Ladies and gentlemen, thank you for standing by and welcome to the Zscaler 1st Quarter 20 21 Earnings Conference Call. At this time, Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today to Mr. Bill Choi, Senior Vice President, Investor Relations And Strategic Finance. Thank you.
Please go ahead.
Good afternoon, everyone, and welcome to the Zscaler fiscal first quarter 2021 earnings conference call. On the call with me today are Jay Chowdhury, Chairman and CEO and Remo Canessa, CFO. Please note that we have posted our earnings release and a supplemental financial schedule to our Investor Relations website. Unless otherwise noted, All numbers we talk about today will be on an adjusted non GAAP basis. You will find the reconciliation of GAAP to the non GAAP financial measures in our earnings release.
Starting in fiscal 2021, we are excluding stock based compensation related payroll taxes in our non GAAP presentation. The gap to the non GAAP reconciliations for historical periods can be found in the supplemental financial information. I'd like to remind you that today's discussion will contain forward looking statements including, but not limited to, the company's anticipated future revenue, calculated billings, operating performance, gross margin, operating expenses, operating income, net income, free cash flow dollar based net retention rate, future hiring decisions, remaining performance obligations, income taxes, and earnings per share. These statements and other comments are not guarantees of future performance, but rather are subject to risk and uncertainty, some of which are beyond our control including, but not limited to the duration and impact of COVID 19 on our business, the global economy and the respective businesses of our customers, vendors, and partners. These forward looking statements apply as of today, and you should not rely on them as representing our views in the future.
We undertake no obligation to update these statements after this call. For a more complete discussion of the risks and uncertainties, please see our filings with the SEC as well as in today's earnings release. I would also like to inform you that management will be presenting at the following upcoming events. Credit Suisse Technology Conference tomorrow UBS Global TMT Conference on December 7th, Barclays Global TMT Conference on December 10th. Our annual Zenith Live cloud summit for the Americas in EMEA will be held virtually next week and for APJ the following week.
We encourage everyone to register and view our summit. We also invite you to attend a 1 hour product Q and A session specifically for investors and financial analysts on Wednesday, December 9th. The presentations for these events will be webcast and the links will be available on our Investor Relations website. Now, I'll turn the call over to Jay.
Thank you, Bill. First of all, I hope all of you and your families are healthy and safe. I'm proud of our strong results and an exceptionally strong start to fiscal 2021 in our first quarter. We delivered 52% growth in revenue and 64% growth in billings, while also generating record operating profits and free cash flow. I believe our financial results demonstrate Zscaler's picture role in enabling our customers digital transformation journeys, which are accelerating at a pace never seen before.
Our visibility and business momentum remains strong, and we are pleased to increase our fiscal year guidance. I believe the market is coming to us, and we are investing across our organization to capture a significant share and our partners for their tireless efforts and commitment to our customer success. I'm also pleased and excited to welcome Chris Cozza to the Zscaler team as our new Chief Marketing Officer. Let me highlight three factors that drove our strong performance in the quarter. 1, building on our growing traction with large enterprises.
We closed a record number of 7 figure ACV deal. The majority of these wins are 3 year commitments to provide the foundation for application network and security transformation. In particular, I am pleased with our increasing wins in the financial services vertical, which is now embracing the cloud and the Office 365 deployments have become an important catalyst is driving significant velocity including a strong pace of new logo acquisitions. I'm very pleased on our investment in our sales organization. We scaled our sales enablement team and built a repeatable and metrics driven process, which is giving us better visibility into our business and ultimately resulting in a strong and growing pipeline.
These efforts 1, our newly hired sales reps are contributing at a faster pace and Our sales productivity is higher than a year ago despite a high percentage of ramping sales reps. 3, the power of our 0 Trust exchange platform is resonating with CXO. Our platform is comprised of 4 key pillars with each enabling a critical element of the transformation. ZIA to secure direct access access to private applications. Zscaler Digital Experience or CDX to deliver user experience for work form anywhere, cloud workload segmentation to protect applications And increasing share of our sales is coming from initial platform purchases by new customers and also growing upsell to existing customers, which is driving a record 122% net retention rate.
I believe in the current challenging environment, and in the post COVID economy. Zscaler will be the go to platform for vendor consolidation cost savings, increased user productivity, and better cyber protection. We are excited about our mission to make the cloud safe for business and enjoyable for users. We enable our customer to increasingly use the internet as their corporate network and replace legacy premier based security with 0 trust security. As the CIO of a Zscaler customer told us, We ended up with and have a user experience that's materially better.
As we look forward to the next few years, we are focused on driving broader adoption of our 4 major cloud solutions, which together maximize the value for our customers digital transformation. From presales to deployment and customer success, we have built a sophisticated sales machine to sell value and deliver measurable outcome at the CXO level. We continue to scale our organization as the market increasingly moves our way. Which are contributing to Additionally, we are demonstrating our value to and demand generation programs. At our recent virtual CXO summit series, We hosted 6 events that drew over 400 CXOs and IT Leaders to discuss secure digital transformation.
Many CXO shared with me that the current work from home environment while temporary has helped them realize that 0 trust architecture is the future, and it can be implemented easily and rapidly. COVID was a catalyst in changing the mindset and shaking off inertia resulting in a reduced need for educating customers over legacy approaches. Inbound customer requests have greatly increased. And we are becoming an integral part of a growing number of larger transformation projects. We continue to see more and seamless access to SaaS applications or applications in your data center or the public cloud.
For example, a global manufacturing company purchased our transformation bundle plus DLP and CASB for 45,000 users and VPA for 25,000 users. Drivers for this deal were network and security transformation. They had a traditional hub and spoke network for 300 manufacturing facilities, which was slowing their adoption of cloud applications such as Webex, Office 365 and Workday. Our next gen firewall vendor try to sell its hybrid offering, but failed to meet the security and performance requirements, including SSL inspection. Interestingly, this initiative was part of a 5 year managed services RFP.
Where all 6 system integrators and service providers bid Cscaler. We are seeing customers increasingly migrate away from their large installed base of legacy on prem gateway and security appliances. To pursue direct to cloud architecture. In 1 new customer win, a Fortune 50 retail customer replaced a legacy web gateway with ZIA for cyber security and data protection. This customer purchased ZIA Professional Bundle plus CASB, SandBox, and DLP for 45,000 users.
Security was a major requirement and only a proxy architecture with SSL inspection was considered. This deal was a good example of Zscaler leveraging our tech partners where CrowdStrike became the endpoint security provider and Microsoft, the against the provider. I'm very pleased with a growing success with the financial industry where adoption of cloud is accelerating. A Fortune 100 Financial Services company purchased our Transformation Bundle with Advanced DLP and Caspi for 18,000 employees to overcome capacity issues with their security appliances when they deployed Office 365. Fireabout based technologies were ruled out due to strict security requirements for SSL inspection and DLP with exact data match.
As these three deals show, our comprehensive data protection offering within ZIA has been gaining traction as customers are concerned about data leakage with employees working from anywhere. Our new auto event CASB is helping us displace CASB point products and increase our deal size. The most common themes in our customer wins are to increase user productivity, reduce business risk simplify IT and reduce cost. The Zscaler platform enables this by consolidating and eliminating point products. Moving on to ZPA.
Our customers view ZPA as the foundation for their architectural shift to 0 trust access for private applications. Our platform eliminates the internet attack surface of customers applications, resulting in reduced business risk. ZPA is a clear market leader with proven maturity and scalability. We are supporting 100 of large enterprises in the complex multi cloud environment. Let me highlight 2 ZPA deals in the quarter.
First, a global bank with headquarters in Europe needed to scale its remote access after the legacy VPN and VDI became a performance bottleneck and a security concern. The IT team had to cope with over 4000 troubles tickets per month from users having issues with their connectivity. This customer purchased ZPA for over 100,000 employees to deliver a seamless, always on experience. While the immediate objective for the steel was to replace legacy VPN CPA was selected to implement 0 trust architecture by establishing an application level policy where users connect to specific applications, not to a network. In another deal, a Fortune 500 tech company purchased ZPA to accelerate M And A integration.
After 1 year, 6000 employees at the acquired division, we're still using 2 laptops with separate VPNs to 2 separate networks. Integrating 2 complex corporate networks can take problem. Without having to connect to corporate networks, CPA provides secure application access across both companies in weeks purchasing our high end ZPA offering. The customer is leveraging ZPA's multiple identity support to accelerate deployment. The customer plans to use ZPA as a standard solution for future M and A, a core strategy of growth at this customer In addition to ZPA, the customer purchased ZD X for 6000 users to quickly troubleshoot issues and increase employee productivity.
To close my business review, I will touch on some early success with our new emerging with our platform and emerging products wins in the quarter, including an upsell with a European bank for 40,000 employees. This customer had ZIA for all employees, and it was frictionless to turn on ZDx to get end to end visibility and resolve performance issues. We also had wins for our CSPM offering, giving us additional opportunities for growth. Our emerging products are increasing our overall competitive differentiation. For large enterprises, who want network and security modernization.
We believe we are the only cloud native multitenant platform that meets the needs Zscaler is the largest in line cloud security platform in the world. We are processing more than 140,000,000,000 transactions daily, while preventing 7,000,000,000 security incidents and policy violations. Deployed across more than 150 data center Our 0 trust exchange platform was built from the ground up for the secure access service edge or Sassy Framework. Building a cloud native architecture with full security and minimal latency is very hard and running a massive in line global cloud with 5 nines of availability is an order of magnitude harder As the world moves to Sassy Framework And Zero Trust Architecture, some of you have asked about competition and why others can't build a cloud native platform like Zscaler? Well, the answer lies in the architecture.
Which is like the foundation of a building that supports everything. Art Foundation is a multi tenant architecture built from the ground up for in line traffic inspection. It delivers over 20 key security solutions, including antivirus, cloud sandbox, cloud firewall, DLP, advanced threat prevention and SSL inspection at scale. That's extremely hard to build and complex to operate as a cloud without compromising user experience. It is like the difference between building a simple SaaS application versus a highly complex SaaS platform like an ERP.
How many cloud native ERP systems are you aware of since NetSuite started 2 decades ago? While single dimensional SaaS applications are easy to develop multi dimensional platforms like an ERP and Zscaler are much harder to design, build and operate. With our business momentum, we are also demonstrating that our strategic sales process and world class execution are important competitive advantages First, our consultative sales model identifies the value we can drive for the customers and enables them to fully realize the benefits of digital transformation. This strategic sales process requires top sales talent. I believe we are the best sales team top to bottom, and we are hiring at a rapid pace.
We are now a destination for top talent around the globe. 2nd, we are deepening our ecosystem of technology partners, which are contributing to deal wins and adding leverage to our sales model. In addition to our ongoing partnership with Microsoft and CrowdStrike, We have now extended our strategic partnership with VM Bear to integrate with their SD WAN solution. And to partner for joint go to market engagements. We've built a go to market engine that would generate long term sustainable growth.
Now, I'd like to turn over the call to Remo for our financial results. Thank you, Jay. As Jay mentioned,
we are pleased with the results for the first quarter of 2021. Revenue for the quarter was $142,600,000, up 13% sequentially 52% year over year. ZPA revenue was 13% of total revenue, From a geographic perspective, we have broad strength across our 3 major regions. Americas represented 51% of revenue, EMEA was 39% and APJ was 10%. Revenue exceeded our guidance due to stronger than expected deal activity, as the value proposition of ZIA and ZPA is increasingly becoming clear to customers.
Turning to calculated billings, which we define as the change in deferred revenue for the quarter, plus totally recognized in that quarter, billings grew 64 percent year over year to $144,700,000. As a reminder, our contract terms typically 1 to 3 years, and we primarily invoice our customers 1 year in advance. Remaining performance obligations or RPO which represents our total committed noncancel future revenue was $864,000,000 on October 31, up 56% from a year ago. The current RPO is 54% of the total RPO. We had a healthy mix between new and existing customers with new customers contributing over 50% of new and upsell ACV.
Our strong customer retention and ability to upsell have resulted in a consistently high dollar based net retention rate which is 122% compared to 120% last quarter a year ago. As we have highlighted, this metric will vary quarter to quarter While good for our business, our increased success selling bigger transformation bundles, selling both ZIA and ZTA from the start, and faster up sales within a year can reduce our dollar base net retention rate in the future. Considering these factors, we feel that 122% is outstanding Total gross margin of 81 percent increased two percentage points sequentially and was comparable on a year over year basis. Sequential improvement was driven by migrating most of the ZTE infrastructure to our data centers during the quarter as well as timing of expenses. While we are pleased with the gross margin performance, I would like to remind investors that a number of our new emerging products, which include CDX workload segmentation and CSPM will be running in the public cloud until we scale them into our own data centers in the future.
While in the public cloud, these products will have lower gross margins than our core products. As a result, we expect gross margins to be approximately 79% for the full year in fiscal 2021. Turning to operating expenses, our total operating expenses increased 11% sequentially and 33% year over year to $96,000,000. Operating expenses as a percentage of revenue improved by 10 percentage points from 77% a year ago to 67% in the quarter. Sales and marketing increased 12% sequentially and 31% year over year, to $64,200,000.
The year over year increase was due to higher compensation expenses and investments in billionaire teams and go to market initiatives offset by lower teeny with our employees working from home. We've been very successful in hiring onboarding remotely, and we're accelerating our sales and marketing hiring throughout this fiscal year. R and D increased 8% sequentially and 42% year over year to $20,900,000. The increase was primarily due to continued investments in our team. G and A increased 9% sequentially and 29% year over year to $10,900,000.
The growth in G And A includes investments in building our teams, compensation related expenses, and professional fees. Our first quarter operating margin was 14%, which compares to 4% in the same quarter last year. Net income in the quarter was $20,000,000 or non GAAP earnings per share of 0.14 dollars. We ended the quarter with over $1,400,000,000 in cash, cash equivalents and short term investments. Free cash flow was positive $42,000,000 in the quarter, which the meaningful improvement $11,000,000 in the prior quarter $9,000,000 in the year ago quarter.
The strength of free cash flow was driven by strong receivable collections, and better underlying profitability in the quarter. Now moving on to guidance. As a reminder, these numbers are all non GAAP which excludes stock based compensation expenses related payroll taxes, amortization of debt discount, amortization of intangible assets, facility exit costs and any associated tax effects. For the second quarter of fiscal 2021, we expect revenue in the range of 146,000,000 $148,000,000, reflecting a year over year growth of 44% to 46%. Operating profit 11 $12,000,000, other income of $800,000 net of interest payments on the senior convertible notes.
Income taxes of $1,250,000 and earnings per share of approximately 0 0.07 dollars to 0.08 dollars, assuming 144,000,000 common shares outstanding. Due to better than expected first quarter performance and our strong pipeline. We're increasing our full year fiscal 2021 guidance for revenue billings and profit. For fiscal 2021, we now expect revenue in the range of $608,000,000 to $612,000,000 or year over year growth of 41 percent to 42 percent. Calculated billings in the range of $755,000,000 to $765,000,000 or year over year growth of 37% to 39%.
Operating profit in the range of 55,000,000 to $57,000,000. Other income of $2,700,000, income taxes of $4,500,000 and earnings per share in the range of $0.37 to $0.38, assuming approximately 145,000,000 common shares outstanding. We continue to see the market coming to us and remain committed to investing aggressively in our company behind the growth in our business. We have a highly efficient opportunity ahead of us. While we'll balance growth and profitability, growth will continue to take priority considering our significant market momentum.
Now, I'd like to turn the call back over to Jay.
Thank you, Remo. Coming off a record Q1, we're seeing the market coming to us. And validating our vision for 0 trust cloud native platform. We believe we are in the early innings of a significant market opportunity to enable secure digital transformation. The value proposition of a 0 trust platform is resonating with customers and is seeing this reflected in our business momentum over and are delivering world class sales execution, which we believe will drive sustainable long term growth.
Thank you for your interest in Zscaler. Operator, you may now open the call for
I show our first question comes from the line of Sterling Auty from JP Morgan. Please go ahead.
Yes, thanks guys. So Jay, you mentioned financial services a number of times in terms of the traction that you're seeing. Where would you say or where would you characterize the a little bit more color on what's going on in terms of what's
going on in terms
of raised.
Sterling, thank you. Financial services have been slow in embracing cloud. But now they are all opening up their embracing cloud and Office 365 is becoming the catalyst. To make Office 365 work, There have to be some transformations in the network and security, and we've done so much work with Microsoft to make sure Office 365 can be enabled securely delivering faster user experience. So that's becoming our number one application to get into that space then it's expanding from there.
Remo, you want to add anything to it?
Yes. So, I mean, the 3 top verticals that we have are financial manufacturing and health. But we're brought across all verticals. So there's really no vertical that's dominant. So, we haven't given out the percentages of each of those verticals, but we're very broad.
Thank you. I show our next question comes from the line of Matt Hedberg from RBC Capital Markets. Please go ahead.
Hey, guys. Thanks for taking my question. Congrats on really strong results here.
Jay, I'm curious the conversations with CIOs obviously are showing up in numbers, really the importance of Zscaler. I'm curious though, how are those conversations in the tone of a vaccine, I mean to me it would feel like a lot of the momentum has sort of cemented the change, but I'm sort of curious on sort of post team, what do you think the tone of buying behavior is in your target customer?
Yes, lots of questions are being asked pre COVID post COVID and whatnot. If you look at our record pre COVID, we have very good growth. Our business is accelerating. It's driven by acceleration and digital transformation. Not COVID.
COVID was a catalyst in shaping of inertia. The change in mindset has accelerated demand for 0 trust. When I talked to CIOs, they tell me we did not realize how important it was to do transformation, being able embrace cloud for collaboration for security and the like. So they are really moving faster than they did before. And so momentum to our business really has picked up because it has highlighted the limitation of the old legacy and old network.
And need to transform and this transformation works. So we are pretty bullish. We think even after vaccine, on business will keep on accelerating.
Yes, one follow on with Jay is that we take a look at our pipelines our pipeline is accelerating. So we're seeing, an acceleration in our pipeline, and that's across the board, both in CIA and CPA.
Thank you.
I
share our next question comes from the line of Saket Kalia from Barclays. Please go ahead.
Okay, great. Hey guys, thanks for taking my question here. Jay, maybe for you, the question is, do you have any statistics or just general thoughts on how many of your engagements are competitive, meaning a competitive bake off process versus perhaps being brought in by a service provider where there really isn't a competitive process. That makes sense?
Yes, Saket, thank you. Yes, your question reminds me of my days at Ear defense of Cypher Trust when I used to sell security appliances, and we used to have lots of wake ups, which box is faster, which box is cheaper. You know, at Zscaler, We're all driven by transformation. Transformation is not a box you sell. It actually starts with CIO level discussion to help them enable the applications to network to security all of them together.
So most of our deals at the higher end at the large enterprise level, aren't really competitive much at all. When you come to lower end We do see some of the competition, but wake ups are rare. In fact, I highlighted, when in my prepared remarks, where even though there was RFP that we won with a managed services partner, all 6 SI and SPs, bit Zscaler, okay. I mean, very proud of it. That's because the customers and the SISP channel understands that you can't take typical legacy boxes and try to make them do transformation.
So when it comes to competition, I think we got some big, big lead, unless someone tries really purpose built something, have good architecture. We'll maintain this lead.
I show our next question comes from the line of Alex Henderson from Needham. Please go ahead.
Thank you very much. Hard to decide what's more to like in your numbers. The margin expansion or the accelerated top line, good job. I wanted to look forward a little bit, if I could, with you, talk about, machine to machine environments. Domains and domain and what you're doing on that front.
It seems pretty clear to me that as we see more and more modern applications, coming out that it's not just the cloud direct architecture that's important, but actually the cross domain traffic. Can you talk a little bit about how you participate in that and what you're doing to secure it?
Yes. The 2 aspects of your question. One is, machine to machine or act to our communication within a public cloud. And the second part is across clouds, maybe Azure East and Azure West type of stuff. You know, while companies are trying to do this doing traditional network security way, doing virtual firewalls and whatnot, we have taken 0 trust approach to the public cloud where we can have app to app communication.
And where we we have the 0 trust of switching technology, we needed identity technology identity for various apps would be built, using the acquisition we did a few months ago a company called EdgeWise Networks. So with that, we can do within the data center machine to machine communication without doing network segmentation, and achieve app segmentation. And we can also go across clouds. But having said that, that's a young market, that's an Asian market, it needs an education. So it'll take some time for the market to grow.
But if we are well positioned to go in early, and get positioned there. That's a big area of investments for us.
Thank you very much.
Our next question comes from the line of Walter Pritchard from Citi. Please go ahead.
Hi, I'm wondering, Jay, on the cloud, workload protection market, there's you're in that market, fairly new products for you. A number of players are in that it. Could you help us understand what you're seeing in the early deals and sales cycles there? Who's the competition is the buyer the same as the buyer that you've generally been selling to? And the differentiation you have there when you're competing in that market kind of as maybe a starting point or when it's a pretty competitive situation?
Thanks.
Thank you. Good question, Walter. Cloud protection is not one piece of multiple pieces, and they're in different stages of the market. CSPM is one area where we are actually competing well that's a fairly well understood and fairly simple market. Your cloud traffic from Azure AWS workload going to Internet, which most of these workloads do.
You can try to do some virtual fire warning and whatnot, which doesn't work, or you can simply send it through Zscaler internet access by simply pointing traffic. A very well positioned in that part of the segment. Then the 3rd segment is what Alex asked about, machine to machine communication and why not app to app. That's a younger area. And that's where we see some young players, some start ups in the game, but generally the market being so young.
There's not a whole lot of competition in that space. And only selected customers are kind of trying to pursue that. I see many customers that I tried to do network segmentation doing this and this hasn't worked at TriNet. And the buyer is somewhat different, as you said. There are 2 types of buyer for cloud protection.
One is actually the IT organization that's actually building application, the DevOps team, because they are actually driven by application, and they offer no security. Then CISO comes and say, wait a second. You can do things fast, but you must put security in place. So we end up dealing with 2 parties. CISOs, we already deal with and DevOps Party that's a little bit new for us to get to know and learn.
Thank you. Thank you. Thank you.
Thank you. I show next question comes from the line of Tal Liani from Bank of America. Please go ahead.
Hey guys, great quarter. I want to my question is more higher level. I'm trying to understand the expectations for next year. So if I look at your guidance and I add a little bit more for beat and raise, which you have done in the last few years, you're going to be staying in the same growth rate we've seen this year. And I'm trying to get the qualitative part of you have older solutions and you have newer markets.
How do you view the growth rate in older solutions like ZPA, how do you view your level of competition there, new customer ability to gain new customers versus grow with existing customers And then same question about your newer areas. What are the driving factors? I'm trying to understand how to build a spreadsheet for next year when it comes to the various solutions that you're offering?
It's a very good question, Tal. Think about the 4 key solutions we talked about ZIA has been a workhorse, has been growing rapidly. But in spite of that, If you look at our penetration in Global 2000, we are just under 25%. And there's a big market majority of the market sitting open out there. In fact, there's still a sizable market of legacy where proxies like Blue Coat and that that's to be removed and we are taking more and more part of that.
So that's kind of one piece. And ZIA is not one product, as you know, ZIA is a portfolio of several offerings and more and more customers are buying either bigger bundles like transformation to start with or they're moving up from business bundles or professional bundles. So that's a pretty sizable thing on ZIA. We know we're close to leveling off at all. ZPA, relatively younger, only about four years old, have gone from 0 to about 30% of the new business in that range.
And if you look at our customer base, just about in the mid-thirty, somewhere 30% or so of the global 2000 ZIA customer have ZPA So even in our installed base of the IO, there's a big market out there. So we think these 2 big proven product portfolios, I call them 2 big pillars. They have plenty of room for opportunity. And in the ZI ZDx digital experience is becoming an interesting product. It's a new product a new area because as you go over the Internet, no one has any meaningful offering to let someone know end to end response time.
We expect pretty good growth for me. One day, we expect almost every user will have ZIA CPA and CDX. That's the way we are driving towards. The 4th area is new area, the cloud workload, the data So I think that Mark will take some time to mature. As Zima has said, we are not really putting tons of revenue in some of the new areas.
But you shouldn't think about CASB type of things as new products. I mean, they're part of they're new, but they're part of ZIA portfolio. They automatically are hatch to our ZIA bundle. In the same way, we're seeing browser isolation picking up, which either goes with ZIA or goes with ZPA, but plenty of room in all areas. And I always said to my sales leaders, we have lots of product to sell.
Let's scale our sales organization. And that's what we are focused on. We are focused on growing go to market, which is doing very well. So excited for next year. Graeme, did I cover it?
Yes, I mean, it's a great question. I mean, you take a look at the percentage of customers that have transformation. We indicated it was 49% in the last call in July. And it's gone up this quarter has continually gone up. CPA, 13% of revenues So big opportunity with our installed base for that and our emerging products.
We had an acceleration in growth of new customers in Q1. Versus the growth in Q4. So we're seeing momentum. We're seeing deal sizes getting bigger. We're seeing the need for transformation on a broader scale.
And as Jay mentioned, driven by COVID. But COVID started the the visibility. What we're seeing right now is the realization on the part of, CIOs and others and companies at high levels We understand that the legacy architectures they've got are really not the right architectures. That's what's driving the business for It is that. In addition to that, proof points that we have, pipelines, interest, productivity,
just a, there's you feel the momentum.
You feel momentum that's coming our way. The what it comes down to, at the end, it comes down to the people, it comes down to the execution. The market is there. The product is there. The vision is there.
And I believe the people are there also. And I think in the
past three quarters, we had done amazing job in scaling our go to market which was the last piece we needed to scale. And we're very feeling very good about it. Agreed. Thank you.
Thank you. Our next question comes from the line of Hamzah Fudula Lala from Morgan Stanley. Please go ahead.
Hey guys, thank you for taking my question. Jay, a question for you. You mentioned earlier that COVID has been a catalyst for Zscaler more longer term in terms of the market. Coming to you in terms of customers coming to you for cloud transformation deals as well as talent coming to you as well. And, you mentioned a really strong hiring environment for you guys.
I'm wondering where are these newer hires coming from? Are they coming from some of your competitors within the security space or is it coming from outside the security space? Can you give us any sort of color on that?
Yes. So, first of all, I think a hiring is happening at a faster pace than we had even expected. So very good. Actually, remember about a year or 2 years ago, we used to say we are behind in hiring sales reps. You might recall that, all that is past.
I think probably a brand is helping well known out there. Also, our sales leadership has put a deep and wide leadership in place. And then getting more specific to answer your question, if you look at 2 broad areas of sales hiring, even though there are multiple areas beyond that are RSNs. Typically, sales reps are not coming from box selling background. Majority of our sales that come from solution selling SaaS type of background because our sales is very different from than a typical box security selling.
So they come from generally software and SaaS type of companies by and large. That's number 1. On the technical side, the SC side, we generally hire from someone that comes with a little bit network and security background because they need domain expertise, which takes a little bit longer. But we are getting tons and tons of interest, and we are trying to stay selective when we hire. But we are pretty much tracking our progress on hiring very well.
Yes. On a net hiring basis, one of the things I'd like all out. We had a record quarter for net hires,
in
the quarter. We hired over 260 people. A quarter before it was 200, a quarter before it was 150 and before that, it was $100,000,000. Of that $260,000,000, about 60% were in the sales and marketing area. We had a record quarter for quota carrying sales rep hires in Q4.
We had a comparable number in Q1. We are accelerating the hiring even more than what we had anticipated on our last call, given what we're seeing.
Got it. Super helpful. Thank you.
Thank you. Our next question comes from the line of Patrick Coeville from Deutsche Bank. Please go ahead.
Hi, guys. This is Dan Kallo on for Patrick. Congratulations on a great quarter. I just wanted to ask on the pricing environment. Obviously seems really strong.
I'm just curious if you guys could comment on how prices have trended and then obviously really impressive retention rate. So I'm curious how much of that is adding new products on versus expanding more into the organization, if that makes sense?
Yes. So it's a comparable pricing environment our price per user did go up, quarter to quarter. Related to what drove the retention rate. As Jay mentioned, the emerging products are not significant impact. So it's more of the existing products you know, the movement to transformation, as well as EPA, which is what drove the, increase in net retention rate.
Yes. Great. Thank you.
Thank you. I'll now question comes from the line of Brian Essex from Goldman Sachs. Please go ahead.
Great result in the quarter. Jay, I was just wondering if you could maybe give
a little bit of color
on the sales force and the maturity of deals that you're seeing. I think in your 10 K, it looked like customer growth was just over 15%. But it sounds like deals are getting larger, as you noted, record number of 7 figure ACV at ACV deals. Could you maybe help me understand, what is the mature what factor is the maturity of the sales force playing into the type of deals that you're seeing, how much is new customer versus expansion of the expansion into your installed base or better penetration into your installed base? And how do you see that maturing throughout the rest of the year?
I know that you noted previously that the elevated hiring in last year should drive, better growth in the back half of this year. Is that Is that accelerating? Just maybe get a little bit of color in terms of the level of confidence you have, for growth through the back end of the year based on the deal activity and sales force maturity?
Yes, Paul, that's quite a few questions. So let me give it a piece at a time. Salesforce maturity, right? Since Dali joined us, we spent about 3 point 4 quarters to make sure we bring in a systematic and disciplined sales process, sales enablement and sales metrics to understand the business leading indicators and all that stuff, plus putting a number of leaders in place. So you asked me, what do I think about the maturity of the sales organization?
I said, extremely happy, very good about it, because having that in place drives the rest of the staff So very comfortable. And it's because of that comfort, we are accelerating hiring more and more sales people in the field. Next, question is related to, deals, customers, new customers, customer growth. I think if you look at one number holistically that out of whatever 4500 or 48 and whatever those customers are, those percentages will be misleading because there's small customers and large customers, we need to get to a level where we start kind of looking at proper segmentation and growth within segmentations. We our big focus traditionally has been large enterprises.
And we have done extremely well amount of penetration we're doing in those customers in terms of percentage. And in terms of the DU that ARR, we're having those customers is actually going up very well. We're very pleased with that. And as I finish, I'll let Remo talk about some of those numbers. And then we're also expanding more into the lower enterprises, so to speak, I think over time, we'll give you more color so you can start computing the growth better.
But if you look at the segment, we are now getting more focused on 2000 user to 10,000 user segments because we already got the largest segment over 10,000 in pretty well covered and we are getting great wins out there. So there's a big market for us to come downstream and expand as well. Anyone you want to add for?
Yes, I mean, the, Jay is absolutely correct. The ARR per customers is definitely increasing. 1 of the One of the ways we break it out is, customers with greater than 3000 users were over $450,000 ARR per customer, which is up year over year. It just keeps on going up. New customer growth, we stated it's within the range or historical range of 50%, 60%.
As I had mentioned before, we had an acceleration of new customer growth in Q1. Also, the comment about sales productivity,
the thing to keep in
mind, which is really encouraging, is that, significant majority of the RSN headcount increase occurred in the second half of fiscal twenty Also, the comments that I made in Q about Q1 that the hiring that we had for RSMs in Q1 was comparable to our record quarter in Q4, and our sales productivity on a year over year basis in Q1 was up. Those are all good indicators from my perspective and give me confidence but, things are looking strong for the company as well as what we've put in place, the structure, the organization, I can I've been around for a long time. And I've seen a lot. I've never seen anything like we've got here at Zscaler with our go to market, quite frankly.
Super helpful, multi card answer. I appreciate it.
Thank you. I show our next question comes from the line of Andrew Nowinski from D. A. Davidson. Please go ahead.
Hey, great. Thank you, gentlemen. Congrats on a great quarter. I just wanted to ask about the partnerships. So you announced a new partnership with VMware and you've always had a very strong partnership with Microsoft.
So I'm just wondering, if Microsoft contributed to the record number of 7 figure deals you had quarter and how you're thinking about the new partnership with VMware?
So let me let me start with VMware has been a good partner for us, the portfolio of SD WAN. If you look at SD WAN, we have always said that SD WAN is a good complimentary area for us and we have been actually securing some very, very large SD WAN deployments healthier. And it was natural for us to team up with with VMware. So what did we do? We had done integration.
So those SD bands can be deployed a lot more easily with a single click. And but more exciting than that, we are actually working them on with them on a number of joint go to market initiatives, our sales people are kind of doing joint account planning and we've got a number of market initiatives. So We think that'll be a good partnership for incremental revenue for both the companies. That's on the VMware side of it. Microsoft, you know, that partner goes, for several years, it started with helping Office 365 deployments with great user experience, single configuration type of deployments, and then expanded beyond to Azure AD to Azure Access to Azure Centennial and even endpoint areas.
Microsoft is pushing now Office 365 in financial services because they have been the late adopter of Office Day 3 65. And that's particularly helping us because those large companies want to make sure this deployment goes well. And Zscaler is the go to go to partner in those deployments. So Microsoft is helping or we are helping Microsoft, and they're helping us. In these financial services customers.
I'm not sure if any of the specific deals this quarter were impacted by Microsoft, But in large companies, there will be large deals where we'll be working together with Microsoft to close those deals. Raimo, did I
miss something? No, I got it. That's great. Thanks guys.
Hi, sure. Next question comes from the line of Fatima Boolani from UBS. Please go ahead.
Good afternoon, gentlemen. Thank you for taking the questions. Jay or Remo, I wanted to hit back on some of the commentary in the prepared remarks around ZPA. ZPA deployment. I mean, we've gone from 0 to mid teens percentage of your revenue now derived from ZPA.
So I'm wondering, and appreciating some of the bigger picture factors that are driving the demand for ZPA. I'm wondering if you can be more specific about where some of the budget dollars are coming from that are getting reallocated in your favor for ZPA adoption And to what extent is there more expansion runway here that hasn't necessarily been pulled forward because we've all started working from home overnight over the course of this year. So just, getting some more specificity around where should the Z PA budgetary dollars are being earmarked away from in your favor?
So if you think about it, While a lot of stuff we do, our transformation, generally, there's an entry point for each area that's the easiest one from budget point of view. So VPN ends up being the entry point as the first point. But as we have said many times, ZPA is being bought for 0 trust implementation. In the past 1 year, I have seen interest in 0 trust gone big, big time. And it's a specific architecture where you don't put connect users to the network.
So any product that's a VPN related, whether it is an on prem product, or it's a cloud based VPN, it's still VPN and doesn't really get counted as a 0 trust offering. So it starts with taking out the VPN budget. But more importantly, all the wins we are having are are being done but also to cloud applications sitting in Azure AWS. And more and more customers want to implement 0 trust, even when you are in the office. So we don't think the ZPA wins are coming because some of the deals are being pulled forward.
We think COVID is the accelerating and showing the need for 0 trust, being able to access anything from anywhere. And we see this acceleration continuing So very confident about that, the ZPA projection and that's reflected in the pipeline we're seeing for ZPA. Yes, with, for new customer business,
you take a look at what percentage of our new customers are buying both ZI and ZPA. It's in the high 30% range. That's up from Q4. It was low 30% range. That's what's resonating.
That is the digital transformation occurring that we see. So that it's again, the things that we're seeing internally related to what's occurring in in the market indicates that digital transformation is top of mind for many IT professionals and Zscaler's kind of great solution or the best solution for them. And so that's giving us confidence.
Yes, if I may say the combination of ZIA and ZPA ensures that any user can work plenty of their office home, wherever. And that's where the dealer trust comes in. It's the same user experience, same level security, same level policy. Is that's what CIO is implying.
Thank you. I show our last question comes from the line of Catherine Trebnick from Collin. Please go ahead.
Oh, congratulations on a phenomenal quarter. You had said in your prepared remarks that you had done well in the 3 verticals, finance, health care, and manufacturing, but it seems like the federal government is a pretty big greenfield for you in 2021. And can you describe or give us some background on what you're doing to prepare to do well in that because they're also moving to Office 365 similar to the financial folks? Thanks.
Yes, Kathleen. Thank you. Federal is a big opportunity for us. And our business is making good progress sales. Our market, we have a sizable team in place now.
We have some very good FedRAMP certifications. And we've got a growing pipeline in 'twenty one and beyond, we expect federal to be a bigger part of our business. Raymond, do you want to give a color off Yes. We had it just now.
Yes. Federal in Q1 was mid single digit of our new and upsell business. And as Jay mentioned, we're very pleased with the progress of our and see that as a substantial opportunity going forward.
So I think we're done with the questions. Then I would like to say thank you for your interest in Zscaler. We hope to see you at Zenith Line and upcoming several investor conferences that we are participating in. Goodbye. Great.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for attending. You may disconnect.