ZS - Earnings call transcript Q3 2019

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Operator

Good day and welcome to the Zscaler's Third Quarter 2019 Earnings Call. Today's conference is being recorded.

At this time like to turn the conference over to Mr. Bill Choi. Please go ahead sir.

Bill Choi

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

was supplemental Investor to Relations today. section addition, a posted earlier In of financial schedule the our website

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

those statements. suggested actual significantly or in results projected forward-looking from any differ may Our

These as you forward-looking undertake to statements apply after rely update future. these our this no in representing on We obligation statements and the not should views call. as of today, them

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

measures. Relations on Investor to release our portion our financial refer Please of earnings a the GAAP website of to the non-GAAP for reconciliation

inform Global Francisco Conference referenced non-GAAP Merrill would ago. a Bank be the the found financial Xth. For also you information on Technology in Lynch's participating we'll I to America GAAP in be moments San can that of periods, in June historical like to reconciliations few supplemental

Jay. to Now over will turn the call I

Jay Chaudhry

thank everyone for Thank call and you us on our Bill joining you today.

strong you to pleased am with share results. third our quarter I

calculated revenue grew Our grew XX% billings year-over-year. XX% and

year-over-year points improved growth, to our our top XX% addition operating line to X%. In margins

Our our in growth our business QX and leverage results model drive to profitability. ability demonstrate the and

our to our consecutive that of are after significant our TAM in with we us. continue market third a quarter data, invest believe we in pleased IDC's of ahead we of we will XXXX. on profitability, going While Based is calendar are analysis business $XX.X for opportunity billion a aggressively

Just applications Salesforce Enterprises as Workday applications. securely to replace on-premise are multi-tenant security platform to have enterprises cloud. appliances saying cloud, adopted goodbye multi-tenant Zscaler choosing like SaaS embrace and and in the legacy the security born to

network securely for acts castle, traditional policy moat ZIA as right of platform public center a to engine in the Internet access location. access a Unlike internal right to and user applications data ZPA business security, our a builds which regardless apps or cloud around cloud. for a or security to a connect SaaS the to

our functionality from our customers come revenue cloud Our their this business security cloud of by comprehensive A stages of progress purchased professional platform progression leveraging bundle. increased journey. and used see purchasing product are bundles as various in majority customers to they of significant customers. through We

ZIA premium our bundle, as of ARR. of adoption mix transmission our strong continued is seeing are we which expected, As growing

while securing we greenfield and addition, new creating internet majority These In coming are internet gateways, from in are of ZIA appliances opportunities. the sales replace breakouts. security existing

This what product significantly application see network provide to trust ZPA business to It ago. continuing are network of the access. delivers ZPA, a remains We history. introduced to Gartner users years in significant couple without zero our reduces calls risk. in which growing we interest granting only access fastest access,

can ZPA. we more ZPA ZIA both single customers and match. we provide While which a other cloud platform be ZIA as together customers, purchased to existing ZPA seeing secure of for vendor upfront and transformation, been an and continues our has by ZIA up-sell sales believe are no

new Let large how ZIA quarter. enterprises ZPA deals me buying are the platform. highlight will the customer with and deal start several shows that I in a

pharmaceutical largest headquarters XX,XXX purchased and world's its the users. of users companies for in bundle with One ZPA Europe over for our XXX,XXX transformation

a business cloud to model. this, from a network and decentralized units to applications. AWS. strategy to To for XXX, for move had one customer a cloud, IT a to centralized increased initiatives, the IT identified Zoom team Moving their and use and transform IT the Office their achieve This of two including

local secure XXX network around for And the offices They globe. number strategy to adopted and two, a security internet transformation. create breakouts

Our back on vision, service anywhere, or them cloud traffic perimeter-less any device direct security regional to realize to the allowed through access without hauling any platform from application a enterprise hubs. with

risk, reduced security longer VPN. while VPN customer rapidly cost access user site-to-site and need remote to mergers either business They ZPA The experience no of with and a the or to enables divestitures, AWS, also approach. level increasing savings. significant network zero integrate results access manage trust the faster will a

our own upfront purchased that issues Bundle XX,XXX in appliances, XXX. a customer Financial traffic from and XXX bound deploy This ZPA significant preparing for was offices. with users. Another Services anticipated internet involving ZIA users deal Fortune to The which premise with would growth and Transformation XX,XXX proxy Office the not web their ZPA scaling was for both keep XXX up worldwide Company

stack use proxy. the was traditional breakout full web secure proxy internet team The decided much once realized a SSL the and to and initiative. next replacement firewall, security Zscaler expanded to their offer significantly more inspection. We of security strategy sandbox including than customer pursue This Zscaler gen local initial SD-WAN a that discussion

user users and They purchased the for experience. employees, all ZIA cover which also will mobile improve

ZPA In remote for that user replace for VPN addition, were having poor of to purchased experience. access two, accusations and business two new integrate businesses units to one use cases, they

XXXX of notes service they success. receive personal to CTOs and often our I commitment quality much how team their from the CISOs of Global CIOs, appreciate of the Zscaler Enterprises and indicating

share company he our had one excited you Bundle recent A ZPA of for for travel leisure CTO and am organizations the X,XXX users. where from company, new users came examples. brought have two deployed move. a large XX,XXX to number Zscaler with them career Transformation a The new purchased A making ago. healthcare I year into Zscaler after and

a financial services Bundle financial ago. out another users. case, company, years from for new had XX,XXX Zscaler Transformation services moved three CIO another rolled company our which purchased In Their

the These our loyalty strong our the wins customers and demonstrate of value of platform.

companies notable for We a bundle, in QX. XXXX, also number using two has had XX,XXX to customer a our dozen A up-sell protect been around world. of since based employees the wins U.S. business conglomerate it's portfolio Zscaler

moving and SaaS and and fast XX,XXX This across provides the and future secure needed portfolio customer proof applications public standard customer for ZPA solution multiple solution The driver: its users a to to to cloud the purchased applications. multiple ZPA solutions VPN is remote made access access replace that companies.

conglomerate new to will businesses this as quickly In acquired companies. the acquires ZIA ZPA addition, enable and integrate actively them

spend Fortune This completed Business customer purchased XXX XX,XXX in headquarters to bank Zscaler. years and upgraded for latest users the XX,XXX purchase Bundle our A users bundle. addition the the of with Asia XX,XXX resulted annual with total ago, of all in doubling that two users transformation

need a mail, control the any roles any defined They policies for driver all required The chat platform. trading window. to this web based access the using cloud as such to of traders employees deal at during upgrade granular also security integrated device restricting location, certain on and for to access posture applications was for

solutions requirements. our help In to meet stringent purchased Data Prevention regulatory addition, Loss they

competitive about a few Let words me say the landscape.

like a make are legacy cloud cloud, finally and you for shift just using cloud. As security attempting can't in enterprise firewall the the service traditional build appliances organizations increasingly are the a VPN appliances can to acknowledging to stacking and secure the vendors create tenant thousands that players designed Netflix of digital the DVD by single software security new on-premise

of customers. we bunch virtual were Workday. We cloud, of This inline machines a including we is in of have spinning in cloud significant needs security up cloud in defensive vendor believe, competitive the a the our the not the cloud a cloud view platform an and imitators, of one, offer of a result cloud. a can't the security the just You born serves advantage which strategy architecture by and like for Salesforce as high-performance our public maturity technology, the of self-preservation

user distributed hauling front a central public cloud, from imitation a cloud. fast of Two, center we unlike data have for cloud a compute purpose requires back multi-tenant no built to doors Zscaler globally experience,

we Four, we Three, security. provides application inspection reducing perform zero business deliver and better SSL at a purpose network scale for proxy built risk firewalls trust VPN's. that network without access access unlike as access

cloud And running mission-critical for Global years of lastly, a a billion processing in-line day. XXXX customers, transactions XX over we have XX experience

compression experience. said, for someone algorithm is it really As no

We and continue to lead. maintaining technology invest our significant in innovate

centers provide multiple XXX generation per fourth data latest second Our large links. gigabits

of tuck-in strategy targeted our continue We acquisitions.

and AI threat is is the deliver acquisition TrustPath Zscaler and into us platform their learning well previously detection. Our integrated machine announced better helping already technology

security highly on extensible isolation market We acquired with rendered platform. go browser. our plan Just into Appsulate, to with downloaded for group it developers. pixels company technology a technology content point browser the or this talented instead week is cloud application incorporate data investing focused due protection are should end in use remain of in to to internet to effective be concerns, or capabilities. as should be our this execution not we the cases We and pre-revenue a This

to enterprises We manager the with to scale level. substantial us experience new in to in general EMEA are large a VP and EMEA selling next welcoming help

Cloud Live in Las Xnd. and We on XXth in will on Zenith October our through be Zenith XXth September Vegas XXth Summit Europe through Portugal, Lisbon, annual holding September Live

keynote cloud We will have an inspiring lineup about to transformation. talk speakers of

our strong market security. are we business. believe early disrupt In very network our summary, a results We traditional growth of pleased to are and in opportunity in continue we with the QX significant innings

over our to walk I'd call financial results. like Remo now to turn through to the

Remo Canessa

Jay. you, Thank

a million, had sequentially QX. up we X% mentioned $XX.X Revenue XX% Jay strong was the year-over-year. As quarter and very for

as and for private comparison was deploying QX and customer public was a For from non-recurring of was recall XX% EMEA sector the aided From X%. $X.X a our the perspective XX% revenue quarter APJ geographic revenue, solution million sequential the cloud. a by represented large Americas revenue

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

As our to are our one one three advance. year contract invoice in we terms typically and reminder customers a years, primarily

April billings $XXX up million one from billings upfront was periods, on than XX, one represents obligations XX% in which $XXX performance remaining backlog was year million XX%. both Excluding Total greater growth year ago. over

mind we'll quarter, difficult that sector This billings XXXX. July year-over-year and large Please will which pose the comparison that with quarter million to $XX.X added in deal QX, QX. next deal comparison in backlog have a million difficult public the a a keep in closed in $XX

ago year up-sell and for which XX. rate, XXX% ended Our quarter. retention the customer compares net based to dollar XXX% in have retention a April was high ability to period consistently and resulted strong XXX% a the last This

Our increased a net rate, which success within which our for selling reduce is calculated retention and on business, bigger while good year-over-year transformation with up start bundle the year, upfront, faster our sales deals a basis. ARR can dollar

Given is these and it to is invest vary margin X% year-over-year. important growth. quarter XXX% target quarter. was to good as near-to-medium top factors, be that XX%, in outstanding and up gross X% in to We to a term, drive sequentially revenue continues our line feel we platform Total will XX% feel to the continue

by of decreased to increased our sequential XX% related We to due operating sequentially our marketing XX% million, professional XXX in headcount headcount, employees sales over increase increased year-over-year but expenses, XX% basis and The total and in increased compensation a primarily marketing. operating to expenses expenses, year-over-year is on to and QX approximately fees. expenses in operating Turning more expenses $XX.X and XX% revenue.

and million. to up to increased headcount to $XX.X compensation year-over-year marketing year-over-year $XX.X expenses. sequentially related XX% up due The increase and million. primarily R&D sequentially going Sales was expenses is and increases, XX% marketing XX% XX%

XX% new acquisition increased in includes to to professional our The related As product offer we investments year-over-year XX% fees and growth to invest continue sequentially and to in teams, including expenses. G&A building functionality $X.X increased million. enhance products. expenses, G&A compensation-related

litigation the lawsuit. in the including settlement expenses million related $X.X of G&A exclude expenses Finjan

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

and for $X.X to ended ago. same quarter short-term We equivalents the $XXX cash, quarter, million year in cash the investments. $X.X flow was compared with positive million Free quarter the positive cash a million in

balance. We mind had in a payment settle impact to made in from which quarter, cash ESPP contributed cash lawsuit. the to our keep we $X our million $X.X positive million Please free program, ESPP program Finjan of does the impact overall a not flow. our

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

million, we million; million approximately range XX%; quarter, $XXX expect share to million to growth of taxes the profit $XX $X.XX shares of to reflecting income operating range common the per zero earnings of $XXX,XXX, For of assuming the $XX to year-over-year in XX% revenue in fourth $X of outstanding. $X.XX,

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

we either on expected primarily QX technology acquiring or as to in little the Appsulate 'XX to impact revenue, no of in development fiscal acquisition team. The are have is

develop is purchase cash plan of $XX our deal it approximate is incorporate . further the this million technology with platform. into and to The Our price all

incur to $X $X services. expect additional expenses operating acquisition up We 'XX approximately related the build in to million to new million and fiscal in to

opportunity. not to I in and building our our our marketing We're to cloud platform would plans we've continue our and business investments near the generate to our operating to leverage We upon proud market additional plan profitability very our sales increased guidance, well or opportunity. pursue to invest reflected programs maximize in achieved that and our but as forward organization what in in to infrastructure. As of term, look emphasize aggressively significant invest as technology in are

will to back over call I Now the hand Jay.

Jay Chaudhry

Thank you, Remo.

We machines realize allow we fully public security not cloud. secure will of whether best for the the cloud to right a cloud on-premise the single-tenant virtual are in as as believe to choice transformation. architecture, The appliances matters, deployed architecture enterprises cloud benefits or

SaaS us. With We cannot application to forward the gaps tailwinds you progress public and is are clouds, look Zscaler scale, to reporting market and to migration your believe and such leave security adoption, experience. imitators future. interest multiple on in deliver the a as These in expensive poor user coming SD-WAN thank in our we for

the for call Operator, open you may now questions.

Operator

from Instructions] Brad Suisse. We'll question [Operator take our Credit Zelnick ahead. Please with first go

Brad Zelnick

upfront competitors on they of in compete seeing of and make Are proof perform billings are Thanks technology are? us might when Jay, at cloud with of and some Bill versus and or about differentiation Remo I'm sense mean the go concept another truly hoping are over deep XX% congrats leveraging make you head-to-head the that public deals types My team you this is too Jay, in to I growth, and you the impressive. risk can you XX% getting on great understand the that this capabilities talked what and solutions? help question your excluding sense quarter. your Zscaler. with but Why into the these briefly able prepared partnerships not to remarks, deliver of to you you all

Jay Chaudhry

vendors questions. compete to Very the it cloud that are you. cloud. the using from thank having wasn't good for technology meant Appliance Brad

have are claiming cloud they when XXX public totally or machines in these So and presence spinning more virtual on is locations misleading. to

where locations regions. applications runs. storage walk through large bit XXX centralized a Google, how public where data me and them run, about on They in That's clouds Let compute world. centers call AWS, the very they're around actually that's these little work.

they addition in Now locations. have some XXX

thing so are natural these sent to them XX locations or information of the front that Some that regions, are be of which presence, and points about so. call others them call doors them can the collect edge

to the in-transit an run cloud. built are not destinations, applications clouds these as So

good. It unless from goes can't so center so of light, hence light to to speed architecturally Ohio. time handle Chicago, in good back. is traffic be cloud distributed build and away the kind data a the can't staying performance For example, response there Speed take enforcement of comes AWS is you that's the security of be

The POCs. don't second business POC's. through do part We of was your about actually really question

transformation top CIOs. are the cloud We driving down through

of this view. POC's none point impacting from So is us of

Bill Choi

that of just the to plus on network XX point locations hyperscale meant compute Jay centralized really that around hauling clarify are Brad back really in XXX an collection these pushed in say want centers inspection data to number true or that or Yes, call done a is they’re it's this edge like they either where of what and so presence back content points. service are hauled,

Jay Chaudhry

Thank you, Bill.

Brad Zelnick

expecting. you Thanks I your this remarks, Remo, for one went in you some you through clarifying, been I had in I if later up have a Remo. Bill. could for than just prepared little on but think might cash But come flow bit then follow And how believe the the flow walk I one offset did us Thanks. settle QX, just Can about we out think and also time think go more also from to clearly cash you lawsuit we ESPP. that should and the as Finjan there's through seasonality?

Remo Canessa

Brad. you Thank Yes.

did $X.X So in flow. we April on the million, pay which Finjan had impact cash a free negative for settlement

from once about hold that's the positive about talked during was million employees the for $X the that ESPP a we've ESPP program and funds quarter. As we program impact

go forward, you when think about basis. we a cash QX As on flow free

you business largest we If where and that from QXs our QXs seasonality are QXs have are in and our billings the smaller. at a quarters perspective, QXs look

cash be So for flow free impacted by cash impact QX flow - that. the will

overall acquisition, days. In few addition, based last and flow we have the on the in with make payments will cash the Appsulate decline made we'll

Operator

Take our RT Patrick question Research. from next Colville with

Patrick Colville

customers? you moment? competitor change of lot chief weak just your you that. guys are How Have about having of change the become aggressive? internal it your being to kind - reacting how with at ask more Does extremely Does a issues planning? when I the and your react to is Can competitors dialogue Zscaler you it

Jay Chaudhry A

the for will proxy looking box impact. channel security selling You opportunities, know with a if refresh big box we same be a a or were this

have have We transformation. said always we top-down selling been

by need like Our driven OfficeXXX, is like SD-WAN. applications projects

securing is local up web sitting which gateway or sales where competitors web secure a in greenfield all opportunity. But help Zscaler replacing it deployed generally is Not us it Yes. almost really. business whole So change locations. just Does cases our end process? breakouts, our we generally? proxy, comes new from Weak does in centralized

Patrick Colville

the from product assumption And to I of a major being driven because that's ask that ton the we assume talk right a growth ZIA where the ZPA it's is on by I'd one just and drivers potential has clearly focus mean going possible. be I the didn't mean of in any quarter. about Or can would business of kind if color that and Is here. I ZPA about awesome. now, be that's just is?

Jay Chaudhry

Yes, the ZPA so But up platform to ZIA is faster. while much ZIA. fast, with for is catch hard growing ZPA growing it's

So together. we the ZIA about if large think and talked about, came you they ZPA, of number deals deal both a our

So new but more opportunity, seeing of the very very, are more it's opportunity. a for are rate we about and very technology and and we're seeing good bullish relatively attached in bullish new the market, but traction ZPAs we relatively

Operator

Henderson to Alex on Needham question and move then another with And from Company.

Alex Henderson

should the scale I the be to market new challenges was sales in rate. that you hoping Is people, the have to how be talk like of about? of a continue hires you Thanks. drive which out to It and to about any we like an guys given little what environment - issue growth? at into future looks going that bit is that may concerned tense a there that much the the could seems spending challenge hiring difficult degree

Remo Canessa

is competitive Remo. environment, It is This Alex. a

our think insignificantly. well we're investing out that on However, count RSM hiring is. That's doing front. a We're not something are making I giving what we we're -

the employees, and this XX% sales a sales who's total others remains quarter, our with marketing headcount. and take easier in to you marketing. a related morning headcount, of company in In of approximately when look XXX hiring. range at our of over This bullish last conversation added we However, than some had a XX% regions it a XX one I VP's the it's and

having, year in our we're performance, market as we're sales continuing So company I a public the as for hopeful being us and now I we're hiring people the go forward. think a well with job continue think as to well momentum marketing and as to that about that Zscaler to our do more visibility as we're getting we a to good that going come

addition mentioned in sales As is but a company. our technology Jay marketing, and focus we're

So we're type through do tuck-in growing organization. to development looking well continue as acquisitions R&D our to as

Alex Henderson

you So leverage starting of higher to your when your sales allow you any recognition teams other basis. to would on variables as to a per productivity think about start of the a increased sales result or are deliverables see that see expansion, capita

Remo Canessa

year one-time at large a this certainly I our is is understand look reason tenured Overall, we the execution. versus is salespeople, it anything and trying when what well down on year. at doing related see We We XXXX deal, XXXX, Yes, take to The productivity where that to seem large the that a sales the productivity the hire QX for for they're of for QX year is it basis. sales flattish comes - in of that quarter opportunity. I hire. a planned over aggressively that market look to as to up, which we're absent

from to continue architects, our our operations. personnel there the in but our services perspective the CXOs organization, need from to perspective, needs build the there. we the cloud also as From our product, support to have Really people, as and well perspective, support markets a salespeople, professional product both just solution and we hire support

Operator

Move from with on Barclays. Saket question our to next Kalia

Saket Kalia

you Maybe first Remo. for

the all for updated First of thanks guidance. billings a lot

QX typical the about seasonality historically talk pipeline to multi-year is, maybe spoke just in large deals those remarks that can you Can the and we swayed exclude what like from last billings your talk a about correlate just growth. upfront if deal You sort general? overall upfront you multi-year had in you about the sequential looks QX prepared that of

Remo Canessa

good Yes, questions.

guidance this giving deals XX%, out a guidance QX, XX% billings that So, look when consistent you which of of sector QX, take are to our guidance public for to is it you to at a revenue we at up of XX%. the pick XX% implies and

our as our So typically QX strongest top two is quarter, and and QX quarters. seasonal mentioned you QX are

don't what we multi-year what perspective is. type at related things feel our take comment, a we pipeline a pipeline deals. We look From to maybe

Our have given guidance methodology the to related has not we that changed.

you that take know deal have, you large very from a out when we XX% that So, upfront last we at guidance the is that XX% year to year-over-basis good. feel on

Saket Kalia

Maybe or do for it subscribe do VPN counts. seat ZPA to about a felt more Jay, in I about the for thinking there I count deal little those your similar the remarks. you Can in some the question that that ZPA prepared were for learn little like local you is ZIA to It just some bit clearly a of a differences use lower. I'm gave of for just about subscribers guess talk examples that? bit But typical number typically same is typically mean the a customers ZIA? offering? cases - clearly ZPA has is ZIA in seat internet differ broad versus breakout. for

Jay Chaudhry

Yes, observation. Saket, good

to to Company have every in applications. we ZIA or want for always protect when they employee As buy platform the the customers internet SaaS who said goes

is it's hence all access about at look you always When ZPA of type certain to So employees. almost applications. it

integrate some broad cases give range ZPA of number XX% were the than I its a subscribers of cases somewhere may of replacement integration, lower the number it In Company to M&A from from XX%, is it's VPN maybe the If So be if far, total the XX% that you in to and the XX% employees of ranges they users. users acquired. being ZIA a it's need generally if other to so ZIA.

I a term, must would will moves XX% probably will XX%, be over use access short office the “ have the XX% cloud as to the everyone time ZPA. eventually a don't range. in to of be to and But need number the the be everyone applications,” you in XX%, So subset think notion I

with So over ZPA users number smaller and starts grows time. of

Operator

We'll from Andrew now Jaffray. Piper Nowinski hear with

Andrew Nowinski

it the follow billings at another QX, make for just up to to I million XX% above with want billings guidance to it deal grow but you another on $XX tough a growth understand you and comp difficult growth up off I did your out, your comp, pull just seasonality, Congratulations you as normal know continues on this. your guess of quarter. I sure just rate. in line put have is well very you backlog great similar

factors any wondering in other there we and consider guidance just I'm just that the conservatism should billings? So, for some than is other QX there

Jay Chaudhry

We like to what our be we that. with and guidance prudent continue to and we've that's historically do done

Andrew Nowinski

your remarks can as on your then And it than you Are shorter or that longer give the any in be of us they different your deals color to large duration whether cited the large large deals deals? relates of duration deals, your may you in prepared duration? other and that of some

Remo Canessa

three years greater. it's the XX% range, Historically for are been new or that further look deals those at the fourth quarter average which for customers of the duration in

years, since customer. So our the done the it's really billing timing, pay for, duration. in by perspective customers we for it's we consistent our no the upfront bill the Related offering compensate change relatively and something annually remained to something if public three not so that's from full

Jay Chaudhry

I Multi-year payment. go if never with deals we've and say are incented our out. generally exceptions some for upfront sales do and Right, deals clarify, force to that annual add payments we may call multi-year

Andrew Nowinski

that lot. a sense. Okay makes Thanks

terms additional you're not margin generate near the clarification, or Just operating those quick expectations? leverage expecting dollar basis basis when of in going does in a on to that presumably you're a term, mean to generate absolute additional, operating you the said

Remo Canessa

operating on and margin both billings for be we'll a next guidance revenue on for quarter profitability. giving the and call, It's Yes. basis the year and the full

that. more on give clarity So, we'll

consistent offering. highly with XX% comment have significantly However, staying with operating the ability we that this to we margin. that wanted model we're increase We a to make the we We our leveraged. understand profitability know comment. is And that have public since gross is

increase intent. we that We significantly. not our flow free can is That cash know

funds and continue need intent at to R&D, both the solution is spending Our market cost We is related have We're money. the and is the do of running that for sales that companies this and spending feel us. come to experience execute, to that and of and is market, over we to come a market XX Zscaler. part cost build grow the myself have branding going infrastructure continue to execution in Jay we to market, have to grow last best what our for years. marketing, significant to strongly the

know to have grow from cash related We trying market for a presence but flow increase our the important of perspective, the as operating to and focus. for value the we to the is market and market the important shareholders that and a we're Wall That's pulse to the a on quickly it's Zscaler as free our it's The become Company profitability perspective Company maximize I comment finger to build us share. of leader can. Street from our

Operator

Powell our Gray take with Deutsche next We'll question from Bank.

Gray Powell

demand via then year? behavior buying patterns? So any have maybe volatile Obviously, the fairly the security curious particularly versus the how high results for And seen focused numbers, some change rest customer we've XXXX did you space just feel good level, you on-prem some more from the this from so quarter, environment just guys vendors. the had or last you but in seen about of

Remo Canessa

Good you. thank question. great, It's

cloud and even and secondly, for priority for that. great when ROI delivers solution actually very our helping And do sales spend driven market are their CIOs savings, slows lots makes which attractive is transformation, by is transformation customers very driven it of and down. process high Our the we

need security not that to - replace, by refresh. be to that product need another driven here's to that need are We sold,

you really want So anything. the seeing impact we of that Remo aren't slowdown. add to

Remo Canessa

you. thank fine, that's No,

Operator

with We'll take question Ives Daniel next our from Wedbush.

Daniel Ives

talking Jay, of to are months versus My increase. as six customers just mean strategically. Yes, Maybe to to maybe nine ago I in size more deal you're you commentary uphill versus more about even maybe start is can how question things downhill, give changing inbounds. to talk there today you continues anecdotal some thanks, off. Obviously deals terms get

Jay Chaudhry

about cloud, them things them good Today, CIO I'll securely a or make doesn't still do do we're that CTO ago of a say will to met who messing CIO, quite number still years in for but comments not to and year but of a or of so with Yes, I thinking, want it the couple cloud, how two they're when say a embrace it would we're to ready to it's hard up. find number sure. A a without area. how worried

clear would before. the we move movement realize and market larger faster than were a than why we deal is happening faster So otherwise. have they they when interest, good solution. that seeing move seeing a Things we're flow there That's

CTO's a they are are we quite That's in credible XXXX helping segment Two, the about as number and are bit. These the cost performance CIO's of willing customers security speak deriving us grows, benefit the Global have companies. and these for to savings. that publicly large for user

to with you I move Three, say go our bring new from in. that back customers and Zscaler in are customers of shared a like to able CXO's couple where actually our examples I to would

good. on but execution, So the as with market pleased down feels are focus heads just environment, but we said Remo

Daniel Ives

maybe discernible But changing about Are some and mean Remo just any getting you our think nature in sizes deals. overall just I the or maybe Jay you overall Thanks. And cycles or Bill obviously deal talk of given there these are deals larger there cycles sales comment of shortening changes closed? they or obviously there? sales just just can terms when

Jay Chaudhry

know three I months. smaller deals you mean still to really. six Not it's for you know

do after to XX deals larger X know You customers to go made to the transformation. the cloud decision months and

quarter, with deal QX. increased You in we than increase greater – perspective, range. customers an X,XXX We're look from for in It's QX know average mid-XXX,XXX users. increased every and did versus size it's it it at the

we this QX. deal did as increases past we seeing from size, average So, quarter an every are

Remo Canessa

number may of the Yes. up. and engagements gone I have awareness add If

obviously numbers. for that's us So, big to deliver needed

Operator

We'll now Nick on move from Cowen to & our question next with Company. Yako

Nick Yako

Jay, moved same have But then And cloud along the color maybe one that awareness around are that really breakouts? percent legacy security certainly mobile-first any breakouts you. you sense world. growing those provide of a in networks work of in we lines, and curve Internet models and where to don't your you any today? of customers own for a adoption There's local local have the can do

Jay Chaudhry

Nick. question, good Very

market, was for initiatives vendor Zscaler. the till So, local was pushing SD-WAN only came breakout that into

is at the the XXX that. share last of of want size of breakout, clients. our a good to if market So, companies own you year, I largest of the about Global guess, were market announced, indication look XXXX local our We

Zscaler percentage what the breakout Actually, second question. breakout. we of reason the Now, was are bought customers doing do local are number one is to local

haven't our big okay? if one for have almost breakout. as deploy because customers look haven't they it, all us Zscaler, bought the with around we’re of But of to who local say at you would I market, it's customers breakout the and SD-WAN the local reasons Now, only done gotten breakouts

vendor We who SD-WAN the predominant are the secures market.

is I enterprises So customer in in done guestimated give to mid-teens. local large that if of you who sitting answer, number the breakout have have my

Nick Yako

And traction? just up. or not the provide whether was any customer of you guys metrics common maybe around just then could percent the and deals there ZPA a new just use if quick gaining see revenue it's wondering uptake I or maybe were of follow then if you cases some

Remo Canessa

From give I a metric next All happy is growing can forward on we’ll the about product on ZPA say that and to looking it our our call. fastest we're and perspective, next call. we're growth with is talking that our

Jay Chaudhry

on Imagine like network. your the including question are got. on gave slow. end put VPN, X,XXX our importantly you case But last year they’re on of remote your access enterprises update XX% use cases. was second people I the security our five think sitting business an they’re cities to risk very needs eliminated Lots very Remo, we'll use big users of make country cases But in because to the don't simple Moscow because is of a about more or in VPNs basis be on and safe. annual Croatia they and at VPN some customers a VPN the popular quarter, interesting we use this the new of upsell the numbers are. front end And where replacing was tactical VPN, metrics QX network.

point in thing to second most But which need they A cloud AWS a do back to a use case like to to your cloud. sitting big back public public of. all one customers do, without choke and like and silly solution know but access because a your data to Azure then that’s that's go users ZPA what is center applications

very are I use those to interesting number be helping, case use or only surprised which divestitures. merged that to many used think small divested other being companies I'm a that's third and and of Our cases. will how follow cases, M&A integration

Operator

next Morgan Franchi We’ll Melissa from question move our with on Stanley. to

Melissa Franchi

on of from expect up that maybe follow complimentary that proxy you’re you Appsulate suggesting of to doing then acquisition in technology. adding browser the And isolation color more wanted that you're I web timeline the a should we Jay, tech add already how is some Can integrated? what perspective? terms what on getting to

Jay Chaudhry

module through sites. using using traffic a path. known Zscaler for is certain the The be go new market call it's in special And is is we're traffic and it relatively could has of of in use important. it healthcare going defense the relevant certain and case browser maybe services, and is a call isolation Financial very It because verticals where direct type example sitting This technologies very kind evolving today. Zscaler it areas. could feature, security simple

be fairly But there sites. suspicious some and may unknown

end those all our user through that to don't and coming the browser point technology. funneled You of want are traffic isolation destinations type

very, So, a complementary very very good fit. it and becomes

So, that's the use case.

engine. platform sure very that a young it we the as coming quarters. with to our the we In customers. sharp very our and a work and be terms And is and developers made team, cloud, that, bought engine will doing are scales offering we a of integration, what an comfortable few once in in integrated available innovative we And it that's team, make core into are

Remo Canessa

little QX or in our -- revenue any for fiscal planning for not revenue very we're XXXX. But

of Zscaler is platform the one one our to I our it we're key have base integrate of we believe We're advantage. of strengths that competitive give putting platform. on code this points a the think which us will one is I going into and

Jay Chaudhry

companies spree of have buying a a customers stuff. Yes. complain on UI that never in may They so but many I and put the about products it, front integrate. seen of type who go

one like pane integrate So, of buy single properly pane a it's focus, just them so our core a the glass, not technology product, good façade a of of and glass.

Melissa Franchi

quick Jay, a then the of it's role Welch. vacant the COO since And one with departure went Bill been follow-up. year about

Just from a still wondering is leadership open how role if you're feeling and sales that perspective?

Jay Chaudhry

Yes, that is correct.

retained We search. have

we role role. are with candidates of we lots a interest. very good being selective, have good of very lots the filling We It's will important us but and for be

progress it. making are on We

Operator

question next from our Ruykhaver with take We'll Jonathan Baird.

Jonathan Ruykhaver

contribution in it to of was kind that the the I you curious the about talk IPO. around XX% SPSI have notes I'm if could around of my ARR. time

of curious contributed have So channels how kind since to just ARRs I was then? those

Remo Canessa

a mid SPs Currently, little X% On new VARs in XX% Yes. basis distributors through VARs. our is traditional SIs bit a revenue X% in higher. to it's range. and It's or and low and the the XX% the range business All though low direct.

our emphasis is Our very is and SPs lot - that Zscaler. A I we SIs mean that for of focus to being feel strategic channel. are put in

to distributor that of forward. to in VAR plan channel understand continue the we invest the channel. We to go importance However,

Jonathan Ruykhaver

be ZPA? same Can with in that might transformation SP SI you talk impact the thing about ZIA having the a and and

Jay Chaudhry

who enterprises. providers, provide folks to network are Yes connectivity Internet the SPs, and service

SP natural the our Systems who a market sorry, are is they the ZIA, them of our public and have and they internal mature. applications we a sale is So for ZI offering bundle with are partners - working integrators offerings. are fit fairly ZPA mature better because from channel And along move ZPA with to for to clouds mature that folks Zscaler.

customers early that's They SI So migration pleased making young, a but the applications. the in so secure with area. in the are is that we only they are is relationship access provide of and the fast also stage. and ZPA do not progress we to

Jonathan Ruykhaver

alternative is an SD-WAN secure Internet question, breakout. final My to securing architecture local

companies and contrast you you just successful compare ZIA? that networking about Jay, you view can as talk how know secure larger know a the you SD-WAN of Some use versus case.

Jay Chaudhry

into over that sophisticated cloud-managed play use one Absolutely. box. the MPLS that's case, switching, things case. branch use SD-WANs and Internet. being X.X don't over integrates gives we to calls back connectivity start traditional all that That you And the routing datacenter

SD-WAN the part able be that second at to branch. bound and The at the to source with each Internet is off the SaaS of peel along traffic

direct can whatever go maybe, broadband the we a over connection So or

you Or be point location, that that proxies, gateway the a DLP secure. the you as local security traditional build Either to like. network and Zscaler with Now, breakout local ZIA. appliances traffic such must firewall,

which can solution hundreds is traffic branches the of to You imagine simply us. better pointing

box. Now, vendors will that we functionality each in the say SD-WAN may some build

sense. a branches, branches. functionality got thousand to in make seem put you've This if doesn't that we'll So thousand

lightest want off point why done the most platform functionality, that and footprint the customers in are know the default can in each the they cloud. The cloud That's we SD-WAN the of we deployments do be simply network traffic the to SD-WAN. security branch so the secures

it in a could of see in time be So that? add most we beneficiary the cloud of cases, where to rare SD-WAN few cases and security in done we box will the trying the may vendor are biggest be the but

Operator

with Boolani We'll UBS. now question Fatima our take final from

Fatima Boolani

remarks did the deals Remo. quarters. Jay for coincident prepared I ZPA increased over four one Jay I have last notice for have that your and I one ZIA has certainly in and of

of sales go-to-market about? place any you if you put quarter adoption to retirement target perspective to inflection as wondering were ZPA in de specific the guess I'm really term drive in have I So that talking or incentives head that facto

Jay Chaudhry

Fatima. question, good very Yes

all ago. of year, a first that available two over we little it made announced maturing. So a is We ZPA years

awareness. obviously there's So more

we expect be well-trained so So will ZPA Internally, it's awareness, financial in for more incentives incentives. a get to and for some team natural deals. of ZPA us do it combination financial maturity, sales sales

Fatima Boolani

gross That's efficient you for delivery you've very clear. the on costs. very just on your front, And Remo margin been

beyond are from you're it that that - if gross outperform margin to able wondering increases margins, margin - front a whether held cost it leverage on helping be dynamics or gross the But anything to or margins. that me. really doing gross the there's performance. other that's I'm So that's pricing for you're pricing the you. And base Thank you've within strong enabling gross you show the just perspective, line to COGS any

Remo Canessa

Thank Yes. you, Fatima.

created. application, gross that with that with we a efficient security the with to to applications percent very It's have we XX-plus you. When going it's honest got software. of be start platform, start run, driving the platform the think amount strength got the and traffic to we've you're just margin I with through have we of of the amount

In do the they're We that, part we increased using. increase at usage pricing. increased customers, look periodically pricing, that's our that addition of and to on related to bandwidth

is group outstanding. Cloud Our Operations

Cloud very basically manage have group very our to is us We created a which strong Operations efficient that's automated cloud. tools help basically

of the is it it. cloud the really platform, our strength manager, a account From the with all are with the to types on of the monthly professional of a top level technical at literally starts gross manage proud very weekly, We're we services basis, and professional But services, it it. scale depreciation that perspective, capital ability those to these we of of things equipment, on stay margins.

Jay Chaudhry

it's would biggest software purpose-built to since have If they what I software, architecture a advantage. platform, we we the Remo public optimize say add highly talked we optimized have that I with Two, may built us gives a third that vendors new parties. own those have stuff to clouds. developed run to without pay mention the I'll in And cloud royalties public to no on having pay money to our our is we to third point any

Operator

like conference that any session. And or remarks. the you. back question-and-answer additional Thank conclude to does to now over I turn today's would Chaudhry for closing Mr.

Jay Chaudhry

at next of the we'll you with We'll time. Conference and speak call. week. interest of Merrill your you Bank at next for you Thank you. our earnings Thank see Otherwise, Lynch America some

Operator

Thank does all you for your today's That you. participation. conclude Thank conference.

disconnect. now may You

Zscaler (ZS) 30 May 192019 Q3 Earnings call transcript