ZS - Earnings call transcript Q1 2019

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Operator

Good day, and welcome to the Zscaler's First Quarter 2019 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Bill Choi, VP of Investor Relations. Please go ahead, sir.

Bill Choi

you the us fiscal thank financial discuss and for results first afternoon for to joining Zscaler’s Good quarter XXXX. the Canessa, on CEO; me call Chaudhry, Jay With Chairman and Remo CFO. are and access By now, our announcement. to everyone earnings have should our announcement the site Investor This in Web found section. also be may on Relations

our addition, In to supplemental today. earlier schedule financial site a posted was Web

calculated gross net to, Let per discussion, are share, free including, today’s control. retention operating performance, to cash me statements rate. of of the anticipated guarantees loss, net uncertainty, statements flow but forward-looking comments company’s our during and pro which other remind performance, you and loss making that are beyond subject billing, future dollar-based net risk expenses, revenue, and not margin, future we’ll rather These limited operating be not some are forma but

from results them update the of forward-looking undertake statements to these These may forward-looking differ actual no this future. should statements Our rely projected you significantly any in views call. obligation or in statements. representing our and not as suggested apply We those after today as on

Relations on see operating a uncertainties Investor on that non-GAAP basis. reconciliation non-GAAP. adjusted future the earnings an today’s Please a GAAP risks more the financial of Securities all noted, be results Exchange site to our about we the numbers earnings to with filings and and will well otherwise complete of our for release condition, our today talk refer Web portion impact For as in the could discussion please and our as of Commission release. Unless

Barclays would XX. financial the Growth TMT few ago. Conference that Needham January San moments referenced can tomorrow periods, will Tuesday, inform in the historical Francisco in GAAP For to like York a reconciliations the on the the participating non-GAAP be information in also and we Conference you Global be New in found supplemental to I

to over turn the Now, like Jay. call I’d to

Jay Chaudhry

Thank Zscaler. solid everyone, to for your continue billings strong you, in you you, our quarter we Bill. business. first We calculated interest robust our pleased posted am as with experience and to I results. And growth in thank share revenue

Our revenue year-over-year grew grew billings $XX.X and XX% to million to total million. year-over-year XX% $XX.X

top we achieved positive the In quarter. our cash and addition flow line free to profit growth, operating for

Our points to operating improved margins approximately XX year-over-year percentage X%.

primary are hub-and-spoke market the breaking they moat? inside data to build experience a direct can notion appliances it a The when of is to of cloud. the Cloud to has and connect Then demonstrates cloud the in opportunity. costs. internal devices deployed network for our you no perimeter be breakout very pursue this market data network enforcement We to backhaul security that, success private changing a This why the the call model. and and to would moat right network for our in are traditional will center. built this and the a plus network we to network over which securely the direct network significant as across applications business We business In be is is SaaS networking in the the the invest Having to network. disappearing. Internet is user with go for world, corporate centers your reaching do what for pleased change can ZPA and where commonly users the is network to adoption walls, networks the believe applications public significantly continue Zscaler our But anywhere application; and local you secure wall quarter. lowers the driver network profitability traffic to anywhere. security mobility outside can’t. cloud the security. or we Internet, office or branch architecture. is aggressively in support organizations corporate and security data a cloud. security world? built of do That said our believe We How known leverage ZIA engine you where architecture center and data becoming XXX Internet to business user is the a applications to Design you Network as Well, acts This improves Internet which irrelevant. in the policy right center

highlight Fortune wins believe sandboxing. illustrate XXX the to secure network and embrace more transformation transformation quarter A DUs its conglomerate we the organizations bundle would transformation. new of IPS with cloud, bundle which for high-end all I the more customer value XXX,XXX deliver purchased in a employees. firewall, start and As three like cloud we includes that for

While gateway, data network dozen It a firewall, we are appliances replacing security traditional centers. as mostly secure such in DNS web a greenfield branch opportunity. is

it old firewalls need already but went for global transformation the breakouts Internet XXX local breakouts. XXX. headed all customer to for about security resources risk. will was This bundle branch traffic XXX to legacy local over which and such the centers security Zscaler XX,XXX VPN provides for We data only deal, to a complex them that sites, the They realized third-party applications a ZPA and contractors the acquired enabling beverage and access to another internal cloud-first for network new secure XXX Fortune also the XXX food substantial XXX Internet company They local Internet who breakouts for entire installed to replacing as Office users purchased are to be checkpost international all over increasing In the approach including locations. applications creating purchased corporate way. needed access thus manage. about from had branches about secure their

new Our the to cloud way system integrator partners the saw using an opportunity Zscaler’s customer platform. do it for

local ownership eliminating lower greater with security any users, location. all inspection. do leakage security at of a of customers for and secure user data enhances a risk becomes simplicity purchased at mobile, information this including cloud-based full cost SSL also to Internet while When solution improves they It users. major and DLP approach sensitive all all with Our coverage customer need also breakout, This operational appliances. experience, a DLP on-prem

customer, new and a for to for strategy transformation global infrastructure. traffic CapEx management Another customer costs these the the this across year sites company estimating the transformation strategy, with $XX the With applications. for this architecture full lower security a spend in a users. network cloud securing ZIA per Zscaler new and SD-WAN all and their for bought XX,XXX from XX% realize To is a over deploying the reduction They’re plus million bundle XX pursue to network for had pharma they our locations. MPLS and ZPA

for anywhere Zscaler sales re-architect provides they the their for on to traffic phase XXX,XXX mobile from the center. networking with platform and applications bundle security. for million two Zscaler application data realized This DLP the customer virtual Internet The access to they without save security use had started processing recently as that A to our users in device with XXX and customer expects of the secure one realization a they Business manufacturing ZIA I our highlight across year are some the the cloud The existing deployed purchased cloud our data our use the to offices, want do for them the or of and Last protecting with enables food deliver from firewalls public to case team of Bundle. XX,XXX to transformation and security direct While security-led over began machines fails the will perimeter-less value The appliances. through win next firewall backhauling AWS. and $XX which and customer center cloud in upsell the appliances leveraging employees. journey. platform case ZPA the helped also any ago a are realized customers cloud. on Azure with with managing surveys others year leading the industry deploying enterprise purchasing Zscaler us SaaS, that initial internal quarter, next-gen per all in strategy, over fast while are but spinning to and of any moving same access deals network

value Bundle data has M&A X,XXX used Business architect and larger because a customer our in network meet EMEA, data these the them we data managed own requirements. in to to entire XX,XXX for a U.S. stringent only customer they can EU this additional security. is seats European EU the chose a customer customers RFP very sales providers all and their data let our store implement privacy twofold. logs logs is Europe customer bid deals centers XX% A large projects. quarter, service that Finally, for the of store and our choose purchased to of me five users. users. market where delivering. two, for With represent they across is providers Number initiative consistent growing for our we successful they or in over telecom to One, are store using service are cloud cloud The case. center. and policy global believe been all in who sandbox and Last of system SI cloud these XX% transformation the and for are that We highlight tremendous in channel acquired part implement have demonstrate were headquartered we added fastest the wanted DLP Zscaler services and and protection deal us advantage organization. the service the us. the Drivers over with strategic been The integrators in this of partnerships revenue SPs competitor

in to partners sales. accelerate will our We invest leverage to them our to and continue enable create

top-down enables We which are us level. capabilities, in go-to-market the at sell sea to investing

in During Nijmeh, deep grow proven revenue the new CMO, and enterprise with hired and marketing pipeline. Micheline a experience to ability we quarter,

and as we a an for hired addition, role Kavitha In customer experience newly transformation. Mariappan to SVP drive creator

for global filled, two these right leaders roles for place Americas sales sales confident that With find sales will to organization. I’m remains strong leader international continue. in the our our With markets, our momentum and priority

we to sales competitive architecture force. the technology We advantage are Overall, We and executing well on we a also expand cloud significant global continue vision. security. for our our on believe have

countries. In Zenith discuss from CTOs, CXOs, early an Remo others. to security XX from of We summary, and with In momentum are to and practitioners XXX XX we Each network lineup Web security you per Group network scale. cloud report have by superior with networking Leader attending walk unique Magic transformation day a through and site we’re pleased Live Live Quadrant appliances is experience meet or believe our now we week’s financial Orange Services, We October, customers security Microsoft, brought results to business. year compared a real delivers Secure traditional in our results. market detect keynote a and Gateways We this perform very Web as can cloud on its Last row. had London time. running who threats where gone of partners We have QX through like XXX,XXX turnover disrupt and to XX significant and than Zscaler in years in of eighth Siemens, million at the named traditional see speakers hundreds a opportunity Zenith This summit CIOs, our including to continued to security which security. updates. we security cloud insights about effect strong our with to international a about outstanding block our Carlsberg more I’d journey. Business in hybrid the day billion operational innings process call Gartner cloud. for leaders requests

Remo Canessa

Thank you, Jay.

Jay perspective, year-over-year. $XX.X for was and was XX% revenue, quarter From up fiscal X%. very Revenue represented XX% million, EMEA and a XX% geographic was XX% strong for APJ to year. our mentioned, had the we Americas quarter, the As a start sequentially of

revenue Turning define million. total in for grew change quarter. which that we Billings the quarter plus to XX% as year-over-year revenue recognized deferred calculated in $XX.X billings to the

a sequential in difficult have QX higher a QX had years QX reminder, QX. historically large sequential prior decline declines and is respectively. quarters, QX As comparison QX The deal we due from our strongest upfront with a been than in and in to billings quarters

the backlog, which upfront customers year upfront million $XX.X years. the contract year year-over-year small in QX, advance both primarily and reminder, performance XX% ago. The seen years. billings declined on obligations, October were terms greater to year have two one in invoice billings our than from over a XXst, XX% are Total remaining prior up three XX% which is $XXX million $XXX fairly million one periods. one typically represents we Excluding was our an as sequentially in deal from would one Also improvement by the declines

strong which consistently period net last to compares ago XXX% a for customer upsell This have ended October a XXX% and year Our retention the is ability rate, dollar-based XXst. the resulted to XXX% in retention quarter. and high

upfront XX%, transformation reduce basis. which margin our operational X which year-over-year. XXX% increase efficiencies. primarily net good with is outstanding as vary and calculated is ARR increased upsells functionality, Our points will while factors, quarter-to-quarter. bigger rate, success year-over-year and year, faster up driven the start a priced deals selling and was sequentially points The of on higher mix feel our bundles bundle business, as within well Total increased it dollar was for an we and by can these gross Considering retention X year-over-year a more

a We this our target with medium term. our important be platform XX% gross our to to in drive and While to focus top in And invest to to range margins, it to revenue continue line near the stage. are at our we is satisfaction good continues not maximize customer to margins growth. gross feel drive is pleased

operating expenses to expenses, XX%. Turning and XX% as sales sequentially $XX.X our million, year-over-year decreased of but total percentage to grew a X% to operating

headcount to continue XX% marketing. grow increased increased XX% in were in we and approximately million. to QX XX to invest employees $XX.X and sequentially we over half business, and marketing by As sales our and year-over-year Sales our

$X.X to building was as products. other a teams, up awareness, and investing enhance $XX.X These expenses held year-over-year to Live growth the quarter. our been and made growth continue and became have XX% Europe We G&A year-over-year and in X% company. we new million. offer as marketing $X.X consulting drive public expenses. million litigation-related programs includes that G&A increased our in R&D Zenith exclude and in functionality year-over-year to in to to to sequentially sequentially teams the invest XX% we we sales conference during flat product The marketing including have expenses in building and million and investments

income a Our to negative first quarter $X.XX. of was Net the margin in the was compares quarter or in earnings quarter share same a X% which positive operating million non-GAAP year. XX% $X per last

approximately the EPS earnings short-term a the same of a positive X.X $XXX quarter, flow diluted compared Given calculated million year basis fully on XXX the in cash, X.X million was ended equivalents shares. with and investments. positive the million in to quarter was quarter million quarter cash cash ago. our the in We Free negative for

contributed $X cash to program free the million approximately flow in ESPP Our our quarter.

by ESPP issuance reduce The cash which first will stock under December our the in flow no program will be free cash balance. QX have in $X overall on million approximately will our impact

to Now on moving guidance.

of all reminder, any and expenses, excludes these intangible a As assets, effects. are non-GAAP compensation expenses which litigation-related stock-based amortization tax associated numbers certain

to taxes to the assuming million the to $X.XX quarter, million For in range to million, the XXX $X.XX million, $XX net second expect $X of loss shares. common of XXX of million income share operating $X $XX we the in range in per in range of revenue loss million $XXX,XXX, approximately

we’ll and pleased are schedule, for unique we we growth. invest our ahead profitability capture a opportunity. to opportunity a continue to with large to have While believe aggressively We market disrupt of

the have we in XXXX. achieve cash I mentioned profitability As plan and positive sustained flow in past, sometime to free fiscal

$X.XX XX%, to outstanding. full million share of range For taxes million operating assuming the common per $X.X growth $X in million XXXX, to $X of the approximately million $XXX range $X.XX XXX of XX% in $XXX or and range year of income we year-over-year to net shares to revenue the of the in expect loss million loss million,

million believe of for of billings upfront of our will large to This XXXX, upfront million we had year. this in to in XXX revenue we exclude $XX.X billings remind I you from be million model comparison billing imply fiscal range a billings year-over-year As comparable XXXX billing from which million results, to a fiscal you If XXX customer. XXXX fiscal that large XXXX would difficult QX one total want growth, $XX.X guided in a produce growth QX for XXXX. the we would

forward have achieved our proud look We’re what and building we to opportunity. on very of

Now, I over call the will to Jay. hand back

Jay Chaudhry

best the realize adoption, matters. cloud app the as SaaS The appliances right tailwinds such leave Remo. a up fully spun benefits as deliver us. are gap Thank user With public clouds, experience. choice and we’re securing a machines SD-WAN whether expensive or coming to migration of They market world. and scale, will can’t the On-prem, not you, deployed poor believe multiple in public cloud. is believe to the cloud architecture tenant security, single for the as virtual we in We and architecture allow to enterprises mobile-first

solid enterprises global X,XXX the embrace making cloud large in progress these accounts We’re as transformation.

on vision. our executing are We

to greater transformation our high-end our growth We are adoption base, driving customer scaling meet and cloud ZPA. bundle of the in

delivering leverage for transformation. now ROI interest our your for the that questions. Zscaler call look you future. may progress in forward We customers high open on Operator, and in We’re reporting for the to for our platform thank you

Operator

time will questions. our Thank you. at take from Brad [Operator Ladies and we question the floor We’ll Zelnick with gentlemen, this Credit for Instructions]. first open Suisse.

Brad Zelnick

the Jay, give you Thank another update to an phenomenal and disruption has much various and I’ve turnover you My experienced distractions. maybe the quarter, and first two just generally you in Is environment? of congratulations competitive leadership late Excellent. for more guys. primary got this field so perceptible with on us company questions. you’re can competitor specific is Jay. on

Jay Chaudhry

Brad, thank you.

the We field. are success in tremendous having

can winning. I the our not due and works competitors success I’m is whether tell are but our issues And architecture well. or I multitenant scales is the reason which to success for number not, sure think we one innovative our

the a don’t rapidly. landscape. competitive We’re growing seeing significant see market shift in I

Brad Zelnick

appreciate as the here, we calling million out, QX? Remo here And years. model we’ve guidance couple the the of which full from we actually billings year. account the think had strong past just I commentary. the seen the the for also for into should if that QX billing seasonality anything just in in you’ve you’ve in you But as upfront given us you’ve about better Thanks quarterly reminding $XX.X the start that us seasonality appreciate remove that for QX we on And billings than given done you. the take in

Remo Canessa

quarters. lot also and just so going Brad, as come I’d basically expect mentioned XX/XX, was said what QX both end we a as prior for year seasonality. the our straddles QX out, and and have a a It strong as was to quarter company XX/XX the we’ve we’ve renewals seasonality before our of forward. and same you I’d of are year-end QX called type type through. same so great expect of us QX

Brad Zelnick

All again congrats. and right. Thanks

Remo Canessa

Great. Thank you.

Jay Chaudhry

you. Thank

Operator

Thank Ives next with take [Operator from Instructions]. Wedbush. question you. Daniel We’ll our

Daniel Ives

Thank you.

changing Jay, the looking in you do significantly drivers alluded So, are how you but to expanding you to pipeline compare and is X, a now think small now little had are when you regards could to with conversations the there really it Zscaler? Maybe customers more months what bit expand maybe at elaborate deployments; enterprises conversations? XX Thanks. your

Jay Chaudhry

cloud key have get parts and functionality. The do transformation the which What’s local firewall we breakouts and transformation transformation not ways. they’re two directly really That’s to was One change now starting did looking more of mind. of really number all ago. at years which slow bundle that is us it in protocols, wants past have couple with sandbox cloud more but was to with all drives the which lot with the deals security drivers, Right. one. one CIO security every a years one in versus as in Two, all like. includes to impacting Bundle two is used Business Internet biggest breakout almost a our That

bundle pipeline, why to that’s moving one is growth posting So we and is are more bigger strong sales. having momentum bigger and two in

Daniel Ives

as a Thanks, go and that quick Great. again. tuck-in through XXXX? we M&A you’re about just thinking Could – you how just about comment

Jay Chaudhry

Yes.

open always are we So M&A to opportunities.

a platform we AI aren’t to strategic for driven so. It results. revenues. largely the small or way. expand buying meaningful in a did We It’s our be at it We acquisition last look in driven by If something was for looking already fit machine quarter will companies and learning a area.

themselves be area, those. in strategic as looking open So be present will those. We’ll we the for opportunities to

Daniel Ives

Thanks.

Operator

question next Thank you. Alex Needham. We’ll Henderson take from our with

Alex Henderson

between I bundles is, actually The a about And up little a or revenues two what on is new around spectacular ZPA? of to of to very professional you we quarter. Thank transformation are much. other to key obviously question the orders rate uptake seeing Have uptake meaningful ZPA which can like any change you also currently in on congrats. the bit from but it. ZIA us of Great. address, And the metrics I second, then any a of you piece? two? we are One of terms would pieces that wanted can the the of the small and around display seen extend rate there’s accelerated you in part uptake bundle? looks a talk is an It’s mix a versus stack give metrics move business that? transformation Where Thanks.

Remo Canessa

Alex. I’ll take that,

it’s last is sits So from in ARR that is is What approximately I can to our we XX% meaningful. has upsell out what double, represented so transformation, that can out ZPA for to what total called for basis called it updates going new ZPA. new so quarter say it talk and changes that is business a quarter up, we when business we and good year-over-year a for business said for increased close we and traction we’ll with is there’s is increasing make is XX%. or feel transformation it Similarly of ZIA. about meaningful when a I is on we say What which what new They last about ZPA. our upsell perspective

Alex Henderson

it orders when cycle the takes either – the those despite the you’re there sell selling Okay, any lot still in fact is that that purchase fairly any the time that a product? look similar you change upscale mix, causing or great. more for And at sell of cycle is is with associated

Jay Chaudhry

thank Alex, you. This Jay. is

more We X are year same the that selling bundles. of a but sell kind able the was ago to transformation we Bundle, say the the in sell cycle. would I are hasn’t Though to sell sell higher sell month cycle cycle bundle changed, Business if

bigger it’s And is because So faster sell but partly sell to that’s Similar market moving our bundles. helping. cycle in being able direction.

Alex Henderson

good. much. Thank Sounds you very

Remo Canessa

Thank you.

Jay Chaudhry

Thank you.

Operator

you. We’ll question Deutsche Powell Thank Bank. take from our Gray next with

Gray Powell

Great. Thank on and much you very congratulations results. strong the

Jay Chaudhry

Thank you.

Remo Canessa

you. Thank

Gray Powell

one just So my side. on

the and spending Over last we’ve of the questions seen sustainability environment we’ve around the lot a macro weeks few in heard into of IP XXXX. the improved extending XXXX

then strong So things do about not think XXXX? as in feel And you do as next going is Zscaler Thanks. into it if how the was XXXX? year calendar overall is how you positioned macro

Jay Chaudhry

That’s a cloud it answer tremendous transformation Number drives you I’ll drive actually not in one, two it Zscaler parts. helps only ROI. good question.

we budget thank overall in He it you when overall a have with So IT for said, my without attractive be companies. piece small went cloud budget him. become had I for of I tight, your in spendings environment the don’t and an much don’t some me. Global – small you such know tiny you. IT but budget. environment I of see of IT very Number I I’m ways you I tightening. piece that fraction of still a many may a of because time stop, CIO more are actually see change a the said, are one. interrupted is think to tell we of strategy me XXXX making hey, we a would I’ll a dialogue solution. That’s a two, interesting I

So you I see every and months. want come to six me

see kind budget with transformation of strategic for piece negative don’t a of impact. I think we’ll small positioning such So with that a

Gray Powell

helpful. That’s very much. Thank Got very you it.

Operator

Thank Morgan you. Melissa. from We’ll question Melissa Franchi with take our next Stanley. Hello,

line open. is You’re

Melissa Franchi

Hi.

Sorry hear about me? that. Can you

Jay Chaudhry

can. we Yes,

Melissa Franchi

of this on is you great. secure since you’re have [indiscernible]? local transformation that’s at which relative the transformation Internet bundle, adoption breakouts? you you displacing elaborate being noted the those by and Can within breakout. need firewall the Okay, bundle the Jay, increasingly incremental the local maybe part firewall And that the cloud quarter. driven functionality to enable either does explicitly what enables the to transformation of Congrats how bundle prior bundle mean

Jay Chaudhry

a It’s question. good Okay.

Bundle. So and give difference, Business breakout of and local has two modules big good that’s the Business firewall. of to The first One all the new Bundle is cloud lots functionality outside for bundle web in you traffic. transformation the

cloud is Second sandboxing.

transformation are buying bundle. at bundle buying are and because to are the when relatively rather People can they handle them they a displacing firewall they not just traffic are buy Internet local than ports firewalls. they all for because with people becomes So cloud web see branch protocols and it where new attractive breakouts hearing it smaller transformation a option cost,

very security kinds the web our very I answer One So road bought office the in loss sandbox because of has that sandboxing, is transformation which of that’s it key threats. data Those traffic for cloud all everywhere are firewall through becomes add-on bundle your with Zscaler traditional a now well for not proxy. that’s works beautifully prevention, into work easy still find DLP, in drivers question the -- carte. there. branch the are and cloud They everyone buy data Office in sandbox. firewall on and Did à new this is handle la and cloud two available every transformation warrior, all bought to functionality module even bundle When that or driver won’t for Skype through of especially XXX traffic, And center. it and all they which

Melissa Franchi

if hiring came in for wondering can I’m sales then, any and relative just particularly if quarter your of if And the magnitude leverage? in leverage, Thank marketing changes That’s you plans maybe I’m elaborate Remo, seen Yes. improvement you. of marketing and can wondering sales that and what’s and on attrition? and how to in you great. particularly operating terms you’ve expectations And margin enabling that sales comment related to

Remo Canessa

good question. so Yes,

is So we about year was marketing employees those and quarter-over-quarter called of hiring those were this year had over marketing From last what most QX a and Zscaler employees, out up. productivity sales. a very that a of XX in and from in basis net in we hired on sales perspective good half of versus were sales leverage. The we and

we what to we’re continue this a as going that plan such we see to we’re as invest. opportunity go very do to forward market achieving profitability, large So proud but of we

profitability perspective we So in that expect fiscal before sustained cash from no said to positive sometime 'XX. free but our there’s change we in flow be and

to expansion profitability, of show significant I quarters we’re flow the over opportunity operating in because as cash last we’re three profitability. we market what order But try free positive going do and think capture to can. the market to going we’ve reaching demonstrated and really to we’ve got being investment in this large opportunity, model the best

Melissa Franchi

you. Thank

Operator

Thank you. our Borges Goldman Gabriela question from Sachs. next with take We’ll

Gabriela Borges

Good taking afternoon. the Thanks question. for

I next roles Jay, customer over new ladies engagement little on love working for of bit better are what the so? to for XX will those key the be your and success. and and the months your So, What new a CMO understand would some or that initiatives two SVP priorities for customer the are

Jay Chaudhry

Good.

overall. to more can with a lot think going targets in are we as our visibility our building is the quite bigger that that CMO, Micheline overall and generation bigger, so helped of with dimension. along but awareness this is done So and do us help are higher number a be us bigger area a the goals two her for lot in Nijmeh, are need on bit so getting has new and And more we bigger, roles, area. demand the focus one getting priority brand IPO

addition those two to So others. big objectives are many in

starting is customer ongoing the transformation, from And customer experience and is with to company. our very this products once interaction. really of starts Regarding and to experience experience SVP we experience It sale sales made, a customer deployment focused me. are

but able together is So make the the to experience. on multiple just Kavitha – in is our fashion a transformation to as these of customer all really a actually second holistic that best In transformation company. side only the things our functions not pull it, across it’s customers own part sure have

changes the in we the go in we going with We the market. deal, through been customers transformation way deal on to have way

done in sale CXO, VARs. some new they’ve Zscaler to all the level, innovations need top-down like. with go-to-market architects the that We figured CTO transformation which we through be sales the figured of of now at the out some seen have is out go-to-market our and done You traditional

company on Zscaler and to itself this the is is changing as making focus world So moving fast. a sure more as transforming is

happy very two very are we So capable to join have these my executives team.

Gabriela Borges

helpful. on that of the status the you. follow is And telecom That’s you service partnerships Thank of up provider have. the some

to large there where that the providers mentioned think separate still you one telecom you bidded penetration Are good Zscaler counter Thank may Do Zscaler have? that in have there a partnerships MPLS? providers more you. you to is services. you the otherwise like to platform as willingness prepared that online? I in offer what the embrace a remarks already in And bring feel you there telecom can five was deal headwind be

Jay Chaudhry

were telcos in four Yes, ago But years kind we down. two, all moving realized that local know a and everyone how hub-and-spoke can to from much to direction or how network breakout. between they move fast it world do moving that is many market direction. slow wondering that in three that is is the that to It true of of the

large them XX than the all would top that in with others. they lot the I say do telcos world, fact largest business us; all some So if a in telcos – more of

by customer we to network that’s want it more with them. them. closely And a as is new they make sure managed goal to our work see moving They to see opportunity. joint a still So the

are the they the customer. managing So they are Zscaler service for managing network, security

So leverage, opportunity are increased able reasons. partly because One, win-win good number That’s there with seeing one. Zscaler the SPs of more that are traction it’s Number along is two, control. we to there. two market from coming a account with taking them revenue more sense? and seeing make proposition Did keep

Gabriela Borges

Yes. Thank for you color. the

Jay Chaudhry

Thank you.

Operator

next Kalia take our We’ll Saket you. Barclays Thank Capital. with from question

Saket Kalia

additions So more are seeing versus firewall sandboxing mentioned the than track Jay, Thanks of modules other? any those biggest the guys. on cloud do used an you which on for Are are and taking up pick you module Bundle. transformation my being Hi, the bundle and of traction here. to one used Business heavily? on stats the heavily just earlier questioning there, line particularly questions the you cloud perhaps

Jay Chaudhry

figure how a traffic, to to set take how bunch essentially got out world, in the to cloud on. If SSL to traditional world, the of users, turned not. up appliance well, good in steps to module we It’s Because This a comes you traffic how are this authentic would integrate those things to there question. sandboxing. Zscaler. then say, when are buy were All sandbox in you a did the place when

turning is or So sandboxing on simple. turning very firewall on

on So once bought very essentially modules, are the when they customer has those rare I not used. time. say would Zscaler almost are all turned It’s modules the

them Now only may the it to XX customer early Internet take to and have local it XXX. is may go on possible nine months breakouts that from XX

rare on turn our XXX on XX still added, not that additional still sandboxing because remain configuration. and click and in module local from And more simply a it as they to of now something breakouts. our they’re a they using bought making customers turning it’s they’re the firewall But benefits. simple. Zscaler those benefit on have It’s and is turned on single Now gets

In the show and console. a fact, customer cloud firewall click in our sandbox we call of sales our cloud what single deployment from we

Saket Kalia

Got That’s helpful. it.

Jay. Just up you, a for follow

la strategy. future? à carte is You the DLP and a talk outside of carte bundling see you of mentioned à part Can for in DLP best why DLP as the bundle la sold ever about we pricing avenue is could the

Jay Chaudhry

an is interesting Bundling no are simple Yes. answers. There exercise.

the too you bundle much, increase can If much. price too you

selling you’re you additional If don’t not modules. enough, bundle

more one And becomes a bundle more I buying us and it it of module those figure learn that it’s la and tells and accepted widely when So science think it. and carte, it’s really out. to art customers try we à time things to start

years bundle So cloud if relatively to cloud bundle I transformation ago, me new. asked ready wasn’t you two firewall sandbox, so or is

it’s sandbox is We XX-month We have a interesting bundle. and didn’t old area. this firewall bundle sold Remo, about DLP separately. an think, cloud before. cloud I

number DLP data world. amount a the module There’s exact in it critical richest been have from where we we That’s before. to selling exact of DLP can make one match, a data local customer’s have called happening is what’s and breakouts But hundreds available. birth security customers deployed DLP And that of or may three the as became five or also decent centers. of the match data So and social we like. field functionality add needed to are they about in module record opening

go Now lots no really the good because system, of locations so is your to speak. DLP through that DLP don’t

are of increased seeing an demand we DLP. So

we us potentially A during customers call it to. more see what not DLP it. for we selling becoming is. future, it’s part of of exactly earlier, our few We’re move timing to in a as But natural do bundle highlight course a the a sure

Saket Kalia

Got it. Very Thank helpful. you.

Jay Chaudhry

you. Thank

Operator

with Thank take from our question you. We’ll UBS. Boolani Fatima next

Fatima Boolani

start lot the customers questions. the afternoon. In the you maybe Good of remarks ZPA. with of and the to land went Thank your customer around both for of in taking gave examples, at who Jay, prepared instances you with ZIA with you. you point a

of on ARRs? extension, the sort So just just as an with broadly your, impact this of are greater both portfolios? landing incidence a And it, speaking starting in terms land what to product pipeline, of you see your call having is

Jay Chaudhry

customers are coming and ZIA from of never if idea, coming brand ZPA with other deal are an new Zscaler some bought you we’re So the as before give have half upsell. probably the who I as approximately

broad of trend. in for is users. deals a picking upfront. would bought those I It that subset ZPA But a along true is say number not for a majority that a all of that’s ZIA are of up ZPA cases, So users, with

may we somewhere to in of XX% number said bought, employee XX% users. bought be bought, the driven enterprise, company. by business all users from it when ZIA before, locations, the of protect largely from total it’s the application to all And needs. in is As is essentially When ZPA is have every an typically ZPA users

I were simplify number market is will more the They’re ZPA And more, subset of bought, to AWS. significantly. wherever a go and still in that a users to and of users still majority as moving cases, phases. are ZPA of So applications up people it, it’s and if matures the Azure early

Fatima Boolani

for gave weak of in the commentary the of makes the being ton improvement profitability quarter. sense. of a I follow significant then just unit year That seeing you on And, in Remo, the in us year up the process two. you around If a during some customer acquisition about a think but IPO trends first the fairly economics

awareness And front, for you. economics larger got Thank us public changed outset, it about and the you I doing Can as transformed more give As you’ve have how better those unit deals doing perspective? of better bundle awareness think a generally overall. a from up you at acquisition me. customer company a that’s deals sense just

Remo Canessa

So margin. you’re talking about the contribution

years as I’d mind margin is offering Our our three was two large to keep talked to as we can. the contribution for as What high market in in go very a like the the see that quickly you public company XX% And that we opportunity. about at we in are this is and range. as to plans

profitability once talked As to plan. billion we changed, hasn’t XX%-XX% on it model of the show revenue. That’s in it road to long-term our operating still we about reach and our $X relates $XXX million

goals free XX%-XX%. to positive the in sustained profitability basis So related expectations our and all 'XX on and or we breakeven fiscal at flow have cash of also short-term not hitting deviated a

everything contribution high. to in then stopped just feel business opportunity, what about and think incredibly renewals, market this margin, you large With shareholder if it investing going when yes, biggest is goes we’re to maximize we we the value. So went keep

Operator

We’ll Jonathan Thank from our Robert take with you. question Baird. next W. Ruykhaver

Jonathan Ruykhaver

afternoon. Good Hi. Yes.

seeing consistent commented what the just heard was I’d total volume that something quarters that You’ve XX% wondering ago. you’re with today? midmarket into – transaction tracking that that I’m about in of business high several past was at Is through the still channel business.

Jay Chaudhry

question. thank Jonathan, for you the

channel. we business broadly It’s coming total through the is business VAR That’s channel sitting the what still It’s VAR midmarket the business. think talked about in the in coming range. XX% the the I the past the really through in not range. same

from VARs the at faster our from business is is channel growth VAR bucket. it. successfully you coming the are SPSI us. Yes, channel the broad are and If buckets, overall But for two the seeing one they pivot are side cloud who the second we SPSI is able and to to some driving bucket of more look

Jonathan Ruykhaver

Okay.

assume to SPSI? safe that is you channel allocation you’re investments look to at the it’s when making, So greater going the

Jay Chaudhry

we make channels. all proportionately in well Yes, as to working channel on we’re are but VAR also investing sure

channel now kind pretty married We of a the in small who new are picking a us, to but growing. really are built good These cloud born – boxes VARs. are world and called the up new they guys for pushing were channel more for

Jonathan Ruykhaver

those some 'XX, to And, in deal of good The you That’s XQ suggested deals very expect large anniversaried, of hear. to somewhat occur. see positive just clarification. you’ve we fiscal get rates get XQ activity of we as is on initial dampening effect anniversary quarters? that a as wanted and they to two I Remo, impact large saw they should the when those retention upfront But

Remo Canessa

having It depends. upfront company if also as for Related and multiyear, investment to security get to large deals those the are Zscaler and these use. we their networking customers making they’re deals going

the budgetary last basis. what And look quarters, it’s deals or type then on customers that. will where more for upfront our pay on your question? contract Zscaler we XX% for over accept would more answer that contract like because a these to we’d Related to our Does basis new reasons, five is So to if business deals. over of been dollars, at three-year That’s four focus.

Jonathan Ruykhaver

situations insight, and Yes. like higher subscribers would drive a somewhat That I’m to I bundle the imagine provides that little it make does greater operating but wondering bit limited. more opportunity just

of it deals or upon additional it kind is that where like rate that that does incumbent increasingly become the large to keep So not retention case? was

Remo Canessa

got Good I it. Yes, question.

is So out customers are more yes, we called that going before transformation.

They customers go for more typically as ZIA. employees. that’s that transformation, all purchase So

seeing impact So also we’re downward is customers retention as a more that rate. Related net to we’re what happens, our sooner. upgrading seeing will put is on that that potentially

look We rate. and retention their year ago net calculate we customers what a at same we ARR. the those customers had So for is

year ago ARR currently. at a versus So ARR we look

so picking is seeing – period, rate. we’re up more upgrading that what are as we’re not that if in So that retention that within customers potentially

positive DLP As those services have a our and positive impacts. we positive platform, more can though, get a could impact could forward we impact, have ZPA under go have as

upfront outstanding feel we we sell. XXX% at And rate how retention to we’re is customers. net we ZIA selling again, sell – when Our more you transformation think about

Jay Chaudhry

Yes.

So of we Remo, if many add, out I metrics. are may

are retention We focused on rate. less net

down. We growth and reducing customer rate churn, retention are more our fluctuate but this may on up retention and or focused net

Jonathan Ruykhaver

Jay, helpful. much. that’s very you very Thank Remo, Yes.

Jay Chaudhry

Thank you.

Operator

for you. At CEO, there the like will Thank time, closing to I queue. remarks. no are questions the Jay in this Chaudhry, to turn call further back over

Jay Chaudhry

you, you again. Thank to quarter’s next Thank during join time right. for look you talking the your to All us. We forward earnings to call.

Remo Canessa

you. Thank

Operator

Thank you. Ladies and teleconference. this gentlemen, concludes today’s

You may now disconnect.

Zscaler (ZS) 4 Dec 182019 Q1 Earnings call transcript