Release Date: December 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Zscaler Inc (ZS, Financial) reported a strong Q1 with revenue growth of 26% year over year, exceeding the high end of their guidance.
- The company achieved a 50% year-over-year increase in operating profit, setting new records for operating margin at 21% and free cash flow margin at 46%.
- Zscaler Inc (ZS) is experiencing significant demand for its AI-powered solutions, contributing to large customer wins and expanding its AI portfolio.
- The company has successfully shifted its sales strategy to account-centric selling, resulting in stronger customer engagement and higher-quality pipeline.
- Zscaler Inc (ZS) continues to gain market share, securing over 35% of Global 2000 and about 45% of the Fortune 500 companies.
Negative Points
- Despite strong performance, Zscaler Inc (ZS) faces ongoing customer scrutiny of large deals, which could impact sales cycles.
- The company's dollar-based net retention rate was 114%, which, while strong, may face variability due to increased success in selling bigger bundles upfront.
- Zscaler Inc (ZS) anticipates that new products optimized for faster go-to-market rather than margins will continue to influence gross margins.
- The company is investing heavily in upgrades to its cloud and AI infrastructure, which could impact short-term profitability.
- Remo Canessa, the Chief Financial Officer, announced his retirement, which may lead to transitional challenges in financial leadership.
Q & A Highlights
Q: Can you discuss the 20% growth in unscheduled billings this quarter and your expectations for future billings growth?
A: The 20% growth exceeded our expectations. We anticipate unscheduled billings to remain above 20% in the second half. Our strong demand for the Zscaler platform, growing pipeline, and increased sales capacity give us confidence in our guidance for the second half. - Remo Canessa, CFO & Jay Chaudhry, CEO
Q: How is Zscaler collaborating with Microsoft to support the rollout of Microsoft Copilot, and how does this impact your competition with Varonis?
A: We leverage our integration with Microsoft for data discovery and classification, providing a unique advantage by being in line for all Office 365 traffic. This allows us to secure Microsoft Copilot effectively, as demonstrated by a seven-figure deal with a G2000 company. Our position in the traffic path gives us a competitive edge. - Jay Chaudhry, CEO
Q: How significant is ZPA as a growth driver, and what is the current state of the VPN replacement cycle?
A: VPNs are still prevalent, but ZPA is a major growth driver, now accounting for over 40% of new and upsell business. The opportunity extends beyond VPN replacement to include zero trust segmentation. We expect all customers to eventually adopt ZIA, ZPA, and ZDX. - Jay Chaudhry, CEO
Q: How does Zscaler's growth compare to firewall vendors, and what opportunities arise from hardware refresh cycles?
A: Our growth significantly outpaces firewall vendors. Firewall refresh cycles present opportunities for us to replace traditional firewalls with our zero trust solutions, including SD-WAN and device segmentation, which are gaining customer interest. - Jay Chaudhry, CEO
Q: Can you elaborate on the impact of emerging products on unscheduled billings growth and which products are driving this growth?
A: The growth is driven by both emerging and core products. Emerging products like AI, workload protection, and ZDX are performing well. We expect emerging products to account for a mid-20% range of new and upsell business. - Remo Canessa, CFO & Jay Chaudhry, CEO
Q: What is the current ARR target, and how are emerging products contributing to new business activity?
A: Our ARR target for the year is $3 billion, with a net retention rate of 114%. Emerging products like ZDX, zero trust branch, and AI solutions are significant contributors, expected to account for a mid-20% range of new and upsell business. - Remo Canessa, CFO & Jay Chaudhry, CEO
Q: How is Zscaler addressing customer scrutiny on large deals, and what role does AI play in your solutions?
A: Customer scrutiny is a general economic trend, but our zero trust solutions, combined with AI, help reduce costs and complexity, making us attractive to customers. AI is a catalyst for our growth, enhancing our security offerings. - Remo Canessa, CFO & Jay Chaudhry, CEO
Q: What progress has been made with Avalor and how does Zscaler handle the scale of data and traffic?
A: Avalor has enabled us to build a data fabric for efficient SecOps. We have introduced products like Risk360 and unified vulnerability management. Our ability to handle large volumes of data and traffic is a competitive advantage, allowing us to offer breach prediction and threat hunting. - Jay Chaudhry, CEO
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
