Zscaler, Inc.

Thank you for standing by and welcome to the Zscaler Third Quarter Fiscal Year 2023 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. In the interest of time and fairness, we ask that you please limit yourselves to one question. You may get back in the queue as time allows. In order to get into the queue, you simply will need to press star 11 on your telephone. If you wish to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. Bill Choi, Senior Vice President of Investor Relations and Strategic Finance.

Good afternoon, everyone, and welcome to the Zscaler third 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 like to inform you that we'll be attending the following upcoming events in June. Bank of America Global Tech Conference in San Francisco on June 7th. Canter's Security and Infrastructure Conference on June 9th. And we will also host an investor briefing focused on our latest innovations at our Zenith Live Conference on June 15th. Now I'll turn the call over to Jay.

Thank you, Bill. We delivered strong third quarter results with all financial metrics above the high end of the guidance we provided last quarter. On a year-over-year basis, revenue grew by 46%, billings grew by 40%, and current billings grew by 44%. Our new business grew significantly across various industry verticals, and we had approximately half of our revenue come from outside the U.S., We have a strong and loyal base of customers with growth retention rates in the high 90s. We have a disciplined approach to growth. And once again, our operating income more than doubled on a year-over-year basis, with operating margins now exceeding 15%. While we continue to operate under tighter economic conditions, I believe the comprehensive functionality of our Zero Trust Exchange platform, our strong execution, and our customer-first approach will enable us to navigate this macro backdrop and deliver on our guidance. Our consultative sales process enables our account teams to adapt to the changing business environment and stay close to our customers, especially at the C-level. We are partnering earlier with CXOs to jointly create compelling CFO-ready business cases that have clear ROI and payback periods. As our Q3 results demonstrate, this high-touch engagement is helping get deals across the finish line. Our go-to-market engine enables us to close many large multi-year, multi-product deals. We are providing increased guidance for the full year, which we believe balances our business optimism and macroeconomic uncertainties. A few quarters ago, we noted that customers were increasingly scrutinizing their projects and budgets due to macro conditions. We've seen this elevated level of scrutiny continue in Q3. Nevertheless, we see high-priority initiatives still moving forward. In my conversation with hundreds of IT executives, cybersecurity remains their number one IT priority. Traditional network security based on firewalls and VPNs cannot handle the complexity of safeguarding enterprises in what has become a work-from-anywhere world. Given the explosion in ransomware and high-profile data breaches, IT leaders are looking to phase out castle-and-moat security to adopt zero-trust architecture. Moreover, C-level leaders from around the globe are telling me that the technical debt of the legacy network and security point products impedes progress and slows down business operations. Our business value message is resonating with customers. Our zero trust exchange offers better security and user experience, while substantially reducing cost and IT complexity compared to legacy networking and security. By consolidating point products and embracing zero trust with Zscaler, our customers are modernizing their security and increasing productivity, which gives them the competitive edge they need to succeed in today's rapidly evolving business environment. We also partner with many tech leaders to deliver easy, jointly integrated solutions for customers, which increases our business value and creates go-to-market leverage for us. Our current marketing campaign called Beyond the Perimeter is a great example of the successful field collaboration with our tech partner CrowdStrike that is increasing our pipeline. In today's environment, our strategy is to double down on customer success. From pre-sales to deployment and customer success management, we have built our organization to deliver measurable outcomes at the CXO level. We made a number of investments in customer success services, technical account managers, partner services, and certification of partners, which together will help our customers move faster towards realizing business value. We now have 400 customers with greater than $1 million in ARR, including over 35 customers exceeding $5 million in ARR. In Q3, our new logo business grew approximately 20% year-over-year. Our proven experience at scale makes us a partner of choice for customers pursuing their Zero Trust security journey. We have a blueprint for delivering greater value, which drives strong upsell. Approximately 60% of our new business came from existing customers, and our net retention rate has again exceeded 125%. Happy customers buy more, and our net promoter score of over 70 is a testament to our strong relationship with our customers. As we have indicated before, we have a 6x upsell opportunity with our existing customers for protecting their users. Our engineering team is innovating at a rapid pace and has expanded our comprehensive platform from securing users to securing workloads, as well as securing IoT and OT. As I mentioned before, customers are increasingly buying Zscaler for users with bundles ZIA, ZPA, and ZDX together. Let me highlight one such platform deal in the quarter. In an exciting upsell win, a fast-growing global bank and APJ upgraded to Zscaler for Users bundle for 150,000 users after deploying ZIA last year. With this upgrade, this customer is significantly reducing time to open new branches by 50% and eliminating the need for firewalls and MPLS network services. We are now a strategic partner to them as they continue to expand their footprint and transform into a cloud-centric organization. This customer said it is the first time they have seen a security vendor that understands their business needs and aligns its solution to address them. With this latest purchase, this customer's ARR surpassed $10 million. This is also an example of the geographic diversity of our business outside the U.S. Today, we serve eight out of the 10 largest financial services and diversified insurance companies in the world outside of China. Over the past few quarters, I observed that analysts and investors often equate ZPA with VPN replacement. This is simply not true. ZPA replaces the entire inbound DMZ, and ZPA is often purchased for all employees. In fact, over half of our ZPA customers have purchased ZPA services for all employees, hence delivering zero trust whether they work in the office or at home. In Q3, ZPA was an area of strong growth, and we saw large new logo deals that landed with ZPA. Let me highlight two such deals. A Fortune 100 logistics company made a four-year multi-million dollar ACV purchase of ZPA and ZDX for 100,000 users. ZPA provides zero-trust application access architecture for their employees, partners, and suppliers as it consolidates multiple point products, including multiple VPNs, load balancers, VDIs, and dedicated private network services. As a result, ZPA is expected to generate a 300% ROI for this customer. In another ZPA land deal, a global 300 tech manufacturing company made a three-year, seven-figure ACV commitment for ZPA and ZDX for all 30,000 employees. Cyber security was their top priority as their IP and software development and manufacturing was being actively targeted by nation-state actors and hackers. Another aspect of our market not well understood by investors is that scale and performance are paramount considerations to customers in the real world. When you are providing in-line inspection, you cannot have a tradeoff between performance and security. Given our large opportunity and our success in the market, it is not surprising to see a number of vendors claiming that they have the same capabilities as we do. They built the products using something known as service function chaining in order to reduce their time to market. The reality is service chaining for inline traffic inspection using microservices results in poor performance. They are effectively trying to scale low performance. Our unique architecture with a patented single scan multi-action technology enables us to deliver comprehensive security at high performance and scale. We secure over 40 million users from some of the largest global brands, and we surpass 300 billion transactions daily. We are the largest inline security cloud, and no one comes close to us. Customers cannot afford to risk the mission-critical operations with immature offerings from unproven vendors. Let me highlight a deal which showcases the scale of our platform. In a large SSE win, a global 30 healthcare insurance company purchased ZPA and ZDX for 450,000 users and ZIA for 430,000 users. Their incumbent CASB provider could not scale to even 5% of the employees when TLS inspection was turned on. At this customer, we are consolidating dozens of point products from a handful of vendors including DLP, CASB, web proxies, firewalls, and VPNs. Our integration with Microsoft E5 Suite across ZIS, ZPA, and ZDX was also an important decision factor for them. In addition, the customer will use vScaler to rapidly integrate new acquisitions in weeks rather than months that are acquired by legacy network security architectures. Next, let me highlight a deal that was led by Data Protection. In our largest win in the transportation vertical, a Global 50 company purchased the ZIA Transformation Bundle plus ZDX and Advanced Data Protection Suite for 165,000 users. Zscaler was chosen over CASB vendor because of her best-in-class capabilities in DLP, CASB, browser isolation, SSPM, and SaaS supply chain security. And of course, our proven cloud scale and resilience was a big factor. This deal started with data protection and quickly expanded to include web proxy, firewall, and sandbox, and to implement direct-to-cloud architecture across their 6,500 locations. We see more customers buying our data protection along with ZIA. and replacing their existing CASB point products. As these deals show, customers are embracing our expanded platform, including our two emerging product pillars, ZDX for digital user experience and Zscaler for workloads. These emerging products are on track to meet our full-year target of high teens percentage of new business. This quarter, we had an upsell deal with a global 200 bank headquarter in APJ that purchased Zscaler for workloads for 70,000 workloads in a multi-cloud environment. As an existing ZIA customer, it was easy and seamless for them to roll out workload protection, which increased their annual spend with us by 35%. We are also starting to close larger deals with our federal government customers as the Zero Trust deployments move beyond the initial land deals. A cabinet-level agency purchased ZIA and ZPA for 110,000 users to cover all of its sub-agencies. After a thorough evaluation, they are standardizing on Zscaler to consolidate multiple point products across the agency and to comply with the president's executive order, which mandates federal agencies to adopt zero trust principles. Our highly scalable and reliable platform and our highest federal authorizations for both ZI and ZPA have been key differentiators in this win. Having landed 12 of the 15 cabinet-level agencies, we have plenty of opportunity to expand further with these very large organizations. To take our customer-centric innovation to the next level, we welcome Shyam Nair as our new CTO who will lead our R&D teams. Shyam has extensive experience in leading and scaling engineering and product development teams that accelerated innovation cycles at Salesforce and Microsoft. He was a driving force in scaling the AI-powered customer engagement platform at Salesforce, which is critical to the next phase of our AI journey. Let me highlight a few examples of how we are leveraging AI ML to deliver better cyber protection today. Our first acquisition in 2018 was an AI ML company. We leveraged the technology together with Zscaler data to deliver far better detection for zero-day attacks. This resulted in reducing the number of files being sent to our sandboxing engine by 80%, reducing time to detection and improving user experience. ZDX, our digital experience service, was launched three years ago. It was built from the ground up to leverage AIML to not just show where performance is degraded, but what caused the issue. The data protection advancements we launched in October 2022 leveraged AI MLs to classify unstructured documents for policy enforcement. And after the launch of ChatGPT, Zscaler delivered policy-based access controls to ensure that customers can use AI applications safely. If the employees submit sensitive data to ChatGPT-like applications, our DLP technology detects it and blocks it. While plenty of AI apps like ChatGPT, GPT-4, BARD, and Bedrock use public data, AI-powered cybersecurity for enterprises requires their own private data. Based on a proxy architecture, Zscaler Zero Trust Exchange is like a private switchboard for all communication for users, workloads, and devices that captures all communication logs, a whopping 300 billion logs per day. These are not DNS logs that have little information beyond the domain. These are not firewall logs that cannot often see SSL traffic. These are complete logs that have structured and unstructured data, including the full URL providing trillions of signals per day. Zscaler has AI experts and data scientists and the most valuable anonymized private data to customize and effectively train LLM models. for the security domain. Imagine a world where our customers will know that they're about to be breached before they are breached so they can proactively prevent the attack. Using AI, I believe Zscaler has the opportunity to predict most of today's ransomware and other sophisticated attacks on our customers. We plan to launch a number of innovations, including many for AI ML at Zenith Live, our annual cloud summit in mid-June in Las Vegas. I invite you to join us. In closing, we believe that we are still in the early stages of a significant market opportunity to disrupt 30 years of traditional network security and capture a large share of our $72 billion addressable market. Our Zero Trust Exchange is built on a unique architecture that securely connects users, devices, and applications using business policies regardless of their location. We believe our 10-plus-year track record of running a massive inline cloud that has to be highly reliable and available makes Zscaler the go-to platform for vendor consolidation, cost savings, increased user productivity, and better cyber protection. We remain focused on creating shareholder value by driving customer-centric innovation, new business growth, and increased profitability. Now, I'd like to turn over the call to Remo for our financial results.