Zscaler, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Zscaler first quarter 2021 earnings conference call. At this time, all participants are in the listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you would need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first speaker today, to Mr. Bill Choi, Senior Vice President, Investor Relations and Strategic Finance. Thank you. Please go ahead.

Good afternoon, everyone, and welcome to the Zscaler Fiscal First Quarter 2021 Earnings Conference Call. On the call with me today are Jay Chowdhury, Chairman and CEO, and Remo Canessa, CFO. Hello. Please note that we have posted our earnings release and a supplemental financial schedule to our investor relations website. Unless otherwise noted, all numbers we talk about today will be on an adjusted non-GAAP basis. You will find the reconciliation of GAAP to the non-GAAP financial measures in our earnings release. Starting in fiscal 2021, we are excluding stock-based compensation-related payroll taxes in our non-GAAP presentation. The gap to the non-gap reconciliations for historical periods can be found in the supplemental financial information. I'd like to remind you that today's discussion will contain forward-looking statements, including but not limited to the company's anticipated future revenue, calculated billings, operating performance, gross margin, operating expenses, operating income, net income, free cash flow, dollar-based net retention rate, future hiring decisions, remaining performance obligations, income taxes, and earnings per share. 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, including but not limited to the duration and impact of COVID-19 on our business, the global economy, and the respective businesses of our customers, vendors, and partners. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. For a more complete discussion of the risks and uncertainties, please see our filings with the SEC as well as in today's earnings release. I would also like to inform you that management will be presenting at the following upcoming events. Credit Suisse Technology Conference tomorrow, UBS Global TMT Conference on December 7th, Barclays Global TMT Conference on December 10th. Our annual Zenith Live Cloud Summit for the Americas and EMEA will be held virtually next week and for APJ the following week. We encourage everyone to register and view our summit. We also invite you to attend a one-hour product Q&A session specifically for investors and financial analysts on Wednesday, December 9th. The presentations for these events will be webcast, and the links will be available on our investor relations website. Now I'll turn the call over to Jay.

Thank you, Bill. First of all, I hope all of you and your families are healthy and safe. I'm proud of our strong results and an exceptionally strong start to fiscal 21 in our first quarter. We delivered 52% growth in revenues. and 64% growth in billings, while also generating record operating profits and free cash flow. I believe our financial results demonstrate Zscaler's pivotal role in enabling our customers' digital transformation journeys, which are accelerating at a pace never seen before. Our visibility and business momentum remain strong, and we are pleased to increase our fiscal year guidance. I believe the market is coming to us and we are investing across our organization to capture a significant share of our large and growing opportunity. I would like to thank the Zscaler team and our partners for their tireless efforts and commitment to our customer success. I'm also pleased and excited to welcome Chris Koza to the Zscaler team as our new Chief Marketing Officer. Let me highlight three factors that drove our strong performance in the quarter. One, building on our growing traction with large enterprises, we closed a record number of seven-figure ACV deals. The majority of these wins are three-year commitments to provide the foundation for application, network, and security transformation. In particular, I am pleased with our increasing wins in the financial services vertical, which is now embracing the cloud, and the Office 365 deployments have become an important catalyst for us. Two, our optimized go-to market engine is driving significant velocity, including a strong pace of new logo acquisitions. I'm very pleased with the performance across all geos. Last year, we doubled down on our investment in our sales organization. We scaled our sales enablement team and built a repeatable and metrics-driven process, which is giving us better visibility into our business and ultimately resulting in a strong and growing pipeline. These efforts are also bearing fruit in two big ways. One, our newly hired sales reps are contributing at a faster pace. And two, our sales productivity is higher than a year ago despite a high percentage of ramping sales reps. Three, the power of our Zero Trust Exchange platform is resonating with CXOs. Our platform is comprised of four key pillars, with each enabling a critical element of the transformation. ZIA to secure direct access to Internet and SaaS. ZPA for Zero Trust access to private applications. Zscaler Digital Experience, or ZDX, to deliver user experience for work from anywhere. Cloud workload segmentation to protect applications. An increasing share of our sales is coming from initial platform purchases by new customers and also growing upsell to existing customers, which is driving a record. 122% net retention rate. I believe in the current challenging environment and in the post-COVID economy, Zscaler will be the go-to platform for vendor consolidation, cost savings, increased user productivity, and better cyber protection. We are excited about our mission to make the cloud safe for business and enjoyable for users. We enable our customers to increasingly use the Internet as their corporate network and replace legacy, premier base security with zero trust security. As the CIO of a ZSkiller customer told us, we ended up with a security posture that's better than when we had a complex network and network security. and have a user experience that's materially better. As we look forward to the next few years, we are focused on driving broader adoption of our four major cloud solutions, which together maximize the value for our customers' digital transformation. From pre-sales to deployment and customer success, we have built a sophisticated sales machine to sell value and deliver measurable outcome at the CXO level. We continue to scale our organization as the market increasingly moves our way. We will continue to build our ecosystem of technology and channel partners, which are contributing to overall sales velocity and expanding our reach across our total addressable market. Additionally, we are demonstrating our value to customers through an increased focus on thought leadership and demand generation programs. At our recent virtual CXO Summit Series, we hosted six events that drew over 400 CXOs and IT leaders to discuss secure digital transformation. Many CXOs shared with me that the current work-from-home environment, while temporary, has helped them realize that zero-trust architecture is the future and it can be implemented easily and rapidly. COVID was a catalyst in changing the mindset and shaking off inertia, resulting in a reduced need for educating customers about the value of the ZSkiller architecture over legacy approaches. Inbound customer requests have greatly increased, and we are becoming an integral part of a growing number of larger transformation projects. We continue to see more customers buying ZI and ZPA together, which enables a true transformation with direct and seamless access to SaaS applications, or applications in your data center or the public cloud. For example, a global manufacturing company purchased our transformation bundle plus DLP and CASB for 45,000 users and DPA for 25,000 users. Drivers for this deal were network and security transformations. they had a traditional hub-and-spoke network for 300 manufacturing facilities, which was slowing their adoption of cloud applications such as WebEx, Office 365, and Workday. A NextGen firewall vendor tried to sell its hybrid offering but failed to meet the security and performance requirements, including SSL inspection. Interestingly, This initiative was part of a five-year managed services RFP where all six system integrators and service providers bid Zscaler. We are seeing customers increasingly migrate away from their large install base of legacy on-prem gateway and security appliances to pursue direct-to-cloud architecture. In one new customer win, A Fortune 50 retail customer replaced a legacy web gateway with ZIA for cybersecurity and data protection. This customer purchased ZIA professional bundle plus CASB, sandbox, and DLP for 45,000 users. Security was a major requirement, and only a proxy architecture with SSL inspection was considered. This deal was a good example of Zscaler leveraging our tech partners where CrowdStrike became the endpoint security provider and Microsoft the identity provider. I'm very pleased with our growing success with the financial industry where adoption of cloud is accelerating. A Fortune 100 financial services company purchased our transformation bundle with advanced DLP and CASB for 18,000 employees to overcome capacity issues with the security appliances when they deployed Office 365. Firewall-based technologies were ruled out due to strict security requirements for SSL inspection and DLP with exact data match. As these three deals show, our comprehensive data protection offering within ZIA has been gaining traction as customers are concerned about data leakage with employees working from anywhere. Our new out-of-band CASB is helping us displace CASB point products and increase our deal size. The most common themes in our customer wins are to increase user productivity, reduce business risk, simplify IT, and reduce cost. The Zscaler platform enables this by consolidating and eliminating point products. Moving on to ZPA. Our customers view ZPA as the foundation for their architectural shift to zero-trust access for private applications. Our platform eliminates the internet attack surface of customers applications resulting in reduced business risk. ZPA is a clear market leader with proven maturity and scalability. We are supporting hundreds of large enterprises in the complex multi-cloud environment. Let me highlight two ZPA deals in the quarter. First, A global bank with headquarters in Europe needed to scale its remote access after the legacy VPN and VDI became a performance bottleneck and a security concern. The IT team had to cope with over 4,000 trouble tickets per month from users having issues with their connectivity. This customer purchase, ZPA, for over 100,000 employees, to deliver a seamless, always-on experience. While the immediate objective for this deal was to replace legacy VPN, ZPA was selected to implement Zero Trust architecture by establishing an application-level policy where users connect to specific applications, not to a network. In another deal, a Fortune 500 tech company purchased ZPA to accelerate M&A integration. After one year, 6,000 employees at the acquired division were still using two laptops with separate VPNs to two separate networks. Integrating two complex corporate networks can take 12 months or more. ZPA is the elegant solution to this problem. Without having to connect to corporate networks, ZPA provides secure application access across both companies in weeks. Purchasing our high-end ZPA offering, the customer is leveraging ZPA's multiple identity support to accelerate deployment. The customer plans to use ZPA as a standard solution for future M&A, a core strategy for growth at this customer. In addition to ZPA, the customer purchased ZDX for 6,000 users to quickly troubleshoot issues and increase employee productivity. To close my business review, I will touch on some early success with our new emerging products. There is an accelerated market shift towards work from anywhere. which aligns with our platform and emerging products like ZDX. We had a number of ZDX wins in the quarter, including an upsell with a European bank for 40,000 employees. This customer had ZIA for all employees, and it was frictionless to turn on ZDX to get end-to-end visibility and resolve performance issues. We also had wins for our CSPM offering, giving us additional opportunities for growth. Our emerging products are increasing our overall competitive differentiation. For large enterprises who want network and security modernization, we believe we are the only cloud-native multi-tenant platform that meets their needs. Zscaler is the largest inline cloud security platform in the world. We are processing more than 140 billion transactions daily while preventing seven billion security incidents and policy violations. Deployed across more than 150 data centers, our zero trust exchange platform was built from the ground up for the secure access service edge or SASE framework. Building a cloud native architecture with full security and minimal latency is very hard. And running a massive inline global cloud with five nines of availability is an order of magnitude harder. As the world moves to SASE framework and zero trust architecture, Some of you have asked about competition and why others can't build a cloud-native platform like Zscaler. Well, the answer lies in the architecture, which is like the foundation of a building that supports everything. Our foundation is a multi-tenant architecture built from the ground up for in-line traffic inspection. It delivers over 20 key security solutions including antivirus, cloud sandbox, cloud firewall, DLP, advanced threat prevention, and SSL inspection at scale. That's extremely hard to build and complex to operate as a cloud service without compromising user experience. It is like the difference between building a simple SaaS application versus a highly complex SaaS platform like and ERP. How many cloud-native ERP systems are you aware of since NetSuite started two decades ago? While single-dimensional SaaS applications are easy to develop, multi-dimensional platforms like an ERP and Zscaler are much harder to design, build, and operate. With our business momentum, We are also demonstrating that our strategic sales process and world-class execution are important competitive advantages. First, our concerted sales model identifies the value we can drive for the customers and enables them to fully realize the benefits of digital transformation. This strategic sales process requires top sales talent. I believe We are the best sales team, top to bottom, and we are hiring at a rapid pace. We are now a destination for top talent around the globe. Second, we are deepening our ecosystem of technology partners, which are contributing to deal wins and adding leverage to our sales model. to our ongoing partnership with Microsoft and CrowdStrike. We have now extended our strategic partnership with VMware to integrate with the SD-WAN solution and to partner for joint go-to-market engagements. I believe we've built a go-to-market engine that will generate long-term sustainable growth. I'd like to turn over the call to Remo for our financial results.