Zscaler, Inc.

Good day, and thank you for standing by. Welcome to the Zscaler third quarter 2022 earnings conference call. At this time, all participants are in the listen-only mode. After the speaker's presentations, there will be a question and answer session. To ask a question during that session, you'll 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 Third 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 to our investor relations website. Unless otherwise noted, all numbers 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, 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 objectives and outlook, our customer response to our products, and 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 June. Loop Software Conference on June 1st, Bank of America's Global Tech Conference on June 8th, Mizzou Virtual Cybersecurity Summit on June 13th, and we will also host an investor briefing focused on our latest innovations at the Zenith Live Conference on June 22nd. Now, I'll turn the call over to Jay.

Thank you, Bill. We are pleased to report another strong quarter. In Q3, we delivered 63% year-over-year revenue growth, 54% billings growth, and 15% free cash flow margins, all while investing for high growth. While most public SaaS companies are happy to get to Rule of 40, we again exceeded the Rule of 70 based on revenue growth, and free cash flow margins. With our increased guidance today, we expect to achieve the rule of 80 for the full year. We are not only delivering excellent growth, we are also delivering strong profitability. We are disciplined in making investments for innovation and go-to-market scale. With the breadth and depth of our ever-expanding Zero Trust platform, we can efficiently sell to our growing base of enterprise customers. We believe our clear focus on securing large enterprises makes us the partner of choice for our customers' Zero Trust security journey. While there are broader macro challenges and economic uncertainties, We have seen an increase in large multi-year commitments for multiple product pillars of Zscaler platform as periods of uncertainty can act as a catalyst for change. This coupled with growing cyber threats such as ransomware are driving IT leaders to transform security from castle and moat security to zero trust architecture. In this environment, customers cannot risk transformational and mission-critical projects with immature offerings from unproven vendors. As the pioneer and category leader in Security Service Edge, or SSE, with the widest and deepest offerings, Zscaler is the trusted partner for vendor consolidation, cost savings, increased user productivity, and better cyber protection. We are adding new global 2,000 customers at a record pace. In the last two quarters, we added close to 80 G2K customers. Now 40% of the Fortune 500 and 30% of global 2,000 companies trust Zscaler to secure their digital transformation. Approximately half of our global 2,000 customers have both ZIA and ZPA. And I am excited to report that ZPA has surpassed over $200 million in annualized revenue. In Q3, we had significant growth in new $1 million plus ACV deals across major geographies and customer verticals. We are seeing an acceleration in multi-year, multi-product pillar deals as enterprises are racing to transform their business. We provide a path for large strategic customers to ramp into larger and longer commitments for our entire transformational platform, not just for elements of it. This is driving a strong growth in bookings, with the total value of our committed future revenue reaching a key milestone. It has surpassed $2 billion. Now, let me highlight some customer deal wins during the quarter. As I mentioned before, I believe all customers will ultimately purchase ZIA, ZPA, and ZDX for all users. This quarter, we have seen ample evidence that customers are buying ZIA, ZPA, and ZDX together, providing zero-trust security for users with fast user experience. In a new logo win, a global 500 food services conglomerate headquartered in Europe purchased ZIAS, ZPA, and ZDX for all 100,000 users. Leveraging our globally distributed SSE platform, this customer is consolidating dozens of different vendors' point products across hundreds of locations in 45 countries. The customer was most excited about having a single zero-trust security policy framework for in-line inspections, across its business units in every location. Given the significant cost savings, up-level security, and improved user experience across the company, the CEO and CFO signed off on this non-budgeted four-year commitment. In addition, they started a paid pilot for our Zero Trust for Workloads offering for this sizable AWS footprint which we are very excited about. Next, in an upsell deal, a global 10 oil and gas customer headquartered in Europe, after deploying ZI and ZPA for 100,000 users, purchased ZDX for all 100,000 employees. ZDX is delivering immediate value by reducing the customer's time to troubleshoot performance issues by 50 to 80%. while consolidating 40 legacy performance point products. In addition, the customer upgraded to a newly introduced ZPA Transformation Bundle that includes browser isolation, application protection, and deception services. This is a four-year deal that increased the customer's annual spend by over 70%. This customer's journey with Zscaler is remarkable. I remember sitting with the chief architect in their office, finalizing the purchase of our ZIA professional bundle six years ago. Since then, their annual spend has increased over 14X to well over $10 million. Next, we look forward to working with them on Zero Trust for workloads. In an upsell win, a Fortune 500 bank in Asia that has deployed ZIA for over 50,000 users, purchased ZPA and ZDX for all 50,000 employees. This is another example of a large customer buying ZIA, ZPA, and ZDX for all users. While the immediate objective for this deal was to replace a legacy multi-vendor VPN infrastructure, ZPA was selected to implement zero trust access by establishing an application-level policy where users connect to specific applications, not to a network, hence achieving app segmentation without having to do legacy network segmentation. CPA did not just replace VPN. It's eliminating the need for the entire inbound DMZ, including DDoS protection, app delivery controllers, and firewalls, generating a payback on their Zscaler purchase within six months. Because of this substantial ROI, even in a tougher macro, Zscaler can help reduce cost while driving transformation. Our integration with Microsoft's E5 suites across ZIA and ZPA was also an important decision factor for them. This latest purchase more than doubled the customer's annual spend. ZIA, ZPA, and ZDX together form a complete solution to implement zero trust for users. Our next immediate big opportunity is zero trust for workloads powered by the same core ZIA and ZPA technology. Let me highlight a few exciting wins in this area. An existing Fortune 100 financial services customer with ZIA deployed for 60,000 users purchased zero trust for workloads to protect 50,000 workloads spanning across multiple data centers and public clouds. This eliminates the need for virtual firewalls and site-to-site VPNs. This multi-million dollar ACV deal is our largest workload deal to date and more than doubles the customer's annual spend. The customer now protects both users and workloads under a single policy framework, enhancing their cyber protection, providing visibility, and simplifying operations. Lastly, let me discuss a new customer purchasing all four product pillars together. An elite research university purchased our comprehensive ZIS, ZPA, and ZDX offerings for 35,000 users and zero transfer workloads for over 3,000 workloads for the multi-cloud environment. Their CIOs top priorities to eliminate the risk of legacy VPNs and lateral threat movement as universities are increasingly becoming a target for ransomware and intellectual property theft. Also, a critical requirement for this win was our zero trust platform meeting the criteria of zero trust framework as recommended by NIST. We closed this three-year, eight-figure deal through AWS Marketplace. I'm very happy with our continued success in expanding our routes to market via cloud marketplaces. Next, I am excited to highlight U.S. federal government, where we are having considerable momentum. Driven in part by the president's executive order, we are seeing increased interest in our zero-trust exchange across all levels of the government. We are excited to help our country dramatically improve our security posture while significantly reducing legacy IT costs. We have the highest level of FedRAMP certifications for ZI and ZPA. In addition, ZPA is the only zero-trust solution with DoD IL-5 certification. There are only a select few cloud companies that have this level of certification, and there's no other cybersecurity company at this level. IL-5 certification is an important differentiator for us. Let me highlight two new customer wins this quarter where this was an important factor. First, a defense contractor that purchased ZIA and ZPA in a six-year, seven-figure ACV deal. Second, a DoD unit also purchased ZPA for secure access to SAP instances in AWS GovCloud. Two important considerations for our ongoing success in the federal market are, first, ZPA is the only cloud security service with FedRAMP high authorization for zero trust remote access. We connect users to applications and not to the network, eliminating lateral threat movement, a core principle of zero trust architecture that can't be achieved by next-gen firewalls or cloud VPNs. Second, ZI is proxy architecture, which inspects TLS encrypted traffic at scale delivering superior security. Our proven track record running the world's largest inline security cloud makes Zscaler the obvious and trusted partner of choice for governments and enterprises. We now have 288 customers, exceeding $1 million in ARR, an increase of 77% year over year. We deliver a mission-critical service that requires unmatched reliability and availability for an inline cloud. There is no compression algorithm for over 10 years of operational experience running such a cloud. An example of a proven scale is that Zscaler processes over 240 billion transactions in line per day, which is more than 20 times the number of Google searches per day. Now, let me share a few observations about our high net retention rates, which has exceeded 125% for the last six quarters. We made a number of investments in customer success services technical account managers, partner services, and certification of partners, which together are driving a faster and greater adoption across our broad portfolio. We have a solid blueprint for accelerating value delivery, which is driving upsells. All of these investments result in happy customers demonstrated by our Net Promoter Score, or NPS, of more than 70, which is more than two times that of an average SaaS company. Next, let me now highlight a rapid pace of innovation. After having built the most comprehensive platform to provide zero trust for users, we are now expanding it for zero trust for workloads. Unlike scores of vendors who offer point products for cloud-native apps, Zscaler has developed a fully integrated CSPM, CIEM, and infrastructure as code scanning with a common backend and fully correlated actionable dashboard. Gartner calls its functionality CNAP, but we have moved beyond CNAP by integrating the threat and data awareness from CIA and ZPA. We will be highlighting it and other innovations at Zenith Live our annual cloud summit next month. We enhanced our AI ML engine for ZDX, our fastest growing new service, to leverage billions of telemetry points from millions of users to improve digital user experience. It cannot only automatically figure out what and where performance issues are, but can also provide information about the quality of voice, video, and screen sharing due to our integration with Microsoft Teams and Zoom. We have also integrated ZDX with ServiceNow, making customer and user support far more efficient. ZDX also got certified and became available on our federal cloud. Our ThreatLabs security research team is tracking over a dozen APT groups and getting better reconnaissance about the tools and behavioral patterns resulting in higher order threat intelligence. This specific threat intel coupled with our massive cloud effect from 240 billion transactions and 300 trillion signals per day enables Zscaler to deliver better threat protection than other vendors. Moving beyond users and workloads, we are now bringing Zero Trust to IoT and OT systems a large emerging opportunity. Today, Siemens and Zscaler announced the availability of an integrated all-in-one solution to accelerate secure access to OT systems. Our joint development with Siemens brings the benefits of Zscaler to factory and industrial control systems. We are thrilled to have Siemens, a long-standing customer, as a development and go-to market partner. In closing, in spite of uncertain macro conditions, we continue to see strong demand for our services. We are in a strong financial position and we will continue to aggressively invest in our business. We are focused on hiring and developing talent and creating a culture that rewards innovation at all levels. We have grown our global organization to approximately 4,500 employees who are energized by our shared mission to secure the hyper-connected world of cloud and mobility. We grew our total sales and marketing headcount by 54% year-over-year, and we remain focused on investing in our go-to market machine. In today's competitive hiring market, Zscaler is a destination for top talent. To drive continued growth in hiring, and to build on Zscaler's high-performing hybrid work culture. This month, we welcome Brandon Castle, Google's former global head of talent acquisition, as our new chief people officer. Brandon has proven experience in building highly motivated and productive teams at scale. With app transformation already mainstreamed, network and security transformation is also becoming mainstream, which we pioneered with our Zero Trust Exchange. We believe customers trust Zscaler more than any other provider for securing their cloud journey. Recent uncertainty in the macro environment is driving customers to accelerate their network and security transformation with our integrated platform resulting in a reduction in cost, complexity, and business risk. We are adding a record number of Global 2000 customers, now with 30% of Global 2000 and 40% of Fortune 500 customers trusting Zscaler. These demanding customers are making large multi-year commitments to our platform. We are not just growing rapidly at any cost, We are also profitable and delivering efficient growth. We will continue our disciplined investment in innovation and growth to capture the large and growing opportunity ahead of us. Now, I'd like to turn over the call to Remo for our financial results.