ZS - NASDAQ

Thank you for standing-by and welcome to the

Good afternoon everyone, and welcome to the

Thank you, Bill. We delivered strong third quarter results with all financial metrics above the high-end of the guidance we provided last quarter. On a year-over-year basis, revenue grew by 46%, billings grew by 40%, and current billings grew by 44%. Our new business grew significantly across various industry verticals and we had approximately half of our revenue come from outside the U.S. We have a strong and loyal base of customers with gross retention rates in the high 90s. We have a disciplined approach to growth, and once again on operating income more than doubled on a year-over-year basis, with operating margins now exceeding 15%. While we continue to operate under tighter economic conditions, I believe the comprehensive functionality of our

Thank you, Jay. Revenue in Q3 was $419 million, up 46% year-over-year and up 8% sequentially.

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

Excellent, thank you so much guys for taking the question and congrats on a strong Q3, especially in light of all the craziness going on in this world. Jay, I wanted to ask you about the U.S. federal opportunity, really seems like you've got a number of good things happening there, you're now in 12 to 15 cabinet level agencies. Can you double-click on the opportunity and pipeline ahead? And maybe talk just more about your strategy in public sector more generally, not just Fed but SLED and maybe international government as well, thank you.

Thank you, Brad. As we have been saying for the last several years, we made early investments in federal certification in FedRAMP, got some of the highest-level of certifications. In fact, they use the same certification, you get what's known as StateRAMP certification, that states require. So we have very strong presence in a number of states, at state-wide level, we've done well there. On the federal front, as we said we got early lands and got 12 to 15 agencies, but now they are beginning to do full rollout, and that's what we are beginning to see. It's being also helped by White House guidelines,

Excellent Jay. Thank you so much for the color.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Matt Hedberg from RBC. Your question please.

Great, thanks for taking my questions, guys, and congrats on the strong results. Jay, for you, you spent some time talking about generative AI, and the ability to monetize it with large datasets. I'm just curious how do you think about a couple of years from now? Are we going to be able to see that generative AI was actually a tailwind to growth and perhaps, could there be additional pricing perhaps consumption element that could support LLM's extended usage in the future?

Yes, Matt, all of the above. First of all, AI is being kind of used in some of the current products to do better threat detection, better data protection and the like, that's number-one. Number two, as AI/ML gets picked up, there'll be bigger cyber risks. It's a race with the bad guy, they'll be able to do some of the more sophisticated attacks, a lot more easily than they can do today. That means companies like

Thanks Jay.

Thank you. One moment for our next question. And our next question comes from the line of Andrew Nowinski from Wells Fargo. Your question please.

Great, thank you and congrats on another amazing quarter. I wanted to ask about I guess I mean number of questions here. I guess I'll go with the one question on the ramp deals. It's something you started talking about at the start of the year and it seems if I'm understanding this correctly that, right now what we're seeing is, is the headwind piece of those ramp deals, and so you're not getting any benefit really from those. And, and I guess when we'll start the anniversary after year one, that's when you start to see a tailwind from the ramp deals, when those customers move to more of a full price for their subscription, if you could just walk us through sort of the timing of when you're seeing -- when you're seeing that shift from headwind to tailwind from these ramp deals, thanks.

Yes I mean, it's a great question Andy, I'll take it. You may take a look at the ramp deals in Q3 of last year and Q3 of this year, the percentage amounts are the same. So there's really no headwind or tailwind related to the ramp deals. Ramp deals started coming in a few years ago, and now it's basically pretty much the same on a year-over-year basis. I do expect ramp deals to go-forward, you know as we go-forward. If you take a look at basically the duration, the billings duration, our growth rate was 44% short-term, that basically was related to duration. The duration that we had in Q3 of last year, was at the high end of our 10 to 14 month range and this year, the duration, basically was slightly above the midpoint. So ramps did not create basically the positive impact to our short-term billings, it was really duration.

Got it thanks, Remo. Thanks guys.

Thank you. One moment for our next question. And our next question comes from the line of Joel Fishbein from Truist Securities. Your question please.

Hi, thanks for taking the question and again, congrats on the margin outperformance here and expense discipline. So, I guess a question for Remo and I know you addressed it a little bit on the call, but I'd love to take a little bit step further about the methodology considering -- and in making sure that you're not sacrificing growth as you continue expand margins at this pretty impressive level, it's got to be a balancing act, and. I know you have some levers there that you're pulling but it looks like it's got to be pretty difficult. So I'd love to just understand that to peel the onion back on that, so.

Yes, from our perspective, when you take a look at-the-market size that we talked about at our Analyst Day, a few years ago. It's a $72 billion market for our addressable market, it's much bigger than that you take a look at where is sales -- we're in the $1.5 billion or so, basically revenue. So the penetration into this market, our ability to upsell also 6x that still remains. We will balance profitability and top-line growth, our focus is still top-line growth, but if you take a look at, as you called out the margin expansion, 600 basis-points margin expansion in Q3, 400 basis-points, margin expansion for the full year, that's outstanding. But that's the model that we talked about. When your topline slows down, you're going to get that natural leverage. I want to make sure that our investors recognize, we feel that we're in a great position to move forward, we're going to continue to invest. And we're going to you know balance basically topline growth and operating profitability. Having said that, to give you more clarity related to fiscal '24, the current street consensus is about 15.5% operating profitability. I think a good place for the street to be in fiscal 2024, just to give you kind of a framework is that 15.5% to 16% range. I do believe that gives us plenty of room to invest and really to continue to capture this market.

Great, thank you so much.

Thank you. One moment for our next question. And our next question comes from the line of Saket Kalia from Barclays. Your question please.

Okay, hi guys, thanks for taking my question here. Jay, maybe this question is for you. First of all, the numbers speak for themselves. I wondered if you could just address the competitive backdrop a little bit, certainly, it doesn't appear in the numbers again, but I know that there were some noise out there with competitive quadrant stuff, wanted to see if you just had any views on that and more importantly whether you've seen that make its way into customer conversations at all?

Thank you Saket. So regarding the magic quadrant. I believe that customers are the real judge. And I'll give you three points why I believe they view

Very helpful, thanks guys.

Thank you. One moment for our next question. And our next question comes from the line of Sterling Auty from MoffettNathanson. Your question please.

Yes, thanks. Hi, guys. Jay, you talked about the success and kind of the go-to-market function and customer success teams. Wondering if you could just highlight for us or remind us the timing of when you did your big hires? Where you are in the capacity of your sales force and what the hiring might look like going-forward to extend the durability of the growth that you're seeing currently.

Yes. Hit a broad go-to-market level. Our goal is to make sure we keep on hiring at the right pace, a broad go-to-market team, as well as some of the takeoff teams that help us push forward some of the newer products. We did moderate some of the hiring, as we saw the market come down quite a -- in the past couple of quarters. Remo do you want to lose -- give some more color to it.

Yes, from a capacity perspective, we're in good shape. You know when we did the -- we reduced our workforce at the end of Q2, one of the things we've talked about is, we're still going to prioritize basically quota-carrying heads and R&D that's still the case. We are in a hiring mode and we will continue to hire. One of the things I mentioned Sterling is that, you know, not lost on us, is that this is a huge market opportunity. We're going to invest and we'll continue to invest in hiring and R&D and throughout the company, for that matter. But really what we did in Q2 was to better position ourselves to make the proper hires going-forward, and that's what we're doing.

Makes sense. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of John DiFucci from Guggenheim Securities. Your question please.

Thank you. So this quarter was people have said and you said pre-announced it, it was really a strong quarter, and looking at the numbers, it looks like real clean results, it's nice to see that, but it's also odd to see that in this environment. And you guys have talked about that, you know the things are, the difficult environment has continued. So I'm just trying to figure out like what changed for you guys this quarter, relative to the past two quarters. Not that they were -- they were -- you struggled with more in the last two quarters, at least from our measures of new ACV signings, and this quarter was really strong. I mean, was it I mean, you did talk about larger deals were there any like sort of anomalous large deals out there or is it just really just you guys now buckled up and are executing better. What would happened, what changed?

So this quarter was strong across all areas. Americas and APJ were particularly strong on a year-over-year basis. And last quarter we said some of the large new logo deals Americas we're taking longer to close. We also said, those deals were not lost, but just delayed. And we did close a good number of those deals. From vertical perspective it was very well-diversified. Strong verticals for federal, for financial services, healthcare and transportation. Our large and major segment did well, we highlighted a number of $100,000 plus user deals. So the fundamentals of our business are very strong, customers are not going to delay cyber as a priority, it is a priority. Cost saving is a big priority as well and we do well in both areas. Cyber, as well our cost-savings. I can tell you when it comes to cyber companies we're probably the only company that delivers significant ROI, because we are actually eliminated, a bunch of point products. So it is fitting well, it's a tougher market, there's more scrutiny, but our foundation is strong, our pipeline is strong. Remo?

Yes I'll like go with -- Jay mentioned. Pipeline, maturity of pipeline, execution, strong across-the-board, Americas was strong, APJ was strong, you know, federal was strong. Again, I think the key thing it was really good execution, from our sales organization on a worldwide basis. Related to large deals, mega-deal, we talk about mega deals when we first went public if deals were greater than $10 million. We've upped that now, mega deals are deals that are greater than $20 million. There were no deals of greater than $20 million. We did have one deal of $10 million in the quarter.

Thank you very much, guys.

Thank you. One moment for our next question. And our next question comes from the line of Roger Boyd from UBS. Your question please.

Great, thanks for taking the question And again, congrats on the very strong results. As you think about fiscal 4Q in fiscal '24, it sounds like you're broadly being pretty conservative around close rates, but Jay, you talked a little bit about some of the efforts you've made internally to get in front of budget scrutiny with some of these CFO ready business cases. I guess I'm wondering, relative to a few quarters ago, are you feeling incrementally better about controlling your own destiny, your ability to influence sales cycles and just curious how material these internal efforts have been in practice? Thanks.

Yes, so this tougher market has made it us a lot more sophisticated than we were before. For example, for new logos, what have we done? We are now doing early engagement, our sales team is getting good at engaging at C-level early on in the cycle. Number two, we had to refine our business value case, CFO ready case studies, a lot more. No longer annual numbers are good enough, now they want to go into quarterly level to see when the ROI can be done. Our engagement of cloud market-based have gotten much better, because we are leveraging the annual commit that's only spent annual spend that's already committed to the hyper scalers, now we had to do ramp deals more frequently, which is kind of to meet their timing of budgets and the like. For upsell, we had done a number of things in the past few quarters, we are ensuring that customers are realizing the value more-and-more. Our customer success teams, our TAMs are doing a great job. And then the product specialists team we put in-place for emerging products, that's working well. It's working very closely with our field sales team. So having a great, highly-differentiated platform which we built on

Thank you. One moment for our next question. And our next question comes from the line of Mike Walkley from Canaccord Genuity. Your question please.

All right, thanks. Remo you talked a little bit about future lumpiness in dollar-based net retention. I guess given some large deals that you'll grandfather in. But can you share with us kind of that mix, you expect to maybe fiscal 2024 of new logo sales versus upsell, is it still around 60%, 40%, ratio given that 6x times upsell opportunity?

Yes, I mean net retention rate is something we don't write to or look at. Our mix this year, we're expecting 40% to 60%, new versus upsell. We look at, really if we look at new and upsell, as those are the drivers in total, and we've talked about before is, we believe the best measure for

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Joshua Tilton from Wolfe Research. Your question please.

Hi guys, this is Patrick on for Josh. First-off, just wanted to congratulate you on the great results in what's been a tough environment. Clearly the mix checks in the quarter, were not exactly correct. So, I was wondering, what do you think is sort of driving that disconnect between the strong numbers put up in the quarter and then the general feedback from the channel. We've heard recently.

So I think this is not new. We have said many-many times that we are not a typical security companies selling boxes through people VARs. We are a transformation play, it's a high-tech sale and working closely with customers and sometimes large-sized, that's how we do business. These channel checks will always be misguided, I mean, that's how I personally look at it. When you are driving transformational C-level and whatnot, it is different. So, I would say, let's be more refined and channel checks. Look our business is strong, our customer engagements are very strong, our differentiation is very strong. Yes, our competitors are trying to create a fund, they are trying to mislead the market, it's our job to make sure we educate them, we communicate them, but the best results we do is when customers deploy our technology than they say, Jay, we're able to turn-on 20,000 users in 7 days and the results are amazing. And then there is a -- if you really contrast I've only seen a couple of cases, that say yes we got a competitive solution, this thing is still struggling out there, we are trying to extend our network from our office to the cloud, it's old-school architecture. So, I do believe that in spite of all that noise and [indiscernible] that comes from out there, our engagement, our differentiation, the way we are executing in the market, the way we are innovating and now in the new area of AI/ML, where we have unique advantage of better data, better private logs, with structured and unstructured data. We will do better than any of the vendors out there Maybe a comment on unstructured data, every vendor has logs. Logs are simply structured data, where are you coming from? Where are you going. The most intelligent information that generative AI can use comes from the URL, which could be hundreds of bytes long. And that's where you figure out what all is going on. Most of the firewalls, don't have any you URL they generally slip the domain level stuff. As we do some of this stuff. I believe will further increase our lead and any that will give us actual TAM and further growth that we are striving for.

Got it, thank you.

Thank you.

One moment for our next question. And our next question comes from the line of Adam Borg from Stifel. Your question please.

Awesome. And thanks so much for taking the question. Maybe for Jay you talked in the script about increasing traction with

Yes, so thank you.

Yes. And customers that have bought

Awesome, thanks again.

Thank you. One moment for our next question. And our next question comes from the line of Shrenik Kothari from Baird. Your question please.

Hi, thank you for taking my question and congrats on the strong execution despite the macro. So, for Jay and Reno, feel free to chime in, you mentioned on a sequential basis. You saw a better than normal seasonality and then of course you guys touched upon factors starting to close larger deals with federal, you of course are seeing benefit from kind of strategic customers ramping into larger commitments. And then of course the execution, the high-touch engagement is helping to get to finish line, international. Can you help us unpack some of these drivers in terms of kind of maybe relative impact on this better than normal seasonality, and then I have a quick follow-up.

Yes I think. Everything you mentioned is 100% correct. You know, I'm a traditional I'll go back to what I feel, I think it's better execution on our sales organization. Yes, I mean, all the factors are aligned, but we are still in a tougher environment with a lot more scrutiny and it's doing better execution. But if you've got good product offering that highly-differentiated and there is a need for it, because customers do want to save money and better cybersecurity that's really what's positioned us well.

I mean, just you follow-on, customers recognize the ROI, it is significant, the ability to simplify your network is significant also. Architecture, related to inline cloud, multi-tenant architecture, not only for users but workloads and IoT, OT and B2B. You know that that's the vision, basically

Thank you. One moment for our next question. And our next question comes from the line of Peter Levine from Evercore. Your question please.

Great, thanks guys for squeezing me in. We've seen one of your competitors come out this quarter with a very specific campaign kind of targeting you guys are somewhat kind of right reverse engineering your tax? So, Jay, is there any validity behind kind of what they're building, you explain to us the complexity, the lift and shift customers overnight. And if you you've been seeing any attrition on that front and then just one quick one, Remo yes, thanks for the color on the fiscal 2024 margins, but to the extent you can any color or high-level discussions you can share with us now on how you're thinking about the growth outlook and to what extent macro playing into that thought process, thank you guys.

So every vendor or has a core competence and they do very well in that competency. A firewall company will be a grade firewall company, the company will be great CASB company and someone who does CDN and DNS should be a good CDN DNS company. You can try to pivot for that competency, you build and create over years and years. It's very hard. If I came and told you that in one year, I'm going to build the best firewall. While it would be hard for me to say that because I can say it may make statements like that, but when companies trying to pivot, it takes a while, and especially pivoting do something that's inline, multi-tenancy, figuring out all the cyber threats without slowing things down it's hard, it's an architectural change. We believe the intellectual property, the IP needed to do so is very hard, that's number one, number two, the amount of passive one has to handle to really deliver the service, your gross margins are likely to be selling some of the 50s and 60s and not like 80% where we sit at. It's because we purpose-built stuff. So it is not unnatural for us to see, the competition trying to comments, maybe I can get into this space I have many times describe

Thank you guys.

Thank you. One moment for our next question. And our next question our final question for today comes from the line of Joseph Gallo from Jefferies. Your question please.

Hi, guys, really appreciate the question and great job on the billings performance in a tough environment. I appreciate the commentary regarding the year-over-year mix of ramp deals in F3Q, is F4Q the same expected year-over-year mix based on the pipe, you guys are seeing today? And then just any other color or commentary on how to think about F4Q billings, which appears seasonally conservative. I know you mentioned lower close rates, but is there anything else timing renewals or anything else we should think about, thanks guys.

Yes, ramps. I would consider the same, quarter-over quarter, just remember it is a tough compare last year, our billings growth was approximately, basically I think it was close to 60% billings growth.

In Q4, also, we had a strong Q3, so basically a tough compare.

Thank you.

All right.

This does conclude the question-and-answer session. I'd now like to hand the program back to CEO, Jay Chaudhry for any further remarks.

Thank you for your interest in