Zscaler, Inc.

Hello, and thank you for standing by. Welcome to Zscaler Third Quarter 2024 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 the question during this session, you will need to press star 11 on your telephone. You will then hear an automatic message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to turn the call over to Ashwin Kajredi, Vice President of Investor Relations and Strategic Finance. Sir, you may begin.

Good afternoon, everyone, and welcome to the Zscaler Third Quarter Fiscal Year 2024 Earnings Conference Call. On the call with me today are Jay Chaudhry, Chairman and CEO, and Remo Kanessa, CFO. Please note 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 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 Bank of America Global Technology Conference in San Francisco on June 5th. Now, I'll turn the call over to Jay.

Thank you, Ashwin. We delivered an outstanding quarter with all metrics exceeding our guidance, and I'm very pleased to increase our full-year guidance based on our strong performance. Revenue in Q3 grew by 32% year over year, and billings grew by 30%. Our $1 million-plus ARR customers increased 31% year-over-year to 523, and we ended the quarter with over 50 customers with $5 million-plus in ARR. Our disciplined approach to growth is reflected in our operating profit, which nearly doubled year-over-year, and our operating margin reached a record 22%. I'm also pleased to report that we had our first quarter of GAAP profitability on a net income basis for Q3. Our strong performance was driven by continued demand for our Zero Trust Exchange platform, which we purpose-built to secure communication among users, workloads, and devices. We expect demand to remain strong as an increasing number of enterprises are planning to adopt our platform for better cyber and data protection. Zero Trust Security remains a top initiative for IT teams as legacy Castle and Moat firewall-based security is ineffective in the new world of cloud and AI. Our zero-trust exchange, processing over 400 billion transactions and preventing billions of security and policy violations per day provides superior security to our customers. For example, last calendar year, our platform prevented over 2 billion phishing attempts, up 60% year-over-year. The cyber and data protection capabilities of our platform are resonating with customers, and we are accelerating the expansion of our core platform with innovations across multiple pillars. We recently introduced the industry's first AI-powered co-pilot for ZDX, our digital experience monitoring solution. This helps simplify and automate detection and resolution of performance issues. We added two significant products to our data protection pillar. One, data security posture management, or DSPM, to discover, classify, and protect sensitive data in public clouds. And two, GenAI app security to provide deep visibility and granular controls for GenAI apps. We introduced Zero Trust Network Segmentation, which expands our platform to local area networks inside branches, campuses, and factories. We expanded our AI cloud solutions by introducing Unified Vulnerability Management to enable customers to proactively identify critical vulnerabilities. We will continue our rapid platform expansion with organic innovations as well as strategic acquisitions. We recently acquired two early-stage innovators, Avalar and AirGap Networks. Avalar's data fabric ingests, normalizes, and unifies data across enterprise security and business systems to dynamically prioritize vulnerabilities based on holistic risk. This innovative data fabric will combine data from our 400 billion daily transactions with over 150 third-party data sources to add various contexts to provide better understanding of risk for timely mitigation. As a result, customers can get real-time actionable insights and operational efficiencies, improving their overall security posture. For securing customer branches, campuses, and factories, we continue to innovate. Our Zero Trust branch solution released last year enables each branch office, campus, and factory to be treated like a Starbucks, which means there is no lateral set movement as the branches are not on the corporate network, and there is no need for firewalls as branches are no longer exposed to the internet. With the AirGap acquisition, We are taking branch security to the next level as we are introducing the industry-first zero trust segmentation inside branches, campuses, and factories for servers and IoT devices. This eliminates the need for legacy firewall-based segmentation for east-west traffic. We talked about our $72 billion market opportunity in the past. Our recent acquisitions and other innovations increase our market opportunity by several billion dollars as they extend our platform into new adjacent markets, including vulnerability management, security operations, and branch security. Moving on to our AI innovations, we are developing multiple AI-powered applications, including RISC-360, Business Insights, unified vulnerability management, and more. We are training our AI security models with the vast amounts of data generated by over 400 billion daily transactions on our platform to deliver superior threat detection. We are leveraging AI to automatically classify data and enforce policies for better data loss prevention. We have delivered GenAI app security to enable secure use of AI apps by our customers. Our GenAI app security delivers, one, visibility into the AI services used by employees. Two, policy control, which allows different user groups to access only approved AI services from the thousands of such services. And three, enforcement of data protection policies to prevent sensitive data from leaking to public AI services. We will be showcasing these and other innovations that combine the power of Zero Trust with AI at our Zenith Live user conference in June. Organizations are relying on Zscaler to continue to innovate as threat actors are evolving and posing new challenges by frequently exploiting firewall and VPN-based security architecture. Recently, hackers exploited a zero-day vulnerability of a leading Nexen firewall and a vulnerability of a leading VPN. Such exploits put organizations at risk as attackers can move laterally on the flat networks created by legacy firewalls. These shortfalls in legacy security will continue to be exploited until enterprises embrace zero trust architecture and phase out firewalls and VPNs. Zscaler's zero trust architecture eliminates lateral tech movement, which dramatically improves security posture of organizations. Our differentiated zero trust and proxy-based architecture is foundational to delivering superior security. Let me give you a few examples. After experiencing a catastrophic cyber attack last year, a large financial services new logo customer purchased our ZIA data protection and ZDX pillars for 25,000 users in a seven-figure ACV multi-year deal. This customer wanted zero trust architecture. and hence excluded the current firewall vendors from consideration. Our superior architecture and strong data protection capabilities were key to winning this deal. As the customer said, Zscaler's CASB, EDM, and OCR technologies are amazing. Zscaler just works. In another example, an existing global manufacturing customer, after learning about a major VPN vulnerability, rolled out Zscaler to 100,000 devices in just three days. Subsequently, the customer increased the purchase of Zscaler for users, including ZIA, ZPA, ZDX, and data protection in a seven-figure ACV deal, increasing their ARR by over $5 million. This customer also made an initial purchase of Zero Trust for Branch and our advanced privileged remote access solution, which speaks to customers' growing interest in our broader platform. Customers are also purchasing more of our platform to eliminate legacy tech debt and consolidate multiple point products while simplifying IT operations and improving user experience. Let me highlight two upsell deals that illustrate this. After making an initial purchase last year, a global 100 financial services customer significantly expanded the purchase of Zscaler for users in a seven-figure ACV deal for over 64,000 users. Despite having years of relationship with a legacy firewall security vendor, they chose Zscaler. This customer is consolidating multiple point products, including Secure Web Gateway, VPN, and VDI. We work closely with one of our GSI partners on this large project. This deal is an example of us working with GSI partners to expand our market opportunity. In another upsell win, a large APGA-based financial services customer signed a seven-figure ACB multi-year deal for 10,000 users buying most of our platform services. In addition to expanding the purchase of Zscaler for users, they purchased our zero-trust for workloads, zero-trust for branch, and AI cloud solutions. Our emerging products contributed nearly a third of the ACV value of the deal. I'm very pleased to share that we are seeing strong customer interest in our emerging products, which contributed nearly a quarter of our new and upsell business this quarter. Here are a few examples. In an eight-figure ACV deal, a Fortune 500 technology customer expanded their purchase of Zscaler for users and made their first purchase of Zero Trust for workloads and our AI cloud solutions. With this purchase, the customer's total ARR increased over 5x to more than $10 million. This was also our largest workload protection deal to date, representing seven figures in ACV. I'm thrilled to see our recent innovations in workload protection receiving increased traction. We closed several deals for our AI cloud solutions, including RISC-360 and Business Insights, with customers across multiple verticals, including broadcasting, consulting, insurance, and many more. CISOs get inundated with lots of security alerts and signals that don't help them take specific actions based on risk. Customers are buying RISC-360 as it provides them with the overall risk score of their organizations, the factors contributing to risk, and the actionable recommendations to reduce risk. For Zero Trust Branch, one of the largest retailers in Europe who initially adopted CIA ZDX and data protection last year, expanded the deployment in a seven-figure upsell deal to include the full suite of Zscaler for users and Zero Trust SD-WAN. Zero Trust SD-WAN, which will be deployed at the regional locations, contributed about a quarter of the ACV value of this deal. Next, in the federal vertical, we are proud to be serving 12 of the 15 cabinet-level agencies, and we continue to pursue new and upsell business opportunities across the federal market to help them adopt zero-trust architecture as mandated by the President's Executive Order. To give an example, in a seven-figure upsell win, an existing cabinet-level agency increased the purchase of ZIA and ZPA by over 50%. significantly increasing the ARR of this already $10 million plus customer. Next, let me give you an update on our progress in the Department of Defense or DoD segment. DoD has a requirement to implement Zero Trust with the technologies and solutions that work best for individual military services and departments. I'm thrilled to share that we signed a seven-figure ACV deal with the DoD branch this quarter. In this land deal, the customer made an initial purchase of Zscaler for users to protect 50,000 users. With our proven Zero Trust architecture, this latest DoD deal demonstrates that we are well positioned to capture the large cybersecurity opportunity at the DoD. Next, let me give you an update on our go-to-market organization where we continue to make great progress. First, to capture the strong demand for our platform and to scale our business to $5 billion in ARR and beyond, we appointed Mike Rich as our Chief Revenue Officer in Q2. Mike hired key leaders in Q3, and he now has his full management team in place. The quality and caliber of Mike's leadership team is exceptional. I'm very pleased with the progress of our sales hiring, particularly at the leadership level. With the right leaders in place, we are now focused on increasing the pace of hiring Kodak hiring reps. Second, as I mentioned last quarter, we are evolving our sales motion from opportunity-centric to account-centric. The eight-figure ACV deal with the Fortune 500 technology company that I called out earlier is an example of the success of this new sales motion. We engage closely with this customer to recommend the best solution for now and the future. We look forward to working with them as they are fully embracing digital transformation and zero trust security. In conclusion, we are on a mission to take our platform everywhere so customers can benefit from better security simplified IT operations, and improved user productivity. We are one of the few vendors that deliver tangible cost savings as we eliminate multiple legacy point products. The last three decades of the security industry have been centered around firewalls, which are no longer effective in today's cloud, mobile, and AI world. I believe the next three decades will be defined by Zero Trust architecture. We have the right platform and the right team to delight our customers and capture our large and growing market opportunity. I'm excited about the journey ahead and look forward to sharing at Zenith Live how Zscaler is combining the power of Zero Trust with AI to power the future of secure digital transformation. Now, I'd like to turn over the call to Rimu for our financial results. Thank you, Jay.

Our Q3 results exceeded our guidance on growth and profitability, even with ongoing customer scrutiny of large deals, the changes in our sales organization, and higher-than-expected sales attrition in the quarter. Revenue was $553 million, up 32% year-over-year, and up 5% sequentially. From a geographic perspective, Americas represented 54% of revenue, EMEA was 31%, and APJ was 15%. Our total calculated billings in Q3 grew 30% year-over-year and remained flat sequentially at $628 million. Our calculated current billings grew 29% year-over-year. Our remaining performance obligations, or RPO, grew 27% from a year ago to $3.824 billion. Current RPO was approximately 51% of the total RPO. We ended Q3 with 523 customers with greater than $1 million in ARR and 2,922 customers with over $100,000 in ARR. This continued strong growth of large customers speaks to the strategic role we play in our customers' digital transformation journeys. our 12-month trailing dollar-based net retention rate was 116%. While good for our business, our increased success of selling bigger bundles, selling multiple pillars from the start, and faster upsells within a year can reduce our dollar-based net retention rate in the future. There could be variability in this metric on a quarterly basis due to the factors I just mentioned. Turning to the rest of our Q3 financial performance, Total gross margin of 81.4% compares to 80.8% in the prior quarter and 80.2% in the year-ago quarter. On a year-over-year basis, gross margin benefited by approximately 60 basis points from a change in accounting attributed to the longer useful life of our cloud infrastructure. As mentioned on our previous earnings call, Beginning in fiscal 2024, we extended the depreciable, useful life of our servers and network equipment and our cloud infrastructure for four to five years. Moving on, our total operating expenses increased 2% sequentially and 21% year-over-year to $328 million. We continued to generate significant leverage in our financial model, with operating margin reaching 22%, an increase of approximately 680 basis points year-over-year. Our free cash flow margin was 22%, including data center CapEx, with approximately 6% of revenue. We ended the quarter with over $2.2 billion in cash, cash equivalents, and short-term investments. Moving on to guidance for Q4 and full-year fiscal 2024. As a reminder, these numbers are all non-GAAP. For the fourth quarter, we expect revenue in the range of $565 million, to $567 million, reflecting year-over-year growth of 24% to 25%, gross margins of 80%, operating profit in the range of $107 million to $109 million, net other income of $17 million, income taxes of $11 million, earnings per share in the range of 69 cents to 70 cents, assuming 165 million fully diluted shares. For the full year fiscal 2024, we're increasing our guidance as follows. Revenue in the range of $2.14 billion to $2.142 billion, reflecting year-over-year growth of approximately 32%. Calculated billings in the range of $2.603 billion to $2.606 billion, or year-over-year growth of approximately 28%. Operating profit in the range of $422 million to $424 million, which reflects up to 490 basis points of operating margin improvement compared to last year. Income taxes of approximately $32 million. Earnings per share in the range of $2.99, to $3.01, assuming approximately 161 million fully diluted shares. We expect our free cash flow margin to be in the low to mid-20% range. We will give specific fiscal 25 guidance on the next earnings call, but I'd like to mention that the increased spend on the data center CapEx, which we had originally planned for fiscal 24, is now planned for fiscal 25. Q3 was a transitional quarter for our go-to-market team, and I believe we did an outstanding job navigating through it. Although our attrition was higher than we expected, as Jay mentioned, we had a strong quarter hiring, particularly at the sales leadership level. We are now focused on increasing the pace of hiring quota-carrying reps. We believe the combination of our existing sales team with these new hires will result in a much stronger go-to-market organization. That said, new hires will take time to ramp to full productivity, which we believe will result in a few points of headwind to our total billings growth in fiscal 25. With our customer obsession, expanding platform, and strengthening sales teams, we're well positioned to continue to gain share in a large and growing market for us. With that, operator, you may now open the call for questions.

Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 11 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 11 again. We ask that you limit yourself to one question only. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matt Hedberg with RBC Capital. Your line is open.

Great. Thanks for taking my questions, guys. Congrats on the quarter. Really, really nice to see the results in obviously a difficult selling environment. I guess, Jay, I think one of the questions that we often get from investors is around security consolidation. And I think you gave a lot of great anecdotal evidence around success of newer products and sort of the traction you're seeing there. Could you just expand upon that and just talk a little bit more about the role of Zscaler in broader consolidation? Because it certainly feels like customers want to do more with less, and just how strategic is Zscaler in that initiative?

Of course, Matt. Thank you. Customers do want consolidation and simplification of lots of point products, but they want to do it along best of the platforms. They don't believe in a single vendor offering the entire, what I may call, God security platform. Okay. our customers are moving a bunch of from point product the whole dmz demilitarized zone goes away so we are playing a big role in consolidation we're taking out lots of firewalls vpns and that's all lots of savings come that's why we're able to justify the sale of our platform by taking out a lot of products now customers do want two or three tiers of security that's why often It's Zscaler for inline, an EDR vendor, and an identity vendor. But the notion of selling ELA, bundle everything, doesn't go well. More and more CIOs and CFOs are scrutinizing shelfware that's being bought. So consolidation is happening. We are playing a big role, but it's focused, selected consolidation, not a point blank, give me everything type of stuff.

Thank you. Please stand by for our next question. Our next question comes from the line of Saki Kalia with Barclays. Your line is open.

Okay, great. Hey, guys, thanks for taking my question here and echo my congrats on the quarter. Jay, maybe I'll make my question for you. You know, I think we all know your views on firewall-based SASE solutions, but I'm curious how you're faring competitively against the smaller competitors here that are maybe more purpose-built, sassy solutions? And do you feel like the market's view here on pricing is changing at all as we see more of those purpose-built, sassy competitors enter the market? The results certainly want to indicate so, but I just want to hear your view on sort of that part of the competitive landscape.

Sure. Thanks, Akit. So, yeah, small and sassy vendors. You know, as you know, we play in the large enterprise market. We don't really see some of these small SASE vendors that are so-called purpose-built. A lot of those purpose-built vendors come from taking firewall as a service into a network together and all that type of stuff. You know, part of the challenge I have with this SASE thing is that it says SD-WAN plus SASE. My customers, my CISOs believe that SD-WAN enables lateral tech movement. So where we are headed, we think SD-WAN has to go away. It'll be replaced with zero-trust SD-WAN. That's the new market segment we are pioneering. So we will keep on driving innovations. Sometimes investors think that SASE or SASE is a static market. They often ask the question, Jay, aren't these guys going to catch up with us? Of course, they're trying to catch up and do what we did four years ago, but we've done another two years ahead. In the cyberspace, it's a race, and we keep on innovating at a faster pace, and I don't think smaller SASE vendors or firewall vendors will be able to catch up with us.

Thank you. Please stand by for our next question. Our next question comes from Milan. of Alex Henderson with Needham. Your line is open.

Great, thank you very much. And it's great to see you guys executing against a tough environment here. But I was taken back by a little bit of the commentary around the higher attrition in your sales organization, even as you're bringing in a lot of additional new salespeople and sales leadership. So can you talk a little bit about the mechanics of why that is occurring? Is that a reflection of a change in policy? Is it a change in skill sets that the firm thinks it needs? What has caused that attrition? And should we be sanguine when we're hearing that you're seeing accelerating people departing the firm?

So, Alex, with the departure of our COO, we saw higher attrition in Q3 than expected, but we expect it to stabilize in Q4. It's a combination of factors, including skill set. But I'm very pleased with how well the GTM transition is progressing. With the hiring of key leaders in Q3, Mike now has full management team. As you know, we have a great brand. We are a destination for top talent with right leaders in place. We have accelerated the pace of hiring Kodak heading reps in Q4. Our high-caliber leaders are attracting and hiring seasoned reps, and they will play a key role in making us successful to take up from $2 billion to $5 billion. Primal? Yeah, I mean, it's a great question, Alex.

You know, the attrition is, you've got to keep in mind, it's both voluntary and involuntary attrition. You know, as Jay mentioned, you know, with Mike Rich coming on board, he's hired his entire leadership in his first quarter here, his first full quarter. Our focus now is going to be increasing the pace of hiring for quota-carrying sales reps Just to give you some color, in the first month of this quarter, which is May, we've hired comparably the same amount of reps that we hired in all of Q3. So what you want to do is you've got to get your leadership in place because that leadership is going to drive the makeup of the sales and go-to-market organization. As Jay mentioned, the go-to-market organization that we have, I feel very, very good about it. I feel... I feel outstanding, quite frankly. The work that's being done, the people that we're bringing on board, you know, and the direction we're going, I think is absolutely outstanding.

Yeah.

And if I may say, I think I'm very pleased with the transition. Is part of the plan to bring Mike on board to get to account-based selling?

Thank you. Please stand by for our next question.

Our next question comes from the line of Brad Zilnick with Dutcher Bank. Your line is open.

Great. Thank you guys so much for taking the question, and congrats, especially on all the emerging product success that you're having. Jay, I wanted to follow up on Saket's question because I think some investors are concerned about intensifying competition in your core market, not just amongst specialized SASE players, but some of the bigger ones as well. And I know Zscaler has always distinguished itself, first and foremost, on its architectural advantage, zero trust exchange, et cetera. But what can you share with us to help appreciate the durability of that advantage? And maybe for Remo, what quantitative metrics can you share, whether it's win rates, pricing trends, sales cycle times, or anything else that can help us gauge the competitive environment? Thank you.

So first of all, starting with, as we said, architecture matters. It's like going from traditional car to electric car. Most are large vendors. are trying to build upon what they have, and we don't believe they'll ever get there. So that's just the architecture. Number two, the market functionality in this area is not static. It's moving and it's evolving. You recall when we went public six years ago, our platform was relatively small. Look at how much it has expanded. And that's only just for users. There's a big market for workloads. You saw a number of deals we talked about where workloads, is taking good traction. Then there are trillions of IoT devices. We are the right platform. We are expanding in that area. In fact, part of the reason we did air gap acquisition was to expand into IoT inside the campus, inside the plant, to do zero-trust segmentation, which typically has been done by firewalls.

And look at the data protection.

That area has exploded. Nobody comes close to doing data protection as well as we do. So functionality is number two. The third thing I believe will keep us ahead in the long run is speed of innovation. You're seeing how well we have innovated, how fast we've innovated. That's for sure. This is not going to slow down. The last point I'll make in this area that I'm extremely proud of, more proud of than any of our financial staff, is a net promoter score of seven. Happy customers buy more. I'll share with you one interesting snippet. A few months ago, I counted CXOs I have worked with who have bought ZScooter for more than once from us. This is Fortune 1000 companies. The number I came with, 285. So all this stuff makes me very confident and proud. Raymond?

Yeah, from a win rate basis, they continue to be very high. So no change in win rates. Pricing trends, you know, really not seeing anything from a pricing trend perspective. It's just remaining relatively constant. I think what that speaks to is basically the strategic nature of our platform and what we do for our customers. And also sales cycles. We talked about our sales cycles, you know, for large deals, 9 to 12 months. We mentioned a few quarters ago that they're moving more towards that 12-month. Really no change there either.

If I may add a little bit on the pricing pressure, Emil. Of course, there is some price impression, but we are focused on value selling. When we are able to go in and say, we are able to take up X million dollar worth of technology and we'll do it so much in Q1, so much in Q2, so much in Q3, we are able to secure pretty good pricing. That's a point I want to make. The market scrutiny is there. But my team is doing a good job in showing value to our customer by eliminating lots of contracts.

Thank you. Please stand by for our next question. Our next question comes from the line of Roger Boyd with UBS. Your line is open.

Great. Thanks for taking the questions. Remo, I know you're not guiding to fiscal 25, but you did suggest that the attrition you're seeing in the third quarter here would be a few points impactful to growth next year. I don't think we'll comment on that, but wondering alternatively if you can just talk about your growth versus profitability framework. In the past, you've talked about biasing towards margin expansion under a certain level of growth, but the messaging right now, it sounds like you feel pretty confident about rehiring under the new sales leadership framework. You're also verging on gap profitability. A lot of moving parts, but just any thoughts on how you're thinking about that growth versus profitability framework from here would be great.

Thank you.

Yeah, I'll focus in on the growth versus profitability and also the gap profit. I think that hits most of your points. From my perspective, Zscaler is perfectly positioned with our platform and its early stages in this emerging market where we're expanding basically our product base. So from my view and Jay's view, we will still continue to invest on top-line growth. You saw in Q3, our operating profitability on a non-GAAP basis was 22%. When we went public, we said our operating profitability target was 20% to 22%. We hit 22%. I am not concerned about operating profitability. The model basically will increase profitability naturally as the business slows down. So there's no reason really to focus on operating profitability. And really, the name of the game right now is to continue to invest and build that top line growth. From my perspective, also on a gap profitability, we got the gap profitability in Q3. primarily related to stock-based compensation going down to 22% of revenue. That 22% of revenue relates to a reversal of PSUs for certain executives that left the company. So going forward on a GAAP profitability, we will get to GAAP profitability, but I don't want to make any projections of when that's going to happen. Again, the focus is on top-line growth. and also maintain operating profitability. For modeling purposes, one of the things they didn't comment on, but I'll comment on now, think about operating profitability going up slightly in fiscal 25, not a lot. Again, our focus is growth, and as long as we feel we're making the right investments to really exploit this market and increase shareholder value, we're going to continue to do that. So a very, very slight increase in operating profitability is what you should think about fiscal 24 versus fiscal 25.

And investments in two big areas. Keep on innovating at a faster and faster pace. Building some of the disruptive technologies that we are so proud of.

Number two, keep on investing and go to market.

Thank you. Please stand by for our next question. Our next question comes from the line of Atiyah Kitchum with Oppenheim & Kupner. Your line is open.

Yeah, hi, thank you. This is Parham Singh for Itai Kidron. First of all, you know, I want to understand your 4Q guidance a little bit. If I just go back the last couple of years, your year-to-year growth rate doesn't change much from 3Q to 4Q, but there's a significant deceleration in your 4Q guide this time. So I want to understand, is that something that I'm missing outside of, say, you know, a little bit of conservatism for higher sales attrition that maybe, you know, people are not thinking about right now?

Thank you for the question. You know, number one, we like being prudent. So that's number one. Number two is Q3 was a very, very strong quarter for us. We beat the basically consensus on a top line basis by 8%. And also fourth quarter of fiscal 23, we called out that we had a large $20 million deal. So it's a tough compare from a billing perspective going into a tough compare for 24 versus 23.

And you got the last point. You know, the attrition, you know, did play into it also.

Thank you.

Please stand by for our next question. Our next question comes from the line of Eric Heath with KeyBank. Your line is open.

Hey, thanks for taking the question. Again, just really strong results in acceleration. Pretty difficult to compare, so great to see. Jay, I mean, look, the macroenvironments Pretty tough, so I'd be curious to hear some of your perspective more on the topic and just hear what customers' willingness to do transformational projects like SASI are at the moment, especially when they do seem to be hitting the pause button in other areas.

Yes. Yes, macro remains tough. remains high. But there's two things that are helping us. One, CIOs, CISOs, and boards remain very worried about cyber with all the ransomware attacks. So if you play a critical role in minimizing cyber threats, as we do with Zero Trust Architecture to minimize lateral movement, we get attention and engagement with CXO. But if then you can show the CXO that you are going to do this cyber initiative and you're going to save X million dollars, you get more attention. So those two things are helping us build a strong engagement and pipeline. Even if you do that, the next hurdle is you need to convince the CFO that actually the savings can be done. They're being more scrutinizing, show me savings quarter by quarter by quarter. We have a strong business value assessment team. We engage with the C-level early on, and we show those benefits. Think of it this way. How many cyber companies are out there doesn't actually show tangible savings. You think a firewall company will show savings? No, they want to protect their firewalls. They don't want to do cannibalization. We can cannibalize. We can actually take out all the firewalls and VPNs and they can VDI off the wall. So it's a good opportunity. We just want to make sure we have the high caliber seasoned salespeople who can engage with C-level and drive all these initiatives. And that's why I'm so excited about That leadership under Mike and the sales team, we are expanding and growing.

Thank you. Will you stand by for our next question? Our next question comes from the line of Joseph Gallo with Jefferies. Your line is open.

Hey, guys. Thanks for the question and really nice results, especially in looking at broader software. Jay, how should we think about the sustainability of these growth numbers? And then as you look at it in the next 12 to 18 months, we're the biggest upside drivers to the top line model. Is it the Salesforce ramping or is it the new products? And then congrats on that quarter of new business coming from emerging. How should we think about that next year? Thanks.

Sorry, the first part was sustainability or what?

Sustainability of growth. And what's the biggest upside? Okay.

The biggest upside. So you mentioned three points there. It's kind of interesting. One is obviously sustainability. sales force matters it makes a big difference so the initiative we're going through with sales force making making sure more and more our sales people are able to engage at the sea level consolidated combined with our gsi initiatives is obviously a big big opportunity for us then you talked about emerging products they are they're very good they're actually evolving, they're taking, they're giving us the results we want. But if you want to ask me what's going to give us the biggest numbers in terms of dollar-wise, when emerging start from small numbers, they don't move the needle. What's going to move the needle from product point of view? CPA has a strong growth. We still expect CPA to give strong growth. C's credential experience has grown significantly. It will move the needle next year. And the data protection portfolio has become significant. It's pretty sizable. And if you ask me, almost every Zscaler customer over time should have our own data protection because once we sit in line for traffic inspection, we are the natural vendor to be doing data protection. And that's another area for growth. Plenty of product offerings. The two areas, new area that can really change things quite a bit for us, Xenotrust segmentation is an acquisition of AirGap. It's a new market we're entering into so far. We stayed up to the branch. We never went inside the branch. We left the east to west firewalls alone. Now we're going in there, not with a better firewall, but without a firewall, doing Xenotrust segmentation. And Avalar opens a whole range of opportunities, and Xenot Live will talk more about that. But very, very bullish in the product portfolio. But once you combine your amazing portfolio with a great go-to-market team, you get excellence.

Thank you. Will you stand by for our next question? Our next question comes from Milana Fatima Boulaini with Citi. Your line is open.

Good afternoon. Thanks for taking my question. Jane Remo, I wanted to reconcile the strength in the execution this quarter against the very explicit commentary around higher than expected sales capacity attrition. So I'm wondering if you can map back to anything internally that helped drive that outperformance on sales execution in spite of sales capacity departure, and maybe specifically if you can update us on how the verticalization efforts you've instituted in the go-to-market organization, how those have been yielding relative to your expectations. Thank you.

So maybe I can start, Remo, and you come back to it. So first of all, verticalization. It's a journey as companies grow. They get there. Companies that are more solution-centric, they actually need to be more vertical. We started our vertical journey with the federal market. Then we expanded to sled markets. And then we recently expanded to healthcare. And you're going to see some more expansions, but more importantly, you're going to see some more folks initiatives to accelerate the growth of those markets. It's going very well. And Mike Trich and his team come from a previous company where they actually have gone through the vertical journey. So I'm very comfortable with people pursuing it successfully. Your second question was, in spite of attrition, good numbers, what's, what's, what's involved. Zscaler is not a point product where the sale depends on the sales FNSC alone. It's a teamwork. We have told you all along that we require, we have some very seasoned CXOs who have been former CIOs, CISOs, CTOs, type of people. We need some architects. We talk about business value assessment. When you have a team like this engaged, the departure of some number of sales people has a limited impact, and we are doing very well, as you saw from our results.

Yeah, I mean, just to add, you know, on to Jay, and just to also confirm from my perspective, the execution, you know, that we had in the quarter was outstanding, and that's driven, you know, for the entire sales organization, you know, it is the new salespeople coming on board and our existing salespeople. I think one of the things that, you know, our execution and the reason that we did well You know, it really speaks, you know, to the strength of Zscale and our platform and the need of our customers for our service. As Jenny mentioned, relationships matter. And, you know, no company I've ever been in my career has the relationships with CXOs been as high and as strategic on a worldwide basis, not even close to what we have here at Zscaler. That matters. Solution architects matters. You know, architectural workshops matter. There's more, there's, there's, there's, it's really a team that goes into, you know, customers with EVCs. It's, it's a, you know, it's really unique company. And what we talked about when we're, we're going public is that, you know, it's not a box sale and box sales are more, I don't want to say tactical, we just call it tactical. This is a strategic sell, which really takes the understanding and of companies at the highest level to make these transformational changes. So I think all of that basically played into our execution.

And one more comment I'll make. Our customers view us as very strategic and mission-critical partners.

That being the case, there's a strong engagement, and that's why our overall retention is so high.

Thank you.

Please stand by for our next question. Our next question comes from the line of Shirinik Ghaffari with Bayer. Your line is open.

Yeah, thanks for taking my question. Congrats on the great quarter. So, Jay, you highlighted data protection in the Q&A, and we are also hearing about the increasing need for kind of very comprehensive data protection. It's been a key focus here. It seems like it's starting to pay dividends. It's kind of inflecting up now. So just curious, as overall AI workloads get bigger and the digital and cloud adoption continues to rise across industries, how do you see new verticals and potentially new use cases that could potentially expand your TAM and also drive growth in the next year, like thinking next year and beyond?

Yes, the new use cases and new products are definitely increasing our TAM. In fact, if you look at data protection, what it used to be for DLP in line is only a piece of it. Data address, data sitting endpoint, data sitting in public cloud, data loss related to SaaS security, supply chain vendors, it's all expanding. DSPM, if you have all of that portfolio, it expanded our TAM quite a bit. AI is kind of interesting. It's increasing the TAM itself, but it's also getting embedded in all products. We leverage AI and data protection quite a bit. Workload is growing. We're very bullish about it. A big area of time expansion for us is actually zero trust per branch. This is where we are in. We believe it's a matter of time in three, four years. Everyone will say, are you using traditional SD-WAN or are you using zero trust SD-WAN? We're the only vendor in the market that offers zero trust SD-WAN. And copycats will try to come and follow us in the next three, four years. Then we're going to move to the next level. We will talk about 10 probably in the coming quarters. But if you ask me to take a guess, Ashwin and I have been debating a little bit. We think we've added somewhere in the $10 to $20 billion on top of $72 billion we've talked about before.

Thank you. Please stand by for our next question. Our next question comes from the line of Gray Powell with BTIG. Your line is open.

Great. Thanks for taking the question. Maybe on the go-to-market side, just anecdotally, we've heard that some of the larger GSIs, folks like Accenture, we just heard that they're fans of Mike Rich. So I'd be curious, what can he do better there that maybe Zscaler was not doing before? How can you improve those relationships and drive more growth?

Yeah, it's a good point.

We highlighted last quarter three things we'll be doing as Mike's key initiative focused on opportunity-centric to account-centric being one, GSIs being two, and verticals being three. All three are making good progress. You know, GSIs know the value we bring to the table. We have been doing a number of deals But as Jay is always impatient and saying not doing enough deals, we need to do more. So one of the key that's needed for us would be to bring in some more higher caliber leaders in that space. We have added a number of leaders who comes from having worked with GSIs like Accenture and working with cloud providers have built billions of dollars worth of business. So extension and expertise and caliber in that area is going to accelerate our business and we are counting on it.

Thank you. Will you stand by for our next question? Our next question comes from the line of Joshua Tilton with Wolf Research. Your line is open.

Hey, this is Patrick on for Josh. Coming back to the competition, we've seen several firewall and VPN-based vulnerabilities disclosed from some of your competitors in recent months that offer those solutions. Can you talk about what impact those have had on demand, if any, and then anything specific to call out in the federal space there as well? Thanks.

Yeah. It's true. We all have been reading about the vulnerabilities coming from some of the leading VPN vendors and some of the fiber vendors out there as well. It has increased demand. The number of engagements we have already closed that came from the VPN vulnerabilities that federal government CISA issued a directive for. The number of them in the pipeline, I'm not sure I can give you a quantifiable number, but I can tell you it is It's a meaningful number. Customers now fully understand that whether VPN on-prem or VPN mask as a cloud service as a virtual machine is still a VPN. And we are replacing a lot of those. That becomes a starting point for ZPA. Then they start looking for zero trust documentation and the like. In the federal government, deals take longer than that. non-specific than the public or private sector. But public sector has decided to eliminate all of those VPNs that have been deployed out there. We've got a number of active engagements going on. You've seen our federal business is going quite well. Very pleased with the progress we're making. And CISEP, both combinations, are playing an important role.

Most of our deals there combine both of them, so any user can access any application from anywhere in Zero Trust fashion.

Thank you. Will you stand by for our next question? Our next question comes from the line of Greg Moskowitz with Mazuhu. Your line is open.

Okay, thank you for taking the questions. Jay, workload protection has done fairly well overall, but historically speaking, the deal sizes have been limited. Given the success that you sort of called out in your prepared remarks, Do you think we may be at an inflection point for workload protection, or does the pipeline suggest that we're still a ways off from that? And then a quick clarification for Remo, if I may. Remo, you mentioned operating profitability going up slightly in fiscal 25. Does that apply to op margins as well, or are you saying that we should only expect operating profit dollars to go up slightly? Thanks.

Yeah. You know, in the workload protection, a thing I'm very proud of is Nobody in the market talks for zero trust communication on workflows the way we do. I guess we like to be pioneers out there who need to evangelize. The debt market is taking off. It has to take off. The deal size in technology type of companies are getting bigger. The deal size in traditional companies are still smaller because the workflows in production are still coming up but not as fast. So I do believe It's a matter of time when almost all of these killer customers will be buying our workload product, and it will bring a big market opportunity, but I think a number of other products that are probably growing faster than this. I don't want to kind of say it's not good. It is very strategic for us. You're working with the customers. It's a matter of time as revenue starts growing at a faster pace.

And Greg, I was referring to operating profit margin percent.

Thank you. Will you stand by for our next question?

Our next question comes from the line of Tal Laneni with Bank of America. Your line is open.

Hi, guys. Thanks. My question is on NRR. You talked a lot about upsell and new products and ability to expand, but your NRR has declined from 120% to 117% to 116% in the last three quarters. How do you connect it to your comments on new products? And on the flip side, the contribution of new customers went up to 50% of your growth this quarter. Can you give us a little bit details on the profile, meaning do you go to different verticals, down market, to SMB? Is there any color to this growth with new customers? Thanks.

Yeah, the NRR at 116 I think is outstanding. The things that influence NRR, and we talked about this with our users. Basically, we're trying to sell the user platform to our customers, and that includes CIA, ZDA, and CDX. So that is going to influence NRR. Also, customers buying within a year doesn't get captured in NRR because NRR is basically a custom device this year versus a year later. But if they buy within the year, that can impact NRR. Having said all that, 116 is a really good number from our perspective.

And we've said over the past many years, you know, the faster you sell, the lower you end on. The bigger bundle you sell, the lower.

So we look at it as a factor, but it's not the most important factor we track.

Thank you.

Ladies and gentlemen, due to the interest of time, our final question will come from the line of Adam Borg with Stiefel. Your line is open, Adam.

Awesome. Adam Bork from Stiefel. Thanks for taking the question. Maybe for Jay on the Advanced Plus Bundle, I know this is a newer offering that you talked about a few quarters back, and it's a healthy pricing uplift given some of the new API capabilities. And I was just curious if you could talk more about how that Advanced Plus Bundle is resonating and kind of what percent of the install base you think this is really addressable to over time. Thanks so much.

Overall, our customers are buying bigger and bigger bundles. That's why our pricing, our ARR is going up because the bigger bundles can take out more products and give them functionality. I'm not sure I have any quantitative data to provide you, but directly speaking, our bigger and bigger bundles are happening. As you listen to our prepared remarks, it's no longer that it's buying bundles for users. along with users. We're selling platforms, selling data protection, and quite often now we're bringing in AI solutions like S360 and the like as well.

Thank you. At this time, I would like to turn the call back over to Jay for closing remarks.

Well, thank you for your interest in Z-Square. We look forward to seeing you at some of the upcoming conferences. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day. you Bye. Thank you. Thank you. Hello, and thank you for standing by. Welcome to Zscaler Third Quarter 2024 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 the question during this session, you will need to press star 11 on your telephone. You will then hear an automatic message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to turn the call over to Ashwin Kajredi, Vice President of Investor Relations and Strategic Finance. Sir, you may begin.

Good afternoon, everyone, and welcome to the Zscaler Third Quarter Fiscal Year 2024 Earnings Conference Call. On the call with me today are Jay Chaudhry, Chairman and CEO, and Remo Kanessa, CFO. Please note 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 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 Bank of America Global Technology Conference in San Francisco on June 5th. Now, I'll turn the call over to Jay.

Thank you, Ashwin. We delivered an outstanding quarter with all metrics exceeding our guidance, and I'm very pleased to increase our full-year guidance based on our strong performance. Revenue in Q3 grew by 32% year over year, and billings grew by 30%. Our $1 million-plus ARR customers increased 31% year-over-year to 523, and we ended that quarter with over 50 customers with $5 million-plus in ARR. Our disciplined approach to growth is reflected in our operating profit, which nearly doubled year-over-year, and our operating margin reached a record 22%. I'm also pleased to report that we had our first quarter of GAAP profitability on a net income basis for Q3. Our strong performance was driven by continued demand for our Zero Trust Exchange platform, which we purpose-built to secure communication among users, workloads, and devices. We expect demand to remain strong as an increasing number of enterprises are planning to adopt our platform for better cyber and data protection. Zero Trust Security remains a top initiative for IT teams as legacy Castle and Moat firewall-based security is ineffective in the new world of cloud and AI. Our zero-trust exchange, processing over 400 billion transactions and preventing billions of security and policy violations per day provides superior security to our customers. For example, last calendar year, our platform prevented over 2 billion phishing attempts, up 60% year over year. The cyber and data protection capabilities of our platform are resonating with customers, and we are accelerating the expansion of our core platform with innovations across multiple pillars. We recently introduced the industry's first AI-powered co-pilot for ZDX, our digital experience monitoring solution. This helps simplify and automate detection and resolution of performance issues. We added two significant products to our data protection pillar. One, Data Security Posture Management, or DSPM, to discover, classify, and protect sensitive data in public clouds. And two, GenAI App Security to provide deep visibility and granular controls for GenAI apps. We introduced Zero Trust Network Segmentation, which expands our platform to local area networks inside branches, campuses, and factories. We expanded our AI cloud solutions by introducing Unified Vulnerability Management to enable customers to proactively identify critical vulnerabilities. We will continue our rapid platform expansion with organic innovations as well as strategic acquisitions. We recently acquired two early-stage innovators, Avalar and AirGap Networks. Avalar's data fabric ingests, normalizes, and unifies data across enterprise security and business systems to dynamically prioritize vulnerabilities based on holistic risk. This innovative data fabric will combine data from our 400 billion daily transactions with over 150 third-party data sources to add various contexts to provide better understanding of risk for timely mitigation. As a result, customers can get real-time, actionable insights and operational efficiencies, improving their overall security posture. For securing customer branches, campuses, and factories, we continued to innovate. Our Zero Trust Branch solution released last year enables each branch office, campus, and factory to be treated like a Starbucks, which means there is no lateral set movement as the branches are not on the corporate network, and there is no need for firewalls as branches are no longer exposed to the internet. With the AirGap acquisition, we are taking branch security to the next level as we are introducing the industry-first Zero Trust segmentation inside branches, campuses, and factories for servers and IoT devices. This eliminates the need for legacy firewall-based segmentation for east-west traffic. We talked about our $72 billion market opportunity in the past. Our recent acquisitions and other innovations increase our market opportunity by several billion dollars as they extend our platform into new adjacent markets, including vulnerability management, security operations, and branch security. Moving on to our AI innovations, we are developing multiple AI-powered applications, including RISC-360, Business Insights, unified vulnerability management, and more. We are training our AI security models with the vast amounts of data generated by over 400 billion daily transactions on our platform to deliver superior threat detection. We are leveraging AI to automatically classify data and enforce policies for better data loss prevention. We have delivered GenAI app security to enable secure use of AI apps by our customers. Our GenAI app security delivers, one, visibility into the AI services used by employees. Two, policy control, which allows different user groups to access only approved AI services from the thousands of such services. And three, enforcement of data protection policies to prevent sensitive data from leaking to public AI services. We will be showcasing these and other innovations that combine the power of Zero Trust with AI at our Zenith Live user conference in June. Organizations are relying on Zscaler to continue to innovate as threat actors are evolving and posing new challenges by frequently exploiting firewall and VPN-based security architecture. Recently, hackers exploited a zero-day vulnerability of a leading Nexen firewall and a vulnerability of a leading VPN. Such exploits put organizations at risk as attackers can move laterally on the flat networks created by legacy firewalls. These shortfalls in legacy security will continue to be exploited until enterprises embrace zero trust architecture and phase out firewalls and VPNs. Zscaler's zero trust architecture eliminates lateral tech movement, which dramatically improves security posture of organizations. A differentiated zero trust and proxy-based architecture is foundational to delivering superior security. Let me give you a few examples. After experiencing a catastrophic cyber attack last year, a large financial services new logo customer purchased our ZIA data protection and ZDX pillars for 25,000 users in a seven-figure ACV multi-year deal. This customer wanted zero trust architecture. and hence excluded the current firewall vendors from consideration. Our superior architecture and strong data protection capabilities were key to winning this deal. As the customer said, Zscaler's CASB, EDM, and OCR technologies are amazing. Zscaler just works. In another example, an existing global manufacturing customer, after learning about a major VPN vulnerability, rolled out Zscaler to 100,000 devices in just three days. Subsequently, the customer increased the purchase of Zscaler for users, including ZIA, ZPA, ZDX, and data protection in a seven-figure ACV deal, increasing their ARR by over $5 million. This customer also made an initial purchase of Zero Trust for Branch and our advanced privileged remote access solution, which speaks to customers' growing interest in our broader platform. Customers are also purchasing more of our platform to eliminate legacy tech debt and consolidate multiple point products while simplifying IT operations and improving user experience. Let me highlight two upsell deals that illustrate this. After making an initial purchase last year, a global 100 financial services customer significantly expanded the purchase of Zscaler for users in a seven-figure ACV deal for over 64,000 users. Despite having years of relationship with a legacy firewall security vendor, they chose Zscaler. This customer is consolidating multiple point products, including Secure Web Gateway, VPN, and VDI. We work closely with one of our GSI partners on this large project. This deal is an example of us working with GSI partners to expand our market opportunity. In another upsell win, a large APGA-based financial services customer signed a seven-figure ACB multi-year deal for 10,000 users buying most of our platform services. In addition to expanding the purchase of Zscaler for users, they purchased our zero trust for workloads, zero trust for branch, and AI cloud solutions. Our emerging products contributed nearly a third of the ACV value of the deal. I'm very pleased to share that we are seeing strong customer interest in our emerging products, which contributed nearly a quarter of our new and upsell business this quarter. Here are a few examples. In an eight-figure ACV deal, a Fortune 500 technology customer expanded their purchase of Zscaler for users and made their first purchase of Zero Trust for workloads and our AI cloud solutions. With this purchase, the customer's total ARR increased over 5x to more than $10 million. This was also our largest workload protection deal to date, representing seven figures in ACV. I'm thrilled to see our recent innovations in workload protection receiving increased traction. We closed several deals for our AI cloud solutions, including RISC-360 and Business Insights, with customers across multiple verticals, including broadcasting, consulting, insurance, and many more. CISOs get inundated with lots of security alerts and signals that don't help them take specific actions based on risk. Customers are buying RISC-360 as it provides them with the overall risk score of the organizations, the factors contributing to risk, and the actionable recommendations to reduce risk. For Zero Trust Branch, one of the largest retailers in Europe who initially adopted CIA ZDX and data protection last year, expanded the deployment in a seven-figure upsell deal to include the full suite of Z-scaler for users and Zero Trust SD-WAN. Zero Trust SD-WAN, which will be deployed at the regional locations, contributed about a quarter of the ACV value of this deal. Next, in the federal vertical, we are proud to be serving 12 of the 15 cabinet-level agencies, and we continue to pursue new and upsell business opportunities across the federal market to help them adopt zero-trust architecture as mandated by the President's Executive Order. To give an example, in a seven-figure upsell win, an existing cabinet-level agency increased the purchase of ZIA and ZPA by over 50%. significantly increasing the ARR of this already $10 million plus customer. Next, let me give you an update on our progress in the Department of Defense or DoD segment. DoD has a requirement to implement Zero Trust with the technologies and solutions that work best for individual military services and departments. I'm thrilled to share that we signed a seven-figure ACV deal with the DoD branch this quarter. In this land deal, the customer made an initial purchase of Zscaler for users to protect 50,000 users. With our proven Zero Trust architecture, this latest DoD deal demonstrates that we are well positioned to capture the large cybersecurity opportunity at the DoD. Next, let me give you an update on our go-to-market organization, where we continue to make great progress. First, to capture the strong demand for our platform and to scale our business to $5 billion in ARR and beyond, we appointed Mike Rich as our Chief Revenue Officer in Q2. Mike hired key leaders in Q3, and he now has his full management team in place. The quality and caliber of Mike's leadership team is exceptional. I'm very pleased with the progress of our sales hiring, particularly at the leadership level. With the right leaders in place, we are now focused on increasing the pace of hiring Kodak hiring reps. Second, as I mentioned last quarter, we are evolving our sales motion from opportunity-centric to account-centric. The eight-figure ACV deal with the Fortune 500 technology company that I called out earlier is an example of the success of this new sales motion. We engage closely with this customer to recommend the best solution for now and the future. We look forward to working with them as they are fully embracing digital transformation and zero trust security. In conclusion, we are on a mission to take our platform everywhere so customers can benefit from better security simplified IT operations, and improved user productivity. We are one of the few vendors that deliver tangible cost savings as we eliminate multiple legacy point products. The last three decades of the security industry have been centered around firewalls, which are no longer effective in today's cloud, mobile, and AI world. I believe the next three decades will be defined by Zero Trust architecture. We have the right platform and the right team to delight our customers and capture our large and growing market opportunity. I'm excited about the journey ahead and look forward to sharing at Zenith Live how Zscaler is combining the power of Zero Trust with AI to power the future of secure digital transformation. Now, I'd like to turn over the call to Rimu for our financial results. Thank you, Jay.

Our Q3 results exceeded our guidance on growth and profitability, even with ongoing customer scrutiny of large deals, the changes in our sales organization, and higher-than-expected sales attrition in the quarter. Revenue was $553 million, up 32% year-over-year, and up 5% sequentially. From a geographic perspective, Americas represented 54% of revenue, EMEA was 31%, and APJ was 15%. Our total calculated billings in Q3 grew 30% year-over-year and remained flat sequentially at $628 million. Our calculated current billings grew 29% year-over-year. Our remaining performance obligations, or RPO, grew 27% from a year ago to $3.824 billion. Current RPO was approximately 51% of the total RPO. We ended Q3 with 523 customers with greater than $1 million in ARR and 2,922 customers with over $100,000 in ARR. This continued strong growth of large customers speaks to the strategic role we play in our customers' digital transformation journeys. our 12-month trailing dollar-based net retention rate was 116%. While good for our business, our increased success in selling bigger bundles, selling multiple pillars from the start, and faster upsells within a year can reduce our dollar-based net retention rate in the future. There could be variability in this metric on a quarterly basis due to the factors I just mentioned. Turning to the rest of our Q3 financial performance, Total gross margin of 81.4% compares to 80.8% in the prior quarter and 80.2% in the year-ago quarter. On a year-over-year basis, gross margin benefited by approximately 60 basis points from a change in accounting attributed to the longer useful life of our cloud infrastructure. As mentioned on our previous earnings call, Beginning in fiscal 2024, we extended the depreciable, useful life of our servers and network equipment and our cloud infrastructure for four to five years. Moving on, our total operating expenses increased 2% sequentially and 21% year-over-year to $328 million. We continued to generate significant leverage in our financial model, with operating margin reaching 22%, an increase of approximately 680 basis points year-over-year. Our free cash flow margin was 22%, including data center CapEx, approximately 6% of revenue. We ended the quarter with over $2.2 billion in cash, cash equivalents, and short-term investments. Moving on to guidance for Q4 and full-year fiscal 2024. As a reminder, these numbers are all non-GAAP. For the fourth quarter, we expect revenue in the range of $565 million, to $567 million, reflecting year-over-year growth of 24% to 25%, gross margins of 80%, operating profit in the range of $107 million to $109 million, net other income of $17 million, income taxes of $11 million, earnings per share in the range of 69 cents to 70 cents, assuming 165 million fully diluted shares. For the full year fiscal 2024, we're increasing our guidance as follows. Revenue in the range of $2.14 billion to $2.142 billion, reflecting year-over-year growth of approximately 32%. Calculated billings in the range of $2.603 billion to to $2.606 billion, or year-over-year growth of approximately 28%. Operating profit in the range of $422 million to $424 million, which reflects up to 490 basis points of operating margin improvement compared to last year. Income taxes of approximately $32 million. Earnings per share in the range of $2.99, to $3.01, assuming approximately 161 million fully diluted shares. We expect our free cash flow margin to be in the low to mid-20% range. We will give specific fiscal 25 guidance on the next earnings call, but I'd like to mention that the increased spend on the data center CapEx, which we had originally planned for fiscal 24, is now planned for fiscal 25. Q3 was a transitional quarter for our go-to-market team, and I believe we did an outstanding job navigating through it. Although our attrition was higher than we expected, as Jay mentioned, we had a strong quarter hiring, particularly at the sales leadership level. We are now focused on increasing the pace of hiring quota-carrying reps. We believe the combination of our existing sales team with these new hires will result in a much stronger go-to-market organization. That said, new hires will take time to ramp to full productivity, which we believe will result in a few points of headwind to our total billings growth in fiscal 25. With our customer obsession, expanding platform, and strengthening sales teams, we're well positioned to continue to gain share in a large and growing market for us. With that, operator, you may now open the call for questions.

Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 11 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 11 again. We ask that you limit yourself to one question only. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matt Hedberg with RBC Capital. Your line is open.

Great. Thanks for taking my questions, guys. Congrats on the quarter. Really, really nice to see the results in obviously a difficult selling environment. I guess, Jay, you know, I think one of the questions that we often get from investors is, you know, around security consolidation. And I think you gave a lot of great anecdotal evidence around success of newer products and sort of the traction you're seeing there. Could you just expand upon that and just talk a little bit more about the role of Zscaler in broader consolidation? Because it certainly feels like customers want to do more with less, and just how strategic is Zscaler in that initiative?

Of course, Matt. Thank you. Customers do want consolidation and simplification of lots of point products, but they want to do it along best of the platforms. They don't believe in a single vendor offering the entire, what I may call, God security platform. Okay. our customers are removing a bunch of from point product the whole dmz demilitarized zone goes away so we are playing a big role in consolidation we're taking out lots of firewalls vpns and that's all lots of savings come that's why we're able to justify the sale of our platform by taking out a lot of products now customers do want two or three tiers of security that's why often It's Zscaler for inline, an EDR vendor, and an identity vendor. But the notion of selling ELA, bundle everything, doesn't go well. More and more CIOs and CFOs are scrutinizing shelfware that's being bought. So consolidation is happening. We are playing a big role, but it's focused, selected consolidation, not a point blank, give me everything type of stuff.

Thank you. Please stand by for our next question. Our next question comes from the line of Saki Kalia with Barclays. Your line is open.

Okay, great. Hey, guys, thanks for taking my question here and echo my congrats on the quarter. Jay, maybe I'll make my question for you. You know, I think we all know your views on firewall-based SASE solutions, but I'm curious how you're faring competitively against the smaller competitors here that are maybe more purpose-built, sassy solutions? And do you feel like the market's view here on pricing is changing at all as we see more of those purpose-built, sassy competitors enter the market? The results certainly want to indicate so, but I just want to hear your view on sort of that part of the competitive landscape.

Sure. Thanks, Akit. So, yeah, small, sassy vendors. You know, as you know, we play in the large enterprise market. We don't really see some of these small SASE vendors that are so-called purpose-built. A lot of those purpose-built vendors come from taking firewall as a service into a network together and all that type of stuff. You know, part of the challenge I have with this SASE thing is that it says SD-WAN plus SASE. My customers, my CISOs believe that SD-WAN enables lacto-tech movement. So where we are headed, we think SD-WAN has to go away. It'll be replaced with zero-trust SD-WAN. That's the new market segment we are pioneering. So we will keep on driving innovations. Sometimes investors think that SASE or SASE is a static market. They often ask the question, Jay, aren't these guys going to catch up with us? Of course, they're trying to catch up and do what we did four years ago, but we've done another two years ahead. In the cyberspace, it's a race, and we keep on innovating at a faster pace, and I don't think smaller SASE vendors or firewall vendors will be able to catch up with us.

Thank you. Please stand by for our next question. Our next question comes from Milan. of Alex Henderson with Needham. Your line is open.

Great, thank you very much. And it's great to see you guys executing against a tough environment here. But I was taken back by a little bit of the commentary around the higher attrition in your sales organization, even as you're bringing in a lot of additional new salespeople and sales leadership. So can you talk a little bit about the mechanics of why that is occurring? Is that a reflection of a change in policy? Is it a change in skill sets that the firm thinks it needs? What has caused that attrition? And should we be sanguine when we're hearing that you're seeing accelerating people departing the firm?

So, Alex, with the departure of our COO, we saw higher attrition in Q3 than expected, but we expect it to stabilize in Q4. It's a combination of factors, including skill set. But I'm very pleased with how well the GTM transition is progressing. With the hiring of key leaders in Q3, Mike now has a full management team. As you know, we have a great brand. We are a destination for top talent with right leaders in place. We have accelerated the pace of hiring Kodak heading reps in Q4. Our high-caliber leaders are attracting and hiring seasoned reps, and they will play a key role in making us successful to take up from $2 billion to $5 billion. Primal?

Yeah, I mean, it's a great question, Alex. You know, the attrition is, you've got to keep in mind, it's both voluntary and involuntary attrition. You know, as Jay mentioned, you know, with Mike Rich coming on board, he's hired his entire leadership in his first quarter here, his first full quarter. Our focus now is going to be increasing the pace of hiring for quota carrying sales reps. Just to give you some color, in the first month of this quarter, which is May, we've hired comparably the same amount of reps that we hired in all of Q3. So what you want to do is you've got to get your leadership in place because that leadership is going to drive the makeup of the sales and go-to-market organization. As Jay mentioned, the go-to-market organization that we have, I feel very, very good about it. I feel... I feel outstanding, quite frankly. The work that's being done, the people that we're bringing on board, you know, and the direction we're going, I think is absolutely outstanding.

Yeah.

And if I may say, I think I'm very pleased with the transition. Is part of the plan to bring Mike on board to get to account-based selling?

Thank you. Please stand by for our next question.

Our next question comes from the line of Brad Zilnick with Dutcher Bank. Your line is open.

Great. Thank you guys so much for taking the question and congrats, especially on all the emerging product success that you're having. Jay, I wanted to follow up on Sackett's question because I think some investors are concerned about intensifying competition in your core market, not just amongst specialized SASE players, but some of the bigger ones as well. And I know Zscaler has always distinguished itself, first and foremost, on its architectural advantage, zero trust exchange, et cetera. But what can you share with us to help appreciate the durability of that advantage? And maybe for Remo, what quantitative metrics can you share, whether it's win rates, pricing trends, sales cycle times, or anything else that can help us gauge the competitive environment?

Thank you. So first of all, starting with, as we said, architecture matters. It's like going from traditional car to electric car. Most are large vendors. are trying to build upon what they have, and we don't believe they'll ever get there. So that's just the architecture. Number two, the market functionality in this area is not static. It's moving and it's evolving. You recall when we went public six years ago, our platform was relatively small. Look at how much it has expanded. And that's only just for users. There's a big market for workloads. You saw a number of deals we talked about where workloads is taking good traction. Then there are trillions of IoT devices. We are the right platform. We are expanding in that area. In fact, part of the reason we did air gas acquisition was to expand into IoT inside the campus, inside the plant, to do zero trust segmentation, which typically has been done by firewalls.

And look at the data protection.

That area has exploded. Nobody comes close to doing data protection as well as we do. So functionality is number two. The third thing I believe will keep us ahead in the long run is speed of innovation. You're seeing how well we have innovated, how fast we've innovated. That's for sure. This is not going to slow down. The last point I'll make in this area that I'm extremely proud of, more proud of than any of our financial staff, is our net promoter score of seven. Happy customers buy more. I'll share with you one interesting snippet. A few months ago, I counted CXOs I have worked with who have bought ZScooter for more than once from us. This is Fortune 1000 companies. The number I came with, 285. So all this stuff makes me very confident and proud. Raymond?

Yeah, from a win rate basis, they continue to be very high. So no change in win rates. Pricing trends, you know, really not seeing anything from a pricing trend perspective. It's just remaining relatively constant. I think what that speaks to is basically the strategic nature of our platform and what we do for our customers. And also sales cycles. We talked about our sales cycles, you know, for large deals, 9 to 12 months. We mentioned a few quarters ago that they're moving more towards that 12-month. Really no change there either.

If I may add a little bit on the pricing pressure, Emil. Of course, there is some price impression, but we are focused on value selling. When we are able to go in and say, we are able to take a X million dollar worth of technology and we'll do it so much in Q1, so much in Q2, so much in Q3, we are able to secure pretty good pricing. That's the point I want to make. The market scrutiny is there. But my team is doing a good job in showing value to our customer by eliminating lots of contracts.

Thank you. Please stand by for our next question. Our next question comes from the line of Roger Boyd with UBS. Your line is open.

Great. Thanks for taking the questions. Remo, I know you're not guiding to fiscal 25, but you did suggest that the attrition you're seeing in the third quarter here would be a few points impactful to growth next year. I don't think we'll comment on that, but wondering alternately if you can just talk about your growth versus profitability framework. In the past, you've talked about biasing towards margin expansion under a certain level of growth, but the messaging right now, it sounds like you feel pretty confident about rehiring under the new sales leadership. You're also verging on GAAP profitability. A lot of moving parts, but just any thoughts on how you're thinking about that growth versus profitability framework from here would be great.

Thank you.

Yeah, I'll focus in on the growth versus profitability and also the GAAP profit. I think that hits most of your points. From my perspective, Zscaler is perfectly positioned with our platform its early stages in this emerging market where we're expanding basically our product base so from my view and jay's view we will still continue to invest uh you know on top line growth you saw in q3 uh our operating profitability on a non-gap basis was 22 when we went public we said our operating profitability target was 20 to 22 percent we hit 22 percent I am not concerned about operating profitability. The model basically will increase profitability naturally as the business slows down. So there's no reason really to focus on operating profitability. And really, the name of the game right now is to continue to invest and build that top line growth. From my perspective, also on a gap profitability, we got the gap profitability in Q3. primarily related to stock-based compensation going down to 22% of revenue. That 22% of revenue relates to a reversal of PSUs for certain executives that left the company. So going forward on GAAP profitability, we will get to GAAP profitability, but I don't want to make any projections of when that's going to happen. Again, the focus is on top-line growth and also maintaining operating profitability. For modeling purposes, one of the things I didn't comment on, but I'll comment on now, think about operating profitability going up slightly in fiscal 25. Not a lot. Again, our focus is growth. And as long as we feel we're making the right investments to really exploit this market and increase shareholder value, we're going to continue to do that. So a very, very slight increase in operating profitability is what you should think about fiscal 24 versus fiscal 25.

And investments in two big areas. keep on innovating at a faster and faster pace, building some of the disruptive technologies that we are so proud of.

Number two, keep on investing, go to market.

Thank you. Please stand by for our next question. Our next question comes from the line of Atiyah Kidron with Oppenheim & Kupner. Your line is open.

Yeah, hi, thank you. This is Parm Singh for Atiyah Kidron. First of all, you know, I want to understand your 4Q guidance a little bit. If I just go back the last couple of years, your year-to-year growth rate doesn't change much from 3Q to 4Q, but there's a significant deceleration in your 4Q guide this time. So I want to understand, is that something that I'm missing outside of, say, you know, a little bit of conservatism for higher sales attrition that maybe, you know, people are not thinking about right now?

Thank you for the question. You know, number one, we like being prudent. So that's number one. Number two is Q3 was a very, very strong quarter for us. We beat the basically consensus on a top-line basis by 8%. And also, fourth quarter of fiscal 23, we called out that we had a large $20 million deal. So it's a tough compare from a billing perspective going into a tough compare for 24 versus 23. And you got the last point.

You know, the attrition, you know, did play into it also.

Thank you. Please stand by for our next question.

Our next question comes from the line of Eric Heath with KeyBank. Your line is open.

Hey, thanks for taking my question. Again, just really strong results in acceleration. Pretty difficult to compare, so great to see. Jay, I mean, look, the macroenvironments Pretty tough. So I'd be curious to hear some of your perspective more on the topic and just hear what customers' willingness to do transformational projects like SASE are at the moment, especially when they do seem to be hitting the pause button in other areas.

Yes. Yes. Macro remains tough. De-schooling remains high. But there's two things that are helping us. One, CIOs, CISOs, and boards remain very worried about cyber with all the ransomware attacks. So if you play a critical role in minimizing cyber threats, as we do with Zero Trust Architecture to minimize lateral movement, we get attention and engagement with CXO. But if then you can show the CXO that you are going to do this cyber initiative and you're going to save X million dollars, you get more attention. So those two things are helping us build a strong engagement and pipeline. Even if you do that, the next hurdle is you need to convince the CFO that actually the savings can be done. They're being more scrutinizing, show me savings quarter by quarter by quarter. We have a strong business value assessment team. We engage with the C-level early on, and we show those benefits. Think of this way. How many cyber companies are out there doesn't actually show tangible savings. You think a firewall company will show savings? No, they want to protect their firewalls. They don't want to do cannibalization. We can cannibalize. We can actually take out all the firewalls and VPNs and NAC and VDI of the world. So it's a good opportunity. We just want to make sure we have the high caliber seasoned salespeople who can engage with C-level and drive all these initiatives. And that's why I'm so excited about That leadership under Mike and the sales team, we are expanding and growing.

Thank you. Please stand by for our next question. Our next question comes from the line of Joseph Gallo with Jefferies. Your line is open.

Hey, guys. Thanks for the question and really nice results, especially in looking at broader software. Jay, how should we think about the sustainability of these growth numbers? And then as you look at it in the next 12 to 18 months, we're the biggest upside drivers to the top-line model. Is it the Salesforce ramping or is it the new products? And then congrats on that quarter of new business coming from emerging. How should we think about that next year? Thanks.

Sorry, the first part was sustainability or what?

Sustainability of growth and what the biggest upside drivers are. Okay.

The biggest upside. So you mentioned three points there. It's kind of interesting. One is obviously sustainability. sales force matters it makes a big difference so the initiative we're going through with sales force making making sure more and more our sales people are able to engage at the c level consolidated combined with our gsi initiatives is obviously a big big opportunity for us then you talked about emerging products they are they're very good they're actually evolving, they're taking, they're giving us the results we want. But if you want to ask me what's going to give us the biggest numbers in terms of dollar-wise, when emerging start from small numbers, they don't move the needle. What's going to move the needle from product point of view? CPA has a strong growth. We still expect CPA to give strong growth. C's credential experience has grown significantly. It will move the needle next year. And the data protection portfolio has become significant. It's pretty sizable. And if you ask me, almost every Zscaler customer over time should have our own data protection. Because once we sit in line for traffic inspection, we are the natural vendor to be doing data protection. And that's another area for growth. Plenty of product offerings. The two areas, new area that can really change things quite a bit for us. Zerotrust segmentation is an acquisition of AirGap. It's a new market we're entering into so far. We stayed up to the branch. We never went inside the branch. We left the east to west firewalls alone. Now we're going in there, not with a better firewall, but without a firewall doing Zerotrust segmentation. And Avalar opens a whole range of opportunities, and Zenith Live will talk more about that. But very, very bullish in the product portfolio. But once you combine your amazing portfolio with a great go-to-market team, you've got excellence.

Thank you. Will you stand by for our next question? Our next question comes from Milana Fatima Boulaini with Citi. Your line is open.

Good afternoon. Thanks for taking my questions. Jane Remo, I wanted to reconcile the strength in the execution this quarter against the very explicit commentary around higher than expected sales capacity attrition. So I'm wondering if you can map back to anything internally that helped drive that outperformance on sales execution in spite of you know, sales capacity, departure, and maybe specifically if you can update us on how the verticalization efforts you've instituted in the go-to-market organization, how those have been yielding relative to your expectations. Thank you.

So maybe I can start, Remo, and you come back to it. So first of all, verticalization, it's a journey as companies grow. They get there. Companies that are more solution-centric, they actually need to be more vertical. We started our vertical journey with the federal market, then we expanded to sled market, and then we recently expanded to healthcare. And you're going to see some more expansions, but more importantly, you're going to see some more folks initiatives to accelerate the growth of those markets. It's going very well. And Mike Critch and his team come from a previous company where they actually have gone through the vertical journey. So I'm very comfortable with keep on pursuing it successfully. Your second question was, in spite of attrition, good numbers, what's involved? Zscaler is not a point product where the sales depends on the sales FNSC alone. It's the teamwork. We have told you all along that we require, we have some very seasoned CXOs who have been former CIOs, CISOs, CTOs, top of people. We need some architects. We talk about business value assessment. When you have a team like this engaged, the departure of some number of salespeople has a limited impact. And we are doing very well. You saw former results.

Yeah. I mean, just to add, you know, on to Jay, and just to also confirm from my perspective, the execution, you know, that we had in the quarter was outstanding. And that's driven, you know, for the entire sales organization. you know, is the new salespeople coming on board and our existing salespeople. I think one of the things that, you know, our execution and the reason that we did well, you know, it really speaks, you know, to the strength of C-Skill and our platform and the need of our customers for our service. As Jenny mentioned, relationships matter. And, you know, no company have I ever been in my career has the relationships with CXOs been as high and as strategic on a worldwide basis, not even close to what we have here at Zscaler. That matters. Solution architects matters. Architectural workshops matter. It's really a team that goes into customers with EVCs. It's a really unique company. What we talked about when we were going public is that it's not a box sale. And box sales are more, I don't want to say tactical, we just call it tactical. This is a strategic sell, which really takes the understanding of companies at the highest level to make these transformational changes. So I think all of that basically played into our execution.

And one more comment I'll make. Our customers view us as very strategic and mission-critical partners.

That being the case, there's a strong engagement, and that's why our overall retention is so high.

Thank you.

Please stand by for our next question. Our next question comes from the line of Shirinik Ghaffari with Bayer. Your line is open.

Yeah, thanks for taking my question. Congrats on the great quarter. So, Jay, you highlighted data protection in the Q&A, and we are also hearing about the increasing need for kind of very comprehensive data protection. It's been a key focus here for, it seems like it's starting to pay dividends. It's kind of inflecting up now. So just curious, as overall AI workloads get bigger and the digital and cloud adoption continues to rise across industries, how do you see new verticals and potentially new use cases That could potentially expand your TAM and also drive growth in the next year, like thinking next year and beyond.

Yes, the new use cases of new products are definitely increasing our TAM. In fact, if you look at data protection, what it used to be for DLP in line is only a piece of it. Data at rest, data sitting in endpoint, data sitting in public cloud, data loss related to SaaS security, supply chain vendors. It's all expanding. DSPM, it filled all of that portfolio that expanded TAM quite a bit. AI is kind of interesting. It's increasing the TAM itself, but it's also getting embedded in all products. We leverage AI and data protection quite a bit. Workload is growing. We're very bullish about it. A big area of TAM expansion for us is like the zero trust for branch. This is where we are in. We believe it's a matter of time in three, four years. Everyone will say, are you using traditional SD-WAN or are you using zero-trust SD-WAN? We're the only vendor in the market that offers zero-trust SD-WAN. And copycats will try to come and follow us in the next three, four years. Then we're going to move to the next level. We will talk about TAN probably in the coming quarters. But if you ask me to take a guess, Ashwin and I have been debating a little bit We think we added somewhere in the $10 to $20 billion on top of $72 billion we talked about before.

Thank you. Please stand by for our next question. Our next question comes from the line of Gray Powell with BTIG. Your line is open.

Great. Thanks for taking the question. Maybe on the go-to-market side, just anecdotally, we've heard that some of the larger GSIs, folks like Accenture, we just heard that they're fans of Mike Rich. So I'd be curious, what can he do better there that maybe Zscaler was not doing before? How can you improve those relationships and drive more growth?

Yeah, it's a good point.

We highlighted last quarter Three things we'll be doing as Mike's key initiative, focus on opportunity-centric to account-centric being one, GSIs being two, and verticals being three. All three are making good progress. You know, GSIs know the value we bring to the table. We have been doing a number of deals, but as Jay is always impatient and saying not doing enough deals, we need to do more. So one of the keys that's needed for us would be to bring in some more higher caliber leaders in that space. We have added a number of leaders who comes from having worked with GSIs like Accenture and working with cloud providers have built billions of dollars of work for business. So expansion and expertise and caliber in that area is going to accelerate our business and we are counting on it.

Thank you. Please stand by for our next question. Our next question comes from the line of Joshua Tilton with Wolf Research. Your line is open.

Hey, this is Patrick on for Josh. Coming back to the competition, we've seen several firewall and VPN-based vulnerabilities disclosed from some of your competitors in recent months that offer those solutions. Can you talk about what impact those have had on demand, if any? and then anything specific to call out in the federal space there as well. Thanks.

Yeah. So it's true. We all have been reading about the vulnerabilities coming from some of the leading VPN vendors and some of the viable vendors out there as well. It has increased demand. The number of engagements we have already closed that came from the VPN vulnerabilities that federal government CISA issued a directive for, there are a number of them in the pipeline. I'm not sure I can give you a quantifiable number, but I can tell you it's a meaningful number. Customers now fully understand that whether VPN on-prem or VPN MAS as a cloud service, as a virtual machine, is still a VPN. And we are replacing a lot of those. That becomes a starting point for ZPA. Then they start looking for zero trust segmentation and the like. In the federal government, deals take longer than the private sector. But public sector has decided to eliminate all of those VPNs that have been deployed out there. We've got a number of active engagements going on. You've seen our federal business is going quite well. Very pleased with the progress we're making. And CISEP, both combinations, are playing an important role. Most of our deals there combine both of them so any user can access any application from anywhere in zero-trust fashion.

Thank you. Please stand by for our next question. Our next question comes from the line of Greg Moskowitz with Mazuhu. Your line is open.

Okay, thank you for taking the questions. Jay, workload protection has done fairly well overall, but historically speaking, the deal sizes have been limited. Given the success that you sort of called out in your prepared remarks, do you think we may be at an inflection point for workload protection, or does the pipeline suggest that we're still a ways off from that? And then a quick clarification for Remo, if I may. Remo, you mentioned operating profitability going up slightly in fiscal 25. Does that apply to op margins as well, or are you saying that we should only expect operating profit dollars to go up slightly? Thanks.

Yeah. You know, in the workflow protection, the thing I'm very proud of is nobody in the market talks about zero trust communication on workflows the way we do. I guess we like to be pioneers out there who need to evangelize. The debt market is taking off. It has to take off. The deal size in technology type of companies are getting bigger. The deal size in traditional companies are still smaller because the workloads in production are still coming up, but not as fast. So I do believe it's a matter of time when almost all of these killer customers will be buying our workload product. And it will bring a big market opportunities, but I think a number of other products that are probably growing faster than this. I don't want to kind of say it's not good. It is very strategic for us. We're working with the customers. It's a matter of time as revenue starts growing at a faster pace.

And, Greg, I was referring to operating profit margin percent.

Thank you. We stand by for our next question.

Our next question comes from the line of Tal Laneni with Bank of America. Your line is open.

Hi, guys. Thanks. My question is on NRR. You talked a lot about upsell and new products and ability to expand, but your NRR has declined from 120% to 117% to 116% in the last three quarters. How do you connect it to your comments on And on the flip side, the contribution of new customers went up to 50% of your growth this quarter. Can you give us a little bit of details on the profile, meaning do you go to different verticals, down market, to SMB? Is there any color to this growth with new customers? Thanks.

Yeah, the NRR at 116, I think, is outstanding. The things that influence NRR, and we talked about this with our users. Basically, we're trying to sell the user platform to our customers, and that includes CIA, ZDA, and CDX. So that is going to influence NRR. Also, customers buying within a year doesn't get captured in NRR because NRR is basically a custom device this year versus a year later. But if they buy within the year, that can impact NRR. Having said all that, 116 is a really good number from our perspective.

And we've said over the past many years, you know, the faster you sell, the lower you end on, the bigger bundle you sell, the lower.

So we look at it as a factor, but it's not the most important factor we track.

Thank you.

Ladies and gentlemen, due to the interest of time, our final question will come from the line of Adam Borg with Stiefel. Your line is open, Adam.

Awesome. Adam Bork from Stiefel. Thanks for taking the question. Maybe for Jay on the Advanced Plus Bundle, I know this is a newer offering that you talked about a few quarters back, and it's a healthy pricing uplift given some of the new AKI capabilities. And I was just curious if you could talk more about how that Advanced Plus Bundle is resonating and kind of what percent of the install base you think this is really addressable to over time. Thanks so much.

Overall, our customers are buying bigger and bigger bundles. That's why our pricing, our ARR is going up because the bigger bundles can take out more products and give them functionality. I'm not sure I have any quantitative data to provide you, but directly speaking, our bigger and bigger bundles are happening. As you listen to our prepared remarks, it's no longer that they're buying bundles for users. along with users. We're selling platforms, selling data protection, and quite often now we're bringing in AI solutions like S360 and the like as well.

Thank you. At this time, I would like to turn the call back over to Jay for closing remarks.

Well, thank you for your interest in ZSkid. We look forward to seeing you at some of the upcoming conferences. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.