Zscaler, Inc.

Good day, and thank you for standing by. Welcome to the Zscaler second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any assistance during the call, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Bill Choi, Senior Vice President of Investor Relations and Strategic Finance. Mr. Choi, the floor is yours.

Good afternoon, everyone, and welcome to the Zscaler Fiscal Second Quarter 2022 Earnings Conference Call. On the call with me today are Jay Chowdhury, Chairman and CEO, and Remo Canessa, CFO. Hello. Please note that we have posted our earnings release and a supplemental financial schedule on our investor relations website. As was 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 March. Berenberg Thematic Software Conference on March 2nd, JMP Securities Technology Conference on March 7th, and Wolf Research Virtual Software Conference on March 23rd. Now I'll turn the call over to Jay.

Thank you, Bill. I'm pleased to share our strong results for fiscal Q2. We continue to see strong demand for our Zero Trust Exchange platform as our customers embrace the cloud. We delivered 63% year-over-year revenue growth and 59% billings growth, while also generating over 50% growth in operating profits and free cash flow. Public SaaS companies are happy to get to Rule of 40, while we have been exceeding the Rule of 70 for the last 12 months, validating our strong execution in pursuing our large market opportunity. Our continued investment in scaling our engineering and go-to-market machines is yielding the best revenue growth we have had in three years, even as we surpassed $1 billion in annualized revenue. We plan to keep on making substantial investments across the company to continue our rapid pace of innovation and growth. What we deliver with our platform is critical to our customers' highest priorities. This is reflected in our deal sizes, which are increasing due to our success with large enterprises who are buying more of our expanding platform. With a significant growth in the number of new logo and upsell customers for orders with over $1 million in annual value, we now have over 250 customers exceeding $1 million in ARR, an increase of 85% year-over-year. Business momentum for a zero-plus exchange is strong due to the market need for a modern security architecture in the world of cloud and mobility. Our flagship ZIA offering has been growing very well as we continue to expand our cyber and data protection services. ZPA has emerged as our second flagship offering, supporting millions of users and the majority of our global 2,000 customers. We are the clear market leader in zero trust application access with proven maturity and scalability. With CI and ZPA, we had demonstrated our success implementing zero trust for users. Our next immediate big opportunity is to bring zero trust to workloads in our ZCP pillar, powered by the same core ZIA and ZPA technology. In addition, our ZDX pillar is enabling a highly productive workforce, and it is seeing strong demand. In a single integrated cloud platform, our Zero Trust Exchange provides secure any-to-any connectivity for users, applications, workloads, and IoT and OT systems, regardless of their location. While many vendors claim to offer a platform because they bought a bunch of point products that are very hard to integrate, no one comes close to the capabilities of our cloud-native extensible platform. We will continue to invest in engineering Customer support, marketing, and sales to accelerate the growth of our new products while keeping the strong momentum on our flagship products. We believe we are in a sustained high demand environment. We have a large and expanding market opportunity powered by our customers' digital transformation journeys, which continue at a pace never seen before. According to IDG's recent State of the CIO report, the top CEO mandate for IT in 2022 is to upgrade cybersecurity to reduce business risk. Whether it is supporting remote work or enabling new digital customer and employee experiences, IT leaders must ensure that business operations are agile, resilient, and secure. Given the explosion in ransomware and high-profile data breaches, IT leaders are looking to phase out castle and mode security to adopt zero-trust architecture to unlock the full promise of digital transformation. It is clear from our growth and our large enterprise wins that architecture matters. Despite legacy vendors' marketing claims, True zero trust security can't be built on legacy network security architecture. As I have highlighted before, there are two reasons why enterprises are selecting Zscaler. One, we're the only proven cloud security provider with a proxy architecture that inspects TLS encrypted traffic at scale to deliver superior security. We connect users to applications. and not to the network, eliminating lateral threat movement. This is a core principle of zero-trust architecture that can't be achieved by next-gen firewalls or cloud VPNs. Let me discuss some of our Q2 deal wins that highlight the advantages of our zero-trust exchange. I will start with a big ZIA win. a Fortune 100 professional services customer initially purchased our ZIA Transformation Bundle plus CASB and DLP and ZDX for 125,000 employees working from anywhere. This quarter, they added 175,000 ZISCs to secure all 300,000 employees. With a cloud-first strategy, and mission-critical client-facing data at stake, they selected our proven scalable platform with a global footprint needed to support the business in over 150 countries. With 93% of their internet traffic encrypted, TLS inspection was a major requirement, and the customer only considered a proxy architecture. Next is a new logo customer that started with ZPA as part of a strategic initiative to transform their IT infrastructure. This global 50 manufacturer, headquartered in Europe, purchased ZPA for 200,000 users to implement Zero Trust Secure. ZPA will eliminate their attack surface, protecting thousands of private applications behind our Zero Trust Exchange. Hence, their apps can't be discovered, exploited, or DDoSed. We are replacing their firewall-based VPNs that allow lateral threat movement. A global systems integrator partner who is implementing the overall transformation project played a major role in driving the Zscaler win, an example of the channel leverage we are creating with our investments in our SI partners. As the shift to the cloud accelerates, customers are buying ZI and ZPA together, enabling a true transformation with direct and seamless access to SaaS and private applications, whether on-prem or in the public cloud. Let me highlight several such deals. In a new logo win, a Fortune 50 insurance customer signed a four-year commitment for ZI, ZPA, and ZDX to securely enable 65,000 employees working from anywhere. For comprehensive cyber and data protection, they purchased the high-end transformation bundle plus CASB, advanced DLP, and SSBM, or SAS Security Posture Management, which is like CSBM for SAS. Fast user experience and superior cybersecurity were the key factors for our wins. In another new customer win, a Fortune 500 FinTech company that had grown through acquisitions signed a nearly five-year commitment to up-level security and simplify IT. They purchased ZIA Transformation plus CASB and DLP as well as ZPA and ZDX for 60,000 employees. This consolidates seven different security point products and accelerates the closure of the 24 data centers. Moreover, ZPA also shortens new employee onboarding to a few days from two and a half months. It also eliminated the need many of the employees had for two laptops to access two separate networks. I'm also excited about our success selling security transformation in new countries. a global 500 manufacturer headquartered in Mexico, purchased ZIA and ZDX for over 18,000 users and CPA for 14,000 users. This is our first seven-figure annual deal in Latin America, a region where we recently started making investments. Next, M&A is an elegant use case for the Zscaler platform. In an upsell deal, Diversified industrial conglomerate with over 20 operating companies that previously purchased ZIA transformation bundle added ZPA for 16,000 users to accelerate M&A integration and reduce business risk without having to connect two corporate networks with legacy firewalls, which could have taken 14 months or more. R0 Trust Exchange provided secure access to applications across both companies in weeks, saving time and money. This customer purchased a high-end ZPA bundle with integrated browser isolation to enhance data protection. They also bought our deception technology to intercept bad actors who may have infiltrated the network. This latest purchase. more than doubled the annual spend with us. Next, let me highlight customers purchasing all four pillars of our platform. In a new logo win, a global 2,000 leader in technology products purchased ZIA transformation with DLP and Caspi, ZPA and ZDX for 11,000 employees, and ZCP workload posture for 6,000 workloads in multi-cloud environments. As they accelerated the digital transformation, the CIO's top priority was to eliminate the risk of legacy VPNs and lateral threat movement while ensuring the best user experience. They put ZDX to the test by asking us to troubleshoot poor Microsoft 365 experience of an executive traveling in Europe. ZDX mapped the entire network path over the internet in real time. isolating specific issues and allowing the customer to quickly resolve the issue and improve the user experience. This proof of value led to the quick ZDX purchase. I believe that over time, every ZIA and ZPA customer will embrace ZDX as workforce productivity is one of the highest priorities for a CIO. Lastly, I'm happy with our early success in expanding our routes to market via cloud marketplaces, first with AWS and now with Azure. Let me highlight two Azure marketplace deals. First, an existing global 200-format customer with headquarters in Europe purchased ZPA for all 87,000 employees, enabling zero-trust access to the private apps hosted in hybrid cloud environments. This purchase was done with just a couple of mouse clicks, and it doubled the annual spend with us. Second, a new Fortune 500 customer in the energy industry made a three-year, eight-figure commitment for ZIS, ZPA, and ZDX for all 23,000 employees. We will continue to invest in cloud marketplaces as a new channel to revenue. Enterprises trust Zscaler over cloud imitators and new entrants because we have a true zero trust architecture and have over 10 years of operational experience running the largest security cloud in the world. Our zero trust exchange processes over 210 billion transactions in line and prevents more than 7 billion security and policy violations per day, providing our customers an unmatched network effect for superior security. To flawlessly run the world's largest security cloud with five nines of availability requires more than security expertise. It requires networking expertise and the ability to control the traffic paths. As Zscaler was born as a cloud company and has been operating an inline cloud since 2008, we have gained this expertise over time. There's no compression algorithm for years of experience. This expertise will become even more important as we address hundreds of millions of workloads and billions of IoT devices. Let me share an example of our cloud operations differentiation. Microsoft extended direct fiber connectivity from the major data centers to ours because of the volume of traffic that flows between Zscaler and Microsoft. This direct connectivity enables us to deliver higher reliability and performance than the traditional internet exchange peering approach. This is a validation of our scale and the criticality of our services to our mutual customers. Another example of delivering great availability and high performance is our integrations with Microsoft and Zoom. With API-based integration for Teams and Zoom, We proactively identify and resolve performance issues for these latency-sensitive apps, without which user collaboration is disrupted and business productivity is lost. Our proven track record running the world's largest inline security cloud makes Zscaler the obvious and trusted partner of choice when enterprises need to securely access mission-critical applications. Let me also talk about our recognized market and innovation leadership. Zscaler pioneered the zero-trust architecture. And over time, our platform subsumed functionality of multiple point products into our secure web gateway foundation. As the market evolved, and customers migrated towards a platform approach such as Zscaler. Gartner expanded the scope of the secure web gateway MQ to include functionalities such as CASB, ZTNA, digital experience monitoring, and browser isolation, and renamed it SSE, or Security Service Edge. After 10 consecutive years of being named a leader in Gartner's M2 for secure web gateway, we were again named a market leader for SSE. Many of you are aware of SASE. So how are SASE and SSE related? SASE framework is the combination of SSE and WAN edge. has all the security capabilities built on Zero Trust architecture and is independent of the type of network. WAN Edge, which is generally SD-WAN, provides connectivity to an SSE cloud. Importantly, Zero Trust security is implemented in the SSE cloud, not in the WAN Edge. As the category leader in SSE, With the widest and deepest offerings, Zscaler is the go-to platform for vendor consolidation, cost savings, increased user productivity, and better cyber protection. As our market opportunities expand, we are promoting two strong leaders to continue scaling Zscaler. We're expanding Amit Sinha's role to president of the company. Amit will continue to lead our engineering and cloud operations teams while also assuming broad responsibilities for expansion of our platform into new areas. We are also promoting Dolly Reich to Chief Operating Officer. Dolly will continue to lead our global sales organization while also assuming broader responsibilities for interlocking among sales, marketing, business development, and transformation teams to further enhance the customer's lifecycle journey. In the new roles, Amit and Donny will be responsible for driving further growth, operational excellence, and collaboration across Zscaler as we continue the path towards our next milestone of $5 billion in ARR. To enable our customers' ever-growing digital transformation aspirations, and extend our market leadership. Our entire organization is focused on attracting and developing talent and creating a culture that awards innovation at all levels. We added approximately 1,000 employees globally in the last six months and have over 4,000 employees who are energized by our shared mission to create a hyper-connected digital world in which the exchange of information is always secure and seamless. In today's competitive hiding market, Zscaler is a destination for top talent. We are proud of our Glassdoor rating, which is among the highest in the industry. Zscaler has never been stronger, and I believe we have a large and growing opportunity in front of us. Now, I'd like to turn over the call to Remy for our financial results.