ZS - NASDAQ

Good day. And welcome to

Good afternoon, everyone, and welcome to the

Thank you, Bill. I am pleased to share our Q2 results, which once again exceeded our guidance for the top line and the bottom line, even amidst an ongoing, challenging macro environment. Revenue grew by 35% year-over-year, and billings grew by 27%. Our customer base spending $1 million or more continues to grow by over 30%. Our operating profit more than doubled year-over-year, and our free cash flow margin reached are record for Q2. During the quarter, we made solid progress on our strategy to scale our go-to-market engine to reach our goal of $5 billion and beyond in ARR. To augment our already strong sales team, we're adding more experienced leaders with a proven track record of running large operations. Considering these leadership changes, I am particularly proud of our field sales execution this quarter. Before getting to the details of our fiscal Q2, let me share a few observations on the business environment. Based on my conversations with hundreds of CIOs and CISOs, I expect demand for

Thank you, Jay. Our Q2 results exceeded our guidance on growth and profitability, even with ongoing customer scrutiny of large deals. Revenue was $525 million, up 35% year-over-year and up 6% sequentially. From a geographic perspective, Americas represented 54% of revenue, EMEA was 31%, and APJ was 15%. Our total calculated billings in Q2 grew 27% year-over-year to $628 million. On a sequential basis, total billings increased 37% quarter-over-quarter. Our calculated current billings grew 26% year-over-year. Our remaining performance obligations, or RPO, grew 29% from a year ago to $3.613 billion. The current RPO is approximately 51% of the total RPO. We ended Q2 with 497 customers with greater than $1 million in ARR, adding 29 such customers in the quarter. We also saw strength in $100, 000 ARR customers this quarter, which grew to 2, 820, adding 112 customers sequentially. This continued strong growth of large customers speaks to the strategic role we play in our customers’ digital transformation initiatives. Our 12-month trailing dollar-based net retention rate was 117%. 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 Q2 financial performance, total gross margin of 80.8% compares to 80.7% in the prior quarter and 80.4% 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 fiscal 2024, we extended the depreciable useful life of our servers and network equipment in our cloud infrastructure from four to five years. Moving on, our total operating expenses increased 3% sequentially and 22% year-over-year to $321 million. We continue to generate significant leverage in our financial model, with operating margin reaching 19.6%, an increase of approximately 700 basis points year-over-year. Our free cash flow margin was 19%, including data center CapEx of approximately 6% of revenue. We ended the quarter with over $2.4 billion in cash, cash equivalents and short-term investments. Next, let me share some observations about the macro environment and our framework for guidance for the rest of the fiscal year. We believe we are still operating in a challenging macroenvironment and customers continue to scrutinize large deals. Customer interest in our platform remains strong, and we are adding experienced sales leaders to our already strong sales team to position us well for sustainable growth in the long-term. In our outlook for fiscal 2024, we're balancing our business optimism with ongoing macroeconomic uncertainties and sales leadership changes. Moving on to guidance for Q3 and full year fiscal 2024. As a reminder, these numbers are all non-GAAP. For the third quarter, we expect revenue in the range of $534 million to $536 million, reflecting a year-over-year growth of approximately 28%. Gross margins of 80%. I would like to remind investors that a number of our emerging products, including newer products like

[Operator Instructions] Our first question comes from Alex Henderson with Needham.

Well, first off, I've got to say, Bill, it was great working with you and congratulations on progression in your career. As for you guys on

Alex, thank you for the question. The short answer is we haven't seen any meaningful change for a number of things you mentioned. Take, for example, macro. It's pretty much a similar environment. Our deals keep on growing. We are doing large deals, so there's no significant crash on deals. We do see demand for cybersecurity products remaining strong. Customers do have budgets for cyber, even though they may be tightening budget for IT overall. And this is because

Our next question comes from Brad

Great, thanks so much and congrats to you, Bill. It's been a fun ride since the IPO. Jay, just following the last question, I appreciate your comments on the environment. You obviously had one of your key competitors last week talking of customer fatigue and you guys are at least in the federal market. You're telling us a little bit of a different story but can you specifically share thoughts about competitors giving away free product and the impact it can or is already having on

Yes, thank You, Brad. We really do not see any cyber spending fatigue among our customers. In fact many of the CIOs that told me that cyber is a priority for spend. But they do have ELA fatigue because a lot of stuff has been becoming shelf wear and it's being scrutinized. Regarding free stuff, many vendors have been trying to give it away for a while and we have been successfully winning against this strategy for a long time. I mean look at our retention rate. It used to be been 90s at IPO now, now it's high 90s and fundamentally cyber is so mission critical that customers will invest in the industry's leading solution rather than rely on cheaper and less effective products that are included as a part of an ELA bundle. Look, we are really dealing with a secular trend too. Just like the role of data center diminished and public out to a call, similarly, the role of firewalls is diminishing and the demand for

Thanks, Jay, maybe just a quick follow-up one for Remo. Remo on the back half billing seasonality that you've set up now for us, could you just maybe speak to any factors we may want to consider and what it is that drives your confidence, and now it looks like a pretty big sequential Q4 as you've set it up for us. Thank you.

Yes, I mean, we made a go-to-market change during the quarter because you're aware, Mike Rich, Mike has hit the ground running and is doing an absolutely outstanding job, balancing the strength that we've got with our sales organization as well as bringing new leadership in. If you take a look at our guide for the year, it is slightly up, we're being prudent. The key thing, I think, for our investors to recognize and what Jay said, this is a large market opportunity. It's a huge market opportunity. And when it's a huge market opportunity, when you look at companies giving away things for free, especially in security, that's one area that basically I wouldn't shortchange. So what we're seeing with the market opportunity, our engagement with our customers, with Mike Rich on board, we feel good about our guidance going forward.

Our next question comes from Andrew Nowinski with Wells Fargo.

Great, thank you, Bill. Certainly going to miss you. Can't wait to see where you land next. And then, overall, just great quarter. Congrats on another strong execution. I wanted to ask you guys about the US federal sector. It sounds like you had some strong upsells in the US Fed may have contributed to some of your upside this quarter. Do you think some of these agencies that you mentioned that are really under-penetrated, they might serve as a role model to other agencies in the U.S. government which could help you continue your growth there and how does your pipeline look in the U.S. Fed over the next few quarters? Thank you.

As we have been investing in the federal market for quite some time. We got the highest level of certification and we're doing very well. In fact, we are heavily engaged with all federal agencies including DOD, 12 of the 15 agencies on our customers. In my prepared remarks, I talked about the federal deal that we doubled the number of users and we doubled that ARR to approximately about $5 million. And with this, we are less than 15% penetrated in the agency in terms of the number of users which means there's an 85% wide space to go up there. We feel good. We keep on investing in it and I think it's a strong area for us. Remo?

Well positioned. And as Jay mentioned, 12 to 15 basically agencies that we're in, these are big deals in federal. It's hard to predict when these deals are going to close. From our perspective, we're well positioned, very well positioned going forward. We've made significant investments with our certifications and also our team, which we feel is outstanding. So the answer to your question, Andy, is we feel good about federal. But, again, bigger type deals, hard to forecast, but we feel good.

Our next question comes from Tal Liani with Bank of America.

Hi, guys. I have a small question and a big question. The small one is about billing. You guide it down 7% sequentially and then guide it up 53% if I take the implied 4Q, which is the highest growth in billing. You had the same problem last year. What's the meaning of it? What's the meaning of billing being weak and then billing being so strong in the fourth quarter? What needs to happen for it to materialize? So that's a small one. The bigger one, Jay, maybe you wanted me to take it one at a time or you wanted me just to ask both?

No, go ahead.

Jay, the second one is a bigger question. SASE is used to be a very secure, a very safe market for you because there were only two players and maybe two and a half players. And now we're seeing tons of competition coming in. And competition is coming at very low pricing. And Fortinet is talking about one-third of your price. The newcomers are coming either through bundling, which enables them to reduce price, or as an add-on to a firewall, which again enables them to bundle and reduce price. And if I ask the question in a provocative way, I'll ask it, what prevents this market from turning into what happened to FireEye and what happened to Sandboxing that when competition started, pricing collapsed in the market?

So, Remo start with you.

So, the things that we've got going on in the third order, first of all, this is our normal range, a much of decline over the last five years from Q2 to Q3. I talked about on a prior question the go-to-market changes that we've made. That certainly plays into things. Related to the back half in the fourth quarter with the implied increase basically in billing, it's related to pipeline close rates and the forecast that our team has come up with. Again, from our perspective, we feel it's prudent guidance. We feel good about it, and we feel that we are in a great position to go forward with the team that we have and will build in our sales organization.

Okay, regarding your bigger question, that's SASE, the market and the competition. Let me put it this way. They are point products and the platforms. You absorb point products into platforms. And then there are products that are mission critical, the products that are not mission critical. FireEye, Sandbox was a feature from day one, it’s not a much barrier to entry. Everyone could build it and add it into the main platform. CASB was a point product all along, became that way. Cloud Security Boston Management, a point product gets bundled with something. And then there's something called platform. For example, the code of our platform,

Our next question comes from Rob Owens with Piper Sandler.

Great. Thanks for taking my question this afternoon. Could you touch a little bit more on your vertical selling motion and maybe some of those new markets that you will have special overlays for? And I would love a little more commentary around your success with your IoT/OT solution. Thanks.

Yes, so let's start with vertical market first. About five or six years ago, we started with a first vertical. That was a public sector. And then within that vertical, we expanded into federal government and state government, education and the like. And those things have been very successful for us. For a year ago, we expanded to health care verticals. And then now we want to expand to a couple of more verticals. When company gets to a certain level, you can actually afford to go vertical because vertical requires a decent amount of footprint. Vertical requires some of the expertise in those areas. For example, we have hired some people who come from very good backgrounds, who have spent time in those vertical markets. So we think it's a good natural area for us to expand. And it's not a new, something totally new for us. We've been there, done it, we need to know, we need to learn how to expand it. For example, financial is a strong market for us. It's almost like a vertical today, though it's not a formal vertical. So we'll see, you'll see us expanding in more verticals. That was the first part. The second part of the question, what was the second part.

Our next question comes from Matthew Hedberg with RBC.

Yes, thank you. This is actually Matt Swanson from that Hedberg. I wanted to follow up on Andy's earlier question on the federal vertical. Yes, it's been a place that's been a little bit mixed among your peers and with the strong results, is anything change from your perspective from a competitive standpoint? Or you mentioned the

We have seen no weakness, no slowdown in the federal market. In fact, adoption of

Our next question comes from Fatima Boolani with Citi.

Hello. This is Mark on for Fatima. Thanks for taking our questions. Can you maybe just speak up a little bit more on the leverage you guys recognize in this quarter, and then really the meaningful to the on margin expansion, even though there's a pretty long roster of initiatives you guys is looking to implement, such as verticalization. So any sorts of leverage performance this quarter, and how does sort of your investment stance or philosophy differ today versus maybe three months ago? Thank you.

Mark, it's actually very hard to hear you. So what I picked up was you were asking about a little more information about our vertical approach. Is that correct?

Can you hear me now?

A little better.

A little better, yes.

Okay, great. Sorry about that. So we were just more so wondering, can you maybe speak a little bit more on the leverage you guys recognize this quarter, and then maybe the meaningful to on the margin expansion. We know that there's a lot of initiatives you guys are looking to implement, such as verticalization. So we just wanted to get a sense of the source of leverage performance this quarter, and how does your investment philosophy basically differ today versus three months ago, and going forward. Thank you.

So I'll take that you. I believe, Mark, you're talking about operating leverage. So we exceeded in revenue. Our gross margins were higher, and our operating expenses came lower. Having said that, we did hire significantly during the quarter, and we'll continue to hire as we go forward. The key thing I think to really think about

No, right and clear.

Our next question comes from Roger Boyd with UBS.

Thanks for taking the questions. And Bill, first off, congrats. I think pretty much summarized the best when you call it a bittersweet moment. But, Jay, I was wondering if you could expand on how you're approaching SD-WAN and single-vendor SASE market, really how that approach differs from traditional vendors there and how you see this changing your competitive standpoint in the market for security edge in general. Thanks.

Yes. So we have always wanted to make sure we deliver

Our next question comes from Brian Essex with JPMorgan.

Great. Good afternoon, and thank you for taking the question. First of all, Bill, congratulations from me as well. It's great to see your success. Maybe Jay for you. So we've seen a little bit of executive turnover here as we watch the story from the sidelines, and would love to get your sense of, and obviously some of these make a lot of sense, right? People come as a team, who believe as a team, there are relationships there, and you did a great job previously calling it out as being a factor of conservatism in your outlook. So maybe two quarter for me. One has turnover been what you expected it to be, particularly given what you've kind of like folded into your guidance and then two, maybe frame out what kind of or how deep and meaningful some organizational changes that Mike Rich might be driving within the organization. Thank you.

Okay, good. So starting with our sales attrition is down in the quarter. And second, when leaders leave, it's natural for some people to follow. But as

Our next question comes from Peter Levine with Evercore ISI.

Great. Thank you for taking my question and Bill congrats on the opportunity. Two parts. One, can you maybe help us understand where NRR maybe troughs out, where you see that trending throughout ‘24, perhaps into fiscal ‘25? And then Jay, you had comments and maybe piggyback of last question on opportunity centric to more of an account centric sales motion. Maybe explain to us what that means and who kind of somewhat appreciated that change.

Yes. I'll answer the NRR question and Jay can answer the opportunity question. So we don't guide the NRR and quite frankly we only look at NRR at the end of each quarter. So we're not providing any guidance in NRR. It can be impacted as we called out on the script related to large deals or more being bought up front, customers buying within the quarter. So, it is a metric that's it's going to move around. But again, we do not provide any guidance on NRR.

Okay. The second part, opportunity-centric versus account-centric. In an opportunity-centric model, the rep normally engages on a tactical basis, the customers are all being, where is my opportunity, where's the deal, let me brought the deal. In the account-centric sale, we create account plans, we focus on growing the account. Now, when you are a young company, you don't have that many customers. You naturally are opportunity-centric and it serves you well. At our stage, there will be a large number of customers. It is important for us to move towards being account-centric. We have a large platform to sell. So, once we land, working with account, creating a joint plan to expand becomes far more effective. And as we scale to $5 billion ARR and beyond, so it's evolving to really become long-term strategic partner with the customer. We have been doing it at a small scale in some pockets of the business. Now, we want to take it across at a larger scale.

Our next question comes from Gregg Moskowitz with Mizuho.

Hey, thank you very much. Bill, congrats to you. It's been a pleasure. I have a question for either Jay or Remo. Some investors are harping just a bit on short-term billing, slowing down a little this quarter. But conversely, based on my numbers, both RPO bookings and CRPO bookings actually accelerated this quarter, which is impressive. So just to level set for all of us, because we know that these metrics can sometimes be a little noisy, is there any incremental slowdown that you have observed in any facet in the Q2 or any change in the level of execution? Thank you.

First of all RPO, CRPO is based on contracted value. And again, those did very well. Billings is actually what's being built. So there's always going to be differences between CRPO and RPO versus short-term billings and in billings. As the company gets bigger, it's just the numbers are growing, but the numbers are, you're not going to get the type of growth rates when four or five years ago. But again, from my perspective, the short-term billings growth rate of 26%, that's very good. That's outstanding.

Our next question comes from Keith Bachman with BMO.

Hi, many thanks. Good evening. Remo, I wanted to start with you, if I could. I wanted to turn the federal comments around a little bit. Your federal business has been very strong for a number of different quarters. And in the past, you've actually provided some context of growth on the federal standalone. And I just wanted to see if you could revisit that. And the lens that I'm putting on the question is, there's been some investor concern that your federal business has been outstanding. And yet, that would suggest a that there's been a more, a greater slowdown, if you will, on the corporate business. So I just wanted to see if you could provide any context for that. And then Jay, perhaps for you, you actually in your prepared remarks talked about, I think you said one half of your net new bookings were from new logos, if I heard you correctly, which is a very strong metric. And I just wondered if you could characterize how, you see that unfolding new logos in particular, as you look out over the next number of quarters. Thank you very much and congrats to Bill.

Keith, I'll start. The federal business has been good for us, because as I mentioned, we're well positioned. We'll provide color on the contribution of federal on an annual basis. I haven't said that. I'll go out and put my neck out, which maybe I should.

Bill's leaving so it's safe.

With Bill's leaving, that's right. He's picking me at the table. We're well positioned in federal. It really comes down to our executions. Let the numbers play the way they play. We'll see how it plays through. But we feel good about our federal business. It's been strong. I would not say it's been carrying us. That's the key comment. But it is basically a vertical that I see that we have a lot of potential. We just need to execute.

Yes, and non-federal is pretty good, too.

So, I mean, we are bullish, but both sides of the business. Moving on to the second part, yes, business, strong business coming from net new logos. It's good in terms of future. And as customer base is getting bigger and bigger. And we have lots of platforms to sell. From a directional point of view, I think we have been planning the upsell being in the, whatever, 60%, 65% range somewhere else there Remo, and new logo, the rest. So I think that's really how we see us moving forward. Now, part of the thing that I'm excited about is we are seeing more and more of million-dollar customers being on board. The number is about almost 500 customers that are a million dollars. Then they are trying to get to $5 million and $10 million. So we are targeting towards getting more and more customers a $1 million to $5 million to $10 million. That's probably the bigger target than trying to get lots of new logos by count of logos.

Our next question comes from Joshua Tilton with Wolfe research.

Hey, guys, can you hear me? Congrats, Bill, and I apologize for the amazing cafe music in the background. But the one question I have that's been on my mind is just none of what you guys are talking about tonight kind of happens overnight. So I guess, were these sales changes factored into the initial guidance that you gave back in Q4? Or are you actually embedding incremental services and related to these changes in the outlook going forward?

I'll speak to basically both Q2 and Q3. In Q2, we said we were expecting close rates to be slightly worse. Things came in pretty much as we thought they would. For Q3, our assumption also there's a level of conservatism slight. Again, for Q3, they're related to close rates.

And we'll have our last question from the line of Peter Weed with A.B. Bernstein.

Thank you. And I guess following up, maybe a couple of questions that we've had here, I mean, I will agree impressive to see the continued acceleration and new customer contribution. I think that had been a worry maybe a year ago whether or not that was going to continue. And obviously you've talked a little bit about expansion coming down with landing orders or deals up front leaving a little bit less upsell, cross-sell opportunity. Maybe help break down a couple of things. One is with a lot more new customers landing in the short term, would this be a good signal for kind of a year from now and in the short term getting some lift just because newer customers expand more. And secondly, how would you think about the opportunity around expansion? Like what are the things that you think you can do to grow the upsell opportunity even though customers are landing larger today? What are you going to be doing to kind of create some lift there with expansion in the future?

Yes, so if you think about what we've done over the past several years since our IPO, we essentially used to start with, in fact, the

And the new customer success that you've been having, do you anticipate that provides some additional lift kind of looking at a year or so, just as a mix of new customers has increased?

We don't wait for a year or two years for the contract. We are in the process of we sell, we go, we talk. Literally, it's an ongoing engagement with the customers. So you're not going to see lumpy things from our us. Like people said, hey after COVID what's going to happen after three years? When three years came in most of our customers had done an upsell or two with us.

That concludes the question and answer session. This time I would like to turn it back to Jay Chaudhry for closing remarks.

Well, thank you for your interest in

Thank you.