Zscaler, Inc.

CEO, and Kevin Rubin, 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, annual recurring revenue, calculated billings, operating performance, gross margin, operating expenses, operating income, net income, free cash flow, dollar-based net retention rate, future hiring decisions, remaining performance obligations, income taxes, earnings per share, our objectives and outlook, our customer response to our products, and our market share and market opportunity. These statements and other comments are not guarantees of future performance, but rather are subject to risk and uncertainty, some of which are beyond our control. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. For a more complete discussion of the risks and uncertainties, please see our filings with the SEC, as well as in today's earnings release. I also want to inform you that we'll be attending the following conferences. UBS Global Technology and AI Conference on December 3rd. Barclays Tech Conference on December 11th. Needham Growth Conference on January 14th. Before I turn the call over to Jay, I wanted to share that I recently transitioned to a new role as product manager of AI security at Zscaler. so this will be my last earnings call as the IR leader. It's been a pleasure engaging with all of our shareholders over the last few years. Kim Watkins, who some of you may know from her tenure at Intuit, will be joining Zscaler in early December to lead investor relations and strategic finance. Please join me in welcoming Kim to Zscaler. Now, I'll turn the call over to Jay.

Thank you, Ashwin. we had a strong start to our fiscal year. In Q1, annual recurring revenue or ARR growth accelerated to 26% year over year and RPO growth accelerated to 35%. Combining our strong free cashflow margin of 52% and revenue growth of 26%, we operated at rule of 78, making us one of the rare companies consistently outperforming the coveted rule of 4D metric. We are one of the only five enterprise SaaS companies with over $3 billion in ARR, growing at over 25%. The continued success of our three growth pillars, AI security, zero trust everywhere, and data security everywhere, is driving our strong top-line performance. ARR from these three growth pillars accelerated in the quarter. I'm particularly pleased with our AI security pillar, which grew over 80% year over year and has already exceeded our FY26 target of $400 million ARR, three quarters earlier than expected. With the strong demand, I expect AI security ARR to exceed half a billion dollars by the end of this fiscal year. Diving deeper into our AI security pillar. While enterprises are leveraging AI to drive innovation and accelerate productivity, the proliferation of AI is also making them increasingly susceptible to attacks. One of the largest AI companies recently reported that a bad actor hijacked its AI coding assistant to autonomously perform a large-scale cyber attack against multiple organizations. This incident highlights two important trends. First, threat actors are using AI to dramatically increase the speed, effectiveness, and blast radius of attacks. We have been predicting an increase in this type of automation by AI agents, and we are now seeing it happen. Just like users, an organization's AI agents are also becoming the weakest link in their security. It is only a matter of time before millions of AI agents interact with each other across enterprises. Imagine a threat actor hijacking even one of an organization's trusted agents and thereby accessing critical corporate resources and sensitive information, resulting in a serious breach. We have a long history of securing users with our Zero Trust Exchange, which enabled our customers to safely adopt the latest technologies such as mobile, cloud, and SaaS. Over 45% of Fortune 500 companies And nearly 40% of global 2,000 companies have adopted our Zero Trust Exchange and Trust Zscaler to secure their businesses. With the rise of consumer Gen AI applications, including ChatGPT, Perplexity, and more, security issues related to access control, data loss, and content moderation made enterprises cautious about allowing employees access to these popular apps. We extended our Zero Trust Exchange to provide visibility into thousands of GenAI apps, enabling enterprises to inspect prompts and responses and enforce proper guardrails for safe and secure use of GenAI apps. Several large enterprises adopted our GenAI solution in the quarter, including a G2K technology company, a Fortune 500 communications equipment company, and a large healthcare software provider. As AI adoption moved beyond consumer Gen AI apps into building and running enterprise AI applications, we introduced solutions in three key categories to secure them. First, AI asset discovery and posture management. AI applications and agents are being developed and deployed today without full visibility for IT teams to safeguard them. To provide organizations with visibility and control, last year we introduced an AI asset discovery solution called AI SPM. AI SPM can detect unauthorized AI applications, prevent over permissions for AI agents and strengthen governance for model deployments. In Q1, several customers, including a leading software solution provider, a global 2000 manufacturer, and a leading insurance company purchased AI SPM from Zscaler. With our recent acquisition of SPLX, we are extending our AI SPM capabilities by unifying discovery of LLMs, workflows, and MCP servers. These capabilities enable customers to meet evolving regulatory requirements for AI to be transparent and explainable among others. The second key area of innovation is AI red teaming. As part of AI lifecycle, customers need to regularly test their applications for vulnerabilities. With SPLx, We now deliver AI Red Teaming to enable automated and continuous testing of AI apps at scale. Our AI Red Teaming solution integrates with customers' CICD pipelines, making it easy to test for hallucination, bias, behavior drift, and more. Several customers, including a Fortune 150 transportation company and a Fortune 100 service provider, have already deployed AI Red Team. The third area of innovation is AI guardrails. Customers need AI guardrails for inline policy enforcement, for acceptable use of AI, for cybersecurity, and for data loss prevention. Inline policy enforcement is one of our key differentiators, which we seamlessly deliver through our Zero Trust Exchange at scale as we process half a trillion transactions daily. Our AI Guard solution leverages this core competency for runtime protection. Zscaler AI Guard sits between the application and LLMs, inspecting prompts and responses inline to enforce customer-defined policies. To share an example, this quarter, a leading consulting firm purchased our AI Guard to secure the use of public AI applications and the private in-house applications such as AI chatbots and AI agents. With our platform capabilities, we're securing over 90 billion AI ML transactions per month. As AI and AI agents define the next era of transformation, we are further extending our platform to secure AI agents, agentic workflows, and AI applications. In addition to securing the use of AI, we are leveraging AI to deliver agentic operations, including agentic SecOps and agentic ITOps. In our agentic SecOps, we are making great progress towards delivering an AI-powered SOC that simplifies customers' operations and automatically hunts for threats. In August, we acquired Red Canary to combine the agent technology with our data fabric technology to deliver actionable SOC insights for our customers. This quarter, a Fortune 500 financial services company, a Global 2000 healthcare equipment company, and a Global 2000 energy company, and more, purchase our agentic SecOps solution. In our agentic IT ops, we are introducing several C-scaled digital experience or ZDX innovations to enable faster resolution to application and network performance issues. Other innovations like the ZDX co-pilot continue to resonate with customers and have driven over 80% year-over-year growth in bookings of ZDX Advance Plus in the last 12 months. I'm very pleased to see continued momentum for our AI security solutions. As I mentioned, we are expecting AI security ARR to surpass half a billion dollars by the end of fiscal 26. Turning to our second growth pillar, we continue to see strong momentum in Zero Trust Everywhere, which includes Zero Trust Users, Zero Trust Branch, and Zero Trust Cloud. Three quarters ago, we introduced Zero Trust Everywhere and set a goal to secure 390 enterprises with Zero Trust Everywhere by the end of fiscal 26. I'm delighted to share that We now have over 450 Zero Trust Everywhere enterprises, achieving our goals three quarters ahead of our target date. Our Zero Trust Everywhere customers benefit from reduced cost and complexity by eliminating legacy network and security products. This expanded relationships through Zero Trust Everywhere also creates follow-on demand for data security and AI security. One of the key components of Zero Trust Everywhere is Zero Trust Cloud, which allows customers to eliminate VPNs, north, south, and east-west virtual firewalls, express route, and direct connect networks, resulting in far better cybersecurity. To share a customer example, in an eight-figure TCV VIN, an existing million-dollar-plus Fortune 500 healthcare customer adopted our Zero Trust Cloud solution along with ZDX Advanced Plus data security modules and more. Zero Trust Cloud secures workload communication across the VPC or virtual private cloud and SAP RISE cloud-based ERP. Without Zero Trust Cloud, the customer would have had to deploy significant number of north-south and east-west firewalls, resulting in increased cost and many months of delay. This customer told me that in the last 15 years, they have not been so excited about the solution that not only brought better security, but also was easy to deploy and operate. Just like the migration of Microsoft Exchange to Office 365 was a big tailwind to our business a few years ago, I believe the migration of SAP On-Prem to SAP Rise will have a similar impact on our business. We continue to see strong interest from customers for Zero Trust branch, which is another key component of Zero Trust everywhere. Zero Trust Branch eliminates a need for legacy point solutions at branches, factories, and campuses. To give you an example, in a seven-figure upsell win, a global 2,000 manufacturing customer more than tripled their ARR and became a Zero Trust Everywhere customer by purchasing our Zero Trust Branch, ZPA, ZDX Advanced Plus, RISC-360, and more. Moving to data security everywhere. We offer a comprehensive data security portfolio with eight modules providing data discovery, data classification, posture management, data loss prevention, and more. Customers are eliminating data security point products in their environment by consolidating data security functionality on our unified platform. To share an example, In a seven-figure new logo ACV VIN, a large healthcare provider purchased five out of our eight data security modules for their 23,000 users. This enterprise chose Zscaler over a leading CASB vendor due to our integrated platform which delivers data security across all channels for all types of data. I'm excited to share that our data security everywhere ARR accelerated to approximately $450 million. The growth across our three pillars is powered by our strong go-to-market engine. One of the key initiatives we recently introduced was our Z-Flex program, which enables customers to commit to a spend and provide flexibility to swap or activate additional modules without undergoing new procurement cycles. ZFlex is driving meaningful upsells and reduced sales cycle and is consistently exceeding my expectations. ZFlex generated over $175 million in TCV, growing over 70% quarter over quarter. To share a couple of customer examples, An existing large aerospace customer made a multi-year, eight-figure TCV commitment under the ZFLEX program, increasing their annual spend with us by over 40%. As part of the FLEX commitment, the customer added nine new modules, including asset exposure management, identity threat detection, unified vulnerability management, email DLP, and expanded commitment for data security. In a seven-figure upsell win, a Fortune 500 business services provider more than doubled their annual spend with us as they expanded adoption of nine modules under the ZFlex program. In conclusion, our business is benefiting from the strong tailwinds from the combination of Zero Trust and AI security. The best AI security is built on the foundation of Zero Trust. Our clear leadership in Zero Trust Security, combined with our comprehensive AI security offerings, positions us well to capture the large and growing AI security market. And with our strong go-to-market engine, we are well positioned to exceed $10 billion in ARR. Now, I'd like to turn over the call to Kevin for our financial results.

Thank you, Jay, and good afternoon, everyone. We exceeded our growth targets in Q1 and operated at Rule of 78 for the quarter. We ended Q1 with over $3.2 billion in ARR, reflecting approximately 26% year-over-year growth. ARR from each of our three growth pillars accelerated in the quarter, including on an organic basis. Q1 revenue was $788 million, growing 26% year-over-year, 10% sequentially, and exceeding the high end of our guidance. Geographically, the Americas accounted for 58% of revenue, EMEA for 27% of revenue, and APJ for 15% of revenue. Our remaining performance obligation, or RPO, grew approximately 35% year-over-year to $5.9 billion, with approximately 47% classified as current RPO. We closed Q1 with 698 customers generating over $1 million in ARR and 3,754 customers exceeding $100,000 in ARR, demonstrating the strategic role we play in customers' digital transformation journeys. Turning to the rest of our Q1 financial performance, our gross margin was 79.9% as compared to 80.6% last fiscal year Q1. I'd like to remind investors that we are introducing new products that are experiencing strong growth and are optimized for faster go-to-market rather than margins. This will continue to influence our gross margins on a quarterly basis. We plan to optimize new products for margins over time as they scale. Operating expenses increased 11% sequentially and 23% year-over-year, reaching $458 million. Operating margin was 21.8% towards the higher end of our long-term range and growing by approximately 40 basis points year-over-year. Our free cash flow margin for Q1 was 52%, including data center CapEx at 2% of revenue. We ended the quarter with $3.3 billion in cash, cash equivalents, and short-term investments. Next, let me provide our guidance for Q2 and full-year fiscal 26. As a reminder, these numbers are all non-GAAP. For the second quarter, we expect revenue in the range of $797 million to $799 million, reflecting year-over-year growth of approximately 23%. Gross margins to be approximately 80%. Operating profit in the range of $172 million to $174 million. net other income of approximately $19 million, earnings per share in the range of 89 to 90 cents, assuming a 21% tax rate and 170 million fully diluted shares. For the full year fiscal 26, ARR in the range of $3.698 billion to $3.718 billion, reflecting year-over-year growth of 22.7% to 23.3%. we anticipate approximately 47.8% of net new ARR to be recognized in the first half. Revenue in the range of $3.282 billion to $3.301 billion reflecting year-over-year growth of 22.8% to 23.5%. Operating profit in the range of $732 million to $740 million Earnings per share in the range of $3.78 to $3.82, assuming a 21% tax rate and approximately 170.5 million fully diluted shares. And free cash flow margin to be approximately 26.0% to 26.5%. With a large market opportunity and customers increasingly adopting the broader platform, we will invest aggressively to position us for long-term growth and profitability. Before moving to Q&A, I'd like to thank Ashwin for his significant contributions to IR and strategic finance and wish him well as he transitions to his product role. I'm also excited to welcome Kim to Zscaler. With that, operator, you may now open the call for questions.