ZS - NASDAQ

Hello, and welcome to the

Good afternoon, everyone, and welcome to the

Thank you, Bill. We delivered a solid Q2 despite economic challenges that have impacted the broader tech industry. For the quarter, our revenue grew 52% year-over-year and billings grew 34%. Billings were impacted by new customers being more deliberate about their large purchasing decisions at the start of the calendar year. These deals have not gone away, and we have closed a few already in February. On the other hand, we had strong growth in our expansion business with existing customers increasing their deployments and adopting our broader platform. Once again, our dollar-based net retention rate was over 125%. We continue to delight our customers by accelerating their path to better security, business agility and cost elimination, helping them solve some of their highest priorities. This drove our Net Promoter Score, or NPS, to a new high. Our NPS now exceeds 80, which is more than 2 times the average for SaaS companies. And, today, more enterprises than ever before recognize

Thank you, Jay. Our Q2 results exceeded our guidance on growth and profitability, even as we managed through continued deal scrutiny and longer reviews. Revenue was $388 million, up 52% year-over-year and up 9% sequentially.

[Operator Instructions] Our first question comes from the line of Brad

Great. Thank you so much for taking the question. Jay, I appreciate the backdrop is tough. We hear it from every company. But can you frame for us your outlook in terms of things within your control and things that aren't? And maybe also if you could, comment on the integrity of the data that you look at that underpins your confidence in

Thank you. If you look at the quarter, we found that our upsell was quite strong. Customers loyal to us, they like our solution, upselling becomes easier for us. In terms of challenging, new logos with large deals are more challenging as there was additional scrutiny and additional approvals needed. The other thing that worked well was that customers like the fact that we are able to do consolidation of lots of point products, the clean architecture, and give them strong ROI. That thing has worked well for us. In terms of competitive positioning, we haven't really seen any change. In fact, I would say that on the higher end of the market, we actually feel like we are stronger than even before because we have established that. We actually have the right architecture, right solution with thousands of customers well deployed and very happy customers. In fact, the other thing we are beginning to see that some of the solutions that are sold by firewall vendors and SASE solutions, and when customers can deploy them, they’re falling apart. I have been asked many times in the past two years, hey, are you replacing some of our firewall-based solutions? Answer I used to give is, I haven't seen very many out there, now beginning to see some of them. The large retailer I mentioned on my call with 20,000 stores tried for over 18 months to deploy a firewall-based SASE solution, so to speak, and eventually gave up, and we are really taking care of it. The other thing I would mention is Remo has often said we can adjust our business model as needed. As environment is getting tighter, we are adjusting the model by slowing down hiring. Our unit economic cost is very high. So you're seeing expansion of gross margins and operating margins -- sorry, operating margins, which our investors do like to see. Lastly, my confidence is coming from tons and tons of customer calls I made. We had 80 CISOs with us for two days doing an exchange. All of these guys I have deployed have done a great job. They understand the architecture, the more the world spreads out there, a better understanding of the architecture, the more they're able to fend off the fluff being spent by competitors. So, I'm very content and comfortable in our ability to stay far ahead of the competition.

Our next question comes from the line of Sterling Auty with MoffettNathanson.

I'm just kind of curious, Jay, when you look at the business, can you give us a high-level sense of how much of the business in the quarter is replacement of legacy security solutions where cost savings is a driving factor? And how much of the business is actually brand-new implementations to enable some sort of project where maybe it's a little bit riskier in these tighter budgetary times?

As you know, every company has some kind of legacy solution for internet gateway or even VPN access. Those are the two starting points for us.

Our next question comes from the line of Andrew Nowinski with Wells Fargo.

So I just wanted to ask about those ramps, deals that you talked about. Just wondering if you could quantify how much those deals would have added to billings in Q2 if they were normal deals versus ramping over time. And also, are customers contracted to spend a certain amount that was deferred, or can they still back out of that ramp piece of it? Thanks.

Yes. So, they're contractually obligated to the ramps and the ramps are strategic. As Jay talked about, with large deployments, we are seeing more ramps. The impact on billings, probably a couple of percentage points is what you can think. But again, with large customers, large deployments buying more of our fillers, ramps were more in Q2.

If I may add, I mean, we look at this as a strategic investment on our part to help customers get started and actually manage your cash for investments in year one by deferring some of that stuff to future years.

Our next question comes from the line of Alex Henderson with Needham & Company.

So, I was actually interested in asking about the ramps as well. But I also wanted to put it in context to the duration in the calculated billings numbers. Can you give us some sense of the magnitude of each of those? I guess a couple of percent on the ramps. But if I look at the ramps, once you get all of that back in a couple of quarters, once they get past the initial start day, so isn't that actually just a timing issue?

Yes. I mean, you're absolutely right, Alex. I mean, the ramps are a timing issue, lower billings upfront and higher billings later based on the ramp. Related to the billing duration, there was a -- it was slightly favorable in Q2. If you look at our billings, calculated billings, they're at 34%, short-term billings were at 32%. That's generally what you can think about the favorableness related to the billing duration.

[Operator Instructions] Our next question comes from the line of Roger Boyd with UBS.

I wonder if I could poke at the efficiency versus capacity debate. I know you reiterated the $5 billion long-term goal, and Jay, your confidence in the market opportunity. But if you do see conditions improve, how do you think about sales capacity heading into fiscal '24 and your ability to accelerate growth at an agile base? Thanks.

Yes. And that's a great question. We are a growth company. We feel that the market opportunity is huge. $5 billion is still what we are shooting for. We saw this as -- based on the comments that I made, we've increased our headcount almost 100% over an 18-month period. And we saw basically inefficiencies in the organization. That's why we're doing this cost optimization. Having said that, our selling capacity remains very strong. And we continue -- we are going to continue to invest in our selling capacity as we go forward into the second half. So, we are going to moderate hiring throughout the company, but our focus is still selling capacity and R&D development.

Yes. So we are still selectively going to hire quota-carrying sales reps as well as core engineering leaders -- sorry, core engineering team members. And we expect our year-end headcount to be higher than the headcount today.

Our next question comes from the line of Joel Fishbein with Truist.

Hey Remo, just on the billings guidance, if you could, just give us a characterization of how you would give a -- say, is it conservative? Is it based on what you're seeing today? Is it getting worse? The environment thing -- we're getting a lot of questions on that. Be helpful to get any color you have on that. Thank you.

Yes. I mean, thanks for asking the question, Joel. So, there was an elongation of the sales cycle. So, we're basically baking into that to our second half, slightly worse, not a lot but slightly worse than what we saw in Q2. So, a little more conservatism related to our billings guidance than the past.

Yes. And we are assuming that current levels of these scrutinies will continue.

Our next question comes from the line of Patrick Colville with Scotiabank.

So, I guess, I'd like to ask about the sales changes that we discussed last quarter on the call. Is the slowdown we're seeing have any bearing on the sales changes that were made earlier in the fiscal year, or has that process been kind of wrapped up and that's in the background now?

Patrick, as we discussed, we made changes to our enterprise segment, the lower end of commodity segment at the start of the year and where it now reports to geo leaders. Those changes are behind us, they've done Q1, and no bearing on Q2 numbers. Okay? So, the main thing we're seeing at the highest level is some of the macro conditions that are impacting from the higher end larger deals. Our low end of the market segments, enterprise and commercial, they actually had done quite well. They're still impacted.

Our next question comes from the line of Saket Kalia with Barclays.

Remo, maybe for you, can we just dig into the ramp deals just a little bit more? And maybe specifically, are these deals that take multiple years to ramp up to their sort of normal run rate on average, or are these things that maybe come back in the next couple of quarters? And relatedly, are you assuming a similar mix of ramp deals in the second half as you think about the conservatism in that guide?

No, it's not multiple years, it's shorter than that. Also kind of related to what are we thinking of ramps in Q3 and the second half, similar to what we saw in Q2. Again, as we talked about, dealers are getting bigger, buying more of our platform. It is a very -- it's a strategic buy for large companies. Regarding the architectures that are out there today, I mean companies understand. They understand that they've got a problem. And for that, these ramps do help us. I would expect it to continue about the same pace in Q3 and Q4.

Our next question comes from the line of Matt Hedberg with RBC.

I just wanted to ask about linearity. It sounded like in your prepared remarks that January was worse than December. I'm curious, do those trends continue into February, i.e., was February worse than January? And is there any way to quantify sort of the impact of the deals that pushed out of the quarter?

Yes. I mean, some deals certainly pushed into February. And February -- but again, some of the deals that we thought we'd do in January came through in February. Regarding linearity, overall linearity was actually better in Q2 versus Q1. But that's also a function of the elongation of the deals. So, that's why its linearity is better. Going forward, I would expect back-end loaded linearity as we've seen the last few quarters. I really don't see that changing.

Our next question comes from the line of Mike Walkley with Canaccord.

Remo, I guess, with new customer pipeline taking longer to close, it seems like upsell is going to be maybe even greater mix over the intermediate term. Can you share with us maybe how that mix changes over the implied guidance for the remainder of the fiscal year?

Yes. That's a great question. If you recall in Q1, it was about 50-50.

That's right.

And we said, we felt on -- for the year, it's going to go more in the 60-40 upsell versus new. In Q2, it was about 35% new and 65% upsell. From my perspective, I think for this year, I think 60-40 is still the right metric to think about, 60% upsell and 40% new.

Our next question comes from the line of Keith Bachman with BMO.

I wanted to ask about -- if you look at the phase deals and/or just the general economic backdrop, is there a change in pricing? In other words, are more customers asking for a release in terms of pricing? And related to that, Remo, I know you talked about the billings and you're assuming some more conservative or things can get worse. But if I look at the billings guide, if in fact, billings are down 9% sequentially in the April quarter, in order to make the annual guide the sequential growth in July quarter is 50% or higher, and that's roughly equal to or above the sequential growth for the last three years. So, I'm just struggling a little bit to understand why the billings guide, we should think there's basically some room, if you will, when I look at the Q4. It just seems like you're asking a lot for Q4.

Yes. I would start on the pricing pressure discount, you talked about, and Remo can get the billing part of it. So due to a tighter macro environment, there is increasing scrutiny and pressure on CISOs this year. Our customers are negotiating order over payment and deal terms. But customers do view us as one of the most mission-critical service. And they want to make sure they buy the service that works, the service they can depend upon. But they're not looking for the cheapest solution. So from their point of view, I would say we aren't seeing tremendous pressure on discounting. We're seeing some focus on it. And to help that, that's where some of the ramp deals come in to help lower the first year cost for the customer to manage their spend. But being strategic, being dealing at the right level and actually delivering a lot of ROI value, reduces pressure on us from a pricing point of view. Remo?

Yes. So, if you look at the average that we've had in the second half sequentially from Q3 to Q4, it's been in the 48%, 49% range. But we've -- our guidance is 46% at the midpoint.

Our next question comes from the line of Jonathan Ruykhaver with Cantor.

So Jay, I'm wondering if you can talk in more detail on the adoption trends you're seeing around cloud workload protection. And what those initial lands look like from a deal size perspective relative to

Thank you. Our overall adoption of cloud workflows product is pretty good as planned. And as customers are launching more and more workflows, they have two options. Either they extend their corporate network just like a branch network to every cloud region and put virtual firewalls there or they do

Yes. Commercial products still tracking to high-teens, both new and upsell.

Our next question comes from the line of Gabriela Borges with Goldman Sachs.

I wanted to ask you on the market opportunity for best of breed. With

Next bake-offs? I'm sorry. Can you expand on last part again?

Yes. Essentially, do you -- you're competing for today, are you getting any signs of feedback from customers saying, we know you're best of breed, but we're not going to prioritize you?

Yes. Our customers are not looking for best-of-breed point products. They're looking for best-of-breed platform with the right architecture. We can tell you if -- when you talk to the low end of the market, they can live with some of the solutions that are kind of half way. But, when you talk about Global 2000, these customers are generally pretty savvy. The requirements are complicated. And we believe the best architecture will win in the long term. I gave you an example this time where a large retailer had gone a different way, thinking that a firewall-based architecture work, tried, failed and came back. I expect to see a lot more customers do the same thing. I think we have ample opportunity in the Global 2000 to take our current penetration to a much, much higher level.

Our next question comes from the line of Peter Levine with Evercore.

Maybe just to piggyback off an earlier question around upsell versus net new. So, it seems like you're able to kind of somewhat toggle your sales force to maybe focus more on those back-to-base opportunities. So one, are you changing incentives, comp plans at all to, I guess, better incentivize your sales force to focus more on those back-to-base opportunities? And then second, the ones that you are seeing a better upsell, like what product is having the highest hit rate?

So, we aren't really making any special changes to upsell versus new logo. This has been asked to us many times over the years. Do we have a special incentive on new logos? Not really. Our platform is very broad and big. So we really -- we want new logos and we want expansion. And expansion -- we know that expansion means upsell is a little bit easier than new logos. That's why you've seen some of the upsell numbers going up this quarter as compared to new logos down. We keep on making refinements to our go-to-market structure and model from time to time, but there's nothing significant we've done now to make any changes. I think one of the best things is we have a very good sales organization. Our architecture is very good. Our deployments are very good. That's why customers come back and c us. I mean, talking to so many customers, they believe we have the best service, best architecture and best security. That's why we win. And I think we'll keep on driving it. But in today's market, we expect upsell numbers to stay high because it's a bit easier as compared to a new a logo.

And then which products are getting the biggest hit rate?

Oh, sorry. Big product. Yes. So, if you look at almost every

Perfect. Yes. Thank you very much.

Thank you.

Our next question comes from the line of John DiFucci with Guggenheim.

You said that EMEA grew strongly year-over-year. But was it the kind of growth you thought it would be? Because the reason I ask is that our checks in the regions were as -- they were pretty mixed. And your revenue growth decelerated in the region. And given the recurring model of revenue is usually a lagging indicator, I get that. But I guess you answered that question. And how do you expect the region to progress going forward? Is there any reason that region might be more competitive?

I'll start, and Remo can add things too. This quarter, EMEA had less dependency on large deals, okay? And as you know, large deals are getting more scrutiny. And U.S. was relatively speaking weaker because they had higher dependency on large deals. Remo, do you want to add any more?

Yes. I mean you're right, John. I mean, revenue is a lagging indicator. And for our new and upsell business, it was one of our strongest, if not our strongest geo. So, EMEA did do well.

And if there's another color I could give you on the market vertical kind of stuff. There are certain verticals that are better than others. As you would expect, the tech vertical was weak in today's market. And some of the retail and on was a little bit slow.

But that would be more for the U.S., right, Jay, the tech vertical?

For the U.S., that's correct. That's correct.

Our next question comes from the line of Shaul Eyal with Cowen.

Jay or Remo, one of the topics in recent quarters is cloud-related costs, or in other words, some enterprise customers are indicating that some of the cost benefits they have subscribed to under the big cloud promise in recent years, at times, that is not living up to their expectations. So interested to learn whether your customers have been bringing up that point in recent discussions.

Kind of hard time hearing you, Shaul. So you might -- I think we caught something about maybe hyperscaler and -- perhaps if you could repeat that?

Yes. So I was asking whether if some customers have been bringing up maybe some disappointment with the overall promise as it relates to cloud-related costs. Is that a topic that has been brought up in recent discussions with your customers?

Yes. So, let me share with you lots of conversation I have. Customers are embracing cloud, okay? There's no -- somebody is not saying, I want to come back or not embrace the cloud. That's point number one. Point number two, the speed at which these guys are moving forward is slowing down. You can expect because some of these large software development projects are slowing down for cost reasons. Number three, that's actually creating an interesting phenomenon, whereby customers aren't able to use all the spend that's committed. Okay? That's actually giving us at a unit where we are actually partnering more closely with some of these hyperscalers where our deal can be part of that customer commit because we are -- as an approved partner for some of the cloud spend. So, those are some of the things we are seeing. But overall, we do see -- it's rare to find a CIO that says I don't like cloud anymore. Are there complaints about cost in the cloud? Yes. Do they see an alternate to go back to data center? No.

Ladies and gentlemen, due to the interest of time, that concludes our Q&A session. I would now like to turn the call back over to Jay for closing remarks.

Thank you for your continued interest in

Thank you.