This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk12: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then one on your telephone keypad. As a reminder, this conference call is being recorded. If you require any further assistance, please press star then zero. At this time, I would like to turn the call over to Mr. Bill Choi, Senior Vice President, Investor Relations and Strategic Finance.
spk14: Good afternoon, everyone, and welcome to the vScaler Fiscal Second Quarter 2021 Earnings Conference Call. On the call with me today are Jay Chowdhury, Chairman and CEO, and Remo Canessa, CFO. 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. 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, market adoption of our offerings, and our expectations regarding the development of the markets in which we compete. 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. We will upload a copy of today's prepared remarks to our investor relations website when we move to the Q&A segment of the call. I would also like to inform you that management will be presenting at the following upcoming virtual events. JMP Securities Technology Conference on March 1st, Morgan Stanley TMP Conference on March 2nd, Truist Securities Tech Conference on March 9th. These presentations will be webcast and the links will be available on our investor relations website. Now I'll turn the call over to Jay.
spk02: Thank you, Bill. We are very pleased with our strong performance in Q2, which showed accelerating growth at scale and rapid innovation of our Zero Trust platform. We drove 55% growth in revenue and 71% growth in billings, while also generating growth in operating profits and free cash flow. Our optimized go-to market engine is driving significant velocity including a strong pace of new customer additions. During the quarter, we achieved a milestone of over 5,000 customers, including over 500 of the global 2,000. Our strategic decision last year to increase our investments across all areas, particularly the expansion of our go-to-market and R&D teams, is yielding strong results. We draw increased wins in our enterprise segment as we begin to pursue smaller enterprises with 2,000 to 6,000 employees. We are helping our customers to securely accelerate the digital transformation journey, which remains their top priority. With our Zero Trust Exchange, Zscaler provides secure any-to-any connectivity for users, applications, workloads and IoT and OT systems regardless of their location. The recent SolarWinds security incident has further elevated the need for a true zero-trust platform like Zscaler. During such sophisticated attacks, our proxy-based architecture would prevent loss of sensitive data, and our application-level segmentation eliminates lateral threat movement. We provide users access to applications, not the network, which is fundamentally different from firewalls and legacy network security architecture. The CIO level of awareness, engagement, and inbound requests for our purpose-built Zero Trust platform have significantly increased, and we are viewed as a foundational application network, and security transformation. I'm proud of our speed of innovation, which is accelerating and further expanding our substantial technology lead. There are four pillars of our Zero Trust Exchange, ZIA, ZPA, and ZDX for user protection and experience, and ZCP for workload protection. We launched our fourth pillar called Zscaler Cloud Protection, or ZCP, which extends our zero trust exchange from users to workloads and has an expanding portfolio of products, including CSPM to ensure proper configuration and compliance, workload communication to secure app-to-app and cloud-to-cloud secure communication, and workload segmentation to achieve app segmentation without legacy network segmentation. In our latest major cloud upgrade, we added over 100 new product enhancements. Over the past 12 months, we have significantly increased the number of solutions delivered through our platform, including Zscaler browser isolation, AutoBand CASB, Zscaler B2B, and Z-scaled digital experience, or ZDX. All this innovation is making our cloud platform wider and deeper. For enterprises who want network and security modernization, we believe we are the only zero-trust multi-tenant platform that meets the needs. Many vendors have tried and failed to build a high-performance, highly reliable proxy required for proper cybersecurity protection and data loss prevention. As a true SASE framework, we are deployed across 150 data centers, enforcing policy at the edge instead of a limited number of public cloud locations. Every day, we are processing more than 150 billion transactions, while preventing up to 7 billion security incidents and policy violations. We are operating at a massive scale and doing so with environmental sustainability in mind. Our platform uses over 75% renewable energy today with a goal to use over 90%. I would like to thank our engineering team for an exceptional job in expanding our platform and keeping Zscaler at the forefront of innovation. Now on to the customer wins. There is an accelerated market shift towards work from anywhere, which is the world Zscaler was built for. In an upsell win, a Fortune 500 chemical company that was using ZIA for a subset of its workforce accelerated the Zero Trust initiative by purchasing ZIA Transformation, ZPA, and ZDX for all 45,000 employees. In addition, they bought two of our recently announced CCP solutions. They purchased workload communications to secure server traffic out to the internet from 200 plants, and workload segmentation or 7,000 servers to secure east-west traffic in the public cloud and data center. I'm excited to see wins like this, where the customer is buying all four pillars of the Zscaler platform. In a new logo win, a new global 2,000 customer in the high-tech industry purchased all three pillars of a user protection service. They purchased ZIA Transformation, ZPA, and ZDX for all 10,000 employees to move away from network security to zero-trust architecture. This customer had standardized on next-gen firewalls and VPNs, which left gaps in security leading to a ransomware attack. In spite of an ELA license from the firewall vendor, they couldn't do SSL inspection at scale. Since Zscaler is a purpose-built proxy architecture, the customer can now inspect encrypted traffic without impacting user experience, leading to better security and reduced business risk. In another new logo win, a customer in the transportation services industry purchased We offer four pillars, CIA, CPA, and CDX for the 7,500 employees. With the cloud and mobile strategy, they purchased our best in class DLP and CASB to protect sensitive information from leaking no matter where the user is. CDX was purchased to pinpoint and resolve performance issues in real time by monitoring the digital experience score of every user and application regardless of their location. We have seen a strong customer interest for our new pillars, CDX and GCP. Over 200 customers to date have purchased CDX. GCP is also off to a great start. With a few dozen deals closed in Q2, and great excitement for our ZCP workload communication. Moving on to ZPA. Our customers view ZPA as the foundation for the architectural shift to zero trust access for private applications. ZPA is a clear market leader with proven maturity and scalability, supporting millions of daily active users and nearly 40% of our global 2,000 customers. Today, ZPA is delivering over 10 million unique application segments without operational overhead of traditional network segmentation. Let me highlight several ZPA deals in the quarter. A global 500 consumer products company with headquarters in EMEA that has been a ZIA customer purchased ZPA for all 100,000 employees and 10,000 third-party B2B partners. This customer wanted to eliminate the security risk of VPN, which provides unfactored access to network resources. ZPA represents the next step in Zero Trust adoption for the IT transformation journey. In an upsell deal, a global 2,000 bank with headquarters in EMEA started with ZIA and ZPA for 10,000 employees in July to expand their work-from-home capacity as a result of a pandemic. Within six months of the initial purchase, the customer bought ZIA and ZPA for the remaining 30,000 employees and CASB for all 40,000 employees. In addition, they purchased ZPA to enable 3,000 third-party B2B partners. Let me highlight a ZIA and ZPA new logo win in the federal space. A research organization mandated with advising federal agencies on cybersecurity purchased a ZIA transformation bundle and ZPA for all 10,000 employees after evaluating various Zero Trust architectures. This customer concluded that if a user connects to the network with a VPN, that is not Zero Trust. Based on this criteria, the legacy firewall and VPN providers were disqualified. An important consideration for our selection was ZPA's position as the first and only cloud security service with FedRAMP certification for zero trust remote access. With the highest levels of FedRAMP certifications for both ZI and ZPA, we are very well positioned to serve the federal government. Lastly, I would like to share another new customer win that highlights our continued ZI success with large enterprises, that are embracing direct-to-club architecture and migrating away from the complex legacy on-premise appliances. A Fortune 100 professional services customer purchased our ZIA Transformation Bundle plus CASB Advanced DLP and CSBM for Office 365 to protect 125,000 employees across 150 countries. as they embraced work from anywhere. Zscaler eliminated the need for 30 different gateways and consolidated six different legacy point products while meeting the customer's environmental goals for their ESG program. With sensitive customer data at risk, security was a major requirement, and the customer only considered solutions with a proxy architecture. Let me conclude with some thoughts on our vision and strategy. At our analyst day in January, we laid out our audacious goal of serving 200 million users and 100 million workloads on our zero trust exchange. To achieve that, our entire organization is focused on attracting and developing talent and creating a culture of excellence. Our commitment to culture starts at the top with our executive team and creates an environment where a global and diverse workforce can deliver excellence to help our customers succeed. We are scaling our world-class engineering organization, which continues to rapidly deliver new products and features to our customers. On the go-to market front, as we have demonstrated over the last 12 months, we have built a sophisticated sales machine to sell value and deliver measurable outcomes at the CXO level. We will continue to scale our sales organization as we are a destination for top talent. Our marketing organization is augmenting talent in all critical areas, while specializing campaigns by persona and segment to better address our significant opportunity. We are focused on driving broader adoption of our four pillars. We will continue to expand our ecosystem of technology partners and value-based channel partners who are contributing to sales velocity and expanding our reach. we are on the right track to capture a material share of the $72 billion serviceable market that we outlined on our analyst day. We are also seeing opportunities in bringing zero trust to IoT and OT systems and are excited about 5G, which pushes computing further to the edge and opens up additional opportunities for Zscaler. We are excited about our future. Now, I'd like to turn over the call to Remo for our financial results.
spk04: Thank you, Jay. As Jay mentioned, we're pleased with results for the second quarter of 2021. Revenue for the quarter was $157 million, up 10% sequentially and 55% year over year. ZPA product revenue was 14% of total revenue. From a geographic perspective, we had broad strength across our three major regions. Americas represented 51% of revenue, EMEA was 38%, and APJ was 11%. Turning to calculated billings, which we define as the change in deferred revenue for the quarter plus total revenue recognized in that quarter, Billings grew 71% year-over-year to $232 million, with billing duration around the midpoint of our 10- to 14-month range. As a reminder, our contract terms are typically one to three years. We primarily invoice our customers one year in advance. Remaining performance obligations, or RPO, which represents our total committed, non-cancelable future revenue, exceeded $1 billion during the quarter and ended at $1.025 billion as of January 31st. RPO grew 68% from one year ago. The current RPO is 53% of the total RPO. Our strong customer retention and ability to upsell have resulted in a consistently high dollar-based net retention rate, which is 127% compared to 122% last quarter and 160% a year ago. As we have highlighted, this metric will vary quarter to quarter. While good for our business, our increased success selling bigger transformation bundles, selling both ZIA and ZPA from the start, and faster upsells within a year can produce our dollar-based net retention rate in the future. Considering these factors, we feel 127% is outstanding. Total gross margin of 81% was flat quarter over quarter and declined one percentage point year over year. but exceeded our expectations. The year-over-year decline was primarily driven by a higher mix of newly introduced products. I would like to remind investors that a number of our emerging products, which include CDX, workload segmentation, and CSPM, will initially have lower gross margins than our core products. As a result, we expect gross margins to be approximately 80% for the full year in fiscal 2021. Turning to operating expenses, Our total operating expenses increased 18% sequentially and 60% year-over-year to $112.9 million. Operating expenses with percentage of revenue increased by two percentage points from 70% a year ago to 72% in the quarter. Sales and marketing expense increased 19% sequentially and 57% year-over-year to $76.5 million. The year-over-year increase was due to higher compensation expenses and investments in building our teams and go-to-market initiatives offset by lower T&E with our employees working from home. We've been very successful in hiring and onboarding remotely, and we are accelerating our sales and marketing hiring throughout the second half of the fiscal year. R&D expenses increased 15% sequentially and 71% year-over-year to $24 million in The increase is primarily due to continued investments in our engineering teams. G&A expenses increased 14% sequentially and 57% year-over-year to $12.5 million. The growth in G&A includes investments in building our teams, compensation-related expenses, and professional fees. Our second quarter operating margin was 9% compared to 12% in the same quarter last year. Net income in the quarter was $14 million, or non-GAAP earnings per share of 10 cents. We ended the quarter with over $1.4 billion in cash, cash equivalents, and short-term investments. Free cash flow was positive $18 million in the quarter, which compares to negative $2 million during the same quarter last year. The strength in free cash flow was driven by strong receivable collections. Now moving on to guidance. As a reminder, these numbers are all non-GAAP, which excludes stock-based compensation expenses, related payroll taxes, amortization of debt discount, amortization of intangible assets, facility exit costs, and any associated tax effects. For the third quarter of fiscal 2021, we expect revenue in the range of $162 million to $164 million, reflecting a year-over-year growth of 47% to 48%. operating profit of $11 to $12 million, other income of $300,000, net of interest payments on our senior convertible notes, income taxes of $1.5 million, and earnings per share of approximately 7 cents, assuming approximately 146 million common shares outstanding. Due to better than expected first half performance and our strong pipeline, we're increasing our full-year fiscal 2021 guidance for revenue, calculated billions, and operating profit. For fiscal 2021, we now expect revenue in the range of $634 million to $638 million, or year-over-year growth of 47% to 48%. Calculated billions in the range of $820 million to $825 million, or year-over-year growth of 49% to 50%. operating profit in the range of $59 million to $61 million, other income of $2.4 million, income taxes of $5.3 million, and earnings per share in the range of 39 to 40 cents, assuming approximately 145 to 146 million common shares outstanding. For your modeling, we would like to remind investors that Q2 and Q4 have been historically our strongest billing quarters with declines in Q1 and Q3 quarters respectively. The average sequential decline in billings during fiscal third quarters for the last five years was approximately 20%. We continue to see the market coming to us and remain committed to investing aggressively in our company behind the growth in our business. We have a highly efficient business model and are making investments across the organization today in order to capitalize on the large opportunity ahead of us. While we'll balance growth and profitability, growth will continue to take priority considering our strong business momentum. Operator, you may now open the call for questions.
spk12: Ladies and gentlemen, if you have a question or comment at this time, please press star then 1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press the pound key. In order to facilitate as many participants as possible, we ask that you please limit yourself to one question. If you have additional questions, you may rejoin the queue. Again, if you have a question or comment at this time, please press star then 1 on your telephone keypad. Our first question or comment comes from the line of Brad Zelnick from Credit Suisse. Your line is open.
spk17: Wow, thank you so much, and congratulations, guys, on all the success. Really phenomenal results. Jay, I wanted to ask you a high-level question around the impact that the Sunburst breach is having on the industry. At your analyst day in January, you'd mentioned that the impact is likely to be larger than the Target breach was in 2013. And if you can, maybe parse out for us how the event has impacted your pipeline across your strategic accounts, maybe all the way down to smaller commercial accounts, and how, if at all, you've changed the way you approach initial conversations with new prospects.
spk02: Thank you, Brad. As we discussed during our analyst day, we are having increased conversations with our customers as well as prospects. We had Sunburst-related webinar recently and had over 800 customers attended. This week, I was asked to talk to a board of directors of a pharma company, and the primary topic was protecting against sophisticated threats like sunbursts. So all this is making cyber a bigger priority than it has been. It's a bigger priority for CIOs as well as the boards. So what is that causing? It is increasing engagements. I'm not sure I can quantify the impact on the pipeline. But we're seeing that the customers who are already educated on zero trust quite a bit are making implementation of zero trust a bigger priority. The number one question ends up being, if people get compromised, how to make sure that the lateral movement doesn't happen? The answer is simple. Don't connect people to your network. Don't build a moat with firewalls and VPNs. Do zero trust implementation where you connect users to applications, not the network.
spk17: Thank you so much, Jay. Congrats.
spk12: Thank you. Thank you. Our next question or comment comes from the line of Mike Walkley from Canaccord Genuity. Your line is open.
spk11: Hey, guys. Good evening. This is Daniel on for Mike. Thanks for taking my question. So I know over the past quarter or so, you've been working on a really improving your sales motion in the SMB and smaller enterprise area. Can you just provide some color on some of the investments you're making and, you know, I guess where you expect to be moving forward?
spk02: I will start and Remo can add on. Yeah, we talked about our expansion towards the enterprise segment that we defined as between 2,000 and 6,000 employees in a company. As you know, we have done extremely well in the higher end in large enterprises over the last several years. So, in this segment, the progress we made is ahead of our expectations. Our growth was faster in this segment. Well, it did come from a smaller base. Having said that, our large enterprise segment is driving the overall strength of our business. We are doing three specific things to grow our business in this enterprise segment. One, adding more sales reps, more sales teams. And we've done a lot of good progress in the past two quarters and will do more in coming quarters. Secondly, adding and expanding channel partners who cover the segment. And third, we are directing our marketing programs to support this segment as well. So in summary, it's a good opportunity to expand segment, and we're doing well. We're pleased with our performance.
spk04: Just as a quick follow-on, we put together or initiated a summit program a few quarters ago, and that is doing well. As a percentage of our revenue, VARs did pick up slightly in the quarter. VARs, as a percentage of our revenues in the quarter, was about you know, just above 50%, whereas the quarter before it was in the high 40s. So, you know, as Jay talked about, I mean, the segments that we sell into commercial is the, you know, less than 2,000 employees, enterprise 2 to 6,000, large enterprise 6 to 40,000, and majors at the 40,000. So the channel program, you know, we're expecting to, you know, have positive results for us, you know, in the lower part of the markets.
spk12: Great. Thanks for the call, Eric. Thank you. Our next question or comment comes from the line of Alex Henderson from Needham. Your line is open.
spk06: Thank you very much. I was going to talk to one of the architectural issues that I think is a fairly interesting differentiator, which is the argument that you guys have built a network based off of per user policy implementation versus architectures from some of your wannabe competitors that are unable to differentiate the traffic flows on a per-user basis or the policy implementations on a per-user basis. Can you talk about that delta between what you're doing and how that shows up in alternative competitors' networks?
spk02: Yeah. The fundamental difference is being a pass-through on network security architecture when traffic is flowing over the network, and a traditional device like a firewall is trying to scan what kind of application it is, guess it, and trying to stop it or not. With our proxy architecture, where we terminate every connection, inspect, and decide to connect to a particular user. So we have policies that are per user by design. There's no, in fact... A user coming from company A or company B or company C each looks like an untrusted user, while in the traditional way, they are kind of batch-based policies. The end result is our architecture gives us two big benefits. One, with proxy, we can do far better inspection at a high scale, high performance, including SSL. Two, it allows us to do zero trust where you don't connect people to a network, you connect to a specific application. And zero trust is probably the biggest thing to help you minimize the damage of lateral movement if something gets infected.
spk03: Thank you.
spk12: Thank you. Thank you. Our next question or comment comes from the line of Andrew Owinski from D.A. Davidson. Your line is open.
spk16: Great, thanks, and congrats on a great quarter. So I just wanted to follow up on Brad's earlier question regarding SolarWinds. You know, it sounds like that's creating more pipeline, but not necessarily contributing to revenue yet. But your billings growth is the strongest that we've seen in over two years. So I'm wondering if you could just comment on what the key drivers are that are contributing to that inflection in your billings growth now since SolarWinds It doesn't look like it's really had much of an impact yet.
spk02: You know, generally, in all these sessions, analysts like to pinpoint a particular event that may cause something. You know, COVID was viewed as maybe the catalyst. This is being viewed as a catalyst. As we have said before, the overall catalyst is that everyone is driving towards digital transformation. COVID may be helping it. Solar winds may be helping it. But customers, they believe that they need to accelerate their transformation, and we are the one who enabled that transformation. If you do your transformation without something like Zscaler, your risk goes up significantly. So where is our growth coming from? ZIA, which has been our workhorse. Yes, now we got over 25% of global 2,000 companies, but we have 75% more to go. it is generating pretty good sales. ZPA, which was a relatively young product two or three years ago, now is actually contributing significantly. About 40% of our global 2,000 customers already have bought ZPA. So these two are the biggest contributors of our billing score. And then the new pillars, ZDX is picking up quite well and also is the new pillar pillar of cloud protection. I think we're very pleased that our customers are buying more and more bigger bundles together. I talked about ZIA, ZPA, and ZDX being bought together by our customers during my prepared remarks. So across the board, we're seeing strength from product side of it. Across geos, we're seeing strength.
spk04: Primo, you want to add to my comments? No, I think, you know, Jay's absolutely right. If you take a look at the breadth of our platform, you know, before we're, you know, user-centric. You know, now we know basically we're also, you know, cloud protection. So, you know, workload protection. So the breadth of the platform is resonating, you know, with our customers. You know, in addition, you know, when we talked at the analyst day that for companies of 5,000 employees, On the user side, we're seeing ARPUs in that $145 range. I can say that in the quarter, we've had deals with customers at the 5,000 employee range in that range at $145. So what's happening basically is that there's a huge need in the market. Legacy architecture is not the answer. And so with Zscaler, with the breadth of platform and the increasing platform that we've created and will continue to create is really perfectly set to go forward into this market.
spk16: Great. Thank you guys so much.
spk12: Thank you. Our next question or comment comes from the line of Eric Superger from JMP Securities. Your line is open.
spk07: Yeah, thanks for taking the question. Say, given what you were saying earlier about proxy versus firewall, can you comment on how difficult it is to augment firewall architectures with proxy capabilities? Because I think one of your competitors is talking about introducing that kind of capability to their solution.
spk02: Well, what should I say? Imitation is the best form of flattery.
spk10: Excellent.
spk02: Having said that, I would say that there's something called native architecture, purpose of built architecture. There's something called bolt-on. Building proxy is hard because you terminate, you inspect, and you reconnect. Compare that to a pass-through firewall. You don't stop anything. You let it go. If you catch something, it's great. If you don't, you don't. Many vendors have tried and failed to build a high-performance proxy because it's hard. The only two vendors in the past 20 years have successfully penetrated enterprises for user security. Blue code for on-prem, they've done it for the cloud. So I think, am I surprised that people try to get by without a proxy? And finally, the customer said, no, no, no, so they changed it. I think delivering this thing will be tricky. We've seen many companies do it. There have been vendors who have been saying that they had a proxy for six, seven years. I would rather not name them, but I still haven't seen them in the market. So we keep on. We are not sitting still. We keep on advancing. The more functionality you add, browser isolation to CASB, to content inspection, to DLP and all, your proxy has to do more and more work and still deliver throughput and still do threat inspection. So we welcome the competition, but we are very pleased with our performance, the kind of lead we have over traditional legacy vendors.
spk07: Very good. Thank you.
spk12: Thank you. Our next question or comment comes from the line of Sterling Audie from J.P. Morgan. Your line is open.
spk03: Yeah, thanks. Hi, guys. So Palo Alto Networks on their earnings call pointed out the success that they've had with Prisma Access. And given the commentary about the success that you're seeing in the enterprise, I'm curious, are you running into each other in an increasing fashion in that segment? And it's just that the space is so big that you're both able to grow at these rates? Or do you think you're serving different segments of the overall opportunity in the market?
spk02: And, you know, final vendors, Started making noise a couple of years ago, a lot of noise. Then it died down about six months after that. In the field, we haven't really seen a whole lot of change to it. When it comes to large enterprises where we dominate, we haven't seen any change in competitive landscape. And I can understand why. Large enterprises are security savvy. They understand the difference between proxy and non-proxy. They understand zero trust and VPN. And that's why we don't expect to see firewall-based architecture in those enterprises. And all of you guys are so close to banks. Find a large bank who believes in not having proxy but using firewall architecture for security. I have not found one. I think when it comes to lower end of the spectrum, probably in the 5,000 users or below, we do see firewall vendors from time to time. And from time to time, you know, these guys aren't that sophisticated. They can be probably tricked into buying something that may not be that sophisticated. So I think you'll see less sophisticated solutions being bought on the lower end. But on the higher end, we haven't seen any change in competition.
spk13: Thank you.
spk02: Thank you.
spk12: Thank you. Our next question or comment comes from the line of Patrick Colville from Deutsche Bank. Your line is open.
spk08: Hey there. Thank you for taking my question, and congrats on a very impressive quarter. Just asking about headcount hiring, I mean, that was a major theme of fiscal 20, and I It looks, you know, potentially in the numbers that, you know, that's probably helping to contribute to growth this quarter. I mean, can you just help us understand how you guys think about hiring now? And if you can share any numbers around net headcount ads, you know, year-on-year or sequentially, that would be great.
spk04: Yeah, I'll take that. So the net headcount ads we had in the quarter was about 240, and it was about 268. in Q1. Generally speaking, you know, it's around 60% sales and marketing hits. And that's what it was also in, you know, historically it's been pretty much every quarter. That was the case in Q2. You know, the comment about, you know, accelerating hiring, yes, we are. We're accelerating hiring. You know, we see a huge market opportunity. We see that we are doing well. We see that we've got the right product for this market. So we're going to continue to invest, you know, across the board in the company. In particular with, you know, field quota sales reps, we had a record quarter hiring in Q4. We had a comparable quarter in Q1, and we had a very good quarter in Q2. And we plan to continue to hire aggressively, you know, throughout the back half of the year. Again, from our perspective, you know, we've talked about putting growth, you know, ahead of profitability. We'll be mindful of profitability. You know, since our public offering, we've been positive profitability and free cash flow. You know, Jay and I are very mindful of that and we'll continue to be mindful of that. But this is such a big opportunity that we feel that, you know, we want to take advantage of it and we're going to invest in it and we're going to try to capture it.
spk02: Yeah, if I may add, over the past four quarters, we have pretty openly shared with you the game plan of scaling our sales organization, building our sales engine from enablement to training and all those things. And I think you've seen the results being delivered quarter after quarter. So we are bullish about it and we'll keep on increasing our headcount in sales, in engineering, in customer support. and all our related areas.
spk08: Great. Thank you so much.
spk12: Thank you. Our next question or comment comes from the line of Fatima Bulani from UBS. Your line is open.
spk01: Good afternoon. Thank you for taking my questions. Remo, question for you. Jay, in his prepared remarks, alluded to a number of very large sort of wall-to-wall transactions that were also multi-product So I'm wondering if you could comment on the large deal activity that you saw in the quarter and if it was maybe outsized in any particular regions. That would be really helpful if you can give us some quantification of that.
spk04: Yeah, good question. So, you know, large deal activity was strong in the quarter. It was comparable to Q1. It was significantly higher than last year. From a geographic perspective, All regions did well. I mean, we are investing in all regions, you know, pretty much the same level. APJ probably a little bit faster than the other regions, but all regions have done well, and we continue to invest. Related to, you know, the comment I made before, you know, when companies see, with the breadth of the platform that we have, and companies see the value of Zscaler, and the ease of implementation, the increased security, and also the ROI, the value proposition is resonating with our customers. And so we're seeing that. And so by adding ZDX and ZCP and broadening the platform, it actually increases the value of Zscaler.
spk02: If I may add a couple of points to it, we've truly... expanded the platform. We haven't gone on a buying spree and throw them in there and call it a platform because those unintegrated products don't add a lot of value. Our customers see the value. For example, to turn on ZDX, it's literally a few minutes. It hardly takes anything because traffic is already flowing through. Everything is happening. The second point I'd like to make is, yes, we did have what you call wall-to-wall deals. I guess that meant all pillar deals. But there are no mega deals in the quarter. And there's no one-time kind of special deal that artificially increased our billings numbers. It was properly distributed, various pillars and across all geos.
spk04: And the follow-on for Jay also, it was a near-record quarter also for new customers. So, you know, it's It was broad. It was strong. And as Jay mentioned, there's no mega deal that we've had in the quarter.
spk01: Very thorough. Thank you so much. Thank you.
spk12: Thank you. Our next question or comment comes from the line of Matt Hedberg from RBC Capital Markets. Your line is open.
spk09: Yeah, thank you. This is Matt Swanson. I'm from Matt. You know, Jake, kind of going back on some of those large deals, it seems like you had a lot of success upselling ZIA and ZPA. I know at the analyst day, we talked about maybe a six times upsell opportunity within your base. When it comes to kind of realizing that opportunity, is it more just a matter of time and as customers see the value, they're coming back or are there steps you can take to kind of more aggressively pursue that expansion?
spk02: So I think, Our customers are happy and trusting us, so that's a starting point. If that's not the case, you won't sell. Two, you need proper sales execution, engagement. Engagement starts on a C-level. The sales machine we have built is helping us. So we are getting a pretty good share of upsell deals. In fact, we don't have differentiation between sales incentive or sales versus new upsell. So we are pleased with the upsell performance and new performance. We have an internal debate between how much do we need new versus upsell. Then Remo and I decide let the total ACV rule. We have both opportunities. But we are seeing good growth, good upsell numbers every quarter.
spk04: Yeah, there's a quick follow-on for Jay, just some numbers. Upsell was very strong. New business was very strong also. If the split between new and upsell in the first half was approximately 50-50, upsell in Q2 was slightly below 50%. Sorry, new was slightly below. Excuse me. New was slightly below 50%. Yeah. And going forward, we think a good mix, you know, for a Z-scaler is 50-50. And the reason is the point that you brought up. I mean, the 6X... you know, ability to upsell into existing customers just for ZIA and ZPA. And so it is significant.
spk09: Thank you, guys. Great quarter. Thank you.
spk12: Thank you. Our next question or comment comes from the line of Brian Essex from Goldman Sachs. Your line is open.
spk18: Hi, good afternoon, and thank you for taking the question. Great to see that Billings Acceleration Program. And on that, I was wondering, you know, if we could get a little bit of color around, you know, your hiring rate. I think it was brought up in a previous question. But wondering, you know, have you reached some kind of a terminal velocity in terms of the rate of hiring and the rate of training and the rate of maturation within your sales force? And maybe a little bit of color, too, around how you're attracting talent in the market. Is it primarily in, you know, localized area or is it, you know, from – multiple geographies that you're able to attract, you know, better talent on your platform?
spk02: I will start, then you can head on. So, first of all, you know, we have become the top destination for the top talent. While the market is competitive, we actually don't have a problem in attracting good talent, whether that's in sales organization or engineering. So, please, Obviously, with that, you need to make sure you have things in place, a proper team for hiding, but that's happening. Related to geos or where the concentration is, from a sales point of view, we are where the customer is. We are a very global organization with big presence all over U.S., all over Europe, APJ, Japan, India, Singapore, all these places. So we are attracting talent from everywhere. And generally... On the sales side, we're looking for talent coming from companies who know how to sell solutions, who need to sell software, who know how to sell transformation sales. That's the first part. The second part was ability to train. Over the past four quarters, we shared with you how we built the sales enablement team, how we built the team with sales leaders, the proper, even proper process for interview for these people, the whole documented process. I think we are very optimized. I would say it's as optimized as I've ever seen out there. So that's why we are able to add significantly large numbers and make them pretty productive in a shorter amount of time than we would do otherwise. We shared a little bit of that during our analyst day, the kind of impact that's being made with better training and better enablement.
spk04: Yeah, just a quick follow-on from my perspective, you know, looking around, you know, sales organizations, you know, my career, really good sales organizations, nothing matches what we have here at Zscaler, nothing. The organization, top to bottom, from the way it's structured and the ability to scale, and as Jay talked about the training with the sales enablement group, never seen anything like it in my career. It gives us the ability, you know, as Jay said, You know, we're not looking for people who feel traditional. We're looking for people who can feel transformation. And, you know, to do that, you need to be trained. And we are a destination. So, you know, do we have the ability to, you know, increase our hiring pace? We do. Do we have the ability to onboard quickly? We do. Do we see salespeople getting, you know, to productivity faster? We are. So, I mean, it's a good place to be.
spk18: Got it. That's helpful. Thank you.
spk12: Thank you. Our next question or comment comes from the line of Tal Liani from Bank of America. Your line is open.
spk15: Hi, guys. My question is about the comps for 2021. Do you feel or do you have any data to think that some of the growth this year was related to COVID, an increase in license fees? take rate because of COVID, and if that's the case, we might have an issue second half 21 with the comps. I know that this is on investors' mind, and I'm wondering if you have any data to support the view one way or another.
spk02: Yeah, let me start with a general comment. Rimo, you can be more specific. I give you the hard part. Look, we do believe that work from anywhere is here to stay. Gas, COVID, became a catalyst to shake off inertia. It actually changed the mindset. And it really not just gave momentum, but also brought to light the limitations of legacy network and security. So we are seeing a customer saying, we are implementing zero trust, which means they need ZIA, ZPA type of deployments even after everything gets back to normal. If that were not the case, they would be doing short-term ZPA deal and saying, I'm going back to the office. I no longer need to do renewals of ZPA. We aren't seeing that. So we think the world is changing. So going back to the office should not be impacting our momentum of the business. That's how I look at it overall. Remo?
spk04: Pipeline is strong and interest is high in Zscaler. And engagement is significant.
spk15: Thank you.
spk12: Thank you. Our next question or comment comes from the line of Hamza Fadawalla from Morgan Stanley. Your line is open.
spk05: Hey, guys. Thank you for taking my question. Jay, my first question for you, you know, you talked about really strong traction with ZDX. I think it was over 200 customers on that product. When you initially launched the solution, it seemed like it would be something that would be, you know, perhaps more complementary with the monitoring vendors. I'm wondering, given the strong traction that you've had, you know, what is your sort of ambition with this product?
spk02: So it is complementary with application monitoring vendors. But it's not complementary with network monitoring vendors. because network monitoring vendors are monitoring traffic between your branch office and the data center over your private network. Private networks are going away. People are sitting anywhere. When you're sitting at home and going to Office 365 or your data center, what network monitoring tools can you use? Hardly any. So we are sitting on the endpoint We are connecting to user applications. We're sitting in the middle. We see the application side. We see the endpoint side. And the best place to give you end-to-end monitoring and complement application monitoring vendors.
spk05: Got it. And then just maybe a follow-up question for Remo. Obviously, you know, massive expansion to Salesforce and the channel over the past couple of years. But I'm curious, what percentage of these reps are, you know, fully productive, right, given the traditional ramp period that they have?
spk04: Yeah, let me just answer it saying that two-thirds of our sales reps are still ramping, so they're not fully ramped. When I say ramping, they haven't been here. They've been here for less than one year.
spk05: Got it. That's helpful. Thank you.
spk12: Thank you. As a reminder, ladies and gentlemen, we ask that you please limit yourself to one question. Our next question or comment comes from the line of Gray Powell from BTIG. Your line is open.
spk13: Oh, great. Thanks for working me in. So, yeah, I'll be quick. So just looking back last year, a lot of companies, they went out and they purchased additional VPN capacity from legacy vendors really as part of continuity initiatives and Are you seeing some of those deals come up for renewal? And do you think that gives you an incremental opportunity to gain share as those companies look to modernize their solutions?
spk02: Yeah. I would say, as I have discussions with our large enterprises, and I personally do quite a few, I have yet to find a customer who I talked to who said, I want to keep VPN for the long run. They're all in various stages of the journey. The growth you see of ZPA from our customer base is a result of more and more Z-scaled customers embracing zero trust and ZPA. I do believe there will always be some exception, but most of Z-scaled ZIA customers will embrace ZPA And I see them more and more embracing ZDX as well. Our strategy of offering a well-designed, integrated platform with four pillars is working well. Two years ago, the question used to be, can ZPA take off, right? That question has been answered over and over. Now the question is, can ZDX and ZCP take off? Early indications are very good. But back to your question of is VPN replacement vendors an opportunity for us, absolutely yes. Our starting point of ZIA is replacing the user protection, which typically is a proxy, and then we start expanding it to a full bundle. Our ZPA entry point is generally a VPN vendor, and then you expand to zero trust with app segmentation.
spk13: Got it. Okay, that's really helpful. Thank you very much.
spk12: Thank you. We have time for one last question. Our final question will be from the line of Young Kim from Loop Capital Market. Your line is open.
spk00: Thank you. So, Jay, on the new cloud workload protection product, it seems like you're already getting some early traction there. Are you seeing an opportunity to partner with hyperscalers such as CWS and Azure to because a lot of the cloud workloads reside on those hyperscaler platforms. And I know you already have partnership with VIA and VPA with AWS. And then also, in addition, do you see the need to begin to target DevOps teams for your cloud workload product?
spk02: Yeah, it's a good question. So as you said, we have already been engaged with leading cloud providers zia and gpa okay on the cloud protection area we got some early initiative going there's a good complementary fit we see with them and i think it's a little bit early i mean it's only a quarter or so but the momentum is strong the pipeline we're building is strong the way you should look at z-scaler called protection is not the way you look at traditional vendors who say i'm going to take my firewall and put the virtual firewall in the cloud We think that trying to replicate your data center in the cloud never worked for even moving apps. How is it going to work for security? We look at workloads like mirror image of users and should be protected like users. So with Zero Trust Exchange, we are able to connect a workload in Region A to workload in Region B over the Internet coming through our Zero Trust Exchange. That's really what makes us very different architecturally. Now, the next part of your question was left shift stuff. As we are engaging with our customer, they are having dialogue with us as they are figuring out their left shift strategy. It's a new area, and we are closely monitoring it. As the market evolves, rest assured, we will be there to serve our customers.
spk00: Okay, great. Thank you so much.
spk12: Thank you. That concludes our question and answer session for today. I'd like to turn the conference back over to Mr. Jay Chaudhry, Chief Executive Officer, for any closing remarks.
spk02: Thank you for joining us. I hope the session was worthwhile. We hope to see you at our next earnings call or before that in one of the investor events we'll be joining. Thank you. Thank you.
spk12: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.
Disclaimer