and monetary ’24 first-half, there have been macro challenges. So it is a difficult surroundings from Zscaler’s perspective. So subsequently, with that difficult surroundings, within the first-half of fiscal ’23 and monetary ’24, now these scheduled billings are coming by means of and people scheduled billings are decrease. That is what’s creating that development charge of seven% year-over-year within the first-half.

Now having stated that, what I made to the remark I made earlier than was that the enterprise is getting extra second-half. We’re changing into a bigger firm, changing into extra second-half. So our steering displays that and that scheduled billings of 23%, these are contracted billings, they’re scheduled and we count on to get these billings.

Ittai Kidron

Thanks.

Operator

Thanks. One second for our subsequent query and it comes from the road of Brian Essex with JPMorgan. Please proceed. Nice.

Brian Essex

Nice, Thanks, and good afternoon. Thanks for taking the query. Jay, I believe — I believe you could have touched on this in your ready remarks, however I wish to circle again into the — to the macro, particularly the aggressive surroundings with regard to pricing. And there are definitely within the Zero Belief area, we’re seeing a whole lot of initiatives to consolidate on sure platforms.

A few of that’s versatile pricing, totally different length, freely giving merchandise free of charge. How is that impacting the pricing surroundings that you just’re coping with? I perceive that there is a whole lot of instances an architectural change that is enticing together with your platform, however simply wished to the touch perhaps for those who may peel again a layer on the pricing dynamics simply to know what you see in your surroundings? Thanks.

Jay Chaudhry

In order I stated throughout my ready remarks, sure, the macro stays difficult and there is deal scrutiny. But additionally on the similar time, cyber, it is crucial. In lots of areas, adequate is sweet sufficient. In cyber and huge enterprises, adequate will not be adequate. So prospects do desire a good — an excellent cyber answer. That is primary. And quantity two, within the cyber space, an actual Zero Belief structure that is cloud native does play an vital function that issues. Now, when you try this, your pipeline truly construct, you might be engaged with prospects and the subsequent half is available in, are you able to shut the deal?

Now closing the deal in immediately’s surroundings does require that you’ll be able to truly present the shopper which you can take a bunch of merchandise out and it can save you cash for the shoppers. And we’re in a position to launch. We’re in a position to exchange numerous new — variety of merchandise, just like the firewalls, VPNs, NAV merchandise, and the like. After we are in a position to present that we’re in a position to get rid of these merchandise, the shopper likes it, that helped us each.

No, now we have our new and upsell enterprise has accelerated truly. So we’re seeing energy in space. So personally, I am not fearful in regards to the competitors. I can deal with pricing conditions by displaying the variety of merchandise you possibly can transfer. Consider different distributors. Do you suppose a firewall vendor who desires to take away a bunch of level merchandise?

The largest put in base when it comes to merchandise immediately is firewalls. They wish to shield these firewalls. We tackle these firewalls, we tackle these VPNs. So we simply need to — this space we carry on getting higher at is ensuring we interact on the sea degree, primary. Quantity two, ensure we create a superb enterprise worth evaluation and now we have owned that course of fairly a bit.

Brian Essex

Received it. Thanks.

Operator

Thanks. One second for our subsequent query, please. And it is from the road of Matt Hedberg with RBC Capital Markets. Please proceed.

Matt Hedberg

Nice. Thanks guys for the questions. Possibly one on the quarter. May you speak slightly bit about, clearly, it was a This autumn, however — and we assume it is back-end loaded. However the linearity of the quarter, something irregular with offers that pushed or pulled? And I assume perhaps for those who may remark slightly bit extra particularly on tendencies in August so far that might be — or I assume now we’re within the September, however by means of August, that might be useful?

Remo Canessa

The tendencies in August, I will let Jay discuss that. This autumn, we talked about that the quarters have turn into extra back-end loaded. Nothing — it was much like the prior few quarters, This autumn. So nothing uncommon with This autumn from a linearity perspective. And relating to tendencies in August, we won’t give particular tendencies on greenback quantities or something like that or enterprise, however perhaps Jay can provide a couple of feedback.

Jay Chaudhry

I believe nothing uncommon to speak about in August. Our enterprise is making progress as standard. So I believe you may most likely hear extra about us as we get higher.

Matt Hedberg

Possibly if I may simply squeeze another in. You already know, it looks like within the spirit of consolidation, it feels such as you guys are in a great spot to consolidate a whole lot of buyer spend. Are you able to discuss giant deal visibility, understanding it’s — it’s onerous to foretell the timing of these issues, however may you discuss form of the expansion in your giant deal pipeline and sort of the deal with more and more enjoying that consolidation function?

Jay Chaudhry

Sure, there isn’t a slowing down on consolidation of level merchandise. We have now been seeing our offers generally getting greater. They’re seeing upsell going an increasing number of. So if prospects spend X, they’re spending extra with us. I shared a number of offers, a number of giant offers, the place prospects began at X and it is gone as much as Y or Z and whatnot. So the primary factor for purchasers are in search of consolidation is, primary, are you able to give me higher cyber and information safety?

Quantity two, can I operationally run and handle this stuff higher? Quantity three, are you able to do value financial savings? That message is loud and clear and we’re dealing with all of that. And for one space I will spotlight for consolidation, which is enjoying an even bigger function for us is information safety. When prospects began with Zscaler, ZIA, they began with cyber safety was the first focus to verify they do not get compromised.

Now with ransomware assaults the place information is commonly ex-filtrated, information safety has turn into an even bigger and extra vital merchandise than it was. Since we’re sitting in line for the visitors that goes by way of the Web, we’re the pure supplier, pure associate to do information safety. And we’re seeing a development in information safety that has turn into one of many quickest rising space for us. I believe a couple of quarters in the past, we talked about that it has exceeded, it has surpassed $4 billion or for us.

And likewise we expanded this platform fairly a bit. We used to do in-line DLP as the first factor. Now we additionally bought DLP or e-mail as a giant factor, SaaS, SSPM, SASE sort of stuff and now DSPM have gotten extra areas. So I believe we have got an amazing increasing platform with cost-savings, I believe they’re extraordinarily well-positioned.

Remo Canessa

So from my perspective, additionally Matt, I imply, just a few numbers we referred to as out on the script, 567 prospects with higher than $1 million ARR, 3,100 prospects of higher than $100,000 and I imagine 60 — over 60 prospects with $5 million in ARR, half a trillion transactions per day. So to place in perspective, I imply, order of magnitude, that is greater than anyone has seen. On the time of our public providing, we’re doing 30 billion transactions per day. So we have gone from 30 billion transactions to 500 billion transactions. The info that we obtain, the data that we obtain that we’re in a position to mainly assist our prospects for a safety perspective.

So I simply do not suppose there’s anyone else on the market who can do it. So it is my view that we’re in an amazing place to seize this market. I additionally imagine that with the go-to-market adjustments that we have made over the past 9 months, we’ll promote deeper within the accounts and likewise we have been one of many issues we referred to as out GSIs. That is going to be an space that we’ll focus in on as we go ahead. I believe the chance is basically huge. I imagine the platform is well-positioned to actually shield prospects and governments all through the world. And I believe, you understand, we be ok with the place we’re at proper now.

Matt Hedberg

Thanks. Tremendous useful.

Operator

Thanks. One second for our subsequent query. That comes from the road of Shrenik Kothari with Baird. Please proceed.

Shrenik Kothari

Hey, guys, thanks for taking my query. So, Jay, in mild of what you stated, proper, you guys are increasing the platform past simply securing customers and now delivering Zero Belief for functions, workloads and IoT, and also you gave instance of a brand new brand win with Prime 10, robust buyer demand for the broad strategy. Simply are you able to elaborate on the character and composition of those contracts, the non-cancelable billings, the compensation of this pipeline when it comes to customers and seats versus workloads and functions that you just referred to as out? And does that assist with the general sort of land and increase movement shifting extra in direction of the workloads and software base and a follow-up for Remo as properly?

Jay Chaudhry

Sure. Let me begin with the platform growth. As I stated throughout my ready remarks, a lot of the distributors are attempting to actually mature a product for shielding customers. They’ve carried out that extraordinarily properly, 47 million some customers protected. So it’s pure for us to increase it to our workloads, IoT, OT gadgets and the like. When it comes to development, to present you some information factors, we discuss rising merchandise from the newer areas after which we have got the mature flagship merchandise on rising merchandise, which is the place the workload safety, IoT, OT sort of stuff falls in, it was about 22% in fiscal ’24. It had gone up from 18% in fiscal ’23 and we count on it to go to mid-20s in fiscal ’25. In order that’s rising sooner. That is why it is in a position to carve out market share out of that.

Now the thrilling factor about that space is there’s actually no actual competitors to do this stuff in Zero Belief vogue. Sure, a number of the workloads and all this carried out by means of firewalls, communication, IoT, OT, what do you do, firewalls and VPNs. Everyone knows that firewalls and VPNs need to go away. And we’re well-positioned. It is simply that — it is slightly bit totally different sale. It is the identical viewers, however slightly bit totally different. IoT, OT, a whole lot of stuff is linked to manufacturing and crops and the like. So you’ll want to attain out of this viewers, however CSOs and CIOs do play a standard function with the acquisition of Airgap, which does truly gadget segmentation for IoT, OT extraordinarily properly without having any firewalls, without having any community entry management gadgets, it’s one in every of space that is being actually displaying tons of curiosity in our buyer base.

In actual fact, our variety of engagements with gadget segmentation for IoT, OT based mostly on Airgap has gone up considerably. In order that’s why I really feel just like the hole between us and folks attempting to return from behind is rising and the barrier to entries will not be trivial on this area. Remo, you wish to speak in regards to the…

Remo Canessa

Sure. From a contracted billing perspective, simply — once more, the important thing level is that we signed three-year contracts upfront. And so getting that certainty with that contract is sweet. After which the billing occurs afterwards on an annual foundation afterwards. That is the scheduled contract billing. So what we’re seeing is our contract lengths are rising, which is optimistic. And likewise we’re seeing our deal dimension rising, which is optimistic too. However we’re additionally seeing prospects shopping for extra of our product and throughout our platform with [Technical Difficulty]

And once more, getting a three-year contract with a scheduled billing offers you certainty associated to the billings, but additionally getting that three-year contract offers you time to mainly promote that buyer extra. And as I discussed earlier than, which is basically key’s that the gross sales group, go-to-market group, we’ll be promoting deeper into the accounts. That is going to be our focus. We will search for new prospects, however we’re additionally going to look to promote deeper into our accounts. So longer contracts, it is a good factor.

Shrenik Kothari

Received it. Thanks loads Jay and Remo. Recognize it.

Operator

Thanks. One second for our subsequent query. That comes from the road of Patrick Colville with Scotiabank. Please proceed.

Patrick Colville

Hey, Jay, thanks a lot for taking my query right here. I assume I wish to ask about rising merchandise. I imply, it was 22% of recent and upsell in fiscal ’24. I imply, very spectacular to see these rising merchandise ramp. I imply, we’ll get this within the 10-Ok, however what was ZPA after which ZIA as a proportion of recent and upsell into fiscal ’24? And I assume — pardon me, the second a part of the query is, how do you count on ZPA and ZIA to development in fiscal ’25? I imply, what is the sustainability and remaining TAM for these two product traces?

Jay Chaudhry

So superb query. So let’s begin with ZIA and ZPA. You already know on the time of IPO, there was just one product ZIA. ZPA was sort of a rounding error, so to talk. However immediately, for those who have a look at the combo between ZIA and ZPA, ZPA has gone from actually nothing to about 40% — over 40% of the brand new enterprise that we’re doing between the 2 of the merchandise. In order that’s very exceptional. In actual fact, if it goes too high-up, I will be sort of questioning, is ZIA will not be going quick sufficient. So I count on it to develop considerably extra, however not fairly.

On the finish of the day, it may get to 50-50. I count on each Zscaler buyer for each person to have ZIA, ZPA, and ZDX, these three merchandise make it an entire bundle and we name it Zscaler for Customers. Zscaler for Customers has turn into our single largest queue mainly as a result of that is what our gross sales crew leads with, which actually says that our purpose is for each buyer to purchase these three merchandise. That is sort of one key space. Now what’s the second a part of your query? Sorry, I forgot.

Patrick Colville

I assume it is — the query we get from traders is how — what’s the sustainability of these enterprise traces? And I assume what you simply articulated is that there is a lot to go in ZPA, however perhaps discuss ZIA. Is there loads to go there or is {that a} extra mature phase?

Jay Chaudhry

So let’s additionally — let’s begin with the second half. That’s how a lot market penetration carried out and the way a lot market penetration now we have left to take. As ZIA was the beginning product, clearly, virtually all prospects begin with ZIA although we’re seeing some prospects beginning with ZPA, so the quantity is comparatively small. However take G2K, we reached almost 35% of G2K, which implies there are about 300 firms — sorry, sure, 300 firms which have spent — sorry, 35% of them are Zscaler prospects.

Now about most likely an space of 60% of our giant ZIA prospects additionally at ZPA. In order that’s good penetration. However when it comes to the chance for us, solely about — of the 35% G2K, about 300 of them spend over $1 million with us. That implies that of the present buyer, the 400 extra that would simply go to $1 million for us. However lots of the prospects in that very same group have gone to $5 million. So what I am saying, there’s a possibility for us to upsell, go from 35% G2K to a better quantity and amongst these 35%, who promote extra ZIA and ZPA. So there is not any lack of marketplace for us.

Different level I will make is on the high-end of the market, we do extraordinarily, extraordinarily properly. These prospects are subtle, they want the performance, breadth, depth, and reliability and resilience we provide. So we’re relying on this factor. Our account-focused program that our new CRO is driving is definitely targeted on going deeper and wider into our present accounts and getting new giant brand accounts as properly. So I hope that offers you the colour you are in search of.

Patrick Colville

Great. Thanks a lot.

Operator

Thanks. Our subsequent query comes from the road of Adam Borg with Stifel. Please proceed.

Adam Borg

Superior. And thanks for taking the query. For Jay, Remo, I do know you talked about this a bit within the script, however I hoped you would speak slightly bit extra about headcount development in fiscal ’25 and the place you are actually investing most throughout gross sales and advertising and R&D? Thanks a lot.

Jay Chaudhry

Sure. We do count on to extend headcount in fiscal ’25. Our fiscal ’25 headcount improve might be throughout all of the areas, R&D, gross sales and advertising, G&A and cloud. I’d say the tempo of hiring in fiscal ’25 might be lower than what it was in fiscal ’24. In fiscal ’24, we added about 1,400 staff. We went from 5,900 staff to 7,300. So I’d take into consideration extra of a reasonable tempo in hiring in fiscal ’25 versus ’24.

Adam Borg

Superior. Thanks a lot.

Operator

Thanks. And our final query, one second please. Subsequent query comes from the road of Hamza Fodderwala with Morgan Stanley. Please proceed.

Hamza Fodderwala

Good night. Thanks for becoming me in. Both for Jay or Remo, curious since Mike and the brand new gross sales management have been on in the previous few quarters. What are a number of the early indications that you just’re seeing early proof factors that offers you confidence heading into fiscal ’25?

Jay Chaudhry

So good query. Keep in mind once we got down to make a few of these adjustments, the important thing factor was for us was we wished to maneuver from early-stage firms that target opportunity-centric stuff to account-centric stuff. That was one of many key phrases. We have now put a program in place. We educated the gross sales pressure and we are literally making good progress in pursuing this course of. How do you see the outcomes? You begin seeing extra upsell within the account base plus and then you definately begin seeing new brand as properly. So we’re seeing good upsell giant offers in giant accounts, that is what we anticipated.

In actual fact, if you consider it, our total variety of $1 million ARR prospects has gone as much as 567 million. Our prospects with $5 million or extra ARR has gone 260 million. Now all of that’s not attributable to the brand new crew as a result of the brand new crew began working for the previous couple of quarters, however we’re seeing key outcomes for that.

The second factor we’re seeing consequently is with the GSI involvement, now we have a particular deal with GSIs, who truly are embedding our providing into their choices. So it turns into a part of their choices as properly. We’re seeing good early indications of that. Quantity three, the standard of gross sales leaders and reps we’re hiring, numerous them come from the background with a deal with account to focus promoting and dealing giant accounts to bigger offers. We’re seeing the standard of these individuals. So from my perspective, the transition goes higher than I anticipated. I am more than happy with it and I am very bullish about it.

Hamza Fodderwala

Thanks.

Remo Canessa

From my perspective. Sure, from my perspective, I will offer you my two sentences and make it actually fast. On the finish of the day, we have got an amazing firm with an amazing platform, the place important want of your product on a worldwide foundation, that is required, fairly frankly. It comes down to at least one factor and that’s individuals. And I imagine what I am seeing with the management that now we have, however it’s in our go-to-market crew throughout the board. It’s — it’s nice to see. And actually, I believe units us up properly going ahead. And as Jay talked about, you understand, robust leaders will rent robust individuals. And I imagine the leaderships now we have on board may be very, very robust.

Jay Chaudhry

Sure. I believe the remark I will make is a barrier to entry to do what Zscaler has carried out may be very onerous and cyber is changing into an increasing number of vital and we’re excited for the chance forward of us. With that, I wish to thanks in your curiosity in Zscaler. We sit up for seeing you at one in every of these investor conferences. Thanks once more.

Remo Canessa

Thanks.

Operator

Thanks all for collaborating in immediately’s convention. You could now disconnect.