Zscaler, Inc.

Standing by and welcome to the Z scale of fiscal year 23 first quarter results earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentations, there'll be a question and answer session. To ask a question at that time, please press star 11 on your touchtone telephone. As a reminder, today's call is being recorded. I will now turn the conference to your host, Mr. Bill Choi, Senior Vice President of Investor Relations and Strategic Finance. Please go ahead, sir.

Good afternoon, everyone, and welcome to the Zscaler first quarter fiscal year 2023 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 objectives and outlook, our customer response to our products, and our 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. I would also like to inform you that we'll be attending the following upcoming events in December. UBS Global TMT Conference in New York City on December 5th. NASDAQ Investor Conference in London on December 6th. Now, I'll turn the call over to Jay.

Thank you, Bill. I am pleased to share our Q1 results. For the quarter, our revenue grew 54% year-over-year, and billings grew 37% against a difficult comparison. Normalized for higher billings duration a year ago, billings grew 42% as customers continued to embrace our zero-trust exchange platform to secure the digital transformation. Our disciplined approach to growth is enabling our operating profits to grow 76% year over year, with operating margins expanding by 150 basis points over the same period. Our free cash flow margin was 27%, which once again placed our performance above the rule of 80 for the quarter, a combination of growth and profitability that we believe only 1% of the public SaaS companies achieve. As the world's largest security cloud platform, we have outstanding unit economics in our business, reflecting high 90% growth retention rate and over 80% growth margins. These industry-leading retention and margins are possible because of our differentiated service and highly scalable multi-tenant cloud platform. In September Zscaler celebrated our 15th anniversary. When cloud and mobility were in their infancy, we founded the company with a bold idea to transform security and the corporate network. We started with a clean slate and created the Zscaler multi-tenant inline cloud platform, establishing modern zero trust architecture. This approach is now recommended by NIST, one of the most respected standards bodies in the industry. Our Zero Trust Exchange is built on a unique architecture that securely connects users, devices, and applications using business policies regardless of their location. I could not be more proud of all our accomplishments to date. And I want to thank our employees, customers, and partners for being a part of this journey. The vision we started Zscaler with is even more relevant today. Hybrid work and public cloud adoption are now mainstream as organizations, large and small, are racing to ensure their business operations are agile, resilient, and secure. These generational tailwinds are durable, and my conviction in our $72 billion serviceable market opportunity is greater than it has ever been. In my conversations with hundreds of IT executives, it is clear that cybersecurity remains their number one priority. Cyber threats, including ransomware and data exfiltration, continue to grow exponentially as attackers exploit VPNs and firewalls. This is driving more organizations from firewall and VPN-based castle and more security to Zscaler's Zero Trust architecture. To meet this need, we launched a new certification program that provides comprehensive knowledge of Zero Trust architecture. and practical guidance for the planning, design, and implementation of a zero trust architecture, enabling networking and security professionals to lead their organization's secure digital transformation. In today's environment, ROI and cost optimization are becoming bigger priorities as business leaders are being asked to do more with less. Our zero-trust exchange eliminates the need for traditional security devices, either as on-prem appliances or virtual machines in the cloud that are difficult to maintain and require compromises between security, cost, and user experience. Our business value message is resonating in this challenging macro environment, and more customers are willing to adopt our broader platform to consolidate multiple point products, increasing our average deal size. As a result, we are actively working on more large multi-year, multi-pillar opportunities than ever before. To align to the increasing deal sizes in each of our geo theaters, we reorganized our field level customer segmentation and expanded our enterprise segment efforts at the beginning of this fiscal year. When we started an enterprise segment two years ago, it started with one global leader for all geos. As this business has grown, it made sense for us to align the segment under each geo leader for faster decision making closer to the customer. These changes contributed to a late ramp in the seasonally tougher Q1. But we believe these changes position us to scale to reach our next milestone of $5 billion in ARR and beyond. In Q1, even as we saw additional deal scrutiny and longer reviews on most deals, we grew our base of customers with $1 million or more in ARR by 55% year-over-year, ending the quarter with over 340 of these customers. As I mentioned before, customers are increasingly buying Zscaler for users. Our complete platform for user protection which includes ZIA, ZPA, and ZDX bundled together. This accelerates our customers' transformation journey and makes us a critical partner for them. Now, let me highlight several such deals. First, pursuing a strategic initiative to modernize the business, a top 10 global bank made a four-year $10 million per year commitment for Zscaler for users. Driven by cloud adoption, including Microsoft 365 and Zoom, this customer needed a proven and scalable SASE solution to secure thousands of branch offices and hundreds of thousands of employees operating in more than 100 countries. Importantly, We met their requirement to eliminate the risk of legacy VPNs and lateral threat movement, which was a board-level priority. Unlike a VPN in the cloud, Zscaler connects users to specific applications and not to the corporate network, which will significantly improve their security posture as employees unwittingly bring infected laptops back to the office. Organizations need a true zero-trust platform to eliminate the risk of lateral threat movement. Next, in an upsell deal, a global 1,000 financial services company in Asia, after deploying ZIA for 110,000 users last year, upgraded to Zscaler for users. our entire user protection platform for all 130,000 employees. As a growing company, they are using Zscaler to quickly and cost-effectively open new branch offices with secure internet connectivity, reducing the branch opening costs by 50% compared to legacy firewall-based architecture. ZPA replaces the extensive VDI infrastructure with zero-trust access. This customer said, and I quote, ZPA provides a far more seamless user experience versus our existing VDI solution. And now we will have visibility to which user is accessing which applications, one of our key security requirements. With this latest seven-figure purchase, this customer's total ARR more than tripled in just over one year. As these two wins illustrate, when these large financial services companies were ready to embrace the cloud, Zscaler was the only platform that met their needs. With security as a major requirement, These financial services companies chose a proxy architecture with ability to inspect TLS traffic at scale and disqualified firewall-based SASE solutions. We now have eight of the top 10 global banks and seven of the top 10 insurance companies outside of China as our customers. I'm also excited to see more $1 million ACV wins in our enterprise segment. Let me share a new enterprise customer in the tech sector who bought all four product pillars, ZIA, ZPA, and ZDX for 4,000 users and posture control for workloads. Zscaler is enabling this secure digital transformation with direct and seamless access to SaaS and private applications regardless of their location. This supports their remote first strategy, enabling them to close 12 offices and consolidate half a dozen point products. This deal was sourced by a VAR partner and speaks to the progress we're making with the channel. As this wind shows, deal sizes in the smaller enterprise segment are growing as customers adopt our broader platform. Next, we are also executing well on our federal government opportunity, which had a strong quarter. We remain the only cloud security service to have two products at the highest level of FedRAMP certification. These certifications are driving our federal business as the U.S. government pursues a zero-trust strategy to enhance the nation's cybersecurity. We had four deals in the Fed vertical that were each over $1 million, all of which included ZIA and ZPA. Our highly differentiated architecture, which connects users to applications and not to the network, eliminating lateral threat movement was critical to winning these deals. We have now landed 12 of the 15 cabinet-level agencies as customers with plenty of opportunity to upsell at these very large organizations. As I mentioned, overall demand from customers to consolidate on our platform is growing. Our net retention rate has again exceeded 125% now for eight consecutive quarters. Happy customers buy more, and our net promoter score continues to exceed 70, which is more than two times the average NPS for SaaS companies. We have a 6x upsell opportunity with our existing customers just for our core ZIA and ZPA product pillars. An important area of continued innovation I'd like to highlight is data protection. Our comprehensive data protection offering has been gaining traction as customers are concerned about data leakage with employees working from anywhere. In Q1, we delivered an industry-first zero configuration data protection service. Leveraging and building on our eight years of innovation in AI and ML, this DLP service provides auto classification of unstructured data to expedite deployments with zero configuration. In addition, we completed the integration of recently acquired shift rights workflow automation technology with our data protection solution to enable organizations to manage hundreds of potential risks and incidents in a simple yet very sophisticated way to significantly reduce case resolution time data protection is the first of many areas where we will broadly integrate shift rights workflow technology into the zero trust exchange platform these additional features combined with previously released exact data match and index data match technology makes us the leading data protection platform in the market. Beyond our core products, we are excited about the rapid adoption of our two emerging product pillars, ZDX to manage digital user experience and Zscaler for workloads to secure servers and workloads. New ACV. from our workload communication product is growing nearly 100% year-over-year, and our newest deception and CNAP offerings are seeing strong customer interest. Let me highlight two upsell deals this quarter that were driven by our workload products. A Fortune 500 aerospace customer that is accelerating its AWS and SaaS adoption purchased Zscaler for workloads to inspect one petabyte of TLS encrypted workload and IoT traffic per month, resulting in better security. This customer purchased our ZIA transformation bundle for 115,000 users two years ago, as they've already committed to our Zero Trust architecture. It was seamless for them to add workload protection which is built on the same Core Zero Trust Exchange. This seven-figure ACV workload deal more than doubles the customer's annual spend with us. In another upsell win, a long-time customer upgraded and expanded their purchase to ZIA, ZPA, and ZDX for 12,000 users and also added Zscaler for workloads to accelerate the application migration to Azure. Zscaler for workloads now represents one-third of this customer's $1 million plus annual spend with us. As these customer wins illustrate, our proven track record running the world's largest inline security cloud makes Zscaler the obvious and trusted partner of choice. Our Zero Trust Exchange processes over 270 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. Our demonstrated ability to scale our cloud platform becomes even more important as we address hundreds of millions of workloads and billions of OT and IoT devices. In closing, while there are broader macro challenges and economic uncertainties, we are seeing an increase in large multi-year commitments for multiple product pillars. As I mentioned earlier, as deal sizes have increased, we have adapted our field-level customer segmentation to better serve our customers and to deliver more consistent execution. Our consultative sales process enables our account teams to quantify the business value of our platform to remain close to the customers, especially at the C-level, and to get deals across the lines. I believe periods of uncertainty can act as a catalyst for change. Customers are engaging with us to embrace zero trust architecture, consolidate point products, simplify IT, and standardize on the Zscaler platform, all of which delivers better security and lower cost. CIOs are telling me that they are using this challenging environment to drive change and to eliminate the technical debt of legacy point products, which are expensive to buy and operate. Customers are increasingly turning to Zscaler in today's challenging environment. While overall IT budgets are tightening, we believe that security budgets remain more resilient. We are bringing more innovations to customers than ever before while scaling our customer support and go-to-market organization. We believe we are still in the early innings of a significant market opportunity to enable secure digital transformation and achieve our $5 billion ARR goal. I'd like to turn over the call to Remo for our financial results.