Good day, everyone, and welcome to the Zscaler's 4Q 2019 earnings conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Bill Choi, Vice President of Investor Relations. Please go ahead, sir.
Good afternoon, and thank you for joining us to discuss Zscaler's financial results for the fourth quarter of fiscal 2019. With me on the call are Jay Chaudhry, Chairman and CEO and Remo Canessa, CFO. By now, everyone should have access to our earnings announcement. This announcement may also be found on our website in the Investor Relations section. In addition, a supplemental financial schedule was posted to the Investor Relations section of our website earlier today.
Let me remind you that we'll be making forward looking statements during today's discussion, 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 please see our filings with the Securities And Exchange Commission as well as in today's earnings release. Unless otherwise noted, All numbers we talk about today, other than revenue, will be on an adjusted non GAAP basis. Please refer to our earnings release on the Investor Relations portion of our website for a reconciliation of GAAP to the non GAAP financial measures. For historical periods, the gap to the non GAAP reconciliation can be found in the supplemental September 17th in conjunction with our Zenith Live Conference in Las Vegas. Zenith Live is our annual customer and partner cloud summit featuring keynote presentations and topic specific breakouts regarding the transformation to a cloud first future.
We will be webcasting both the Zenithlot Keynotes and the Analyst Day program, which you can access on the Events section of our IR website. Now I'll turn the call over to Jay.
Thank you, Bill, and thank you, everyone, for joining us on our call today. In Q4, we are pleased to announce that we delivered strong revenue and operating profit growth in the fourth quarter with positive free cash flow. For the quarter, our revenue grew 53% and billings grew 32% year over year. Against a very difficult comparison. And for the full year, our revenue grew 59% and billings grew 51%.
I will start our sales execution, including the hiring of our new President GoToMarket and Chief Revenue Officer. And conclude with some of our deal wins in where organizations are choosing multi tenant cloud architecture to empower them to scale quickly as they move their applications and data to the cloud. Digital transformation and adoption of mobile and cloud fundamentally change network traffic patterns and break the traditional perimeter protection model where organizations build a hub and spoke network and the mode of security appliances to secure the network. Built for a world without walls, Zscaler cloud, acts as a business policy engine, which is now deployed across more than 150 data centers to deliver the full set of security and policy enforcement on a direct path to the application. Our mission is to provide fast, secure and reliable access to information no matter where it lives.
Responding to customers' need for better advice for a cloud centric world where appliance based perimeter security is less relevant. Gartner has recently published a groundbreaking research note titled, the future of network security is in the cloud, In this paper, they introduced a concept of a secure access service edge, pronounced Sassy Sassy goes well beyond the disruption of MPLS with SD WAN or hardware appliances with cloud or applying 0 trust principles. As I interpreted, Sassy has the following key points. Number 1, demands that service providers offer compute power at the edge of a widely distributed network. Distributed as close as possible to each endpoint.
Number 2, light branch with just a router in all security services in the cloud. Trade delivers in line encrypted traffic inspection at scale. Most importantly, Gartner recommends reducing complexity of network security by moving to ideally one vendor for Secureweb Gateway cloud access security broker or CASB, DNS, 0 Trust network access, and remote browser isolation capabilities. We agree with these key findings, and I recommend that everyone read this report. It is available on our main website.
These Scalar platform was designed from the start for the world that Gartner has spelled out. And as the world moves towards a Sassy model, traditional network security vendors are embracing Zscaler's vision of cloud based security after rejecting it for years. They're trying to retrofit the legacy appliances into a cloud world and making more and more noise about what we believe are the fundamentally flawed hybrid security cloud offerings. Their message is keep on buying my boxes, but use my so called cloud service. When users are on the road or in a branch office.
But we believe the piece together hybrid clouds can scale leave gaps in security are expensive, deliver a poor user experience and will not allow enterprises to fully realize the benefits of the cloud. Just like you can't create a Netflix service, by stacking thousands of DVD players in the cloud, you can't offer an in line high performance security cloud by spinning up a bunch of virtual machines in a public cloud. This is a defensive strategy which in our view does not serve the needs of the customer. To put it simply, architecture matters Zscaler has 4 architectural advantages that firewalls can't just add on. Edge cloud for policy enforcement, multi tenancy proxy for SSL or TLS inspection and 0 trust network access.
These killer's platform deployed across more than 150 data centers was built from the ground up and provides the advantages of elasticity, scale, deep content inspection and user experience that is difficult to match. In addition, we have over 10 years of operational experience, running our security cloud at scale. As I have said before, there really is no compression algorithm for experience. To keep on growing at a rapid pace as we seek to reach a $1,000,000,000 in revenue, we need to build which delivers even if the market environment gets tougher. We're not sure if the macroeconomic environment is having an impact but we started to see some large deals taking longer to close.
To help us deliver go to market scaling and execution. I'm very pleased to announce that Dali Rajik, is joining Zscaler as a present go to market and CRO. I have been deliberate about finding the right leader with a progressive mindset as this is an extremely important role. Dali shares my views on value driven strategic selling, and I'm confident that he is the right leader to drive our sales execution. He brings a wealth of SAS and cloud experience and a proven ability to scale global sales and channel in support of our long term growth objectives.
On the deal front, I'm excited that more customers are buying the ZIA and ZPA platforms together, which enables a true transformation with direct access to any service or application from anywhere on any device without backhauling traffic and CPA for internal applications in your data center or in the cloud. As some of you know, ZPA is a newer platform that we started selling about 2 years ago and is now an important part of our business. Already contributing 14% of our new business. With approximately half of the business coming from existing ZIA customers. Let me start by highlighting a new customer that bought ZIA and ZPA together, a global information services company spun off one of its business units, along with the legacy network and data center infrastructure, with an opportunity to start with a clean slate they adopted a strategy to pursue a full transformation to the cloud with internet as the wide area network cloud as the new data center and Zscaler as a policy enforcement platform.
The customer purchased the ZIA business bundle plus cloud firewall and data loss prevention for all 25,000 employees and CPA for 10,000 mobile users. Without building a new network with scores of new security gateways that customer is leveraging Zscaler to provide secure, fast, and reliable access for all and with greater operational simplicity, a global system integrated partner who is implementing the overall transmission project played a key role in driving the Zscaler sale. An example of channel leverage, we are creating with our investments in our SI partners. Let me give you an example of an existing ZIA customer adding ZPA, a Fortune 100 Multinational oil and gas customer with headquarters in Europe that bought our ZIA transformation bundle for 65,000 employees last year, purchased ZPA for over 56,000 users. ZPA represents the next step in this customer's IT transformation journey towards their cloud first strategy.
After adopting local internet breakouts for 4 fifty locations, a customer bought ZPA to replace its legacy VPN and do a lot more. ZPA will provide access to its applications in the data center and in the public cloud, while increasing the level of security with a 0 trust network access approach. ZPA creates a unified policy based access across all environments including the thousands of apps that they're moving to AWS and Azure. This large company also expects to benefit from ZPA to integrate potential acquisitions. This latest purchase increased the total customer spent with Zscaler by 2 thirds.
In our large ZIA deals, We continue to see Office 365 deployments and securing local internet breakouts as the primary driver. A Global 500 industrial company with headquarters in Europe purchased our business bundle, and cloud sandbox for 120,000 users, as they required a scalable solution that can keep pace with over 50% growth SSL traffic inspection and cloud sandboxing were needed for better security for all locations across 60 plus countries and all users, whether at the headquarters, our branch office, or on the road. In another deal, a Fortune 100 consumer goods company that purchased business bundles several years ago. Upgraded to transmission bundle plus data loss prevention for all 100,000 employees. After deploying Office 365 last year, the customer was overwhelmed with the growth of traffic for OneDrive and SharePoint.
With Zscaler, they will no longer have to backhaul Office 365 to 4 data centers. Instead, they're implementing SD WAN for nearly 300 locations for local internet breakouts to deliver better user experience. To secure all local breakouts, the customer purchased cloud firewall, Sandbox, and DLP for all users to keep malware from coming in and sensitive information from leaking out no matter where the user is. For customers who want network and security transformation, we believe we are the only cloud native multi tenant platform that meets their needs. The cloud security market is evolving rapidly, and we are adding significant functionality to our platform and creating more distance from the cloud imitators.
You will hear more about our innovations at our Zenith Live cloud summit next week. Overall, the competitive environment remains favorable and we have high win rates coupled with a strong net dollar retention rate of 118%. In fact, Our customer churn rate declined quarter over quarter year over year. We ended fiscal 2019 with over 3900 customers. Total Global 2000 customers increased to over 400 as of July 31, up from over 300 a year ago.
And we have over 100 of the Fortune 500 companies as our customers. We are strengthening our channel partnerships with large system integrators and global service providers who contribute over 50 percent of our revenue. We will continue to aggressively invest in our business to pursue our significant market opportunity.
Thank you, Jay. Revenue for the quarter was $86,100,000, up 9% sequentially and 53% year over year. For the year ago comparison, recall that Q4 2018, revenue was aided by $1,400,000 and non recurring revenue from a large public sector customer deployed our platform as a private cloud. From a geographic perspective, for the quarter, Americas represented 51 percent of revenue, MEO was 41% and APJ was 8%. For the full year, revenue was $303,000,000, up 59%.
ZPA remains the fastest growing new product in our history ZPA contributed 14% of our new and upsell business in fiscal 2019, up from 10% in the prior year. 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 32 percent year over year to $126,000,000. As a reminder, our contract terms are typically 1 to 3 years and we primarily invoice our customers 1 year in advance. Excluding upfront greater than 1 year billings in both periods, billings would have grown over 50%.
Remaining Performance Obligations or RPO was $554,000,000 on July 31. Up 39% from $398,000,000 1 year ago. As a reminder, the large public sector deal added $26,000,000 to RPO a year ago. Based on our ending July 31, annual recurring revenue for ZIA, approximately 43% is from our high end transformation bundle. Which includes our next generation firewall and sandbox, up from approximately 35% last year.
Our strong customer retention and ability to upsell have resulted in consistently high dollar based net retention rate, which was 118% for the quarter ended July 31. This compares to 117 percent a year ago 118 percent last quarter. Our increased success selling bigger deals upfront which start with Transformation Bundle and faster upsells within a year, while good for our business can reduce our net retention rate, which is calculated on a year over year ARR basis. Considering these factors, Total gross margin was 81%, down 1% sequentially and up 1% year over year. We feel that 80% continues be a good target range in the near to medium 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 6% sequentially and increased 31% year over year to $62,200,000, but decreased as a percent of revenue to 72%. The sequential increase in operating expenses primarily due to increased sales and marketing spend in R&D. We increased our headcount in Q4 by over 130 employees and ended the year with over 14.80 employees. Sales and marketing increased 6% sequentially and 33% year over year to $41,000,000 The increase is due to higher compensation expenses and marketing programs.
R and D was up 7% sequentially and up 28% year over year, to $13,200,000 as we continue to invest to enhance product functionality and innovate on new products. G and A increased 3% sequentially and increased 26% year over year to $8,000,000. The year over year growth in G and A includes investments in building our teams and other expenses related to becoming a publicly traded company. These expenses exclude $3,000,000 in litigation related expenses. Our 4th quarter operating margin was a positive 9%, which compares to a negative 4% in the same quarter last year.
Net income in the quarter was $9,100,000 or non GAAP earnings per share of 0.07 dollars. We ended the quarter with $365,000,000 in cash, cash equivalents and short term investments. Free cash flow was positive $7,600,000 in the quarter compared to a positive $11,900,000 for the same quarter a year ago. Our ESPP program decreased our free cash flow by approximately $4,000,000 in the quarter, Whereas in the year ago quarter, it had a positive $3,000,000 impact. The SVP program does not impact our overall cash balance.
Now moving on to guidance. As a reminder, these numbers are all non GAAP, which exclude stock based compensation expenses, amortization of intangible assets, certain litigation related expenses, and any associated tax effects. For the first quarter, we expect revenue in the range of $89,000,000 to $90,000,000, reflecting a year over year operating loss in the range of negative $1,000,000 to breakeven. Please note, Q1 will include $6,000,000 in expenses for 3 major marketing events, including Zenith Live Americas, Zenith Live Europe, and our sales kickoff. Income taxes of $700,000 and earnings per share in the range of 0 to 0.01 dollars, assuming 139,000,000 common shares outstanding.
For the full year fiscal 2020, we expect revenue in the range of $395,000,000 to $405,000,000 or year over year growth of 30% to 34%. Calculated billings in the range of $490,000,000 to $500,000,000 or a year over year growth of 26 percent to 28 percent. Operating profit in the range of $13,000,000 to $18,000,000 income taxes of $2,800,000, earnings per share in the range of $0.12 to 0 $0.15 assuming approximately 140,000,000 common shares outstanding. Our guidance reflects plans to invest aggressively in our business to pursue our significant In addition, we'll 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 billing quarters, with sequential declines in Q1 and Q3 quarters, respectively.
Over the last 3 to 5 years, first half billings have represented on average 43% to 44% of full year billings. In fiscal 2020, we expect our first half mix to be in the 42% to 43% range. The reason for this is primarily related to our new CRO any familiar with our business and fully ramping. Also, please keep in mind that we had a large upfront billing of $11,000,000 in Q2 of 2019, from 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 29% to 30 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 the ongoing Symantec lawsuit.
With our headquarters move, we expect a modest budget of $4,000,000 to $5,000,000 for tenant improvements. Including these cash payments, we expect our free cash flow margins in fiscal 2020 to be 1 or 2 points lower compared to our operating profit margins. Longer term, we would expect free cash flow margins to be higher than our non GAAP operating margins. Now I'd like to hand it back over to Jay.
Thank you, Remo. In summary, design as a cloud native multi tenant architecture, We believe we are in the early innings of a significant market opportunity to enable cloud transformation just like Salesforce and Workday developed cloud native, multi tenant platforms to disrupt large legacy software vendors. Zscaler has a similar opportunity to disrupt network security. With multiple tailwinds such as Office 365, SAS Adoption, SD WAN, and act migration to public clouds, we believe the market is coming to us. With the addition of Dali Rajik, We are building a sales organization that can deliver world class execution.
We look forward to seeing you at our Zenith Live cloud summit and our Analyst Day in Las Vegas, where we will showcase some of our upcoming new products. We thank you for your interest in Zscaler and look forward to reporting on our progress in the future. Operator, you may now open
And we'll take our first question from Brad Zelnick with Credit Suisse. Please go ahead.
Great. Thank you so much. Can you guys hear me? Yes. Hello?
Excellent. Congrats on a fantastic year. Excellent. Excellent. So congrats on a fantastic year and it's great to see your sustained growth.
Above 50% if we make the proper adjustments. Jay, I wanted to ask you about your comment about large deals taking longer to close. What are the proof points that suggest to you that this may be due to macro deterioration versus perhaps execution issues? And gives you the confidence this isn't a change in the competitive dynamic for what you're selling?
Yes. So we deal with the large number of deals, our pipeline has been growing. The comment we made was that some of the larger deals took longer, talking about macro versus competition. I can tell you that if we analyze our top 50 deals, which we did, we really see any competitive real competition from fiber guys or any other guys. So our competitor rate remains very, very strong.
On the macro level, We haven't seen any significant things to really say that macro is playing a role in it. We do believe that as the large number of reps are being hired, they all need to go through a bit more sophisticated sales methodology, sales framework and the like, So we can keep on scaling the successful execution we have been doing so far. So not worried about any competitive pressures, no clear indications on the macro, though that kind of remains to be seen as everyone does talk about them, but we are excited that we have a new CRO who can help us further scale the kind of work we've done before to the next level.
Congrats on the higher. And just to follow-up on this topic with Remo, if we look at long term deferreds, it would seem there as well that duration might be shrinking a bit from what it had been last quarter. Is this due to the same dynamics that Jay is discussing or are there other factors to consider as well? What's baked into your guidance for the full year? Is it more of what you're seeing exiting fiscal 2019?
Or is it assuming what you saw on average throughout the entire year? Thank you.
Yes. Thank you, Brad. My guidance basically is what we've seen through the entire year, based on duration. The, if you take a look at the total deferred revenue, it grew 53% short term deferred revenue grew 57%. And what we have in long term deferred revenue, we've got that public sector deal which transfers over from long term to short term.
I wouldn't think anything different from a duration perspective, in my guidance for fiscal 2020.
Great. Thanks so much. We'll see you next week.
We'll take our next question from Alex Henderson with Needham And Company. Please go ahead.
Hi, thanks. This is Roger Boyd on for Alex. I'm wondering another way, can you say what portion of RPO you expect to recognize over the next 12 months?
So the, the CRPO is, it's about 45% I'm sorry, the CRPO is $305,000,000. So that will be over the next 12 months.
Got it. And then, on sales execution, I was wondering if you could just provide some detail on what you offer in terms of channel enablement and what you do for your partners in the way of in education to help them smooth out their deployments.
So two questions here. One is, what are we doing to enable our partners? And the second question is about deployment. From what we have said all along, that our sale is not a typical security appliance type of sales where you train 100 of our channel and they go and sell to technical people. We are fundamental to enabling cloud transformation.
So sales is driven top down at the C level CIO CTO season. So our best channel partners are system integrators and service providers, though we end up doing a fair amount of heavy lifting. And the heavy lifting is natural because when you're doing driving a new transformational sale, when you're disrupting the old world, you have to drive high touch. But as I indicated in one of the wins I highlighted, our SI partners are doing a great job. Regarding deployment, actually Zscaler is relatively easier to deploy.
We do train our channel partners We also have our own sales sorry, deployment teams that work with channel partners. Our deployments, happened pretty well fairly fast. And customers overall are very happy as you can see from our net retention rate and is also our churn rate, which has been pretty low.
Great. Thank you very much.
Thank you. Moving next, we'll go to Tal Liani with Bank America. Please go ahead.
Hi guys. I have two questions. Number 1 is more high level question for Jay. Last week, there was an analyst day of one of the competitors that said that in the long run, proxies are not the right solution and the right solution is to offer the same services from the network. And this was a firewall company.
I'm wondering the stock went down on this. I'm wondering if you can address this issue directly. The second thing is Is there anything you plan on doing outside of what you discussed? Is there anything you plan on doing to address the slower sales growth of the environment that you noted. Thanks.
So first of all about proxy, I think if you asked any expert out there, what security inspection technology gives you better capability to inspect and block threats. I think 99% of smart people agree it's a proxy technology. So I think statements like that may have a competition truly making 0¢. In fact, a lot of you work for large banks, right? You care about security.
If you look at the top 10 large banks in the world and how many of them have next implied about lots of them, how many of them replace the proxy technology for outbound traffic, I believe you'll find it 0. In fact, I know of a very large bank, that has spent tens of 1,000,000 of dollars on an NextGen firewall and deployed them all over. And this bank is still depending upon our proxy technology to inspect geographic footprints. That's one piece. Tool, if you look at any vendor who is doing any meaningful thing, even sitting in front of servers, like Akamai's the world, they all have proxy based technology because without proxy, you have little or no control.
Lastly, firewall which is a pass through device was a good thing before the SSL world when traffic was not encrypted. Today, in most of the cases, 90 plus percent of the cases, its SSL traffic, TLS traffic. Firewalls were never designed to inspect SSL. Proxy technology is needed for SSL. If you really don't inspect the traffic, It is like a luggage passing through an airport inspection checklist without inspected.
That not a good thing. So I think these statements are meaningless. They mislead customers. They give them false sense of security. And do a disservice to the security industry.
From a growth perspective, things that we've done we've been up without a CRO for about a year and a half. That was deliberate on our part jay's part to make sure we found the right person. So we did not want to jump the gun, and hire the wrong person. We feel that we have the absolute right person to run our sales organization. Also, we've hired, we made several hires over the last 4 to 6 months, VP of Federal, VP of the East, a new VP general manager of EMEA, the CRO and VP of Sales Enablement, we see this as a large market opportunity.
And we're going to increase our sales and marketing efforts, in fiscal 'twenty. Having the right person on board gives us confidence to invest more into our sales and marketing organization to maximize this market opportunity.
Yes, if I may add, I mean, as we compete out there, we almost win every deal very low situations where we don't win. So very comfortable with our differentiated technology, very comfortable with sales process we find. We just need to make sure we can keep on scaling it as we set our targets for bigger and bigger numbers.
So given the comments, you just mentioned, does it mean it's going to take you longer to get to your margin targets? Does it change the trajectory of margin improvement?
No. I mean, from our perspective, but we've said all along that we get to our operating model of a 20, 22% operating profitability once we're at $800,000,000 to $1,000,000,000. There's no change in that. The one change related to the guidance is that, we brought down the 1st half down to 42%, 43% versus historically where we've been 43%, 44% in our total billings. The reason for that is that with Dolly coming on board, he's going to take some time to get ramped up to understand the landscape.
So we want to give him some room related to our billing guidance.
Our next question will come from Andrew Nowinski with Piper Jaffray. Please go ahead.
All right. Thanks and congrats on the 9th quarter. Maybe if you could just start with, I know in the past you've talked about Office 365 as a significant tailwind for Zscaler. I'm just wondering if you, if you can give us any parameters and how we should think about that in terms of what's left in fiscal as we had in fiscal 2020, And if you could also just rank order your top growth drivers impacting your fiscal 2020 guidance. Thanks.
Yes, Office 365 has been a big driver because Office 365 almost requires that you do local breakout. And that's because the amount of traffic generated by Office 365 is far far bigger than all other SaaS applications combined. So that's point number 1, point number 2, today, about 20% of the largest Global 2000 companies are Zscaler customers. That means about 80% aren't. Most of the customers have bought Office 365 but the deployment is lagging behind.
Zscaler comes into help to local breakouts. So deployment can happen cost effectively, better response time. So we see a significant opportunity for Office 365 ahead of us. We are not linked to the sale of Office 365 we are needed for the deployment of Office 365. The second big driver for us is SD WAN, SD WAN technology is evolving.
Actually SD WAN is also driven by a big part cause of Office 365 and local breakout type requirements. If you look at all the SD WAN deployments are happening in large enterprises. Zscaler is often the choice to secure those SD bands. So that's a big opportunity as well. So among drivers, I would say, Office 365, and SD WAN are our top 2 drivers, along with ability to provide security especially with the SSL traffic happening out there at a much larger scale than it used to be.
That's great. Thanks Jay.
Our next question will come from Saket Kalia with Barclays. Please go ahead.
Hey guys, thanks for taking my questions and apologies for the background noise. First, maybe for you, Jay, we were talking about competition from the firewall players. I guess the major change that has happened in the last 90 days has been one of the major appliance vendors, of course, changing hands. So I'm curious, and of course, I'm talking about broadcast Symantec. I'm curious, how have your conversations with customers changed, if at all, since that's been announced?
Yes. So first of all, the large enterprises we are dealing with they largely, if there's one solution that's deployed beside Zscaler for outbound traffic, it is semantic blue code. On the lower end, you start seeing other proxies from different other vendors. And our success in the large enterprises has been by displacing those proxy appliances. So as I have went out and met customers, which I often do, where the customers in the past felt that yes, they need to change, but they'll make a change over time.
It is more urgency because uncertainty in this space. So we do believe that it will be the beneficiary of this change.
Got it. That makes sense. And for my follow-up for you, Remo, as we think about the billings guide for next year, how do you sort of thought about the big deal environment? It sounds like here in Q4, maybe it maybe some large deal took a little bit longer to close What have you assumed about large deals in your fiscal 2020 guide?
Yes, I would say they're going to get back to similar levels as they were in fiscal 19. I mean, there's a lot of things that go into the guidance. I mean, it's the new CRO on board, trajectory of hiring and so forth, but I'd say it's going to be pretty similar.
Very helpful. Thanks guys.
We'll go next to Dan Ives with Wedbush Securities. Please go ahead.
Yes, thanks. Can you just talk about maybe some of the hiring plans in fiscal 'twenty and maybe, how that would be even U. S. Versus international?
Yes. I so, you know, the total hires that we had, in fiscal 2019, we had net hires of about 430 employees My expectation is that we'll hire and are planning for hiring more people than that. The concentration of the hiring is going to be in sales and marketing. Number 1, R and D, number 2, cloud operation support, number 3, and then basically everything else. When I take a look at geographically, if you take a look at the distribution we have at Zscaler, about a third of the employees are here in our headquarters in San Jose.
A third are in India and a third the rest of the world. India has been ticking up a little bit over the last few quarters. We've got 2 offices, one in Chandegar, and one in Bangalore. So my expectation is the percentages will probably be pretty similar, maybe a little bit more in India. Versus the rest of the world, but, you know, pretty similar percentages based on what we have currently.
Got it. And if I think about 7 figure deals, there's a large deals in the pipeline. How many you think most of those deals right now, it's only Zscaler and those deals in terms of the BEM being uncompetitive? Maybe just talk about that. And then the questions were asked before about competitive and dynamics.
Maybe just talk about, is there any change there or just from a high level talk about what you're seeing in sales cycles? Thanks.
Yes. So as you would expect, a large enterprise. When they go and make a change, they do look for multiple, providers as a standard process, as a standard practice. But what's exciting that I find in this company that I've never seen before is when an SP is at when a large enterprise goes to, RFP with 5 service providers for the network transformation and Zscaler being local breakout being part of it, we quite often get bit by all five widest, which is very exciting. And sometimes it may be for And most of the time, other 1 or 2 providers end up being, typical proxy vendors you would expect because that's where large enterprises expect.
And we win those deals hands down. We do very well. So that's why beyond worried about the competition, there's a lot of noise we hear about the firewall guys, okay. And it's it makes no sense. In fact, last week, as someone alluded to, they talked about, displacing Zscaler in two deals.
I wasn't sure what they're talking about. I know every Zscaler customer with over a million users, and they're all very happy and doing very well. Regarding displacement at a Fortune Fifty retail customer they alluded to. I personally know every Zscaler Fortune 100 Zscaler customer, and we did not lose any. So people, I think when they get desperate, They look for leading information.
I've analyzed top 50 deals, and we rarely see this firewall vendor in them. We do expect to see further misleading claims in the future from legacy firewall vendors who are trying to this cloud security wins. The legacy secure web gateway vendors were trying to compete with Zscaler. We saw the same behavior. They try to upgrade the security appliances.
They gave away the cloud, and they would falsely claim it as a cloud security win and displacement of Zscaler. Our technology, our differentiation stay strong. Our sales methodology stay strong. We just need to make
Thanks.
Our next question will come from Joshua Tilton with Berenberg. Capital Markets. Please go ahead.
Hi, this is Francois on for Joshua. We were trying to understand the focus is on the win win in the market, but could you possibly speak to how you're seeing pricing develop? Has it been improving how have average deal sizes been trending? Any commentary around that would be helpful. And then one more follow-up on macro in EMEA.
Have you seen any signs of slowdowns in that region due to these macro fears?
I'll try to answer a few of them. Average deal size is based on ARR, for customers that are greater than 3000 users.
Has gone
up every quarter, and it did go up in Q4. Related to any pricing pressure, our discounting quarter to quarter, Q3 to Q4 year over year for new upsell business is lower. So, no, we're not seeing the pricing pressure. Related to EMEA, I'll let Jay talk more about that.
Yes. EMEA, there's a fair amount of talk on Brexit. You can hardly see the newspaper without a news about it. We do wonder about it, but we haven't seen tangible effect on the business. We do see customers talking about some of the uncertainty out there.
Can I put my pulse on a big effect? I'm watching carefully. I'm not sure I can put it on. I think we need to do probably we have some more work to do to hiring and scaling the business. We brought in a new leader in EMEA last quarter.
He's doing great job wrapping up the sales teams and really scaling it to where we need to go. I'm going to remind you guys that we are unusually large in EMEA. Or Internationally. At our stage of the company, 50% of the business comes from international and about 40% of that come own AI, it's a very important market for us and will remain focused on investing there to keep that kind of market share.
Thank you.
Our next question will come from Gray Powell with Deutsche Bank. Please go ahead.
Great. Thanks for working me out. I greatly appreciate it. And maybe just a couple of questions. So one, if I look at the guidance and I look at revenue growth in absolute dollar terms.
In fiscal 2019, you added a little over $110,000,000 in new revenue, just a total revenue basis. And the guide for fiscal 2020 implies that you add a little bit less than $100,000,000 So is there any reason that the absolute dollar growth should go down, particularly given the sales and marketing investments that you made?
We like to be prudent with our guidance. In our guidance, we feel is prudent.
Okay, fair enough. Good answer. Maybe just one on the product side then. What kind of improvements have you made on the cloud firewall functionality And how do you feel about your potential to displace branch office firewalls?
Potential to replace branch office hardwalls. We had done tons and tons and tons of them. So So first of all, if someone is talking about firewall, cloud firewall disease collecting functionality, they may be getting mixed up with that data center firewall. Many times, I talk to customers. This is what they say.
They say, firewall guys were here. They're telling me that you should have the same policy in your branch firewall and that it is in your data center. I see. Okay. Tell me more.
How many rules do you have in your data center firewall? So 6000? In fact, they say, I bought 2 products to manage those firewall rules. As of course, your data center is complex over time, evolved, netting and everything. Said, what are you trying to protect in your branch office?
The answer is employees. What's the difference between when you sit in a branch office or you sit in a, you know, airport and a coffee shop? Is it nothing? So are you really putting a firewall with 6000 rules at your home or every branch office? That's silly.
So firewalls in the branch office for outbound traffic are very straightforward. In fact, most of the cases, they aren't even needed. They're needed because somebody feels like they should have it. The reason they're not needed is When you don't have anything coming from outside in, you have no listening port, your tax surface becomes 0. That's when you have the best security And that's really what should be done.
Our firewall is very rich. We never lose any situation. We never have a case where someone said your branch firewall is not rich, you know. Now our focus is now really creating lots of rules and branch firewall. Our focus is really working on 0 trust network type of approach.
That Gartner talks about the SASC kind of approach where you don't even bring people on the network. So in summary, we're trying to do things the new way where you don't control the network, you don't worry about network security, you securely connect a user to an application, and you're simply, simply a switchboard in the middle of it. So very comfortable technology and the lead we are increasing And next week, you're going to see some significant big new areas of expansion that we'll be announcing at Zenith Live.
That's great. Thank you very much.
Thank you.
Our next question will come from Nick Yacow with Cowen and Company. Please ahead.
Thanks guys. Jay, you mentioned seeing more customers adopt both ZIA and ZPA out of the gate. Which is great. So I guess I'm just wondering if that's having an outside impact on the sales cycles?
So, yes, bigger the products that you buy, typically longer the sales cycle. Or if you talk about in general, the bigger your deal, the longer the sales cycle. But I think our mix has to be The mix is not really, I won't say that all most of the deals are becoming combined ZIAZPA. The transformation sale in general is complex. It's top down.
You end up securing the support of not just head of networking, head of security, head of architecture, So we have a larger number of people who can do it well, but we need to grow that type of sales team, along with some of the architects and all, to really make sure we are effectively selling it. And the most exciting thing I found about Dolly. He had some of the same top down selling mindset, with value creation and with very good sales methodologies. So I think we'll be doing a great job in scaling it to make sure our numbers keeps on growing.
Great. Thank you. And as a follow-up, as you continue to expand the platform and really address more components of the security stack over time,
How do you weigh layering
in that new functionality into that transformational bundle versus pricing this new functionality as a separate product or component like you've done with ZPA? Thank you.
Yes. I think those are the things you take the market you look at the on option rates, you look at other market kind of willing to pay, and then you change your bundles over time. You have seen us change some of the bundles over the past couple of years. And I think there'll be some more changes over time I think we'll see some large platforms being announced that are kind of significant beyond the traditional typical security we're talking about, I think you'll be pleased with the evolution rather significant addition of technology we are doing to further create distance between the cloud imitators and us.
We'll take our next question from Keith Weiss with Morgan Stanley. Please go ahead.
Keith, are you there?
Caller, please check.
Sorry about that. I was on mute. Thank you for taking the question. So I was just asking as we're going into the next fiscal year, you have a new CRO, who needs time to kind of ramp up, but you also have a much broader product portfolio selling a much bigger vision into your customer. How should we think about the kind of degree of change we should expect in the sales force kind of in as we enter the year versus prior years.
Is there significant kind of restructuring that we should expect sort of from the get go or is that going to come later in the year once Dali has time to kind of ramp up and come up with a game plan?
Darlene and I have been discussing it for quite a while. We don't really expect significant change in the sales teams, we do expect a significant change in the sales methodology, sales framework, to be able to deliver the message consistently. Those are the kind of refinement we need to do, which need to be consistently gotten across. We overall have good sales team. We need to make sure our enablement, our training, our metrics, who exactly know what needs to be done is we're the focus I mean, think of, we all know that when you go to a certain stage, so 0 to $300,000,000, $300,000,000, you have one set of stuff as you go to the next big phase to a $1,000,000,000 kind of targets, you kind of make a lot of these things in place.
And those are the type of things for the next level. We are honing on and refining and scaling. And by the way, all those factors sorry, all those factors are built into Remos forecast for 2020.
Yes. Ebony, we'll take one last question, please.
Certainly. We'll go next to Keith Bachman with BMO. Please go ahead.
Hi, thank you. It's a good segue from the past question. Jay, I wanted to just push back a little bit. You've mentioned that you still have 80% of the largest enterprise you have to penetrate and this is an evangelical sale. It requires, in many cases, an architectural change.
And so I'm just wondering why you wouldn't need to lean on a much more significant sales force in order to keep revenue growth rates and frankly penetration rates on new logos growing and less dependency on the SI community who I think is more about fulfillment given the model that you have. And so I'm just wondering why sales and marketing expense would need to keep growing at a pretty high rate given those attributes. And I'm just going to sneak in just one clarification. Could you told us what the CRPO was, a $305,000,000, but I just wanted to see could you just clarify what the growth rate of that was as well? That's it for me.
Thank you.
I'll answer the growth rate. It's 45% year over year.
So regarding the first part of the question, I think if you looked at what I said early on too, I said yes, channel partners do help, but we do tons of heavy lifting. Transformation sales are actually high touch sales. So we are investing significantly in our sales and marketing. In fact, if you look at our 20 plan, we haven't brought down sales and marketing as a percentage of revenue which typically we would year over year. And that's keeping in mind that we need to keep on putting some more gas on it.
And I, if I left another message impression, then I didn't do a good job, we actually are driving sales with our own sales organizations and channel is helping us channel is facilitating us. We aren't getting channel leverage. But all of you should know when transformation happens, channel can only do so much when technology become more mature and commoditize channel plays a much bigger role. So we are investing, but prudently, right? There's only so much you can invest in terms of number of sales people, sales and marketing, total headcount we're adding this year or last year is pretty significant.
So fully aligned with the message you said if I said any of it otherwise, it wasn't clear.
And this does conclude today's question answer session. I will now turn the call back over to Jay Chaudhry with for any additional or closing remarks.
We thank you for joining us for this call. And we look forward to seeing a number of you at our Zeno Live conference as well as our Analyst Day. Otherwise, we'll talk to you next quarter. Thank you. Thank you.
And once again, this concludes today's call. Thank you for your participation. You may now disconnect.