Good day and welcome Scaler's 1st Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Bill Choi, Sir, please begin.
Good afternoon and welcome to the Zscaler 1st quarter 2020 earnings conference call. On the call with me today are Jay Chowdhury, Chairman and CEO, and Remo Canessa's CFO. By now, everyone should have access to our earnings announcement which can be found on our website in the Investor Relations section. In addition, a supplemental financial schedule is available for download at ir.zscalerdot com. Please note, unless otherwise noted, all numbers we talk about today, other than revenue 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. For historical periods, The gap to the non GAAP reconciliations can be found in the supplemental financial information referenced a moment ago. Let me remind you that we'll be making forward looking statements during today's discussions, 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, 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. Our actual results may differ significantly from those projected or suggested in any forward looking statements.
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, that could impact our future operating results and financial condition. Please see our filings with the Securities And Exchange Commission as well as in today's earnings release. Would like to inform you that we will be participating in several upcoming investor conferences.
Next week, management will be at the UBS Global TMT Conference and Cowen's Networking And Cyber Security Summit in New York City, and also the Barclays TMT Conference in San Francisco. On January 14, we will be at Needham's Growth Conference in New York. Now I'll turn the call over to Jay.
Thank you, Bill, and thank you everyone for joining us. We reported solid Q1 results delivering strong revenue and operating profit while making strategic investments to scale our go to market machine to the next level. Our revenue grew 48% and billings grew 37% year over year in Q1. And we're increasing our outlook for revenue and billings for the full fiscal year 2020. Adoption of the ZIA transmission bundle continues to grow.
And ZPA remains our fastest growing product. I'm thrilled ZPA together, which provides a single platform for secure cloud transformation. That we believe no other vendor can match. As you know, Dolly Reich, joined this September as our President GoTo Market And Chief Revenue Officer. I'm excited about the key initiatives Our sales leadership is putting in place to position us well for the long term at our recent Zenith Live cloud summit.
I was pleased to hear CIOs, CTOs, and CISOs, of Global 2000 Enterprises, sharing with pride their cloud transmission journeys enabled by C Scalar. That delivered lower costs, improved security and provided a fast and reliable user experience. I'm very proud that Gartner recently recognized Zscaler as a leader in the secure web gateway Magic Quadrant. For the 9th year in a row. And vision, significantly separating us from the competition.
We pioneered the cloud native integrated security platform and our cloud service is trusted by over 3900 customers including over 400 of the Forbes Global 2000 to access applications no matter where they live. The Zscaler cloud processes over 80,000,000,000 transactions per day, which is over ten times the number of Google searches per day. This provides an unprecedented network effect which allows us to deliver superior security to our customers. To pursue a massive opportunity Huri Appliances. Let me now highlight a few wins in Q1 that showcase what we believe are our sustainable competitive advantages.
I will start with an upsell that highlights the scalability and elasticity of our cloud. This Fortune 100 customer purchased our professional bundle for all 40,000 employees 3 years ago. In Q1, they tripled that annual business with us by upgrading to business bundle adding additional users and purchasing protection for server traffic going from the data center to their public cloud. They deployed local internet breakouts at over 1000 locations. During the cloud journey, including rolling out Office 365.
Their internet traffic increased exponentially reaching 1.2 petabytes per month, which is equal to 10,000,000,000 photos in Facebook. And their IT leaders praised the elasticity of the Zscaler cloud when a company wide video conference call by the CEO went flawlessly, even though the network traffic doubled during the event, How would a single tenant security cloud possibly handle this? Now I will share a new logo win of a Fortune 100 customer that needed to uplevel their security. Unlike most large enterprises, they had no proxy gateways and instead relied upon next gen firewalls for the user traffic to the internet. No wonder they had a high risk posture.
They purchased ZIA transmission bundle for all 14,000 employees. With Zscaler, they can detect and prevent advanced threats and 0 day attacks, which are increasingly found in encrypted traffic. This results in better security. Next, I will highlight the win that illustrates benefits of our Edge cloud capabilities. And enables faster M and A integration.
A top global health care company that bought our business bundle and cloud firewall for 30,000 employees 18 months ago purchased an additional 30,000 seats to integrate a recent acquisition. The 2 companies have a combined global presence with hundreds of locations across 70 countries. Each company had embarked on a network transformation journey for local internet breakouts, but with 2 very different approaches to security. The acquired company was a next gen firewall shop, with scores of firewalls deployed in branch offices, giving a false sense of security as 95% of the web traffic is encrypted and was not being inspected. To integrate the 2 companies, they standardize on Zscaler.
Implemented SSL inspection and are ripping out all the branch firewalls. The result, significant savings and a big improvement in the U. S. Federal market. Last year ZIA and ZPA received FedRAMP certification at the moderate level And last month, ZPA reached FedRAMP Readiness at the high impact level, which put Zscaler in an elite group of technology companies.
ZIA is the only FedRAMP certified secure cloud Internet gateway today. ZPA is the 1st and only cloud security service. That has received FedRAMP certification for 0 Trust remote access. This positions us very well in each with an annual contract value greater than $500,000. The first win is with a large strategic agency with an initial order for CIA and ZPA for 15,000 mobile users to deliver secure access to applications with 0 trust network access.
The second agency purchase the complete CIA and CPA platform for all 6800 employees. To enable cloud transformation to secure SD WAN deployment for local breakouts and to provide direct access to any application from only 2 years pant's largest transportation companies, purchased our ZIA business bundle and cloud Sandbox for all 30,000 employees to secure local breakouts and increased security for all users. Non proxy technologies, such as NextGen firewalls, were not considered since comprehensive security was important. A common theme of all these wins is that a cloud first world requires a cloud native architecture. In a recent groundbreaking research note, Gartner defined a new product category named Secure Access Service Edge or SASE pronounced Sassy.
Gartner predicts that a future of network security is in the cloud, and most organizations will move their network security to a SaaSD model. Importantly, Gartner recommends reducing the complexity of network security by moving to one vendor for secure web gateway, CASB, DNS, 0 trust network access, and remote browser isolation capabilities. This is the scaler. We strongly believe this validates our vision when all principles Gartner has outlined for Sassy. Number 1, Sassy demands that the security providers offer security at the cloud edge.
Close to the user for good user experience. Zscaler provides inline security at the cloud edge in more than 150 data centers around the world In contrast, legacy security vendors claiming to offer a Sassy service are spinning up virtual machines on public clouds with traffic backhaul through centralized compute. That is not security at the edge. That is not Sassy. Number 2, Sassy recommends that a branch office should have a light footprint with simply an SD WAN router.
And all security services in the cloud. While the Zscaler cloud is a light branch architecture, the legacy firewall vendors are peddling heavy branch appliances. Again, that is not Sassy. Number 3, Gartner specifically says, quote, many of the chassis capabilities will use a proxy model end of quote because a proxy is required to inspect encrypted traffic. These killer meets this requirement while NEX and Firewalls don't.
Hence, NEX and Firewalls are not Sassy. Number 4. Lastly, Sassy advocates a cloud native multi tenant architecture. Which is the foundation of the Zscaler cloud platform. You can't take legacy single tenant security appliances and stick them in the cloud as virtual machines and call it cloud security.
That would be like placing thousands of DVD players in a public cloud and calling it a Netflix streaming service. In summary, Zscaler was designed for the Sassy world that Gartner has spelled out. Some of you have asked questions about competition from next in firewall vendors. Over the last ten years, we have faced various competitors starting with large legacy secure web gateway vendors who claimed to offer a cloud security service. Where are they today?
As security must move to the cloud, legacy firewall vendors are now making similar noise. Next and firewalls are designed to build a moat around the castle, to secure the network and the data center. They are the wrong architecture for securing users. The next question is why can't they build a platform like Zscaler. Well, to answer lies in the architecture.
Architecture is like the foundation of a building. You can't change the foundation unless you start all over, which is hard. And takes a long time. We know that startups like Salesforce And Workday competed and won against much larger on premise incumbent vendors because of the cloud native architecture. We believe we are doing the same in the network security space.
Let me talk about our products I will highlight a few innovations and Zscaler Digital Experience or ZDx, the 2 major product lines we announced at Zenith Live are getting great initial feedback from our customers. The auto band CASB that we announced at ZEMF Live is receiving very good early reception. Combined with our existing inline CASB capabilities, We will now offer a complete CASB solution. Is ahead of plan and is already being tested by customers. Building upon the TrustPath acquisition we did last year, We have significantly enhanced our threat detection capabilities with machine learning and AI.
Moving on to tech Partnerships. To complement our comprehensive platform, we believe in partnering with tech leaders. This provides an integrated solution for customers and creates go to market leverage for Zscaler. For example, We have a deep and wide partnership with Microsoft Office 365 and Azure Public Cloud. Microsoft named Zscaler, the 1st and only cloud security provider, to be a certified partner in the Microsoft Networking Partner Program or NPP for Office 365, which has stringent requirements for user performance.
Microsoft only recommends NTP partners for Office 365 connectivity. We are working closely with both VMware and Silver Peak, the only 2 leaders in Gartner's recently published SD WAN Magic Quadrant. Let's now turn to our go to market. Zscaler is an enabler of cloud transformation. As a result, we have a different top down sales process and go to market strategy than Lexi vendors.
As I stated during the last earnings call, we are focused on improving our sales execution, to take Zscaler beyond a $1,000,000,000 in revenue. That is why I'm excited to have Dolly on board as he's building a highly scalable go to market machine. He has already driven rapid and tangible progress building a multidimensional go to market model, putting us into a great position to scale. Let me give you a few examples. We implemented a more refined metrics based model of accountability and transparency giving us better visibility into how our businesses run.
We are ahead of our plan to build a new sales process and enablement program that will deliver consistent and high level execution in the field. It is already having a meaningful impact in our day With all that, we have implemented in a very short time. I'm very pleased with our progress and confident that we are building a solid foundation for a highly scalable sales machine for our long term growth.
Now I'd like to turn over the call to Remo for our financial results. Thank you, Jay. Revenue for the quarter was $93,600,000, up 9% sequentially and 48% year over year. From a geographic perspective, for the quarter, Americas represented 51% of revenue, EMEA was 41% and APJ was 8%. Turning to calculated billings, which we define as the change in deferred revenue for the quarter, plus total revenue recognized in that quarter.
Billings grew 37 percent year over year to $88,300,000. As a reminder, our contract terms are typically 1 to 3 years we primarily invoice our customers 1 year in advance. Remaining performance obligations or RPO, which represents our total committed non cancelable future revenue, $555,000,000 on October 30 1, up 35% from $411,000,000 1 year ago. Our strong customer retention and ability to upsell have resulted in a consistently high dollar based net retention rate. Is 120% for the quarter ended October 31.
This compares to 118% a year ago and last quarter. Our increased success selling bigger deals starting immediately with our transformation bundle and faster up sales within a year while good for our business and reduce our dollar based net retention rate, which is calculated on a year over year ARR basis. Considering these factors, we feel 120 percent is outstanding and it will vary quarter to quarter. We are pleased with the continued adoption of our comprehensive cloud perform by our customers as they increasingly rely on us for their transformation journey. In fact, 2 thirds of our top 25 customers were also customers 2 years ago, and the cumulative ARR has more than doubled over this period.
Total gross margin was 81%, flat sequentially and down 1% year over year, we feel that 80% continues to be a good target range in the near term as it is important to continue to invest in our platform to drive top line revenue growth. Turning to operating expenses, our total operating expenses increased 17% sequentially and increased 44% year over year to 72 $700,000, but decreased as a percentage of revenue to 78% compared to 80% last year. Sales and marketing increased 20 sensation expenses and the cost of 3 major marketing events, Zenith Live Americas, Zenith Live Europe, and our sales kickoff. R and D functionality and innovate new products. G and A increased 6% sequentially and increased 32% year over year to $8,500,000, year over year growth in G And A includes investments in building our teams.
These expenses exclude $2,000,000 in litigation related expenses. Our first quarter operating margin was 3%, which compares to 2% in the same quarter last year. Net income in the quarter $4,100,000 or non GAAP earnings per share of $0.03. We ended the quarter with $378,000,000 in cash, cash equivalents, and short term investments. Free cash flow was positive $9,400,000 in the quarter compared to positive $5,200,000 for the same quarter a year ago.
Our ESPP program increased our free cash flow by approximately $3,000,000 in the quarter, same as a year ago. ESVP program does not impact overall cash balance. Now moving on to guidance. As a reminder, these numbers are all non GAAP, which excludes stock based compensation expenses, amortization of intangible assets, certain litigation related expenses, and any associated tax effects. For the second quarter, we expect revenue in the range of $97,000,000 to $100,000,000, reflecting a year over year growth of 31% to 35% For the year ago, comparison, recall that Q2 2019, revenue was aided by $2,300,000 in non recurring revenue from a large public sector customer deploying our platform as a private cloud.
Excluding this revenue from last year, guidance reflects 35% to 39% growth. Operating profit in the range of $3,000,000 to $4,000,000, income taxes of $900,000 and earnings per share of approximately 0 point 0 $3 assuming 138,000,000 common shares outstanding. For the full year of fiscal 2020, we expect revenue in the range of 405 $1,000,000 to $413,000,000 or year over year growth of 34% to 36%. Calculated billings in the range of $500,000,000 to 5 10,000,000 or year over year growth of 28 percent to 31 percent, operating profit in the range of $15,000,000 to $18,000,000, In Q4, we expect to host our annual Zenith Live events in both EMEA and Americas. We expect the cost of these two events to be in the range of $5,000,000 to $6,000,000.
Income taxes of $3,600,000 and earnings per share in the range of $0.13 to $0.15, assuming approximately 139,000,000 common shares outstanding. Our guidance reflects our plans to invest aggressively in our business to pursue our significant market opportunity. We are pleased with the progress our CRO is making. And we are confident he is the right person to drive our sales and go to market execution. We are stepping up sales and marketing investments in order to build the foundation for long term growth.
In addition, we will increase investments in our technology platform and cloud infrastructure. As you model billings, I want to remind you that historically Q2 and Q4 have been our strongest billings quarters with sequential declines in Q1 and Q3 quarters, respectively. With our outperformance in Q1 billings, we now expect first half billings to be approximately 43% of full year billings compared to our prior expectations of 42 to 43%. Also, please keep in mind that we have a large upfront billing of $11,000,000 in Q2 2019 from a large public sector customer deploying our platform as a private cloud, which will pose a tough year over year comparison in Q2. Excluding this deal, our billings guidance for the full year implies 32% to 35% growth.
In terms of free cash flow, please note we will have additional spend for tenant improvements related to our headquarters move in January as well as ongoing cash outlays for lease payments on our existing San Jose buildings and litigation expenses related to our ongoing Symantec lawsuit. These extraordinary items are expected to be approximately $15 to $20,000,000 in cash payments for the full year. As a result of these payments, we expect our free cash flow margins in fiscal 2020 to be 0 to 2 points lower compared to our operating profit margins. Longer term, we expect our free cash flow margins to be higher than our non GAAP operating margins. Now, I'd like to turn it back over to Jay.
Thank you, Remo. In closing, Let me state 4 key points that make me excited. Number 1, architecture matters especially for a cloud security platform that must set in line to inspect all traffic for policy enforcement. We believe we have and enormous barrier to entry. Number 2, with multiple tailwinds such as Office 365, SaaS adoption SD WAN and F migration to public clouds, we believe the market is coming to us.
Number 3, we are in early innings of the cloud journey. We're disrupting a $20,000,000,000 TAM with ZIA and ZPA. In addition, we recently announced Zscaler B2B and ZDx which we believe will expand our TAM significantly. Number 4, with new go to market leadership onboard, we're building a sales machine that can deliver world class execution and sustainable long term growth. We thank you for your interest in Zscaler and look forward to reporting on our progress in the future.
You may now
you. And our first will come from Alex Henderson with Needham.
Great. Thank you very much. I was hoping to ask a question around the new sales head, the the chief revenue officer, to what extent, he's become come in and been effective, how long do you think it takes for his programs to be fully ramped, and to get to to the maximum benefit is that a 3 to 4 quarter process, of reacceleration? And then the second piece of it, if I could, lot of questions coming at me from, clients about, you know, the, competition from, the next gen firewall players. It seems to me that that has not been a factor, but, can you talk about whether that's shown up in terms of pricing pressure or any other, notable metric, other than, you know, lost deals, but maybe some other element mix that may have, pressured things.
Thanks.
Yes. Alex, thank you. This is Jay. Regarding your question about our go to market, our CRO. As you know, we have done very well so far, built our business to 100 of 1,000,000 of dollars.
Now our goal is to take it to $1,000,000,000 and plus, which means scaling our sales execution. Dali actually is, the right guy who is driving a number of these things. Let me give you a perspective of what all he's driving. So for execution at scale, I'll give you 3 examples. 1, you know, when you have scores of salespeople.
It's one thing when you're 100 of salespeople, you need far better sales enablement, far better training for us. We used to have a small sales enablement team. DALLIE has come in and built a pretty sizable team and the team is already rolling out some of the training programs. Number 2, to really scale your business, you need a very consistent and repeatable sales process that may be more refined. And Dali has come in and taken our process and further refined it, and it's being rolled out to the whole field.
Number 3, While we had tools and systems in place, to scale to next level and to have better accountability, better visibility, to give us better leading indicator in sales activities, he and the leadership team has started work from many areas. So a lot of these things are already making a difference and we are seeing it. And I think as each quarter goes by, we will see more and more impact of the work being done by Dali and his team. Raimo, do you want to add anything? Yes.
A couple add ons to that also. I mean, our plan is still to be a 20 percent plus operating margin once we hit $800,000,000,000 to $1,000,000,000 of revenue. You know, related to pricing pressure, our discounts are lower this quarter. Our average prices per user are higher. When I take a look at our ARR for customers are greater than 3000 users.
It's higher this quarter. It's in the high 300,000 range and our churn is down.
Alex, regarding your second question about competition from firewall vendors. Somehow this question keeps on coming, I try to address it during my, statements. But fundamentally, if you look at the large enterprises to protect users, they almost always look for a proxy architecture. You guys deal with large banks. If you talk to top 20 banks and ask anyone, would you just depend upon our next gen firewall for user protection?
I haven't found a yes answer from a single bank so far. Now it's probably true that you see some of that is happening on the lower end where the customer is less security savvy and they're able to go with some of that solution happening. So probably on the SD WAN side, some of that is happening in the lower end, but where our primary focus is, we don't really think any of the impact from the firewall vendors making noises happened and impacted us. So far. I think it's the architecture that we got much better that's giving us an edge.
And I think it's long term at.
All right. Thank you. Our next question comes from Daniel Barnes with Bank of America.
Great. Thanks for taking the questions guys. First for Jay, maybe, no mention of the longer sales cycle. Quarter. So can you just walk us through the changes you're seeing versus last quarter when you called that out?
And then I got a quick follow-up. Thanks.
Yes. The changes in terms of the cell cycle and all haven't really changed a whole lot for us. I think what we are doing is tightening our sales process and tightening our execution. We aren't really seeing much market impact in terms of slowdown on any of the stuff. With better leadership and some of the things I outlined, I think its focused execution is what we are doing and we are beginning to see it's make a difference for us.
I think it'll help us in the long run because we are building a stronger, stronger infrastructure to scale our sales. Great.
Makes sense. And then Remo quick, good to hear the new products are getting good reception. I'm curious if you have any ZDx or ZB2B in your fiscal 2020 expectations? And what's the potential for these new products to ramp and maybe drive some upside this year?
Yeah. So no, there's nothing we're planning for, and you shouldn't plan for anything either. We're planning to get these products out in the second calendar quarter of 2020. The potential for the products, as Jay mentioned, with the Caspi out of band, browser isolation, user experience and the B2B, we feel that there's a pretty significant upside for us with these types of products. But nothing for this fiscal 2020 should be the accounted for?
Yes. If I may add, we are engaged with customers as you would expect in beta stages, doing evaluation and testing, our interest is 0. I mean, just to clarify, what we announced was 2 big product lines, Zscaler B2B and Zscaler Digital Experience. And then we also announced 2, what I would call, features, auto band CASB, CASB is a feature. And browser isolation is another feature that's relevant for both ZIA and ZPA.
Early indications very positive. These products become generally available in calendar Q2.
Our next question will come from Patrick Colva with Arete Research.
Thanks for taking my question. Can we just talk about the CASB product? Because, I mean, that's something that from speaking to your customers There's a lot of interest in CASB right now. And some have said that Zscaler would be a natural insertion point into that CASB debate. Above and beyond your current partnerships right now with, I think with Microsoft and McAfee.
So just it's good to better understand that product if possible, please?
Yes. So for a long time, we have had what we call inline CASB. If all traffic it goes through us, we have to do CASB, which includes threat detection and protection, DLP and the like. And for out of band, we depended upon 2 partnerships you mentioned, McAfee and Microsoft. Our customers keptron telling us that it's a small add on.
We should be doing it. So we took them seriously. We built it. So we become a single provider. So it's a notch show a feature for us to add on and we're seeing lots of traction, we will continue our partnership with Microsoft and Sky High, Mac up in this area.
If customers want something like that, they have it. But we believe a large number of customers will take Zscaler. And if there's another CASB solution, I think we'll end up displacing it.
Great. Thank you. And can I just ask a quick follow-up on the dollar based net retention rate? So the 120% is extremely impressive, no doubt, and especially given it's a sequential and annual increase. But it does imply that revenue from new customers, would have tailed off both sequentially and annually.
So Do you mind just help me understand if that's correct? The revenue contribution became increasingly skewed to existing customers or if there are any metrics you can share to help me better understand new customer revenue and customer counts?
Yes, that's a good question. So typically, we range with 2 versus upsell 60% to 40% new versus upsell and also 50% to 50%. In Q1, the mix was closer to 50% to 50% to 50%. What's important to recognize, we don't really distinguish internally the difference between new and upsell. We track it but we incentivize our sales organization both for new and upsell.
When you take a look at, the installed base that we have and the penetration, that we have with our installed base, there's a significant opportunity for us to upsell into that installed base. We don't want to disincentivize our sales organization you know, selling into that installed base. With Dolly on board, I'm sure he'll be driving all aspects of the business, including new customer acquisition.
Raimo, if I may add, if a company is a single product company with a narrow offering, they have to keep on worrying about new customers in order to drive the growth, we have such a wide platform and more products being added to it So we are less worried about making sure we just do new customers. So our number one goal is to maximize new ACV hence, we don't have a difference between new versus upsell. And Remo said the range of new has varied from 50% to 60%, I think that's a good range. But as you see more new products coming, some of them can be sold on its own without the installed base. We expect over time to go up.
But we don't look at NRR net retention revenue as the most reliable indicator. It varies quite a Remo, you have commented on in the past why it varies.
So I mean 120%, that's clearly outstanding. You know, we've ranged in the 118 percent for several quarters. We called out, you know, several quarters ago that there could be pressure on that NNR net retention rate, as more companies are buying transformation upfront, which is what we're seeing. In addition, if customers are buying things quicker, you know, within the year because part net net retention rate is based on ARR at the beginning of the year versus what it is currently. If customers buy product within that period, that's going to put pressure also on the net retention rate.
Now those are the negative effects to it. The positive effects to it are that 43 percent of ARR in CIA was transformation. 14% of our new and upsell business last year was the ZPA. So there's upsell capabilities with those products. In addition, as Jay mentioned, with our new products, there's a potential for it also going up.
The point to make is it's going to fluctuate. It's a hard, hard metric to really put your finger on. 120% is outstanding, but it could fluctuate.
Our next question will come from Andrew Nowinski with D. A. Davidson.
Great. Thank you. And congrats on the nice quarter. I want to start with a question on, the fed side I think you mentioned a few modest sized deals with civilian agencies, but I'm wondering if you can give us your thoughts on how Microsoft being awarded the Jedi contract might impact Zscaler given your strong partnership with Microsoft and having and now having both ZIA and ZPA FedRAMP certified.
Actually very excited about the opportunity. We started investing in FedRAMP certifications over 2 years ago it's a very hard certification, but we made the investment. And as you've seen in recent press releases and the like, we got certification for both. ZPA and ZIA. And as I said, we are the only vendor that's FedRAMP certified with cloud security gateway.
And on the ZPA side, only vendors certified for, 0 trust remote access. That puts us in a very, very good position. Now the way Zscaler works is it's independent of cloud. We can access Microsoft, AWS, Azure, all these clouds work with us, but having a good partnership already in place with Microsoft will help us or closely with them in the field from go to market point of view. So while we have begun to get some early deals, we are pretty optimistic about the opportunity, though we do realize that federal deals can take a little bit of longer time.
But very pleased with the team we have put in place. The team has grown quite a bit and it's delivering.
Okay. Thanks Jay. And then, the telcos have also been a fairly large driver of demand. Over the course of the last few years. Can you just give us any color on what if anything has changed with regard to the revenue contributed by the telco providers?
Yes.
At telco, they have been an important partner for us. I won't say any partner has been driving a lot of demand for us. As you know, as we drove transformation, we have done a lot of evangelism So we have been driving a lot of demand. It is in high touch sales. But as customers are asking for more and more transformations, Now we do see no more leads coming from telco partners to say my customer is asking for it.
We're beginning to see RFPs coming out and say, I need to do transformation. The deal I referred to in my earnings call from Japan actually was an RFP that was issued to 3 telcos in all three telcos with Zscaler because we met the requirement. It's a good business happening. We are trying to go further down market with Alcos. That's a new project.
Actually, Dali is trying to drive. So far, a lot of business we've done telcos on the very high end for the large enterprises. So excited about the opportunity. They're natural partners for us even though there is yes, some contention about network costs and whatnot, but we really don't impact us. It's the market that's looking for it and we are taking advantage of the market.
Yes, telco is typically represent around 50% of our revenue and that's about where it was in Q1.
Our next question will come from Saket Kalia with Barclays.
Hey guys, thanks for taking my questions here. Jay, maybe to start with you, a lot of talk on competition, particularly from the firewall side. I'd actually love to shift a little bit, maybe talk about competition from the traditional secure web gateway players, here that are transitioning most notably with Blue Coat. I guess the question is, what are you seeing in terms of sales engagement with those types of opportunities since the deal is closed? And really their willingness to explore a solution like Zscaler?
Yeah, you know, when it comes to competition, our real competition from incumbency point of view is secure web gateway because they have the right architecture as a proxy architecture. Where we have been winning against them is because they have been good on premise single tenant proxy architecture. But they couldn't pivot to the cloud. They couldn't build a viable multi tenant architecture. Right, remember my DVD versus Netflix, for example.
Now among these traditional vendors for secure web gateway, Blue Coat had big presence at large enterprises as an appliance. And and with, that's the sale to a new owner. There's somewhat uncertainty out there, so we are seeing a lot of additional interest from large enterprises who are looking for alternatives And also, some of these customers are moving to the cloud. So it is be helping us. So we're getting inbound inquiries that we're not getting before.
So we think it's a big opportunity for us we got some focus to take advantage of it.
Makes sense. Raimo, maybe for my follow-up for you, somewhat related, but now that Symantec is part of a larger entity, you talked about $15,000,000 to $20,000,000 in, one time cash costs, including litigation Can you talk about the litigation portion of it and how does that sort of progress now that ownership on Symantec has sort of changed hands?
Yeah. The litigation portion is $8,000,000 to $10,000,000. The transaction with Broadcom Symantec just what's completed. So there's not much update. I mean, the only thing I can say is that we do not feel, we infringe.
We're going to defend ourselves vigorously. And the lawsuit that is currently out there is not having any impact on our business at all?
We're carrying on, as you pointed out, change of hands can present an opportunity. And if it did, we will be open to it.
Our next question will come from Brian Essex with Goldman Sachs.
Good afternoon and thank you for taking the question. Jay, maybe if I could point to a couple of the sustainable competitive advantage examples that you gave. One, the first one pointed to the scalability and elasticity of your platform and the third one pointed to your Edge cloud capabilities. But both really interesting instances of pursuing internet breakouts. Maybe if you could help us understand a little bit how these deals Spired and who the partners on the SD WAN side were?
And was this driven by maybe an SI that was putting the deal together and working with a company on a consultative basis? Or was this something that you led and held their hands through this process and pulled maybe the SD WAN vendors in and put the deal together on your side?
Yes. The way these things are happening it's still not a process where market is mature and and RFPs get sent out all the time. As we have mentioned, we are still in a high-tech sales model. There is a good amount of evangelism needed, though it getting easier and easier, what it used to be, a typical process. Our sales team goes out and engages the customers, shows them the value of transformation that can deliver user experience with lower costs.
And that basically leads to a natural discussion and say, let's get an SSP or site together because it's generally involved transformation. SD vendor awareness is out there. We start collaborating with SD vendors out there. As I mentioned to you, VA Invirance and SilverPeak are good partners for us, but the leaders out there, and we come together and offer a proposal and solution. So what I say I would say majority of the large deals that are driven and closed they're still led by us, then we bring the partners along.
But in a good number of them, they do come from partners and many times SD WAN vendor introduce us to a deal and sometimes we introduce them to a deal. So that's why we like this technology partnerships. Microsoft, VM, where are 2 big technology partners that are helping us. On the SP front, the large SPs that top 4 or 5 SPs globally are very good partners.
Got it. Maybe just a follow-up too. Thank you for that. That's very helpful. Remo, when we spoke with Dolly in September, he had a goal of maybe taking 30 to 60 days to evaluate data on the platform, build models, evaluate talent, hire and so forth.
Is he through with that? And do you know like definitively kind of the framework of of what the incremental spend on the sales and marketing side will be for this year? Or might that kind of bleed into next year? I'm just trying to get a sense of when we might anticipate some meaningful leverage on the sales and marketing side of the model.
Yes. Good question. I would start seeing basically improvement next year related to, and again, the guidance that we gave contemplates the investments we're making in sales and marketing. Dollars, 30 to 60 day plan, mean, I've worked with a few CROs and, you know, watching, you know, what Dolly's doing here in the 1st couple months is, he he's moving very quickly. And doing outstanding.
I mean, he's building the sales leadership in the organization. He's building, as Jay mentioned, our sales enablement and training, you know, if he's, you know, better defining sales responsibility and putting in place the framework for us to be a much bigger company and placing, putting in place that accountability. You know, in summary, what I see what Dali's doing, he's putting structured discipline leadership and there's a passion, but he has Quite frankly, I don't know any sleeps. It's going very quickly, but it is going to take time. So, you know, that was the reason for our guidance.
Initially at 42%, 43%, you know, billings in the first half, and we increased that to 43% and increased our billings guidance to 50510 you know, I'm excited, you know, working with Dial Dolly, and what he's doing and look forward to it.
Our next question comes from Matthew Wells with Citi.
Hi, thanks for taking my question. Can you provide an update on customer feedback and learnings around ZB2B and ZDx? I understand both are still in beta and plan to go live, I believe, next quarter actually.
Yes, I think we'll be able to give you more tangible and meaningful customer feedback probably next quarter. Right now, I would say the degree of interest and opportunity I had anticipated, 3 or 6 months ago. It seems bigger than that. So high customer interest But again, it's limited engagement so far. So the limited engagement we have is very high degree of interest, but we'll give you more as we have more tangible feedback.
Got it. And just a follow-up on that. Is the sales force incentivized around the products while they're still in beta or is this just when they go live next quarter?
We have no incentive. In fact, product management is actually working closely with a selected number of customers. So we're not really pushing. We would rather not push till the products are properly cooked and all the kinks are out of it. Once they become GA, only then Salesforce start selling them.
Thank you.
I just wanted to clarify that these new products are going to be generally available in calendar Q2. So it is not next quarter. Thanks. Next
we have Melissa Franchi with Morgan Stanley.
Hi. This is Melissa Dunn on for Melissa Sankey. I was hoping you could provide some color around activity in EMEA. Revenue growth in that area was slightly slower than the rest of the region. So wondering if there were any macro softness in your view or maybe execution considerations?
Thank you.
No, yes, thank you. No, from a macro perspective, really don't see it. EMEA grew 40% which is slower than the Americas and APJ. We did have a leadership change, in EMEA, which we're very excited about But, at 41% of total revenue, in EMEA, APJ 8%, America at 51 is pretty consistent with what it's been in the past. But from a macro perspective, not really seeing any changes.
Yeah. We're bullish on AMEA. I think we got a good incumbent installed base. We'll keep on growing it. We're making the right amount of investments from AMEA.
And just a quick follow-up to what extent is ZPA driving initial conversations with new customers versus ZIA. And these. So has there been any change in what you've seen in competitive deals?
In the past few quarters, we have been seeing about half the new customers coming for ZPA. Sorry, half the ZPA deals coming from new customers and half coming from upsell. So that's kind of number of customers. But having said that, that ZPA deals are smaller than ZIA deal. As we said before, when ZIA is bought, it's bought for everyone in the company for all employees and ZPA are based on a number of applications.
So that's one. ZPA is opening more doors for new logos than we had initially thought of. So please with that. Your second question is retention for ZPA. You know ZPA market end up what Gartner calls 0 Trust network access or others call SDP, it is still a young market.
We kind of rarely run into each other because it's relatively small. So not a very competitive space. It's more of a matter of evangelizing and showing people that doing traditional network security with things like VPN is a dangerous thing. They don't need to do it. Once they get it, you win the deal.
Our next question will come from Fatima Boolani with UBS.
Afternoon. Thank you for taking the questions. Jay, I have a question for you and a follow-up for Remo. Jay, you talked a lot about the internal improvements and pipeline rigor and sales enablement initiatives that Dolly has sort of put in place and put into motion. So internally, you're really elevating the rigor in the sales organization and go to market.
I'm wondering if you can speak to the external and external distribution avenues and sort of what you're provider or SI distribution perspective, because as we understand, your model doesn't traditionally lend itself well to the box pushers. So I wanted to get your sense of what sort of investments are in play, from an external distribution perspective.
Absolutely. There are a number of points I could make there. In fact, I heard from someone other day, they said, it seemed like you're defocusing on channel I said not sure where that's coming from because actually we are putting more focus on channel. Now the point is it's not the same traditional channel. So what are we doing about channel?
We know SPs have worked for us. We'll keep on making more investments rather looking at going downstream with some of the SPs and not just do the very large enterprise deals. On the channel or maybe called the VAR channel, traditionally, right? The people who largely are in the box selling business, that has limited limited synergy with us. But Dali is focused on 2 types of channel partners.
1, we have done cloud native boutique VARs well, but only limited. We're expanding the reach. Darling has successfully done those cloud native hyper vendors in its previous life. So we are focused on getting those things done. 2, finding more vendors who are ready to pivot.
Every channel person doesn't want to pivot or or they wish they don't have to pivot because boxes will keep on selling forever. So those are the 2 things doing. I talked about sales enablement and training. That's really not just needed for channel sorry for internal seams. That's needed for channel as well.
So we are actually putting a lot of focus in that area as well because that's needed for them to become more effective.
That makes a ton of sense. A Remo question for you, you've been very explicit on the level of the sales and marketing front as reflected in your guide, but as I think about Analyst Day, you're a little bit more explicit on your sales capacity investments. So maybe accelerating that sales capacity footprint to 60% this year. I just wanted to get a sense of an update of how the sales hiring has been tracking as you started the new year. And that's it for me.
Thank you.
Yes. Our sales tracking for Q1 is a little bit behind, but our expectation is still to get to that 60%
We're looking for Q2 to be a good quarter for us, but it's all taken into account our guidance. Yes, I would add that in the past quarter, we raised the bar in hiring better quality people and also acceleration hiring. In fact, under Dali, we put together a new recruiting playbook, where we are educating, we are training all of our frontline sales leaders make sure we hire that right kind of people. Again, part of scaling, when you only have 10 liters who are hiring, it's a small problem. When you have 50 sales leaders who are hiring, it needs better scaling and better, better methodology and process.
And that's what we are really scaling out.
Thank you. Our next question will come from Dan Is with Wedbush Securities.
Yes, thanks. So maybe can you talk about the government market? Obviously, a lot of deals moving to cloud, Jedi is just I think one of them. And just given where you are in terms of Azure, in terms of that channel. Maybe just talk about that as an opportunity.
Over the next 6 to 12 months in terms of how you're viewing that going in 2020?
Yes, I think I'll add upon what I said earlier, getting FedRAMP certifications is the first thing unless you have them. Nothing not much matters. So we had done that. And also in FedRAMP, there's a moderate level, certification is a high impact. Having done both of them for ZIA sorry, ZPA is both done ZIA.
We are at moderate. We'll get to high impact shortly, the door is wide open for us to leverage. And Azure with Microsoft Partnership is a good opportunity but we also work with a there's a fair amount of, AWS out there. Very bullish, Sean. Can I say that?
Just a good team. I would say if you asked me a year ago versus today, I feel we are significantly ahead of where I thought it would be.
Great. Or maybe you will take one more question.
Thank you. Our last question will come from Eun Kim with Rosenblatt Securities.
Thank you. Congrats on the solid quarter on on the ZPA front, just wanted to ask about the competitive nature of that market. Are you seeing some of the same competitors of ZIA for your ZPA product And also, are you selling to the same department, or are they typically 2 different buyers for ZPN ZIA? Thanks.
So it's a good question. ZIA is generally driven by transformation in our ideal world. We start the CIO, go down to head of infrastructure who wants to transfer the network and security gets brought along. And it's a full blown play. ZPA actually has, a few different paths.
I'll talk about 3 of them because it's very different opportunities. Say if your applications are going to the cloud, public cloud, like Azure and AWS, you don't need to go back through your data center, go direct through Zscaler. It's a good opportunity. In that case, so who is the buyer? It's actually generally head of infrastructure because he was providing that connectivity 4.
Number 2, many customers say, yes, I'll look at cloud, but I have one problem to solve today. My remote access VPN. I hate it. It's slow, and it's not secure. So replacing that, The VPN, the buyer could be security.
The buyer could be networking. Our 3rd area, very different buyer. M and A. When companies are bought, generally, they want to bring the networks together in the old world of network security. The Zscaler world, you don't bring the networks together.
You simply with ZPA, provide access to each other's applications transparently. In that case, traditional IT is less of an buyer you basically deal with. It is it a CIO level, but it's also sometimes the M and A team that's put in place to bring the 2 companies together. Some common buyers, some different buyers.
Thank you, gentlemen. That concludes our question and answer session. And I would like to turn the call back over to Mr. Jay Childree for any closing remarks.
Both, thank you all for your time. And we look forward to seeing you at our upcoming conferences this quarter. Thank you again. Thank you.
Thank you. Ladies and gentlemen, this concludes today's teleconference and you may