Financial Results for the second quarter of fiscal 2019. With me on the call are Jay Chowdhry, 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 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.
Unless otherwise noted, All numbers we talk about today 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 GAAP to the non GAAP reconciliation can be found in the supplemental financial information referenced a few moments ago. I would also like to inform you that we'll be participating in Piper Jaffray's Securities Symposium in Chicago on March 14th.
Now, I'll turn the
call over to Jay. Thank you, Bill, and thank you, everyone, for joining us on our call today. I am pleased to share with you our record second quarter results. Our revenue grew 65% and calculated billings grew 74% year over year. In addition to our top line growth, we achieved another quarter of positive operating profit and free cash flow.
Our operating margins improved 19 percentage points year over year to 13%. Our Q2 results demonstrate the leverage in our business model and our ability to drive growth and profitability. Having said that, we will continue to aggressively invest in our business to pursue our significant market opportunity. We are well positioned to capitalize on the mega ships in the data center and network architectures to support the secure adoption of cloud. In the cloud world, applications can be anywhere and devices and users can be anywhere.
The notion of inside the network or outside the network is disappearing. It is no longer a simple matter of defending a network perimeter. Which has effectively disappeared. Design for the ring which has no walls, the Z pillar clouds ex as business policy engine, deployed across more than 100 data centers to securely connect the right user to the right application. ZIA for internet and SaaS applications and ZPA for internal applications in your data center, the public cloud or a hybrid cloud.
With the Zscaler security cloud, There is no policy or trust assigned to the network level and therefore there's no need to maintain a complex expensive private network and stacks of appliances that do network security. Our comprehensive cloud security platform is being leveraged by our customers as they progress through various stages of the cloud adoption journey. Let me highlight several deals in the quarter that illustrate the diverse use cases. A top global bank in Asia purchase Zscaler business bundle for over 100,000 employees to scale capacity and up level security. This customer experienced scaling issues with an on prem web proxy as they piloted Office 365.
That existing appliances would not keep up with the surge in entrant on traffic from 12 100 offices worldwide. The incumbent appliance vendor offered hybrid cloud security. As we often see in the market, the hybrid solution failed to meet the customer's requirements. They're also up leveling security by deploying necessary inspection, advanced set protection and sandboxing. In addition, they purchased our DLP solution to help meet regulatory requirements.
We talked to you about our entry into Japan last year and I'm pleased to share with you that our business is growing well
in this new market. For example, a Global 500 IT products and services company which last year purchased Zscaler entry level professional bundle and SSL inspection functionality for 135,000 users to replace on premise web proxies is now consolidating additional layers bundle and cloud sandbox for all 135,000 users replacing their incumbent sandboxing vendor. The drivers, protection against highly targeted 0 day attacks that are almost always hidden in SSL traffic. SSL traffic has increased to more than 80% of the web traffic and this traffic is not visible to traditional security appliances. Imagine 80% of the luggage passing through airport security unchecked You can't because that would be unacceptable, but this is exactly what happens when organizations attempt to use Nextgen firewalls to protect users.
Zscaler bought natively designed as a full SSL proxy. Which means our customers can inspect encrypted traffic without impacting user experience, leading to better security and reduced businesses. Let me give another example, where Zscaler was purchased to secure the transformation of customer's network and security infrastructure, a Fortune 500 Retail And Manufacturing company, purchase Zscaler transformation bundle, which includes cloud firewall, IPS and cloud sandbox, for all 25,000 users to secure 100 of locations. In addition to helping Office 365 deployment, the customer will secure an upcoming SD WAN initiative for local internet breakouts. Zscaler will further enhance security with coverage for all users, including mobile and improved user experience as their on premise GLP sitting in a few data centers becomes ineffective with local breakouts that customer purchase DLP for all users to protect sensitive information from leaking, no matter where the user is at the headquarter or branch office or on the road.
On a laptop or on a mobile device. Another deal highlights our capabilities in M And A And Business reorganization use cases, a global pharma is spinning off 1 of its divisions, driving the need to separate out its applications, network and security from its parent company. In the pre cloud world, they would be moving their applications to new data centers, building a separate wide area hub and spoke network and a mode with security appliances, which can often take a year or 2. Instead, they pursued a full transformation to the cloud with internet as its wide area network and Zscaler as the policy engine. The purchase Zscaler transformation bundle for ZIA and ZPA for 24,000 users across 155 locations without building a new network and new security gateways.
The customer is leveraging Zscaler to provide secure, fast, and reliable access for any user from any location and device. At a lower cost of ownership and with greater operational simplicity. And this will take months rather than years. Next, I will highlight a deal for Fortune 500 auto company that started the ZPA and quickly expanded to ZIA. In August, this customer purchased ZPA for 10,000 users including 2000 contractors for VPN replacement and M and A integration.
With ZPA, our customer was able to provide access for specific and have full visibility into users, applications and traffic. This success led the customer to purchase ZIA business bundle plus cloud firewall functionality for all 46,000 users across 350 locations less than 6 months after purchase resulted in quadrupling of the total customer spend with Zscaler. Lastly, on our Q4 call, We discussed the largest deal in Zscaler's history, which contributed $16,500,000 to billings in the quarter. This quarter, this public sector customer began the 2nd stage of the security transformation project resulting in an additional $11,000,000 We expect this deal to generate $50,000,000 in revenue. Remo will discuss this deal further.
This customer required a highly scalable policy engine that can handle 120 gigabits per second throughput, while inspecting SSL traffic for security. To give you a reference point, a majority of Fortune 500 enterprise customers need a few gigabits per second of sustained throughput. This cloud architecture allowed us to extend our cloud to the data center and deliver a hybrid solution. These deals demonstrate the unmatched benefits that Zscaler delivered. While traditional firewall and VPN vendors are making more noise about their hybrid security cloud.
The technology is fundamentally designed to protect the corporate network by building a moat around the corporate castle. In the cloud world, where will you build a moat yet legacy network security vendors are trying to do what their technology can, extend your corporate network to various public clouds where office, hence, increasing business risk. Legacy network security vendors, hybrid cloud security is a defensive strategy which, of the customer. It's a single tenant architecture. That's not designed for the cloud.
Their message is keep on plying my boxes, but use my cloud service when your users are on the road or in a branch office. In this hybrid cloud approach, who manages the on prem boxes and who manages the cloud version? Where are logs and how do you keep data private? It's a disjointed solution. This equates to splitting a single application between the data center and the cloud.
How many customers have deployed Siebel or PeopleSoft in the data center and a virtual version of it in the cloud. We know what happened to it. When was the last time you heard of them? With our born in the cloud architecture. Based on the use case, we extend Zscaler's cloud to the customer's premise doing hybrid cloud the right way where we have full responsibility for managing, scaling and running the service.
We believe we have a significant competitive advantage as a result of the technology architecture and maturity of our platform. As the world's largest security cloud, we are inspecting 65,000,000,000 transactions each day. As part of ongoing expansion, our latest 4th generation data centers provide multiple 100 gigabits per second links for a total peering capacity of over 1 terabyte per second per site. The requirements for a security cloud that handles all of your internet and cloud traffic is very high. Hence, Zscaler delivers 5 nines of availability SLA.
We have over 10 years of operational experience running our security As seen with some of our highlighted deals, ZPA is building momentum. Customers are exploring 0 trust network techniques to offer access to apps without granting access to the corporate network. As an early pioneer in software defined perimeter, we have a mature rich ZPA offering that's running in production at 100 of enterprises. While many imitators are coming out with access to web apps, ZPA was designed for secure and fast access to internal applications using all protocols and running on multicloud and hybrid cloud environment. This allows us to address a wide range of use cases that others can't.
I'm pleased to report that we are executing on our vision and making solid progress in the global 2000 accounts. We remain focused on execution and investing in our go to market capabilities. And we expanded our workforce by approximately 100 employees this quarter with half in sales and marketing. We are taking our Zenith Live cloud summit on the road with a series of regional events called Zscaler Academy World Tours. At these events, we are providing hands on labs best practices and customer case studies on how to enable IT cloud transformation securely.
We are also strengthening our channel partnerships. With large system integrators and global service providers, which contribute over 50% of our revenue. In summary, we are very we are in the early innings of a significant market opportunity I'd like to now turn the call over to Remo to walk through our financial results.
Thank you, Jay. As Jay mentioned, we had a very strong Q2. Revenue for the quarter was $74,300,000, up 17% sequentially, and 65% year over year. Q2 revenue was aided by $2,300,000 and non recurring revenue from the large public sector customer deploying our solution as a private cloud. This amount was mostly comprised of private cloud infrastructure as well as recognition of deferred subscription revenue from Q1 as we achieved a project milestone.
From a geographic perspective for the quarter, Americas represented 53 percent of revenue, EMEA was 40% and APJ was 7%. 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 74% year over year to $115,000,000. This quarter, we benefited from a higher mix of upfront greater than 1 year billings including approximately $11,000,000 from the public sector customer. 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%. Total backlog, which represents remaining performance obligations, was $461,000,000 on January 31, up 69% from $273,000,000 1 year ago. Our strong customer retention and ability to upsell have resulted in a consistently high dollar based net retention rate, which is 118% for the period ended January 31. This compares to 122% a year ago and 118% last quarter. Our increased success selling bigger deals upfront, which start with the transformation bundle and faster upsells within a year while good for our business can reduce our net dollar retention rate, which is calculated on a year over year ARR basis.
Considering these factors, we feel 118% is outstanding and it will vary quarter to quarter. Total gross margin was 80%, down 2% sequentially, and 1% year over year. We feel that 80% continues to be a good target range in the near to medium term. And is important to continue to invest in our platform to drive top line revenue growth. Turning to operating expenses.
Total operating expenses decreased 1% sequentially and increased 27% year over year to $49,800,000 but decreased as a percentage of sales to 67%. The sequential decline in operating expenses is primarily due to the timing of our worldwide sales kickoff and seen at Live European User Conference in Q1. We increased our headcount in Q2 by approximately 100 employees. Sales and marketing decreased 1% sequentially and increased 27% year over year to $33,200,000, As mentioned, the decline is primarily due to the timing of sales and marketing events. Even though we have a sequential decline in sales and marketing expenses, we're building our sales and marketing teams and investing in marketing programs.
In Q2, we increased our sales and marketing teams by approximately 50 employees. R and D was up 4% sequentially and up 23% year over year to $10,700,000, as we continue to invest to enhance product functionality and to offer new products. G and A decreased 8% sequentially and increased 37 percent year over year to $5,900,000. The year over year growth in G And A includes investments in building our team consulting and other expenses that we've made as we became a public company. The sequential decline in G And A is primarily due to lower professional fees.
These expenses exclude $1,800,000 in litigation related expenses. Our 2nd quarter operating margin was a positive 13% which compares to a negative 6% in the same quarter last year. Net income in the quarter was $11,600,000 or non GAAP earnings per share of $0.09. Given the positive earnings in the quarter, our EPS was calculated on a fully diluted basis of approximately 134,000,000 shares. We ended the quarter with $340,000,000 in cash cash equivalents and short term investments.
Free cash flow was positive $12,000,000 in the quarter compared to negative $4,600,000 for the same quarter a year ago. Our ESPP program reduced our free cash flow by approximately $5,600,000, as we initiated our first stock issuance in December. ESPP program does not impact our overall cash balance. So 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 third quarter, we expect revenue in the range of $74,000,000 to $75,000,000 reflecting a year over year growth of 51 percent to 53 percent, operating profit in the range of 0 to $1,000,000,000. Income taxes of $600,000, earnings per share of approximately 0.01 dollars, assuming 135,000,000 common shares outstanding. For the full year 2019, we expect revenue in the range of $289,000,000 to $291,000,000 or a year over year growth of 52 percent to 53 percent billings in the range of $365,000,000 to $307,000,000 or a year over year growth of 42% to 44%. Operating profit in the range of $11,000,000 to $13,000,000 Income taxes of $2,100,000 and earnings per share in the range of $0.11 to 0.13 dollars assuming approximately 135,000,000 common shares outstanding. Looking forward, our plans are not to maximize profitability or to generate additional operating leverage, but to invest aggressively in our business to pursue our significant market opportunity.
With our CMO and Senior VP of Customer Experience And Transformation On Board, we'll be stepping up our marketing investments in the coming quarters. In addition, we'll increase investments in our technology platform and cloud infrastructure. And 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. This sequential decline will be accentuated by the multiple greater than 1 year billings we had in Q2, including $11,000,000 from the public sector customer. Also keep in mind that we have a large upfront billing of $16,500,000 in Q4 of 2018 that will pose a tough year over year comparison in Q4.
We're very proud of what we have achieved and look forward to building on our opportunity. Now, I would like to turn the call back over to Jay.
Thank you, Remo. We believe we are the best choice for securing the cloud and mobile first world. The right architecture matters, on premise single tenant architecture, whether deployed as appliances, or as virtual machines spun up in a public cloud will not allow enterprises to fully realize the benefits of cloud. These imitators can scale, leave gap in security are expensive and deliver a poor user experience with multiple tailwinds such as SaaS adoption SD WAN and app migration to public clouds, we believe the market is coming to us. We thank you for your interest in Zscaler and look forward to reporting on our progress in the future.
Operator, you may now
you. To reach our equipment. For asking
questions.
My first question comes from the line of Melissa Franchi from Morgan Stanley.
Great. Thank you so much for taking my question and congrats on the quarter. So, Jay, it sounds like obviously Zscaler is enabling transformational scale, particularly with ZIA, but also ZPA. Just, just given your result, it does seem like perhaps that transformational sale is becoming a little bit more mainstream. If that's correct and, and it is becoming more mainstream.
What are you seeing in terms of the sales cycle? Are you seeing a shortening of sales cycles as enterprises are getting more comfortable with this approach?
So, thank you, Melissa. As we have said in the past, our sales cycle for smaller accounts is about 3 to 6 months for larger is about 6 to 12 months. I would say the number of deals are growing rapidly, hence our pipeline is going up. That's why we're closing more deals. But some of the transformations do take time.
So it's probably moving to the lower end of the range we talked about, but I won't say it's being cut down into a few months. Yeah. I would still say probably 6 to 12 months more on the lower side than the upper side.
Our next question comes from Brad Zelnick with Credit Suisse.
Thank you so much and congrats once again Jay Remo and team on a phenomenal quarter. Jay, so much of the legacy approach is security is tied to infrastructure. Like you said in your prepared remarks, building motes and what we've protected things in the past like networks and points, but now the world is hyper virtualized and dynamic, which is really driving your success.
But just in the last couple
of days, you've seen 2 major legacy security players rattling Sabers as it relates to endpoint. And we're also seeing a battleground emerge around data analytics and orchestration as the next platform plays. So My question is in the past, you've talked about endpoint players being natural partners for Zscaler. Does that ever change? And as well, as for becoming the data orchestration layer, it would seem Zscaler has a natural advantage if you wanted to participate.
How do you the future shaping up in this regard and what role might C Scalar play? And I've got a follow-up for Remo.
Okay. It's a good question. It is true that there are lots of security vendors out there and enterprises do want consolidation, but I believe real solidation is done by building an extensible platform from a clean slate. And that's what we are doing about network security by sitting in the traffic path and consuming subsuming all that functionality. Now having said that, I don't believe you'll see a god security vendor who consolidated all functionality from endpoint to analytics to identity and the like.
So there needs to be a natural ecosystem of partners where you know where your strengths are. You talk about endpoint. Let's look at Endpoint. We think the core competencies and technology for Endpoints are very different from in line traffic inspections. You have seen in the past, many network security vendors have tried to sell endpoint protection for years.
How much progress have they made? We believe in being partners with endpoint partners. Now security analytics and orchestration, It is an interesting area. We actually partner in this area. Traffic inspection, you need it from endpoints, identity, servers, applications like Office 365.
I personally believe that large, non network security vendors who have core competency of cloud scaling databases and machine learning will do a better job. So we are partnering with those vendors. I think we have talked to you in the past between ZIS EPA together eliminating entire in line policy enforcement is about a $18,000,000,000 TAM. And it seems to be growing. So a long answer, but do we want to compete in the endpoint or security analytics?
Not really, we have good partnerships there.
Our next question comes from Dan Ives with Wedbush Securities.
Yes. Hey, hope all is well and just a phenomenal quarter.
So my question is, In terms of the transformation going on
in terms of sales cycles,
I mean, are you seeing the transformation on a particular vertical or it's kind of across the board in terms of this kind of acceleration that we're seeing in terms of the strategic deals?
Yes. Dan, good question. So the transformation lies along the lines of which verticals are embracing cloud sooner than others. Manufacturing sector actually embraced cloud before many others. And they also needed to do local internet breakouts.
So that's where we got GE and Siemens of the world out there. The companies that are a bit slow in embracing cloud, financial services were slow, but now they're picking up. Healthcare was slow, but they are picking up. So it's a bit along the vertical lines, but it's hard to meet a CIO who says I don't embrace cloud. Once you embrace cloud, you must transform your network and your legacy security.
So we are seeing increased interest, but a little bit on the timing of the question, sorry, the sell cycle. See transformation requires the CIO, CTO, CISO architects to come along together. So it does take some time. It's not a matter of here is a cool new security box. It has better feeds and speeds and let's replace one with other.
It is an architectural transformation. That's why it takes a bit longer time and a different kind of technology.
Our next question comes from Andrew Nowinski with Piper Jaffray.
Great, thank you, and congrats on a great quarter. So you talked about winning a deal against an on premise web proxy vendor, and they were trying as customers trying to use, that to support their Office 365 roll out I'd assume that the scalability issues that you highlighted are likely not specific to that necessarily at customers' environment, meaning other potential customers deploying Office 365 would likely face similar issues. So I was just wondering if you could give us your estimate of how far along, we are with regard to the tailwind from the Migration Office 365.
So very good question. You are correct. That this issue wasn't specific to this customer and the web proxy. This is what happens when you move your exchange server to the cloud, 80 percent of email traffic and calendaring traffic that used to stay within your company. Only a 20% used to go out.
Now all traffic, every email, every calendar entry has to go out to the cloud and come back. So the amount of traffic with all the file attachments and everything grows significantly. What we are finding is Once you go to simply increases your total inter traffic to double or triple. Now that not only creates problems for web proxies, it creates problems for firewalls, And because each outlook client creates 15 to 20 persistent connections, you run out of connections, you have to upgrade the security equipment out there and then the bandwidth costs and MPLS. So Office 365 doesn't just work through simple proxies and firewall.
It has a lot of IP address management issues. There's some bandwidth quality or service issues. We have worked with Microsoft over the past 3 years with single click deployment and handling quality or service and the like. So we're well positioned to handle Office 365. Now the second part of the question is, how much deployment?
What's going on with Office 365? Office 365 has actually been bought by probably majority of the enterprises we deal with And those who haven't bought, they're probably in the early stage of piloting and the like. So to give you a perspective, today about 22% of the traffic that goes through Zscaler cloud is Office 365 traffic. 3 years ago, the number was about 2%. Okay.
As it goes up, that I'm going to keep on going up. I believe we have probably about 25% of the offices is CVI customers. Offer customers on the cloud, but there's plenty of headroom for us where Office becomes a catalyst for us to drive transformation.
That's great. Thanks Jay. And then one question with regard to the marquee public sector customer you referenced on the call. Do you think that when established as Zscaler is somewhat the vendor of choice in the public sector that you can leverage, that win across other agencies perhaps?
So it definitely does. And so the interesting point is when the customer put all the requirements, we were the only vendor who could really meet the requirements. I think we're well positioned, but still you have to go and engage and win the deal, but very well positioned for others.
Try to keep up the good work guys.
Thank you.
Our next question comes from Gray Powell with Deutsche Bank.
Great. Thanks for taking the questions and congratulations on the good results. So I'll be curious. I know that you're selling a much broader platform. But I'd love to hear what your what your view is on the overall growth of the Secureweb Gateway market?
And then within that, do you think or how fast do you think that, cloud form factors are growing versus appliance form factors?
So we don't track the growth of appliance form factor. I'm not even sure there is a growth in appliance form factor, okay. But having said that, every deal Zscaler wins actually has some kind of web proxy out there because it's hard to find an enterprise that doesn't have web proxy for outbound traffic. Web proxy has been the standard for user traffic going to the internet. But as you saw in most of our deals, something may start with a proxy, but evolves to the next and the next level, our web proxy equivalent bundle is actually our professional bundle, which is a very small number of probably Remo, about 5% of the business comes from essentially web proxy placement.
The remaining from business bundle, which has a lot of advanced functionality, including bandwidth control, type of stuff needed and transformation bundle, which are obviously includes firewall and cloud sandbox and the like. I the point I'll make is I don't think our business is driven by replacement of a web proxy or a firewall. Our business is driven by a CIO saying I am embracing cloud, which is driving to do network transformation, which essentially requires local internet breakouts and they must be secured and we are the purposeful solution for securing the local breakouts.
Got it. That's that's really helpful. And then one for Remo, if I may. So just kind of looking at sequential trends, if I back out the one time item from revenue, you grew revenue by about 14% in the January quarter from the October quarter. Any expecting we should any reason we should expect growth to be more like 3% to 4% sequentially in April?
Well, I mean, that's our you've got our guidance. So we're comfortable with our guidance. And again, we feel prudent with the guidance that we've given.
Okay.
Thank you very much.
Our next question comes from Gabriela Borges with Goldman Sachs.
Good evening. This is Dan Church on for Gabriela Borges. Thanks for taking my question. I guess, just to start, it certainly sounds like customers are coming onto the platform at higher AOVs. Maybe just if you can walk me through some of the puts and takes of what they're what AOVs look like relative to a year ago when you IPOed and what that the puts and takes to, upsell opportunity from there and how that's been trending?
What is an AOV
average order value, sorry, or initial order value.
Got it. Got it. So yes, average sales price. Yes, it's been increasing on a quarter over quarter basis. It, currently, you know, 4 customers have and we look at the larger customers of greater than 3000 users.
It's in the mid-three 100,000 range. It has gone up year over year and it has gone up consistently quarter over quarter?
Probably at the IPO time is less than 300 k for the same type of customer.
That's correct. If the IPO time was below 300.
Great. Thank you. I guess, just as a follow-up, there's a handful of appliance vendors out there talking about SD WAN, maybe how have your conversations with customers been changing? And how are customers thinking about the transformative switch to Zscaler versus going with another appliance vendors and maybe some of the puts and takes. And if you think We are giving the ROI on lower MPLS costs customers are willing to invest in these transformations irrespective of a more challenging macro environment.
Yes. Good question. We actually are the natural choice for SD WAN securing the SD WAN, as I said in some of the earlier comments, that network transformation is driving local internet breakouts, and those breakouts need to be secured. SD WAN vendors are consolidating the functionality at the branch level switching routing functionality, but they really don't have security built in and some of them are trying and they will try to do so, but it's very hard to do top line security. So the way I look at it as SD WAN market accelerates, it becomes a stronger and stronger tailwind for us.
Now ZIA sales does not require SD WAN. Traffic can be sent to Zscaler from any router. And but SD WAN may deployment and management of the branch network easier. By doing local breakout, it can save money, but it still needs security and that's where we play in we believe SD WAN will keep on helping us. And also, we we're working with all of In fact, we've done integration where literally with a single click on the console configuration, the traffic can be sent to us through APIs and monitoring can be done.
Very excited and comfortable with that opportunity.
Our next question comes from Tal Liani with Bank of America.
Hey, guys. This is Dan Bartus on for Tal. Thanks for taking my questions. Kind of follow-up to last one, but I wanted to focus on pricing. So you guys have obviously discussed a lot of the tactical advantages.
But when we look at your competitors that can bundle SD WAN, meaning mainly Cisco umbrella, forward in that SD WAN. Ignoring those architecture differences, do you think Zscaler would still potentially be a lower cost option there?
Do you think Zscaler will be a lower cost option there? So first of all, even before SD WAN. In fact, I was talking to one of the Cisco execs a couple of years ago, 70% of the traffic that came to Zscaler came from Cisco devices, 70% in very small then said, oh, that's in line with my market share, 70% of the routers in my market are my routers. Okay. So what you're really saying is we have been all the customers we have out there from these big network vendors.
The traffic is still coming to us. And the reason is the following: The Zscaler security is not bought as a part of the network stuff. Zscaler truly transformation sales top down driven it creates a kind of a need for, securing the local breakout. And when the customer selects SD WAN and all, we become a natural player. So the other point I'll mention is in all these large enterprises, security becomes a functionality, the richness, ability for policy to move around ability for logs to come back GDPR compliance, the requirements are so high that some of the solutions that are not designed for the cloud world, they just they just don't work very well.
So do those things concern us, not really.
Okay, great. Makes sense. And then really quick, if we can get any metrics on the breakout of percent of sales that are direct or through the channel or managed through service providers? Just trying to get a feel for where the momentum is shifting in the go to market strategy as well. Thanks.
Yeah. Yeah. So direct is under 5%, and those are legacy deals that we've got. Everything's going through the channel. Currently for new business.
And it's pretty close to split fiftyfifty between SPs and SIs at 50% 50% through the VAR channel?
If I may add, I mean having done appliance companies before, typical appliance vendor, but 85%, 90%, 95% business goes through traditional VARs. And SPs and SI is a very small percentage because those are they don't like to resell boxes, okay. In our case, to have over 50% of revenue comes from SP and SI is a good differentiation because those drive transformation.
And our next question comes from Alex Henderson with Needham.
Hey guys. So, price for perfection and you delivered it. Nice job. I got just a housekeeping things I'd love to take care of. Can you give us some sense of what the uptake around ZPA was in the quarter what the mix and bundles was?
And what was the increase in sales staffing percentage wise sequentially. I think it's 15%. Am I doing that math right?
So I mean, the increase related to transformation and ZPA. What we said is that we'd give metrics out on that when we had meaningful changes all I can say is that ZPA is doing very well, and business has been increasing on a quarter over quarter basis. Transformation also, as companies are recognizing the need to adopt a transformational strategy, Our transformation sales are also increasing. We'll give we'll give you an update certainly at the end of our fiscal year for that. Related to the sales increase and sales mix and so forth, we increased our headcount overall in the company by approximately 100 employees in Q2.
And about half of those were in sales and marketing So we see the large market opportunities that we have in front of us and, we are aggressively hiring.
Yes, I got this problem.
Let me add on ZPA, Alex. Sorry. It's the fastest growing product for us, and we're very bullish on it.
I got the 50 hires. I was just trying to figure out what the base was compared. Is that 15% to 20% increase sequentially in staffing on headcount?
We haven't given those metrics out, related to what the increase is. Great. Thank you.
That concludes today's question and answer session. CEO, Jay Chaudhry at this time I will turn the conference over to Rebecca for your closing remarks.
Great. Well, thank you all for your interest and time. Hope to see many of you at the RSA conference. Otherwise, we'll talk to you at the next quarter's earnings call.
Great. Thank
you again. Bye bye. Thank you.
This concludes today's call. Thank you for your participation. You may now disconnect.