Zscaler, Inc.

Welcome to the Zscaler second quarter 2024 earnings 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, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bill Choi, Senior Vice President of Investor Relations and Strategic Finance. Please go ahead.

Good afternoon, everyone, and welcome to the Zscaler Second Quarter Fiscal Year 2024 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-gap 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 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. I also want to inform you that we'll be attending the following conferences in March. JMP Technology Conference in San Francisco on March 4th and Morgan Stanley TMT Conference in San Francisco on March 6th. Now, I'll turn the call over to Jay.

Thank you, Bill. I am pleased to share our Q2 results, which once again exceeded our guidance for the top line and the bottom line, even amidst an ongoing challenging macro environment. Revenue grew by 35% year over year, and billings grew by 27%. Our customer base spending $1 million or more continues to grow by over 30%. Our operating profit more than doubled year over year, and our free cash flow margin reached our record for Q2. During the quarter, we made solid progress on our strategy to scale our go-to market engine to reach our goal of $5 billion and beyond in ARR. To augment our already strong sales team, we're adding more experienced leaders with a proven track record of running large operations. Considering these leadership changes, I am particularly proud of our field sales execution this quarter. Before getting to the details of our fiscal Q2, let me share a few observations on the business environment. Based on my conversations with hundreds of CIOs and CISOs, I expect demand for zero trust security to remain robust in 2024 and expect customer budgets for zero trust to be up this year, particularly in light of the recent surge in the number of high profile breaches. threat actors continue to exploit vulnerabilities of firewalls and VPNs, which allow them to spread ransomware laterally inside an organization. In a recent example, a VPN vulnerability was so severe that CISA, the U.S. cybersecurity agency, took the extraordinary step of mandating that federal civilian agencies disconnect their Iventi pulse secure VPNs within 48 hours. This is yet another example of why customers are increasingly realizing that their security posture remains vulnerable and are motivated to transform their firewall-based security to our zero-trust architecture. Spinning up firewalls and VPNs in the cloud and calling it a sassy solution doesn't solve cybersecurity challenges. While customers want to consolidate point products, they're looking for a fully integrated platform that delivers zero-trust architecture. Cyber is so mission critical that customers will invest in the industry-leading solutions rather than rely on cheaper or less effective products that are included as part of their ELAs. They want best-of-breed platforms with the best functionality that integrate with other platforms, thus eliminating dozens of point products. Zscaler Zero Trust platform is an integrated and purpose-built solution that delivers comprehensive security and provides a compelling user experience while reducing cost. Strong customer interest in our platform drove a record first half total bookings with nearly half of net new bookings coming from new logo customers. We added a record number of new logos for our Q2. This demonstrates the momentum in our business, and we are increasing our outlook for revenue and billings for fiscal 2024. We are operating in a strong demand environment for Zero Trust architecture. To capture this demand and scale our business to $5 billion ARR and beyond, we appointed Mike Rich as our Chief Revenue Officer last quarter. Mike joined us from ServiceNow, where he established a scalable go-to-market engine to drive deeper engagements with large enterprises. Going forward, Mike and his team are focusing on three key areas. First, our existing opportunity-led sales engine has helped us deliver strong growth over the years, enabling us to surpass $2 billion in ARR. To drive our next phase of growth, we are evolving from an opportunity-centric to an account-centric sales motion, leveraging Mike's experience in building such plans. As we grow our sales organization, we are adding more experienced leaders and strategic sellers with the right level of experience working with CXOs and global system integrators. As we begin our planning for fiscal 25, we are developing account plans that are aligned with our customers' long-term strategic initiatives. and we are partnering with our customers to build transformation roadmaps to modernize their security and IT infrastructure. Second, we launched our top accounts pilot program a couple of quarters ago, which is successfully driving deeper platform engagements and adoption. Building upon our initial success and leveraging Mike's experience, we're scaling this program across more top accounts. Third, we're increasing our focus on vertical selling We introduced a vertical-specific sales motion a few years ago, starting with the public sector and expanded it to the healthcare vertical last year. Based upon the successful growth in these verticals, we plan to continue to expand the program into more verticals by adding domain experts who can drive vertical-specific strategies to better align with our customers' strategic initiatives. We now have a double-digit number of customers spending more than $10 million with us annually. With our expanded platform and these go-to market initiatives, I believe we will see more and more of our large enterprise customers reach $10 million ARR levels over time. Now let me highlight three factors that drove our performance in Q2. First, We are seeing continued success in selling our broader platform, including CPA, data protection, CDX, zero trust for workloads, zero trust for branch, and AI-powered solutions. Driven by upsells, our $1 million ERR customer count grew by 31% year-over-year, ending the quarter with nearly 500 such customers. Second, We had a strong federal quarter with particular strength in upsells to cabinet-level agencies. We have plenty of opportunity to expand further in the federal market. Third, we achieved a Q2 record for new logo additions, reflecting early success with our channel investments. Our $100,000 or more ARR customer base grew 21% year over year, ending the quarter with over 2,800 such customers. Let me highlight two new logo deals from the quarter. First, a Fortune 100 healthcare customer purchased ZIA, ZPA, ZDX, and Advanced Data Protection for 10,000 users in a seven-figure ACV deal. ZPA will greatly enhance their security and user experience while eliminating legacy security gateways by consolidating the VPN and VDI appliances. Protecting patient healthcare records is of paramount importance to this customer, which made data protection a crucial consideration for this deal. For the next phase, they're planning to expand to over 100,000 users, representing a significant upsell opportunity for us. In another new logo deal, after suffering repeated ransomware attacks, a technology company purchased 20,000 seeds of CIA, ZPA, ZDX, and advanced data protection. They're phasing out the legacy Castle and Moth firewall-based security, which failed to protect them against ransomware attacks. This customer excluded the incumbent firewall-based SASE vendor from consideration, as they wanted a true zero-trust architecture. This is a multi-year, eight-figure TCV deal, which is expected to generate over 100% ROI for the customer by eliminating the multiple firewalls, VPNs, and BDI systems. Now let me highlight two upsell deals that highlight broader adoption of our comprehensive platform. In a seven-figure ACV deal, an existing Fortune 500 financial services enterprise, currently using ZIA, ZPA, and data protection, upgraded to our high-end ZPA transformation bundle and added endpoint DLP for 73,000 users. This also marks our largest endpoint DLP deal since the introduction of this module just two quarters ago in our data protection solutions. By moving to the high-end of our ZPA and data protection packages, this customer increased the annual spend with us by over 60% to over $10 million annually. In another seven-figure ACV deal, a major global mining company increased its ZIA and ZDX purchases to 48,000 users and purchased ZPA transformation for 30,000 users. With the ZPA purchase, the customer is eliminating the VPN appliances and providing zero trust access for the workforce spread across remote locations worldwide. With this expanded purchase of our platform, the customer's annual spend with us nearly doubled to approximately $5 million. Next, let me discuss our opportunities in the federal market. As I mentioned earlier, we saw strong growth in net new ACV from the federal vertical in Q2. After an initial lands at 12 of the 15 cabinet level agencies, we continue to win additional awards as agencies are increasingly adopting zero trust architecture to meet the president's executive order. For example, in a seven-figure upsell deal, An agency customer expanded its seats with ZIAS, ZPA, and data protection purchases, nearly doubling their annual spend with us. With this upsell, the customer is already approaching $5 million in annual spend, even though we are still less than 15% penetrated in terms of the number of users, representing a significant upsell opportunity in this agency. With the highest levels of FedRAMP certifications for both ZIA and ZPA, we are very well positioned to benefit from continued growth with our federal customers. Building upon our success in the U.S., we are investing in building public sector programs for half a dozen nations that have adopted FedRAMP-like certification programs. This is a significant opportunity for us, but like any government initiative, this will take time. Moving on, our R&D engine continues to deliver innovations, rapidly expanding our platform and providing larger upsell opportunities. Given our strategic position, we are interacting with more CXOs than ever before and having much deeper engagements. For example, we recently hosted a CXO summit in India attended by over 200 senior IT leaders, including over 100 CXOs. At the summit, one CXO said, and I quote, the velocity of features that Zscaler releases every time we meet is extremely impressive. Our comprehensive platform protects not just users, but also workloads and IoT devices. While still early, we're seeing growing traction in our emerging platform solutions, including Zero Trust for Workloads, Zero Trust for Branch, and Zero Trust for B2B, as well as our AIML-powered solutions. Zero Trust for Workloads continues to gain wider adoption. For example, in an upsell win, a financial technology company purchased Zero Trust for Workloads for 25,000 workloads, which contributed to nearly doubling their annual spend with us to over $1 million. A large aerospace company more than tripled their Zero Trust for Workloads purchase, contributing to a 60% increase in their annual spend with us to over $1 million. In January, we launched Zero Trust for Branch, which enables one-to-one connectivity between branch devices and applications, thus securing branch IoT devices and eliminating the risk of lateral tight movement. Our Zscaler plug-and-play appliance would be the only solution customers will need at the branch, as it eliminates the need for legacy SD-WAN appliances routers and firewalls, thus dramatically simplifying branch networking and security. Zero Trust for Branch is a key component of our Zero Trust SASE solution, which is the industry's first single vendor SASE solution built on Zero Trust. Zero Trust SASE pairs Zscaler's leading SSE with our new Zero Trust SD-WAN. We have seen early adoption of our Zero Trust SASE from customers across a range of industries, including a U.S.-based energy and retail company, a Europe-based Fortune 500 manufacturing company, a U.S.-based financial services company, and many more. Moving to our AI cloud. Within this portfolio, our newest products, RISC-360 and Business Insights, are growing rapidly. Business Insights is helping CIOs and CFOs optimize cost of the SaaS applications, office locations, and more. For example, an existing global 2,000 consumer products customer purchased Business Insights for 97,000 users to replace their homegrown solution that cost over half a million dollars annually. Recently adopted SEC disclosure requirements and board-level interest in understanding cyber risk are driving demand for RISC-360. For example, a global 2,000 manufacturing customer purchased RISC-360 for nearly 16,000 users to automate the process of risk quantification and take proactive measures to reduce cyber risk. We have already delivered several AI innovations, including ML-based data classification, ML-based policy recommendations, RISC-360 business insights, and more. In addition, one of our AI products I am particularly excited about is Breach Predictor. Breach Predictor is our vision to leverage the power of our platform to predict breaches before customers get breached. We're working relentlessly to bring this and more industry-leading AI innovations to our customers this year. With our innovation engine humming and delivering cutting-edge products and our go-to market organization focused on scaling and growth, I am more excited than ever about the opportunities ahead of us and our ability to capitalize on those opportunities. Now, I'd like to turn over the call to Remo for our financial results.