Zscaler, Inc.

telephone keypad. As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to Mr. Bill Choi, Senior Vice President, Investor Relations and Strategic Finance. Mr. Choi, you may begin.

as we talk about today will be on an adjusted non-GAAP basis. You'll 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 and market share. 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, the impact of any previous or future acquisitions, and 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. J.P. Morgan Technology, Media, and Communications Conference tomorrow on May 26th. Bernstein's Strategic Decisions Conference on June 4th. Bank of America Global Technology Conference on June 8th. Bayer's Global Consumer Technology and Services Conference on June 10th. And Mizuho Cybersecurity Summit on June 15th. Sessions which offer a webcast will be available on our investor relations website. Lastly, we would like to invite you to Zenith Live 2021, which is our virtual customer and partner cloud summit. The Americas and EMEA events will run from June 15th through the 17th, and for APJ will be June 22nd to the 23rd. We encourage everyone to register and attend our summit from our website, zscaler.com slash zenithlive. Now I'll turn the call over to Jay.

Thank you, Bill. As you saw in our earnings release, we delivered outstanding results for the third quarter with accelerating growth at scale while increasing adoption of our broader platform. We drove 60% growth in revenue and 71% growth in billings. We also generated strong growth in operating profits and delivered record-free cash flow. Enterprises are looking to Zscaler to secure the digital transformation and architect for the work from anywhere economy, which we believe is the new normal. Our results exceeded our expectations and we are again increasing our guidance for fiscal 21. Our business is fighting on all cylinders, our superior architecture, and optimized go-to-market engine is elevating us above the competitive noise. Our Zero Trust Exchange platform connects users, devices, and applications, which is fundamentally different from firewall-based CASL and mode security. Our platform prevents lackful threat movement and eliminates the attack surface by making applications invisible from the internet hence reducing business risk. Furthermore, our proxy architecture designed to inspect SSL encrypted traffic blocks sophisticated threats and prevents loss of sensitive data. Faced with the latest news making ransomware and other cyber attacks, CISOs and CIOs are turning to Zscaler to dramatically improve the security posture while reducing the legacy IT costs. As you have heard me say before, architecture matters. Zscaler purpose-built the right high-performance multi-tenant proxy architecture from day one, whereas many vendors are trying to retrofit their existing solutions, which inevitably fail. Built from the start to enforce policy at the edge, as advocated by SASE framework, we are deployed across 150 data centers with five nines of availability. We are processing more than 160 billion transactions daily, preventing up to seven billion security incidents and policy violations. This unmatched network effect provides better security and user experience. Let me highlight three factors that drove our strong performance in the quarter. First, building on our strength with large enterprises, we closed a record number of seven-figure ACV deals across a broad range of industries. Most of these wins are clear commitments to provide our customers the foundation for application network, and security transformation. Second, an increasing share of our sales is coming from broader platform purchases by new and existing customers. Strong platform upsells drove our 126% dollar-based net retention rate in the quarter. On newer solutions like AutoBank CASB, Zscaler Digital Experience, or ZDX, and Zscaler Cloud Protection, or ZCP, are increasingly contributing to our wins. The breadth and depth of our platform is resonating with customers, and I believe Zscaler is the go-to platform for vendor consolidation, cost savings, increased user productivity, and better cyber protection. Our strategic decision last year to increase our investments in go-to-market is yielding fantastic results. I'm very pleased with our performance and momentum across all GEOs, all market segments, and all products. Earlier this year, we expanded our investment in the enterprise segment, which consists of organizations with 2,000 to 6,000 employees. This quarter we saw a higher mix of new business from the segment. Now let me highlight key wins in the quarter starting with ZIA. Because of the pandemic, a global 500 technology company in Asia was routing internet traffic of their employees working from home over VPN through the corporate data center. This created a poor user experience for SaaS applications like Office 365 and overwhelmed the security appliances. To power the workplace modernization initiative for their 18,000 employees, the customer purchased ZIA Transformation Edition, including SSL inspection, cloud firewall, and sandboxing, as well as ZDX. ZDX improves productivity by identifying and helping resolve user performance issues over the entire cloud network path in real time before users complain. In another new logo win, a global business services company facing challenges supporting work from anywhere purchased our business edition plus cloud firewall, CASB, DLP, and ZDX for all 46,000 employees to directly access SaaS applications to reduce business risk and improve user experience. In addition, they replaced a legacy VPN with CPA to provide zero cost access to private applications for the 29,000 call center employees. With a purchase of three of our four platform pillars, This customer is accelerating the digital transformation from a five-year goal into a six-month reality. Next, let me share two significant deals that show our growing momentum in the financial services vertical and our increasing success working with our tech partners. A top-tier global investment bank is pursuing a zero-trust strategy by rebuilding its security architecture for the modern hybrid work environment. They purchased a ZIA Business Edition plus DLP, Cloud Sandbox, and ZDX for 50,000 users. With security as a major requirement, only a proxy architecture with SSL inspection at scale was considered. Our 10-year track record of running a massive, highly reliable, and available inline security cloud made us the best choice. Taking advantage of the breadth of our platform, this customer also started limited deployments of additional products, including browser isolation, CASB, workload segmentation, and CPA. This deal is a great example of the successful field sales collaboration between Zscaler and our tech partner, CrowdStrike. In another financial services win, a multinational company embracing cloud transformation purchased the entire ZIA portfolio, including CASB, Advanced DLP, and CSPM for Microsoft Office 365, plus ZDX for 30,000 employees. Like the prior deal, this customer only considered a proxy architecture, and firewall architectures were disqualified. The Zscaler platform purchase consolidated four vendors, streamlined their operations, and reduced IT costs. This is another great example of field sales engagement with another important tech partner In this case, Microsoft. As these new customer wins show, the attached rate of our data protection products, including DLP, out-of-band CASB, browser isolation, and CSPM for SaaS is growing. Now let me discuss an upsell deal that was primarily driven by data protection. An existing global 200 pharma customer with headquarters in Europe purchased CASB, advanced DLP, and Sandbox for all 79,000 employees to up-level their security. We displaced the incumbent out-of-band CASB point product, a trend we are increasingly seeing as customers are standardizing on Zscaler's integrated platform. In addition to access private applications, they bought 3,000 ZPA seats, The first step to eliminate the legacy VPN. This latest purchase was a seven-figure ACV deal with double the customer's ARR. As we look forward to a post-pandemic world in which employees unwittingly bring infected laptops back to the office, organizations need a true zero-trust platform to eliminate the risk of lateral threat movement. Secondly, we are also seeing SD-WAN projects restarting with companies moving to direct-to-cloud architecture from the legacy hub and spoke network and castle and moat security. In the quarter, an existing global 200 manufacturing customer with headquarters in Europe upgraded their 120,000 user subscription from business to transformation bundle to secure local breakouts at the 1,000 locations worldwide, some with SD-WAN and some without SD-WAN. The transformation bundle added cloud sandbox and cloud firewall, which doubled this customer's ARR. And finally, I will highlight an upsell win with the Global Pharma Company that previously purchased the transformation bundle and ZPA for 15,000 users. The SD-WAN deployment was delayed last year, and now they're accelerating the network and application transformation with a five-year commitment to Zscaler. This quarter, they purchased an additional 50,000 ZIA and ZPA seats to cover all 65,000 employees, while also adding DLP for all users. They also purchased our new ZPA private service edge to enable zero trust access for the employees returning to the office. This demonstrates customers are implementing ZPA for all employees, not just for remote users. In addition to our ongoing success in protecting users, our next big opportunity is protecting workloads with Zscaler cloud protection. We are rapidly expanding our GCP portfolio through organic innovation and targeted acquisitions. Let me highlight our recent M&A activity. As announced last month, we acquired TrustDome, a leading provider of cloud infrastructure and entitlement management, or CIEM, to complement our CSPM solution. CIEM and CSPM together, properly integrated, can correlate identity information with configuration data and enforce least privileged access for cloud environments, hence reducing business risk. This further expands our market opportunity for workload security. In addition, today we announced a definitive agreement to acquire smoke screen technologies, which provides us with a deception technology to detect active attacks and lateral threat movement. We plan to integrate smoke screen with our CIA and CPA solutions to enhance our active defense capabilities. You will hear more about these solutions at our Zenith Live Cloud Summit next month. As we look forward to the next few years, the focus on driving broader adoption of our four platform pillars, which together maximize the success of digital transformation. Our core ZI and ZPA business has never been stronger, and we are excited about the early traction of ZDX and ZCP, the next growth engines for the company. Now I will highlight three points about our go-to-market machine, which is scaling very well. Our field organization continues to scale and is executing on all cylinders. Moving to our partners, as I mentioned in our deal wins, we have strong and growing technology partnerships. In addition to incremental product integration, we continue to grow our go-to-market partnership with CrowdStrike, who also became a customer this quarter. I'm proud that Zscaler was named the Zero Trust Champion at Microsoft's 2020 Partner Awards. Further expanding our technology relationships, we recently partnered with IBM to add Zscaler services to the Zero Trust security offerings. This partnership includes integrating with their identity MDM and SIM solutions and joint go-to-market initiatives. On the channel front, we're expanding our summit partner program and adding VARs that are building cloud transformation practices. Our service provider relationships are strong and we're building joint engagements with system integrators. On the marketing front, we are aggressively investing in thought leadership for zero trust security and expanding demand generation programs. In summary, we are making tremendous progress across all three areas, sales organization, marketing, and channel partners, and delivering strong results quarter after quarter. we are on track to capture a material share of our $72 billion serviceable market. Now, I'd like to turn over the call to Remo for our financial results.

Thank you, Jay. As Jay mentioned, we are pleased with the results for the third quarter of 2021. Revenue for the quarter was $176.4 million, up 12% sequentially and 60% year-over-year. CPA product revenue was 16% 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 $225 million, with billing duration towards the upper end of our 10 to 14-month range. We had several customers choosing to pay upfront for their multi-year contracts. As a reminder, our contract terms are typically one to three years, and we do not offer any special incentives for upfront payments. With that in mind, we are also pleased that short-term billings, which are calculated based on the change in short-term deferred revenue plus reported revenue for the period, grew 61% over the prior year. Remaining performance obligations, or RPO, which represent our total committed non-cancelable future revenue, were $1.2 billion as of April 30th. RPO grew 85% from one year ago. The current RPO is 51% of the total RPO. Our strong customer retention and ability to upsell the broader platform have resulted in a consistently high dollar-based rent retention rate. which is 126% compared to 127% last quarter and 119% a year ago. As we've highlighted, this metric will vary quarter to quarter. While good for our business, our increased success selling bigger bundles and selling multiple pillars from the start and faster upsells within a year can reduce our dollar-based net retention rate in the future. Considering these factors, we feel that 126% is outstanding. Total gross margin of 81% was flat quarter over quarter and improved by one percentage point year over year. As a reminder, gross margins in the second half of last fiscal year were pressured by the augmented use of public cloud to meet the 10X surge in ZPA traffic as pandemic lockdowns began. Turning to operating expenses, our total operating expenses increased 6% sequentially and 53% year over year to 119.7 million dollars operating expenses as a percentage revenue declined by three percentage points from 71 percent a year ago to 68 percent in the quarter primarily due to lower t e which was partially offset by increased hiring and m a expenses sales and marketing expense increased six percent sequentially and 56 percent year-over-year to 80.9 million dollars The year-over-year increase was due to higher compensation expenses and investments in building our teams and go-to-market initiatives. R&D expenses increased 8% sequentially and 55% year-over-year to $25.9 million. The increase is primarily due to continued investments in our engineering teams. G&A expenses increased 4% sequentially and 33% year-over-year to $12.9 million. The growth in G&A includes investments in building our teams, compensation-related expenses, and professional fees. Our third quarter operating margin was 13% compared to 9% in the same quarter last year, and T&E spending had a positive 270 basis point benefit. Operating margin was better than our guidance range due to stronger than expected performance in the business and due to timing of certain sales and marketing spend. net income in the quarter was $21.4 million, or a non-GAAP earnings per share of 15 cents. We ended the quarter with over $1.4 billion in cash, cash equivalents, and short-term investments. Free cash flow was positive $56 million in the quarter, which compares to $9 million during the same quarter last year. The increase was driven by our strong billings growth, receivables collection, and operating performance. Now moving to guidance. As a reminder, these numbers are all non-GAAP, which excludes stock-based compensation expenses and related payroll taxes, amortization of debt discount, amortization of intangible assets, and any associated tax effects. For the fourth quarter of fiscal 2021, we expect revenue in the range of $185 million to $187 million, reflecting year-over-year growth of 47% to 49%, gross margins of 79%, I would like to remind investors that a number of our emerging products, including ZDX, workload segmentation, and CSPM, will initially have lower gross margins than our core products. We are currently managing the emerging products for time to market and growth, not optimizing them for gross margins. With this in mind, we believe 79% to 80% is a good range for us in the near term. Operating profit in the range of $13.5 million to $14.5 million. Other income of $300,000 net of interest payments on the senior convertible notes. Income taxes of $1.7 million. Earnings per share of 8 cents to 9 cents, assuming approximately 146 million fully diluted shares. For the full year fiscal 2021, we now expect revenue in the range of $660 to $664 million, or year-over-year growth of 53 to 54%. Calculated billings in the range of $878 million to $880 million, or year-over-year growth of approximately 60%. Operating profit in the range of $71 to $72 million, earnings per share of $0.47, assuming approximately 145 million fully diluted shares. The acquisitions of Trustome and Smokescreen are expected to have an immaterial impact on revenue in Q4 and at fiscal 2022, as they are early-stage companies. Our plan is to further develop these products and incorporate their technologies into our platform. We expect to incur $2.5 to $3 million in additional operating expenses in Q4 related to the acquisitions. including a new R&D center of excellence in Israel. This is incorporated into our Q4 guidance. For your modeling purposes, we expect to incur approximately $13 million to $15 million in operating expenses related to the acquisitions in fiscal 2022. With a huge market opportunity, we 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 will balance growth and profitability, growth will continue to take priority considering our strong business momentum. Operator, you may now open the call for questions.

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 Alex Henderson. Your line is open.

Why don't we move to the next question, please? Howard, can we move to the next question? Howard, are you on?

Mr. Hinniston, please repeat your question.

Can you hear me?

Yes, sir.

I wasn't picking it up.

First off, let me thank you for a superb quarter, outstanding results. And the question I have is really on the sales capacity that you've been adding over the last year. To what extent do you see that capacity now maturing in terms of its productivity, and how do you think about additional continuation of that incredibly successful program? Thanks.

Alex, thank you. As you know, we have been adding and rather accelerating sales capacity. We are pleased with performance, and we are counting on it to deliver us accelerating growth. Remo, you want to give a color to it?

Yeah, the majority, you know, of our fuel quota sales reps are still ramping. So, you know, a significant portion of our organization is still on ramp days. The key thing that we brought up in the past is that we are aggressively hiring. And we had a good quarter hiring in Q3. We're expecting to have a very good quarter in Q4. So our plans, you know, as Jay talked about in the earnings call, is that, you know, the market is really strong. You know, it's moving to us. You know, all indications are that we're in a great position. So we're going to continue to aggressively hire and really, you know, go after the growth of Zscaler going forward.

And if I may add one more statement, while it's a competitive market for talent, Zscaler has become a top destination for top talent. So we're able to attract good talent and grow our sales team stronger.

Thank you. Our next question or comment comes from the line of Matt Hedberg from RBC Capital. Your line is open.

All right, guys. Thanks for taking my question, and congrats on very strong results, obviously. Jay, there's obviously a lot of success you're seeing in the enterprise on upsell and large deals, but I had a question on the federal or, I guess, public sector market. Obviously, the Colonial Pipeline attack highlighted the risk here that some utilities are at You know, just can you talk to us about how you think about zero-trust architecture could benefit the public sector? And, you know, might that be an accelerant, you know, as we look forward for the next year or two?

You know, we have been hearing enterprises talk about zero-trust more and more for the last 12 to 18 months, especially after some of the solar winds type of attacks. There's a bit of steam. But now it's good to see that federal government is waking up and saying they need to do something. It's good to see a very clear directive coming from Biden administration, which highlights a need for zero trust. And by the way, I must say that many vendors are trying to hijack the term zero trust. But zero trust, as written by the EU, based on the NIST research paper, it is not done by firewall. It is connecting entities to entities without a pass-through connection, and we believe we'll have a big advantage of it. We started investing in federal space about three years ago, had to go through a lengthy process of certifications of FedRAMP and the like. We are very well certified. We started investing in sales organizations about two years ago, have a strong team, a strong and growing pipeline. So federal business seems great. And the second part of your question is actually public sector, which is the non-federal part, which is state, local, and educational stuff. We are doing in that part very well as well. Remo?

No, I think, Jay, you hit it. I mean, the key thing is that we've invested significantly in federal. As Jay talked about the FedRAMP certifications, you know, FedRAMP High for ZTA, and also we are moving towards FedRAMP High for ZIA, which puts us in a you know, completely different position than other companies. In addition, I think one of the strengths is that we've been able to build the sales organization, SE organization very strongly, and partners in federal. So I feel we're well positioned in the federal market going forward. Thanks, guys. Well done.

Thank you. Our next question or comment comes from the line of Greg Moskowitz from Mizzou. Your line is open.

Okay, thanks for taking the question. Congratulations on a phenomenal quarter. You know, Jay, maybe to follow up a bit on the last question, and you sort of touched on this a little bit, but from what you're able to gather, have the recent high-profile breaches dating back to solar winds and inclusive of the Colonial Pipeline attack, have they had any discernible impact on your pipeline? So, you know, again, we hear the anecdotes, much like you do. I'm just kind of curious if there's anything that is able to translate to some extent from what you're able to tell.

So first of all, the number of inbound engagement from not just CIOs and CISOs, and in many instances, the board have stepped up. So it's clear that there's a high degree of interest in making sure that companies are secure. That's point number one. Point number two, when those level of C-level get engaged, the budgets open up. They become less of an issue. When you're dealing with a CIO whose budget is hundreds of millions of dollars to get a few million dollar deal for us, generally becomes a lot easier. So we are seeing tremendous interest. Are customers having discussions that they need to do zero trust implementation because of security factors, including Colonials and SolarWinds? Yes. Can I quantify what part of business and pipeline? probably I'll be guesstimating too much. So I'll leave it open to say a positive impact, but hard to quantify.

Okay. Very helpful context. Thank you.

Thank you. Our next question or comment comes from the line of Gray Powell from BTIG. Your line is open.

Great. Thank you very much for taking the question, and congratulations on the good results. So, yeah, you mentioned that your expanded investment in the mid-market or the mid-enterprise segment were companies with 2,000 to 6,000 employees contributed a higher mix this quarter. Is there a way to roughly quantify how much of the upside this segment is driving? And then how should we think about the potential contribution from the segment ramping over the next six to 12 months?

Yeah, I mean, just for clarification, the enterprise segment is for employees of 2,000 to 6,000 employees per company, and it is the fastest-growing segment that we have. On a quarter-over-quarter basis, the growth for new and up-sell business has been a couple percentage points. What this shows, basically, is our investments in the summit program that we've made. So the summit program targeted primarily towards VARs, and VARs primarily towards the segment segment. We are seeing very, very good growth, and we're happy with the growth. As I mentioned, it's the fastest-growing segment that we have. The segments we have are majors, large enterprise, enterprise, and commercial. So this is the largest one. So this is growing the largest, fastest.

If I may add, it was natural for us to expand into enterprise. We started from the high end, having strong presence in majors and large enterprises. It's a natural part for us, and we are pleased to see the performance. In this area, we have been adding quite a bit of sales force in this area and partner program together is delivering good results.

Got it. And are sales cycles faster there, or is there anything different in the competitive environment?

Yes, they are faster, as you would expect. Typically, the bigger the deal, the longer the sales cycle. The smaller the company, fewer the stakeholders, and faster the sales cycle.

Understood. Okay. Thank you very much.

Thank you. Again, ladies and gentlemen, in an effort to ask as many questions as possible, we please ask that you limit yourself to one question. Our next question or comment comes from the line of Mike Walkley from Canaccord. Your line is open.

Great. Thank you, and my congrats also on the strong results. Just wanted to dig in on the comments on ZPA about it's going to all users, not just remotes. any way to size the opportunity of further penetration within your customer base? And just thinking about VPA, you know, with it taking off with the pandemic, any thoughts on, you know, longer-term modeling giving potential tougher comps, even though the pipeline sounds strong? Thank you.

So first of all, from day one, our belief was, that ZPA was never designed for remote access VPN only. It was designed as a zero trust architecture implementation. No matter where the users are, they go through our switchboard. So they're never on the corporate network. And when pandemic happened, since everyone was remote, so ZPA actually got bought from almost every employee in most of the companies. That was a big shift we saw, whereby previously, Companies will buy ZPA for 20, 30, 40, 50, 60% of the employees. But we knew the number will get to 100%. And as employees are coming back to office, in fact, customers are worried about these people bringing their infected machines back to the office. So they want to do zero trust even when they're in the office. So for that, they want to go through ourselves. RZ Zero Trust Exchange. In fact, for that, we built another service. We call it Private Service Edge. Imagine a private switchboard running in your data center to implement Zero Trust for on-prem users, which is actually a great opportunity for giving customers segmentations for the applications, which is what customers are looking for. So I think it's a matter of time, but every employee of our customers will have ZIA, ZPA, and actually ZDX as well. Because while ZIA and ZPA allows you to work from anywhere and access any applications, ZDX makes sure users have a great experience and the issues, they can be easily resolved.

And from a penetration perspective, for our G2K customers, a little over 40% have ZPA applications. So, significant opportunity for us to upsell into our existing customers. So, a little over 40% of ZI customers have ZI. That is correct. Yes, that is correct.

Great. That's helpful. Thank you.

Thank you. Our next question or comment comes from the line of Andrew Nowinski from DA Davidson. Your line is open.

Okay. Thank you. Congrats on another great quarter. I had a question on the CrowdStrike win. You hear a lot about how endpoint security and specifically EDR technology is necessary to stop breaches like the Colonial Pipeline attack. Given that CrowdStrike prides themselves on stopping those breaches, I'm wondering why they would need Zscaler. So if you could provide any more color maybe on what they're deploying and how they're using Zscaler and whether you think any other enterprises may follow their lead and deploy both CrowdStrike and Zscaler together.

You know, I have yet to come across a serious large enterprise who doesn't believe in layered security approach. So endpoint serves as an important layer and cloud serves as a second layer. That's the most common thing out there. So when you buy into that notion, which is what we do and most customers do, it's natural for a customer to say endpoint from CrowdStrike and cloud security from Zscaler. And what's exciting for customers is for the two to be able to work together with proper API-based integration. CrowdStrike and Zscaler have done this product integration over the past 12 to 18 months, and that integration keeps on going to the next level where we can help each other and customers get the benefit of it. So driven by product integration that customers wanted, and then our joint sales engagements appealed where our teams are working together because we complement each other. It's a great win-win partnership for both of us, CrowdStrike and us. Did I answer your question?

Yes, you did. Thanks, Jay.

Thank you. Thank you. Our next question or comment comes from the line of Keith Bachman from Bank of Montreal. Your line is open.

Good evening, and thank you for taking the question. Jay, I wanted to see if you could give some more color around both ZCP and ZDX. And the question really is, any comments or color on attach rates, how much you're contributing, where the wins are, you know, any more color so we could get a sense about how much those assets, new solutions rather, are contributing today. and how you see that unfolding over the next 12 months. Many thanks.

Yeah, thank you. I'll start with a strategic positioning, and Remo can add on the quantitative side of it. As you know, CCP, it's called protection, is a massive opportunity for protecting workloads. There are a couple of areas there. One big one is communication among workloads, which is traditionally done the old school way by connecting various workloads and availability zones with a wide area network, side-to-side VPN and the like, which creates big risks because of lateral movement. So with workload segmentation, we have implemented a zero-trust architecture, which will disrupt legacy network-based security for workload just like we've done it for users with ZI and ZPA. That's one part of it. And obviously, it's easy for us to start with our own customers And that's a large customer base, and that's where early traction is. And then on the second side is the security posture type of stuff. This is where some of the offering is cloud security posture management, CSPM, and trust-don't acquisition combined give us a strong offering. We're bullish about the CCP market, which is nascent, but it's growing rapidly. The CDX part is very interesting. This is complementing CI and ZPA identify and resolve any user performance issues. So this is a natural add-on to any ZIS EPA sale. Remember, we used to sell ZI only. Then we started selling ZIS EPA together. More and more deals are with ZIS EPA together at the start. And now we are seeing more and more deals with ZIS EPA and ZDX together, which makes a natural bundle for our customers to enable their employees to work many years and have great experience. Primo?

Yeah, I mean, just from a numbers perspective, we still expect the contribution for new and upsell for CCT and CDX to be mid-single-digit this year. As Jay mentioned, the reception of both products has been high, and we feel good about those products going forward. But think about the contribution this year for new and upsell in that mid-single-digit range.

Okay, perfect, thank you.

Thank you. Our next question or comment comes from the line of Patrick Colville from Deutsche Bank. Your line is open.

Hey there, thank you so much for taking my question. So I've just done the math. CRPO billings, if I'm not mistaken, rose 85% this quarter, which looking at the disclosure, since you guys have been kind of giving RPO and CRPO, seems to be the kind of highest growth rate ever So hugely impressive. What are you guys seeing to kind of have this real acceleration this quarter? What are the kind of comprehensive factors? And I guess kind of importantly, how sustainable are they as we look forward into the rest of calendar 21 and 22?

I'll take the first part and have Jay get some color. You're right, Patrick. It's outstanding results. The CRPO growth is 68% and the RPO growth is 85%, which is absolutely outstanding. When you couple that with our billings growth of 71%, it just shows that basically things are going very well for us. What's changing is basically what we've seen, what we've been talking about. With the accelerant last year related to when COVID hit, companies recognized that they had to get their employees connected, you know, to their networks in order to, or applications in order to do business. And we saw that. Now, that was the big increase, you know, for last year with CTA, which is 43% of our new and upsell business. Since then, basically, what that brought to light is basically that yesterday's networks aren't going to work. You know, infrastructure is still not going to work. Those are the discussions that we've been having, you know, with customers. That is basically a change which is occurring is recognizing the current infrastructure in place is really not the optimal infrastructure that companies need going forward. With that, what we've done as a company, we've broadened our platform. We've broadened our platform, as we just talked about, CDX, workload protection, and additional basically features under our product. So the broadening of the platform related to the movement to really digitize you know, transforming your networks has led to basically deal sizes, you know, becoming larger, more strategic, you know, partnership. And also, you know, just the credibility that Zscaler had. Now they've been a public company for, you know, three plus years, you know, and, you know, we've got a strong balance sheet and we've got, you know, strong team. And again, the key thing is Zscaler was built for this world. The platform was built for this world over 10 years ago. And if you take a look at the expansion, basically, of the amount of traffic that we put through, to have the type of gross margins with the type of traffic across over 150 data centers, you know, with SLAs being almost zero, quite frankly, on a quarterly basis, is a testament to the strength of Zscaler. And I think that's what's playing through with our communications with our customers. Okay.

I think it's better to hold. But accelerating digital transformation being one, expanded portfolio and platform being two, large, great sales force being three, and our brand and customer references, all four are accelerating our sales.

Great. Thank you so much for taking the time. Yes.

Thank you. Our next question or comment comes from the line of Catherine Trednick from Colliers. Your line is open.

Oh, thanks for taking my question. And congratulations, phenomenal quarter. Can you unpack a little bit the summit program and how well you're doing there versus your sales through the service provider channel to give us a better idea where you're really seeing explosion in your opportunities? Thanks.

Yes. Yes. You know, our service provider channel evolved fairly early on as our customers want new transformation and CIOs told SPs to work with us to make that happen. It's a strong channel. It's a growing channel. VARs took time. In the past couple of years, more and more of the VARs have realized that the box sales are not going to last forever, so they're pivoting more. The ones who are pivoting to embrace cloud transformation services They are our favorites. They're actually becoming part of our summit program. That's what the part program was built, and we have a good participation from VAR programs. And as a result of that, we're seeing the growth of VAR contribution of business growing at a faster rate.

Yeah, from a numbers perspective also, VAR's, you know, percentage of our revenue is below 50% range. SPs and SIs combined is below 40 percent, and direct is mid-single-digit. The growth rate in SPs and SIs has been significant year-over-year also, so we've had significant growth in SPs and SIs on a year-over-year basis.

Thank you.

Thank you. Our next question or comment comes from the line of Saket Khalia from Barclays. Your line is open.

Great. Hey, thanks for taking my question here, guys. Actually, maybe just to piggyback off that last question on channel, maybe a little bit more of a strategic one for you, Jay. You know, the service provider channel has been an area that these dealers work with, you know, for years, as you noted. And it felt like this quarter you're starting to see some other security vendors maybe start to work with them a little bit as well. I guess the question is, how are your conversations with those service providers, and how do you think that sort of plays out in the future as other security vendors maybe start to work with that channel as well, on SASE specifically?

Yeah, so first of all, as Remo said, our business, the SPSI over here is growing quite well. I think in terms of other firewall type of vendors, that's not new news. Service providers have been selling firewall type of stuff especially for MSSP servers for years and years, so not a new area. Yes, adding the SD-WAN to those firewalls is probably a new area we hear about, but most of that stuff has happened on the lower end. You know, when you talk to large enterprises, they actually engage with us and then partner together and drive the transformation. None of that has changed. On the lower end, Probably there's a combination of some of the SD bands combined with firewalls, but we are bullish about the SP channel, SI channel, as well as the VAR channel. In fact, our investments in channel are growing significantly because that's giving us more and more leverage, and we will continue to do so.

Very helpful. Thanks. Thank you.

Thank you. Our next question comes from the line of Tal Liani from Bank of America. Your line is open.

When I ask you why are you successful, the answer is always the same, so I'm not going to ask you again. But I want to ask you about competition and the fact that you're so successful for such a long period of time. And we do see new players in the space. I'm wondering how the competitive landscape changed. Who do you see today in competitive bids versus what you've seen before, and how is the gap between you and the competitors? So anything you can share with us on the competitive landscape. Thanks.

Well, you know, we ask this question to ourselves many, many times. We analyze it every quarter. Frankly, the truth is not a whole lot had changed on the competitive landscape. We were hearing so much noise from firewall vendors and the like, Have we seen any change? On the larger segment, larger customers that we always talked about, haven't seen a change much at all. We have seen a few cases, and I mentioned a couple of them during our prepared remarks, where 50 vendors tried to go in and compete but got disqualified because they didn't have the architecture. Well, you could say that now some of them are saying, yes, we have a proxy architecture. But announcing is one thing. Building a scalable, reliable proxy that a large enterprise will depend upon is a very different thing altogether. Having said that, when we come down to the lower end of the spectrum, say under 5,000 users or so, we do see some of the vendors where it's kind of less security-savvy customers. But as we are engaging more and more in the space, with our enterprise segment. We do some of them, but once we engage, we're winning pretty handsomely. So very comfortable on the comparative front because customers are more and more actually on every segment looking for consolidation and simplification. So low-end players that are coming from point product and trying to expand, so to speak, don't really make it well. Some of the bigger ones are legacy vendors with old story, are zero trust. exchange platform does much better because we are truly a zero trust architecture. And as I said, you can convert a firewall into a zero trust architecture. That's kind of oxymoron.

Got it. And do you feel that you need to make acquisitions in order to grow the TAM? Or is it more time to focus on execution and sales and marketing and just try to, within your current TAM, try to get more market share? Where is your focus between the two?

That's a good question. Both. Why not? Now, having said that, I would say we won't be looking for acquisition to grow 10. We're looking for acquisition to fill in any potential area that we need to kind of strengthen or expand into adjacent markets. It's pretty open to it. We're done a few small acquisitions at the right opportunity with the right technology. We'll look for everything that makes business sense. We see that as a market opportunity for us. Our momentum is so good, so why not keep on moving at a faster pace? And on sales and marketing, we are investing. We're investing heavily. In fact, Remo and I have lots of internal debates on top-line growth versus bottom-line. We kind of say a top line is a priority, though both of us happen to be such that we can't be spending like drunken sailors. You'll obviously see our bottom line being pretty good.

Thank you. Thank you. Our next question or comment comes from the line of Eric Semperger from JMP. Your line is open.

Yeah, thanks for taking the question, and congrats. In the SD-WAN space, who are your best partners at this point? Are there different architectures for SD-WAN that fit well with you, or how do you look at that space?

SD-WAN, so the answer is pretty simple. It's starting with vendors who compete on the higher end, who have an enterprise-class architecture platform. They're natural to work with us because our large customers want them. As I said kind of before, there are three vendors we see frequently for SD-WAN deployments of large enterprises. It's VMware, it's HP Aruba, and it is Cisco. Most of our customers have one of the three deployed on the high end. Then the low-end customers coming from the firewall side of it, Do they have some large enterprise customers? Yes. But a lot of their business ends up being on the lower end, and we see them less often. But we do have customers who may have other SD-WAN vendors, but they decided that we were the security cloud of choice. And we're open. We integrate with everyone. I can take traffic from almost any SD-WAN vendor. But with some of them, we have stronger working relationships. VMware is our best partner when it comes to go-to-market.

Very good. Thank you.

Thank you. Our next question or comment comes from the line of Hamza Farawala from Morgan Stanley. Your line is open.

Hey, guys. Thank you so much for squeezing me in. Jay, just maybe a high-level market question for you. I think some of this you touched on earlier, but we're clearly seeing a critical mass in terms of adoption of trends such as SASE and Zero Trust Network Access, a lot of the stuff that obviously you've been aligned towards from day one, and you're clearly a big beneficiary of that and have been. But at the same time, I think... You know, at least in the short term, it seems to be kind of a rising tide list of all boats, right? And, you know, many of the firewall competitors, as you mentioned earlier, are talking about, you know, similar approaches. Not to necessarily goad you to talk about any one particular vendor, but, you know, at what point do you think that some of the FUD, right, from your perspective kind of winnows down and, you know, people look for a solution that's truly architected for this trend like you talk about?

Yes. You know, we've seen this movie before. If you recall, there's some proxy vendors whose sales were rising and depressing. Jay, you guys are winning. Why aren't they losing? So, man, we are still young. We still have a small part of the market, which 25%, 30% of the customers have deployed us. What are other guys doing to keep on dealing with the data-centric architecture, network-centric architecture? they're buying more and more firewalls, right? It'll take some time. Inertia is a powerful thing. But I think when it comes to doing truly the new architecture with zero trust, where you don't put people on the network, you don't have a pass-through architecture, that's the only way to stop colonial type of threats, pipe kind of threats, and solar wind type of threats. I think you'll see things changing. And That's what I think overall. The market is pretty big right now. We aren't really inhibited or impacted by any of those competitors. We're doing well. I think inertia will keep them going for some time until the architecture really changes. Take, for example, spinning a VPN in the cloud doesn't make anyone zero trust. It's still VPN. Are customers buying and deploying it? Of course they are, right? Will that change over time? Of course it will. Can you make VPN into a zero trust? You can't.

All right.

Thank you.

Thank you.

Thank you. Our next question or comment comes from the line of Rob Owens from Piper Sandler. Your line is open.

Great. Thanks for taking my question. Jay, relative to return to work, we think about reopening. How would you expect the pace of digital transformation and therefore network transformation to potentially change? And where are customer conversations right now around the sense of urgency? Thanks.

So customers are beginning to make plans to come and work from the office. Many of them have partially opened up. What they learned during the COVID crisis was that the corporate network doesn't play a very important role They could work from anywhere. But having said that, when employees are in the branch office, they need to make sure that traffic can go directly from the branch office to the cloud just like it went from employees' home directly without going back to the data centers. So that is actually restarting some of the SDVM projects so they can do local breakout. But the bigger issue that's helping us or the bigger opportunity that's helping us is They want to make sure employees in the office still do zero-trust architecture with a product like ZPA. So we are seeing good interest in fully zero-trust so they don't have an issue where the lateral movement of threats like solar winds can get them in trouble or the infected machines coming back to the office can get them in trouble. And we are helping companies implement better security, full security as they return to the office as well. Overall, a good, positive opportunity for us.

Thank you. We have time for one final question. Our last question comes from the line of Brian Essex from Goldman Sachs. Your line is open.

All right, back to the boss. Thank you for taking the question. I really appreciate it, and congrats on the results. I was wondering, maybe, Jay, if you could expand a little bit on some of the drivers here in terms of, you know, you've got macro headwinds, you've got sales productivity, you've got transformational shift to the cloud, expansion of your platform. How does that relate to customer growth? Is there anybody who can kind of quantify customer growth and then grade those tailwinds in terms of which are the most meaningful with regard to the growth trajectory that you're experiencing now?

When you said customer growth, are you talking number of customers or revenue growth?

Yeah, I guess I'm looking for logo growth relative to some of the platform expansion and sales productivity initiatives that we have currently in play.

Right. We are doing well in both areas, new logo growth and upsell. It's interesting to bear in mind the companies should be pay more for new logo or not. And we decided not to because there's so much an opportunity to sell the platform which falls under upsell. The new logo, we have a good mix of business coming from new logo as well as upsell. So the opportunity, as you said, the macro environment is helping more focus on security, is helping us. Salesforce has done a phenomenal job in the sales organization. Now we are seeing very good results from our early focus and channel with Summit Partners. Marketing, we got a new CMO. We expanded and strengthened the marketing team. A lot more investments in the marketing area. And platform and product machine is really coming at a very good speed. Very bullish on our opportunity going forward.

Yeah, from a total customer perspective, we've grew our customer base by about 20% year over year.

Got it. That's super helpful.

Thank you very much. Thank you. That concludes our Q&A session at this time. I'd like to turn the conference over to Mr. Jay Chaudhry for any closing remarks.

I'd like to thank you all for your continued support. Please join us at our Zenith Live annual climate summit in mid-June. Thank you again. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.