ZS - NASDAQ

Hello, and welcome to

Good afternoon, everyone, and welcome to the

We had an outstanding Q4, and I am very pleased to share our strong growth which once again exceeded our guidance. Our revenue grew 21% year over year, and operating margin exceeded 22%, which is a quarterly record for us. We are seeing growing demand for our large and expanding platform, which provides best-in-class cyber and AI security while eliminating complexity and reducing cost. We are seeing significant customer interest in our powerful AI security solutions, including our new AI Guard and GenAI security offerings. An increasing number of enterprises are choosing 40% of the global 2,000 and over 45% of the Fortune 500 companies. Driven by the strong customer demand, our annual recurring revenue or ARR increased about 22% year over year and surpassed $3 billion, making us one of the only two pure-play SaaS security vendors to achieve this milestone. For fiscal year 2025, with our revenue growth of 23% and free cash flow margin of 27%, we operated at rule of 50. While many public SaaS companies strive for rule of 40 results, we have consistently exceeded the sought-after industry benchmark. Heading into fiscal 2026, we are accelerating our platform innovations across three growth factors: AI security, zero trust everywhere, and data security everywhere, which together surpassed $1 billion in ARR in Q4. Let me share more details on our innovations in these three areas starting with AI security. We have entered an era of omnipresent AI, which is fundamentally transforming enterprises and is leading to an explosive growth of AIML traffic. The scale of this transformation is truly remarkable. Our ThreatLabs report revealed that AIML transactions on our cloud increased 3500% in the past year. The adoption of AI at this breakneck pace is creating new security challenges, such as model jailbreaking, prompt injection, model poisoning, and more. The growth in AI also increases complexity and creates new cyber risks. To address these emerging security challenges, we are innovating in two primary areas. First, security for AI applications. We have delivered solutions to secure AI apps and access to those apps, whether by users or AI agents. To secure AI apps from traditional cyber and emerging intent-based attacks and to battle the new security challenges I just referenced, we recently launched

Thank you, Jay, and good afternoon, everyone. Our Q4 results represent a strong finish to fiscal 2025, reinforcing the demand for our solutions and our operational scale. We operated at rule of 50 in fiscal 2025, demonstrating our commitment to growth. We ended fiscal 2025 with over $3 billion in ARR, a milestone that reflects approximately 22% year-over-year growth. Notably, as Jay mentioned, we are one of only two pure-play SaaS security companies to surpass this level of ARR. ARR represents the next twelve months' revenue from existing customer contracts active at the end of the period. For modeling purposes, quarterly ARR figures from prior year periods are included in the supplemental materials accompanying our Q4 results. Q4 revenue was $719 million, growing 21% year over year, 6% sequentially, and exceeding the high end of our guidance. Geographically, the Americas accounted for 55% revenue, EMEA for 29%, and APJ for 16%. For the full fiscal year, total revenue reached $2.7 billion, representing 23% year-over-year growth and surpassing our guidance. Our remaining performance obligation or RPO grew approximately 31% year over year to $5.8 billion, with approximately 46% classified as current RPO. We closed fiscal 2025 with over 9,400 customers, including 664 customers generating over $1 million in ARR, and 3,494 customers exceeding $100,000 in ARR. We now serve nearly 40% of the global 2,000, and over 45% of Fortune 500 companies, demonstrating the strategic role we play in customers' digital transformation journeys. Turning to the rest of our Q4 financial performance, our gross margin was 79.3%, as compared to 81.1% last fiscal year Q4. Our gross margin this quarter is lower than our historical target of 80% due to a one-time deployment of a large private cloud in a government customer's data center, which included a hardware component that carries lower gross margin. Given the one-time nature of this shipment, we expect gross margin to move back up to 80% in Q1. Operating expenses increased 3% sequentially and 16% year over year, reaching $411 million. Operating margin was 22.1%, exceeding our long-term range and growing by approximately 60 basis points year over year. Since Q1 2023, operating margin has expanded by over a thousand basis points, underscoring the leverage in our model. Our free cash flow margin for Q4 was 24%, including data center CapEx at 8% of revenue. For fiscal 2025, data center CapEx represented 6% of revenue, approximately 60 basis points lower than last year due to investment timing. We ended the quarter with $3.6 billion in cash, cash equivalents, and short-term investments, including net proceeds of $1.7 billion from the convertible note we issued during the quarter. Next, let me provide key assumptions driving our fiscal 2026 guidance. On August 1, we successfully closed the acquisition of Red Canary. We recognized approximately $83 million of ARR at close. Our full-year ARR guidance assumes $95 million contribution from Red Canary, and our full-year revenue guidance assumes approximately $90 million from Red Canary. Our Red Canary ARR guidance assumes no contribution from customer contracts up for renewal in fiscal 2026. Looking ahead, we are shifting our focus from billings to full-year ARR as our primary growth metric. Regarding seasonality, we anticipate net new ARR will remain weighted towards the second half of the year, with approximately 46.5% to 47% in the first half, including the contribution from Red Canary, and consistent with historical trend. Finally, we are assuming the macro environment to be relatively unchanged in fiscal 2026. With that, let me provide our guidance for Q1 and full-year fiscal 2026. As a reminder, these numbers are all non-GAAP. For the first quarter, we expect revenue in the range of $772 million to $774 million, reflecting year-over-year growth of approximately 23%. Gross margins to be approximately 80%. I would like to remind investors that we are introducing new products that are experiencing strong growth and are optimized for faster go-to-market rather than margins. This will continue to influence our gross margins. We plan to optimize new products for margins over time as they scale. Operating profit in the range of $166 million to $168 million, net other income of approximately $18 million, earnings per share in the range of $0.85 to $0.86, assuming a 23% tax rate and 167 million fully diluted shares. For the full year fiscal 2026, ARR in the range of $3.676 billion to $3.698 billion, reflecting year-over-year growth of 21.9% to 22.7%. Revenue in the range of $3.265 billion to $3.284 billion, reflecting year-over-year growth of approximately 22% to 23%. Operating profit in the range of $728 million to $736 million, earnings per share in the range of $3.64 to $3.68, assuming a 23% tax rate and approximately 169 million fully diluted shares. Free cash flow margin to be approximately 26% to 26.5%. With a large market opportunity and customers increasingly adopting the broader platform, we will invest aggressively to position us for long-term growth and profitability. With that, operator, you may now open the call for questions.

Thank you. Ladies and gentlemen, as a reminder to ask a question, to withdraw your question, please press 11 again. Please limit yourself to one question only. Our first question comes from the line of Saket Kalia with Barclays. Your line is open.

Okay, great. Hey, Jay. Hey, Kevin. Thanks for taking my question here, and nice finish to the year. Jay, maybe for you, you know, there were times when SASE was a healthy space in the past, despite firewalls being healthy as well. But now it seems like firewall appliance growth is starting to slow. And you touched on this a little bit in your prepared remarks, but to what extent do you think SASE is replacing firewall appliances? I know we all think we all know that it's replacing secure web gateway appliances. But what does the velocity look like on firewall appliances?

So, Saket, a very good question. First of all, I basically said that if you want zero trust, you can depend on firewall or security. So firewalls have to go. Some of these old boxes take a lot longer to go sometimes than we want them to. First, I think the spiral appliances in the branch are the first to go. And the launch of

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

Excellent. Thank you so much for taking my question. And Jay, Kevin, unbelievable. Congrats on a strong close to the year and a very healthy outlook for fiscal 2026. Jay, I wanted to ask about

VFax is an important program that built upon two very important foundational pieces we put in place before. The first thing was to really eliminate the bunch of point products we end up doing architectural workshop that identify what else go out. Two, our business value assessment team quantifies if those pieces are removed when can they move, and how much cost can be saved. Then

Thank you.

Our next question comes from the line of Mike Cikos with Needham. Your line is open.

Hey, guys. Thanks for taking the questions here, and echo my congrats on the quarter. I wanted to cycle back to the

Sure. Very good question. So first of all, as you know, to do full security, you need to make sure you're able to implement zero trust not just for users, but also your branches. So each branch becomes like an intern cafe as well as cloud workloads. You can have zero trust communication among workloads. Our customers early on started with zero trust by users. We've done a very good job in that. The next natural thing for customers to worry about is open branches. That should be going to zero branch. And that's actually eliminating a lot of firewalls and SD WANs out there. And cloud is the next big thing. And with AI, workloads building up, we see more demand, more adoption, of zero trust in the cloud. So it's a natural part of the journey. We are seeing what we expected. So that's the adoption part. Now what kind of impact can we have We're seeing a large number of deals where ARR has gone to two x or three x and sometimes higher. And as you know, with time, workloads will grow even though users may not grow over time. So we expect this trend to be a very good thing. From incentive point of view, we don't really give our sales team targets for each product. But we do give them additional incentive from time to time for certain new products or new logos type of stuff. But it is true that the demand is pretty good in these areas And a customer with zero trust. Users, zero to branch, and zero trust cloud. Becomes zero trust every other customer. And we're excited with the opportunity we have to take a large install base of users to the next two pillars. I hope that helps.

Thank you. Please stand by for our next question. Our next question comes from the line of Meta Marshall with Morgan Stanley. Your line is open. Question for you on the AI security front. When customers start looking towards the AI security product adoption, just where are they looking for first, kind of the security for AI with some of the data security or agentic solutions or that AI for security kind of on the security ops side.

Thanks.

Sure. Thank you. Our customers first start to have secure use of public AI such as Gemini of the world, we offered the solution starting about eighteen months ago. It's fairly well deployed. Now you the goal is to make sure we secure the so it doesn't leak out to public applications. The next piece became how about secure my private applications, my private models that are sitting in my data center? Or my public cloud. From there, we recently launched an offering We call it AI guardrails. It's early stage, but it is having tremendous interest. From futuristic point of view, the next big interest is coming from agent to agent communication.

Thank you. Our next question comes from the line of Joshua Tilton with Wolfe Research. Hey, guys.

Thanks for taking my question. Congrats on a great end to the year. I guess what I'm trying to just get a better handle on is it looks like if you strip out Red Canary from the guy for next year, but you guys are guiding to net new ARR growth. Which does scream like it's strong. But I guess what I'm just trying to understand is is there any way you can give us a sense of what net new ARR grew this year? So we can kinda gauge you know, where you're guiding from. Like, are you guiding to an acceleration? Are you guiding to a deceleration? There anything you could help us understand for the trajectory of the net new ARR that you're guiding to for next year?

Yeah. Thank you for the question. We are guiding for high single-digit net new ARR growth in fiscal 2026 on an organic basis.

Thank you.

Please standby for our next question. Our next question comes from the line of Andrew Nowinski with Wells Fargo. Your line is open.

Okay. Congratulations on a strong finish to fiscal 2025. I wanted to ask you guys about the data security portfolio. I know $425 million was pretty impressive from an ARR perspective. I think you added about $75 million this quarter alone. And I know that's a stand-alone suite of solutions, but it seems like those products go hand in hand with

So we are seeing data security being bought along with

Please stand by for our next question. Our next question comes from the line of Fatima Boolani with Citi. Your line is open. Good afternoon. Thank you for taking my question. Kevin, this one's for you. It's a little bit more tactical with respect to

Thanks for the question. The truth is that

Oh, great. Thanks for taking the question, and congratulations on the good results. So yeah, I wanted to follow-up on wanna follow-up on the earlier questions on

Yeah. So thank you. Yes. It is true that user is most mature Cloud started out with small deployments, and customers are saying I never seen anything like zero trust cloud. What is this? Because we are the pioneers. We really introduced the notion in the cloud. And that's growing very nicely. And the branch we needed to offer a plug and play solution And then with a few capabilities, which we basically evolved over time. Now we have very mature wonderful solution. And I mentioned earlier, this is an area where I don't need to do any demand gen because the demand is exceeding all our expectations. So where is it coming from? Customers have a lot of SD WANs already deployed on SD. They're finding that they are not easy to manage. There's a lot of operational overhead, round table management. But more importantly, SD WAN enables lateral threat movement. A single infected machine in one branch office can traverse the whole network It's a mesh network and bring all other things down. That's the biggest problem we fix. That's what our customers are looking for. So we replace SD WAN or replace whatever old school network. They have in place. It's an exciting area for us. I have been personally passionate about eliminating all these firewalls all these branches I think we're getting closer to it. Thank you.

Please stand by for our next question. Next question comes from the line of Eric Heath with KeyBanc. Your line is open.

Hey. Thanks for taking the question. I'll echo my congrats as well. Maybe just to follow on on your comments regarding Gray's question on the branch. One thing I wanted to ask you, Jay, is there was a lot of strength in the retail sector coming out of COVID. Buying branch firewalls. Could you just talk about your exposure to retail and specifically as we think about fiscal 2026, calendar 2026, how are you thinking about the opportunity for

Yes. Retail is a great segment. In fact, if you look at where our customers are going, they want to start from the smaller branches. And to larger and then to plants and factories. Here's a typical dialogue that goes me with a customer. Let's start with a simple grant. What's the difference between you sitting in a branch office as you sitting at home? The answer typically is nothing. Second question, do you have an SD WAN at home? No. Do you have in the branch office? Yes. Do you have a corporate firewall at home? No. You have it in the branch office? Yes. Why? The only reason is you always done it that way. So we are starting with the low-end firewalls, which are relatively easy, then we go to the next level. Retail is a fairly easy and simple segment. Yes. There's some very large stores out there, but lots and lots of retail stores are straightforward. And simple. They're very similar to each other. So the deployment rollout becomes easier. So we're counting on retail among other areas for our business growth from zero trust branch in FY '26. Thank you.

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

Thank you for taking my question. This one is for Jay or Kevin. When I look at the metrics you disclosed around the proportion of net new ACV from

Yeah. Very good question. We have been very pleased with the contribution of emerging products. We delivered good results. Very pleased with it. But as we move forward, I think we are shifting our focus on three significant growth factors to better package rather than leave them as one bucket of emerging products. AI securities, one,

Our next question comes from the line of Joseph Gallo with Jefferies.

Hey, guys. Thanks for the question. I wanted to follow-up on Josh earlier question. Kevin, appreciate all the guys' color. Given this is your first fiscal year guidance, can you just talk through your methodology, maybe relative to the

Yeah. Thank you for the question. You know, look, there is no fundamental shift in guidance philosophy. I think we have historically been prudent with how we've set it set our guidance, and I expect to continue that. Fed in particular, was about high single digits as a percentage of the business in 2025. We're expecting similar performance going forward. But, fundamentally, you should not expect anything any philosophical or shifts in methodology with respect to guidance. The only obvious change is we are moving from billings to ARR going forward as we believe that metric is better aligned to our go-to-market and how we're running the business. Today. If I may add, regarding the macro, we aren't expecting any meaningful change in macro. Macro pretty much has kinda remained the way it is. So no changes assumed in that. Thank you.

Our next question comes from the line of Brian Essex with JPMorgan. Your line is open.

Hi, good afternoon, thank you for taking the Jay, appreciate the comments on Agentyx SecOps and AgenTek IT ops. I would love if you could maybe peel back a layer and help understand some of the conversations that you're having with customers from the particularly from the perspective of, you know, are they primarily focused on what you've done combining, like, Avalor and Red Canary for more of a streaming-based analytics platform, particularly on the SecOps side. Or are they leveraging that to address AI? Or are they leveraging that to target more kind of, like, legacy SIM business? I know everyone's kinda pointing their finger at you know, displacing Splunk and QRadar type business. Would love to hear a little bit more about your conversations and how you're Yeah. Leveraging into that space.

Yes. So agentic operation for us foreign. Two broad buckets. One is security operations. Here, we are combining a number of products to build unified vulnerability management that Avalara brought to us, asset exposure management we built on our data fabric platform. And then we basically are building the SecOps taking a genetic technology for RedCray together. We think this is going to accelerate us to become a leading player in the area where in the new world, we don't think customers should be paying for building these data lakes. I think customers should be paying for outcomes. And that's the model we're building towards based on outcomes, don't charge in based on how many gigabytes data is coming to you. That's one part. The second part, what we call it, agentic IT operations. AI and agents can help us to figure performance issues and, therefore, on an two buckets. One is user performance. Here, we've taken our CDX product. Added a bunch of agentic technology to make sure we can identify and troubleshoot those things. Very quickly. Next, we are expanding our

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

Hey. Thanks for taking my question. Again, congrats on the great execution. Jay, just to double click on AI security. Right? You mentioned, of course, about the key focus areas, securing agentless workload and user to agent. Again, that's quite distinct from the legacy posture. Since AI is evolving fast and the new billion-dollar opportunity, just how can you elaborate how that plays into the new logo focus now, right, that you highlighted

So first of all, we have both big opportunities. We have new logos sitting at about 45% of Fortune 500 or nearly 40% of Global 2,000. There's a plenty of market on the high end of the market where we do extremely well. But the platform is so big that we can keep on upselling and upselling both opportunities are big. So with that, we don't really focus and say, you've got to do new logos. We do provide some financial incentive for new logos. Now when it comes to solution like AI security, or some of the new solutions we do, Generally, not always, generally, our customer base is much easier to solve because we got so much credibility. We got relationship with the CIO at the CSO level. So we're able to go. In fact, we are able to build some of these solutions with some of these customers as design partners with us. So if I just tell you, most of the new stuff we bring in majority of that will come from upsell opportunity but there are many solutions that are opening doors for new logos as well. Thank you.

Please stand by for our next question. Our next question comes from the line of Todd Weller with Stephens. Your line is open.

Jay, just a follow-up on the SecOps piece of AgenTek operations. When do you anticipate kinda having that full-fledged kinda next-gen next-gen SOC platform available? And then what's your take kind of filtering pipeline capabilities? At

It's a good question. You know, we look at the overall big picture. In the data area in two main buckets Exposure management is one of them. And security operations and threat management is the second one. First of all, this exposure management is a fragmented market today. No one really dominates the market out there. This is where a number of our products built on top of our data fabric are offering good opportunities for us. And this severe your unified vulnerability management comes in, This is where your asset exposure management are surface management, as well as our risk three sixty comes in. That's one bucket. Fairly well differentiated unified offer by one vendor rather than five different point product vendors. Now moving to the right side, which is a security operations area. Yes. This has been done in a traditional way. Here's my massive data lake or Delta Lake, and here are my tools on top of that. Our data fabric approach allows us to bring in logs, but synthesize them and really create entity relationships. So I don't really need to keep all these dogs. My security analyst don't need to go against a billion logs a day. So architecturally, they're very different. So we're going in in an incremental fashion. And I think over the coming few quarters, we'll be able to say we take care of the whole thing. So it's kind of a journey. Even if I had everything today, a customer will take a few quarters to get out of where they need to. But we are moving towards pretty rapidly to offer a solution where you can replace whatever PC you need to replace. But having said that, we are not against the notion that if I got saved 100 terabytes of data sitting in my old school SIM, If I can take out 50 terabytes of it in the first three or four months, I'm gonna cut the cost into half to start with. And it may take a couple of quarters to remove the rest of it. So we look at it as a phased, meaningful approach working with the customers as a partner. And Red Canary starts playing an important role. I was talking to the seesaw, a very large customer, a

Our next question comes from the line of Adam Borg with Stifel. Awesome. Thanks for most excuse me. Thanks so much for taking the question. Maybe just building off the last question on Red Canary. So obviously, great to see the acquisition closed. Big part of the AgenTeq operations opportunity. Maybe you could just remind us of the top R&D and sales and marketing priorities as we play out this year. Thanks so much.

Tony, can you repeat the last statement you made?

Sure. Just the top R&D and sales and marketing priorities for fiscal 2026.

Overall for

Specifically for Red Canary.

Okay. So number one, the acquisition we made was driven by technology Our teams are working well together to make sure we can take that agentic technology, and they have very sophisticated agent technology for detection and investigation. That gets integrated with our data fabric So we build a strong solution that can be taken to market. Number one. Number two, that can sales team is acting like a specialist team for the security operations. And getting leverage from

Please stand by for our next question. Our next question comes from the line of Andrew DeCasperi with BNP Paribas. Your line is open.

Thanks, and congrats on the $3 billion milestone. That's something to be proud of. One question I had is on the guidance for Red Canary contribution for this year. I think on the last earnings call, you said that we're contributing about half of the $140 million of ARR. I think now you're saying it's about $95 million I'm just wondering is that 35% increase driven by anything? Or is that what the asset is growing at? Or are you doing something different based on the answer to the last question you just made?

Yeah. Thanks for the question. So the commentary on the last call was with respect to how much we would anticipate recognizing at the close. What we ultimately determine at the closing is that we recognized $83 million of ARR We are assuming low double-digit growth. In the Red Canary business for '26. And so for the guidance for '26, we've assumed $95 million in contribution from Red Canary. The last thing I would just keep in mind is you know, MER providers have historically had higher churn rate than our business. And this is a new business segment for us. So while we are engaging very closely with Red Canary customers, and considering all the different moving parts here, we are taking a prudent approach to how we're treating their ARR. Thank you.

Ladies and gentlemen, due to the interest of time, I would now like to turn the call back over to Jay for closing remarks.

Thank you all for your interest in