ZS - NASDAQ

Hello, and thank you for standing by. Welcome to

Good afternoon, everyone, and welcome to the

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

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 is $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 2922 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 margins 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 of approximately 6% of our 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 with 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 $0.69 to $0.70, assuming 165 million fully diluted shares. For the full-year fiscal 2024, we're increasing our guidance as follows. Revenue in the range of $2.140 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 of approximately 28%, operating profit in the ranges 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%. 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'd 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're 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. [Operator Instructions] 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 the traction you're seeing there. Could you expand upon that and just talk a little bit more about the role of

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 deep platforms. They don't believe in a single vendor offering the entire, what I may call, God security platform. Our customers are moving a bunch of front point product, the whole DM

Thank you. [Operator Instructions] Our next question comes from the line of Saket 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, I think we all know your views on firewall-based [SaaSy] (ph) solutions. But I'm curious how you're faring competitively against the smaller competitors here that are maybe more purpose built SaaSy solutions. And do you feel like that the market's view here on pricing is changing at all as we see more of those purpose built SaaSy competitors enter the market? So, the results certainly would indicate so, but just want to hear your view on that part of the competitive landscape.

So, thanks, Saket. So, yes, small SaaSy vendors, as you know, we play in the large enterprise market. We don't really see some of these small SaaSy 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. Part of the challenge I have with the SaaSy thing is that it says SD-WAN soft SFC. My customers, my CSOs believe that SD-WAN enables lateral-type movement. So, where we are headed, we think SD-WAN has to go away, it'll be replaced with

Thank you. [Operator Instructions] Our next question comes from the line 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 sales people and sales leadership. So, can you talk a little bit about the mechanics of why that is occurring? Is that a reflection of change on 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 TTM transition has progressed. 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 the right leaders in place, we have accelerated our pace of hiring quota-carrying 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 us from $2 billion to $5 billion. Remo?

Yes, I mean it's a great question, Alex. The attrition is -- you got to keep in mind it's both voluntary and unvoluntary attrition. As Jay mentioned, with Mike Rich coming onboard, 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 outstanding, quite frankly. Pleased with the work that's being done, the people they're bringing onboard, and the direction we're going, I think, is absolutely outstanding.

Yes. And if I may say, I think I'm very pleased with the transition, is a part of the plan to bring Mike onboard to get to account-based selling.

Thank you. Please stand by for our next question. Our next question comes from the line of Brad

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 port market, not just amongst specialized SASE players, but some of the bigger ones as well. And I know

Okay. So, first of all, starting with, as we said, architecture matters, it's like going from traditional car to electric car. Most of the large vendors are trying to build upon what they have and we don't believe they'll ever get there. Okay. 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 market has expanded. And that's only just for users. There's a big market for workload. You saw a number of deals we talked about where workload is taking good traction. Then there are trillions of IoT OT device. We are the right platform; we're expanding in that area. In fact, part of that reason we did Airgap acquisition was to expanding to IoT OT inside the campus, inside the plant to do

Yes. From a win rate basis, they continue to be very high, so no change in win rates. Pricing trends, 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 for large deals of nine to 12 months. We've 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, Remo, of course, there is some pricing pressure, but we are focused on value selling. When we are able to go in and say, we are unable to take out ex-million of dollars, what is technology and we'll do it so much in Q1, so much in Q2, so much in Q3, we are able to secure a 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 point products.

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 of 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. You're also working 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.

Yes. 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,

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 Ittai Kidron with Oppenheimer & Co. Your line is open.

Yes, hi. Thank you. This is Param Singh for Ittai Kidron. First of all, 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 a little bit of conservatism for higher sales attrition that maybe people are not thinking about right now?

Thank you for the question. 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 -- tough compare for '24 versus '23, and you got the last point, the attrition 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 KeyBanc. 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 macro environment is 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 at the moment, especially when they do seem to be hitting the pause button in other areas.

Yes, macro remains tough, [TU] (ph) scrutiny remains high. But the 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

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 out over the next 12 to 18 months where are 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 of what?

Sustainability of growth and what the biggest upside level is?

Okay, all right. The biggest upside, so you mentioned three points there. It's kind of interesting. One is obviously Salesforce matters. It makes a big difference. So, the initiative we're going through with Salesforce, making sure more and more our salespeople are able to engage at the C-level, consultated combined with our GSI initiatives, is obviously a big, big opportunity for us. Then you talked about the emerging products. 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 stock from small number, 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.

Thank you. Please stand by for our next question. Our next question comes from Fatima Boolani with Citi. Your line is open.

Good afternoon. Thanks for taking my question. Jay and 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 has been yielding relative to your expectation? 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 Fed market and then we recently expanded to health care. And you're going to see some more expansions, but more importantly, you're going to see some more initiatives to accelerate the growth of those markets. It's going very well and Mike Rich and his team come from the 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 involved?

Yes. I mean just to add on to Jay and just to also confirm from my perspective, the execution that we had in the quarter was outstanding and that's driven for the entire sales organization. It is the new sales people coming on board and our existing sales people. I think one of the things that our execution and the reason that we did well, it really speaks to the strength of

And one more comment I'll make. Our customers view us as very strategic and mission critical partner. That being the case, there's a strong engagement and that's why our overall retention is so high.

Thank you. Please standby for our next question. Our next question comes from the line of Shrenik Kothari with Baird. Your line is open.

Yes. 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 area for us. It seems like it's starting to pay dividends, it's kind of inflecting up now. So, just curious like as overall AI workloads get bigger and the digital and cloud adoption continues to rise across industries. So, how do you see like 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, the new products are definitely increasing our TAM. In fact, if you look at data protection, what it used to be for DLP inline, it's only a piece of it, data at rest, data sitting endpoint, data sitting in public cloud, data loss related to SaaS security, supply chain vendors, it's all expanding DSPM, all of that portfolio that 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 TAM expansion for us is actually

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, like what can he do better there that maybe

Yes, it's a good point. We highlighted last quarter, three things we'll be doing as Mike's key initiative focus from opportunity centric to account centric being one, GSI has been two and verticals being three. All three are making good progress. And GSI 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 at billions of dollars of work in the business. So, expansion in 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 Wolfe 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.

Yes. So, it's true. We all have been reading both the vulnerability is 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, there are number of them in the pipeline. I'm not sure I can give you quantifiable number, but I can tell you it's a meaningful number. Customers now fully understand that whether VPN, on prem or VPN MOS 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

Thank you. Please stand by for our next question. Our next question comes from the line of Gregg Moskowitz with Mizuho. 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.

Yes. In the Workload Protection, a thing I'm very proud of is nobody in the market talks for

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

Thank you. Please stand by for our next question. Our next question comes from the line of Tal Liani 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.

Yes, the NRR at 116%, I think is outstanding. The things that influence NRR and we talked about this many times with our users, basically we're trying to sell the user platform to our customers and that includes

Having said all that, 116 is a really good number from our perspective.

And as said over the past many years, the faster you sell, the lower your NRR and 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 Stifel. Your line is open, Adam.

Awesome. Adam Borg with Stifel, 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 installed 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 is 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 actually speaking, bigger bundles are happening. As you listen to our prepared remarks, it's no longer that buying bundles for users along with users, we're selling platforms, selling data protection. And quite often, we begin to sell AI solution like Risk360 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