Zscaler, Inc.

Good day, and thank you for standing by, and welcome to the Zscaler first quarter 2022 earnings call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that this call is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your host today, Bill Choi, SVP, Investor Relations and Strategic Finance. Please go ahead, Mr. Choi.

Good afternoon, everyone, and welcome to the Zscaler Fiscal First Quarter 2022 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, earnings per share, our market share, and market opportunity. These statements and other comments are not guarantees of future performance, but rather are subject to risk and uncertainty, some of which are beyond our control. These forward-looking statements apply as of today, 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 the IR website when we move to the Q&A segment of the call. I would also like to inform you that we'll be attending the following upcoming events in December. NASDAQ Investor Conference, Barclays Global TMT Conference, BMO Growth and ESG Conference. Now I'll turn the call over to Jay.

Thank you, Bill. Building on our incredible momentum from last year, we had an exceptionally strong start in fiscal 22. In Q1, we delivered 62% revenue growth and 71% billings growth while generating record operating profits and free cash flow. We are again seeing strong revenue growth across all verticals, customer segments, and geographies with over half of our revenue coming from outside the U.S. We recently achieved a significant milestone of surpassing $1 billion in annual revenue while continuing rapid growth. In my recent dialogues with hundreds of CISOs and CIOs, Eight out of 10 are looking to phase out legacy network security in favor of zero trust architecture due to increasing cybersecurity risks and accelerating digital transformation initiatives. I will highlight two main reasons why enterprises are selecting Zscaler over legacy solutions. One, we saw a more than 300% increase year-over-year increase in sophisticated threats hidden in SSL encrypted traffic. A large number of them are ransomware attacks and most would bypass next-gen firewalls which aren't designed to inspect encrypted traffic at scale. We are the only cloud provider with a proxy architecture designed to inspect SSL encrypted traffic at scale. to deliver better security. This year, our cloud has blocked more than 20 billion threats hidden in encrypted traffic. Two, by connecting users only to applications and not to the network, a core principle of Zero Trust architecture. We eliminate lateral threat movement, hence reducing ransomware attacks such as the colonial pipeline breach. In contrast, firewalls and VPNs connect users to the network, enabling lateral threat movement. It is clear from our growth and enterprise wins that architecture matters. And zero trust security can't be built on legacy network security architecture. This gives us long term advantage. Turning to the quarter, let me discuss two factors that drove our performance. One, we saw continued strength in new and upsell bookings of over $1 million in annual value. We drove 87% year-over-year growth in customers exceeding $1 million in ARR, ending with over 220 of these customers. Two, the expansion down market to enterprise segment organizations with 2,000 to 6,000 employees is scaling and it remains our fastest growing segment. With increasing contributions from the enterprise segment, the total number of customers who pay us more than $100,000 per year is up 53% year over year. to over 1,600. Our 71% billings growth this quarter speaks to the commitment that customers are making to our Zero Trust Exchange platform. As we have noted before, the purchase of ZIA is often the first step to adopting our platform. Let me share a couple of ZIA-driven deals. A Fortune 50 insurance company purchased ZIA Transformation Bundle with Cloud Firewall and Sandbox, plus DLP and CASB for data protection to secure 170,000 employees and affiliated agents working from anywhere. This customer wanted secure and fast access to Internet and SaaS applications, particularly Microsoft 365 and Teams. Connecting to Zscaler's nearest edge cloud, where we have direct peering with hundreds of application providers. The users are seeing a 75% improvement in response time. Next, a leading defense industry integrator purchased ZIA for 200,000 users, plus workload protection for internet traffic. Our ZIA platform which recently achieved FedRAMP high ready status will help them meet many requirements for CMMC, a cyber security standard for defense contractors. Zscaler is consolidating the several point products, simplifying the network, enforcing consistent cyber policy across multiple business units while reducing operational costs. We believe these large deals show that we are the only multi-tenant, zero trust platform meeting the needs of major enterprises to transform the legacy hub and spoke network and castle and mode security. With customers shifting to the cloud, more are buying CIA and ZPA together, enabling a true transformation with direct and seamless access to SaaS and private applications, whether on-prem or in public cloud. Here are a few examples. A Fortune 500 banking customer signed a four-year commitment for three key pillars of our platform. Their existing ZIA contract was upgraded to include cloud firewall, sandbox, DLP, CASB, and browser isolation. They also purchased ZPA for all 100,000 employees to implement app segmentation without having to implement legacy network segmentation. In addition, ZDX was purchased to identify and help remediate application network or endpoint issues to ensure great user experience and employee productivity, regardless of their location. This deal more than tripled the customer's annual spend with us. Having adopted full portfolio for user protection, we are now discussing zero cost security workloads with this customer. Next, in a new logo win, a Fortune 100 insurance customer purchased ZIA transformation bundle, and ZPA for all 30,000 employees to pursue their cloud-first strategy. With cyber protection as a major requirement, this customer only considered a proxy architecture to perform SSL inspection at scale and rejected firewall-based architectures. ZPA will eliminate their attack surface. hiding their thousands of private applications behind our zero trust exchange, hence they can't be discovered, exploited, or DDoSed. We are consolidating at least three vendor point products, materially reducing complexity and operating cost. Our integration with CrowdStrike and Microsoft was also an important consideration for them. One of the powerful use cases for ZI and ZPA is to accelerate M&A integration with significant ROI. An existing European-based global 500 manufacturing customer purchased ZI transformation bundle for 30,000 employees of the newly acquired business and ZPA for 50,000 users to accelerate the M&A integration. The legacy approach to providing access to private applications post-acquisition requires integrating two complex corporate networks, which they expected to take 18 months or more, without having to connect two corporate networks. Zscaler's approach provided secure access to SaaS or private applications across both companies in weeks, saving time and money. After having disrupted premier base security for users with our zero trust exchange, we are bringing zero trust to workloads with Zscaler Cloud protection. Let me highlight a few ZCP wins and existing ZI and ZPA state government customers. purchase workload segmentation for over 4,500 workloads along with ZDX and CASB for the 28,000 employees. This was a seven figure annual contract value driven by our emerging products. Implementing zero trust for workloads will reduce their cyber risk by achieving micro segmentation without doing legacy network segmentation. Moving on to our workload posture offering. We are seeing increased interest from customers in CSPM for configurations and CIEM for entitlements. During the quarter, a tech company bought CSPM for over 9,000 workloads and a software enterprise bought CIEM for 5,000 workloads. Our workload communication offerings, powered by CIA and ZPA technology, is building momentum with additional customer wins in the quarter. For example, a healthcare customer purchased workload communication for 3,500 workloads, and a financial services customer purchased it for 1,000 workloads. When you look at these wins, Our success starts with true zero trust architecture, which is the opposite of firewalls and VPNs. Our zero trust exchange is the largest inline cloud security platform in the world, processing over 200 billion transactions per day, which doubled in the last 18 months and is preventing more than 7 billion security and policy violations per day. This massive amount of traffic provides us 300 trillion signals per day to feed our machine learning and AI engines, resulting in superior threat protection and better detection of user and application traffic anomalies. This network effect is a big competitive advantage for us. Each of our 150 plus data centers receives a continuous stream of more than 200,000 unique security updates every day. This can't be done with a single-tenant VM-based architecture that legacy security vendors are running on public phones and calling SASE. This is only possible with a purpose-built, highly scalable cloud that Zscaler built from day one. I'm very proud of our pace of innovation that delivers value to our customers. Let me share a few stats for the quarter. ZIA delivered 29 Agile releases and ZPA delivered 44 Agile releases. Each product pillar delivered scores of new features and enhancements. Our threat lab security research team discovered and delivered over 495,000 new advanced threat indicators and signatures to our global cloud. In addition, our cutting edge security research scientists discovered and reported 18 new zero-day vulnerabilities. These are testimonials of the sophistication and scale of our research team. A great platform combined with a great research team enables us to deliver great cyber protection to our customers. Let me highlight some of the significant features we delivered in Q1. We enhanced our out-of-band CASB to support additional fast applications. We see more customers buying our CASB along with ZIA and replacing their existing CASB point product. we added optical character recognition technology to our DLP offering, addressing data loss problem or images in files like PDFs. This feature combined with previously released Exact Data Match and Index Data Match technology makes us the leading data protection platform. We integrated our recently acquired smoke screen active defense technology with ZPA, making it easier for customers to deploy and manage it from a single console. A piece of innovation for our newer pillars like ZDX and ZCP is accelerated. For example, one of the most demanded ZDX features is real-time performance monitoring for Zoom and Microsoft Teams, which we delivered by working closely with Zoom and Microsoft through API integration. We added over 150 features to ZDX in the past 12 months, delighting our customers. One customer said, and I quote, we now have unprecedented visibility into the environment, We can respond faster and forecast where we may have issues and address those areas before they become a problem. I want to highlight another increasingly important area, helping our customers achieve their ESG goals. Our highly efficient cloud replaces hundreds of thousands of on-prem appliances. and eliminates the need to buy more in the future, resulting in the significant decrease in the energy resources and carbon emissions associated with building, transporting, powering, and cooling them. As you may have seen from a recent press release, our cloud platform now uses 100% renewable energy. As part of this effort, we have a cross-functional team with oversight from the board to drive our sustainability strategy. Zscaler has never been stronger, and I believe we have an incredible opportunity in front of us. We have our sights set on the next milestone, growing our ARR to $5 billion. I believe the key to sustained growth in our next stage is to accelerate the broader adoption of our platform. Our Zero Trust Exchange platform with four major pillars provides a comprehensive foundation for securing and improving application access in the world of cloud and mobility. With ZIA and ZPA, we have proven our success implementing Zero Trust for users. Our next immediate opportunity is to bring Zero Trust to workloads powered by the same core ZIA and CPA technology. As we shared in our deal highlights, we are seeing solid traction with ZDX and ZCP, the newest growth vectors for the company. We are seeing increasing average revenue per customer, and we estimate a six times growth opportunity on upsell with our current customers. From pre-sales to deployment and customer success, we have a sophisticated sales machine to sell value and deliver measurable outcomes at the CXO level. Over the next several years, our innovation engine will further build out the breadth and depth of our platform, extending our already substantial technology lead. We are also pursuing some very exciting opportunities to extend zero trust to operational technology or OT systems with manufacturing leaders like Siemens. In summary, we are very excited about our future and we believe we are still in the early innings of a significant market opportunity to accelerate secure digital transformation. I'd like to turn over the call to Remo for our financial results.