Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Zscaler 4th Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Bill Choi.
Please go ahead.
Good afternoon, and thank you for joining us to discuss Zscaler's financial results for the fiscal fourth quarter and full year 2018. 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 our website earlier today.
Discussion, including but not limited to the company's anticipated future revenue, operating performance, gross margin, operating expenses, net loss pro form a net loss per share and cash flow dollar based net retention rate. 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 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. For historical periods, the gap to the non GAAP reconciliations can be found in the supplemental financial information referenced a few moments ago. Would also like to inform you that we will be participating in the City Group's TMT Conference in New York City on Friday, September 7, and the Deutsche Bank's Technology Conference in Las Vegas on Thursday, September 13th. Now, I'd like to turn the call over to Jay.
Thank you, Bill, and thank you, everyone, for your interest in Zscaler. I'm pleased to share with you our strong 4th quarter and full year fiscal 2018 results. We posted record revenue and record billings in the quarter, as we continue to experience rapid growth. In Q4, our revenue grew 54% year over year to $56,000,000 and billings grew 72% year over year to $95,000,000. It was an exceptionally strong end For the full year, our revenue grew 51 percent to $190,000,000 and billings grew 65 percent to $258,000,000.
In addition to our top line growth, we had healthy operating performance in the quarter as and we generated positive free cash flow. We ended fiscal 2018 with over 3200 and 50 customers. Total Global 2000 customers increased to 300 as of July 31. Up from over 200 a year ago, which reflects strong traction among large enterprises. We believe these results demonstrate Zscaler's increased adoption and the pivotal role our cloud platform plays.
To enable secure cloud transformation. It also shows strong sales and marketing execution. An increasing share of our sales are coming from our transformation bundle, which includes cloud firewall, IPS and sandboxing. Cloud and Mobility are breaking the traditional perimeter where organizations built the hub and spoke network to backhaul branch office traffic over wide area network to the data center. Then they built the mode of security appliances that established a perimeter around the corporate network to secure the network.
Well, that's why we call it network security. We believe that network security is irrelevant for the cloud. Applications can be anywhere. Users can be anywhere. The notion of inside the network or outside the network is disappearing in the cloud world where internet is becoming the corporate network.
Where would you build the mode? Spinning a firewall of web proxy virtual machines on AWS doesn't make it cloud security. It is still network security. Design for the world of cloud which has no walls. Zscaler acts as a policy engine deployed across 100 plus data centers, to securely connect the right user and ZPA for internal applications in your data center or the cloud, we believe we have the right architecture and are the best a $17,700,000,000 TAM that our analysis of IDC's data indicates are spent annually on network security products.
Our strong business momentum is reflected in our financial results. I would like the largest deal in our company's history, which contributed $16,500,000 to billings in Q4. We're rapidly growing internet traffic to 60 gigabits per second throughput and need to inspect SSL traffic for security. This customer required a highly scalable internet gateway. To give you a reference point, majority of Fortune 100 Enterprises need a few gigabits per second of sustained throughput.
True to its name, Zscaler scales well. We were the only solution that could meet our requirements and deliver good user experience. Zscaler cloud architecture allowed us to extend our cloud to their data center and deliver a hybrid solution. A Fortune 100 Communication Services company with headquarters in Asia and presence in over 50 countries, purchase both ZIA and ZPA for 50,000 users to securely enable their business for the cloud. A very good example of customers embracing the entire Zscaler platform upfront.
This customer acquired and restructured its entities and needed to standardize secure application access. Across four business units with different network and security infrastructure. ZPA is designed to do exactly this. Without having to from multiple vendors leading to better user experience, cost savings and simplification of infrastructure. A leading European IT Services company purchased our business bundle for over 100,000 users.
They have traditional network and security infrastructure, up and spoke network with a handful of internet gateways, This customer had a CEO driven mandate to make business more agile and reduce costs To achieve this, the IT team identified 2 initiatives: 1, network and security transformation and to increased use of cloud, including a move to Office 365. The strategy they arrive at, local internet breakout at every office, and their solution Zscaler to secure over 200 local breakouts around the globe, plus security for the mobile workers to enable cloud transformation. Our service provider partner will deliver Zscaler as a managed service to this customer. In parallel, this customer systems integration business unit will be commercially offering Zscaler services for resale and consulting engagements. We also had a number of notable upsell wins in Q4, a top 10 bank in U.
S. Which purchased our transformation bundle and DLP for 10,000 users 6 months ago. Purchased additional user licenses to cover all 55,000 employees. As a bank is embracing the cloud, including Office 365, they developed local internet breakout strategy for 2800 branches and 200 back offices to replace their traditional perimeter security and hub and spoke network that had only 2 internet gateways. In addition, they wanted to enhance security.
Security for mobile users, secure guest WiFi and inspection of SSL traffic for malware and data leakage. The natural solution, Zscaler transmission bundle, along with SD WAN devices. These killer will be the only security chat post for traffic headed to the internet from all branches and the data centers. While we are replacing traditional network security appliances, such as secure web gateway, outbound firewall, DNS, sandbox, and TLP in current 2 data centers. It is mostly a greenfield opportunity.
We are creating about 3000 new secure local internet breakouts, driven by M And A requirements and user unhappiness with the traditional VPN, they also bought ZPA for a subset of users. Our Financial Services customer that bought transformation bundle for 15,000 employees about 2 years ago, purchased ZPA for all 15,000 users. While ZIA provided them secure and fast access to internet and SaaS, ZPA will do the same. For their internal applications, some of which are in the data center, while many are in Azure and AWS. This deal enables realization of this strategy.
Perimeterless enterprise would direct access to any service or application from anywhere on any device without backhauling traffic through the data center. A result, fast user experience and lower cost. They will no longer need either a site to site VPN to Azure or AWS or a remote access VPN. This eliminates all network security appliances, including traditional VPN, except the inbound firewalls to the data center. A Fortune 100 Multinational Oil And Gas company in Europe that bought a small paid pilot of our transformation bundle 1 year ago, expanded the purchase to all 65,000 users.
This customer is launching an initiative for global IT transformation. It is comprised of 1, local internet breakouts in four fifty locations across 65 countries. 2, cloud first approach to applications such as Office 365 and 3, minimal on premise infrastructure. Another driver was to enhance security with SSL inspection and to secure hundreds of guest Wi Fi locations. Like many other deals, while we are replacing network security appliances in their current internet gateways, It is mostly a greenfield opportunity to create about 450 secure local internet breakouts.
Let me make a We're very excited about rapid growth. ZPA was introduced nearly 2 years ago and was made available to all sales rep 1 year ago. In fiscal 2018, ZPA contributed approximately 10% to new and upsell business with almost half coming from new customers to Zscaler. Continued adoption of the Zscaler platform as customers increasingly rely on us to enable the transformation journey. Our born in the cloud or the cloud platform is delivering value to our customers.
Zscaler provides 4 compelling benefits to customers: 1, deliver a better user experience with local internet breakouts. 2, enhanced security with cloud effect and full in line inspection, including SSL scanning at scale. 3, minimize cost for security appliances and MPLS network and 4, simplify infrastructure by reducing the need We feel that our go to market We are investing in our A strategic advantage for us is our channel partnerships with large system integrators and global service providers. During the fourth quarter, we upgraded our cloud with scores of features that strengthen our security, improve reporting, and enhance usability Notably, we took our data loss prevention or DLP functionality to a new level We introduced Exact Data Match on EDM. We believe this is the industry's 1st multitenant DLB for the cloud, that scales to billions of fields.
Rather than looking for a generic match for any credit card or social security number, which is prone to false positives found in other DLP solutions. Our DLPDN can make sure that personally identifiable information, like credit card numbers or millions of users at a bank or an insurance company don't leak out. We significantly enhanced our cloud IPS capabilities for threat detection. The overall efficacy of a cloud IPS is far superior to traditional IPS. Because we natively inspect all traffic, including SSL.
These killer was designed as a proxy architect that is required to inspect SSL traffic. Most vendors attach IPS to firewalls, which are stateful architecture and are designed to We delivered significant enhancements to real time interactive analytics. Rather than showing just security counters like number of threats, Zscaler provides normalized risk score at the user level location or department level and the company level. CISOs can see the risk posture trends as well as how they are doing against their peer groups. 2 weeks ago, we announced the acquisition of market leading artificial intelligence and machine learning technology and the development team of stealth mode security startup trust path.
FirstPath developed AI algorithms to identify new threats and provide deep visibility resulting in enhanced security efficacy. These innovations will be incorporated into our extensible cloud platform and derive intelligence from 50,000,000,000 transactions we process daily to identify anomalous traffic build user behavior profiles and detect sophisticated targeted attacks as they emerge. We are excited about our future because of what we enable for our customers on the cloud journey. In June, we had our 1st inaugural cloud summit, Zenith Live in Las Vegas with hundreds of customers and partners attending. We had an inspiring lineup of keynote speakers to talk about the cloud transformation.
Including Scott Guthrie, the head of Microsoft's cloud and enterprise group and executives from GE, Siemens, AT and T, and others. We will be bringing Zenith Live to London next month on October 21st to 23rd. We are also excited about a major milestone ZPA GAAP. ZPA GAAP, our ZPA version for the federal government has achieved FedRAMP certification for the moderate security level and was granted a torch to operate by the Federal Communications Commission FCC. ZPAgov is the 1st 0 trust remote access platform that has received FedRAMP approval.
This authorization enables us to expand into the federal market. In summary, we're very pleased with our record Q4 and fiscal 2018 results. We believe we are in the early innings of significant market opportunity to disrupt traditional network security. I'd now like to turn the call over to Remo, to walk through our financial results. Thank you, Jay.
As Jay mentioned, we had a very strong 4th quarter in fiscal 2018 We are pleased with the results we achieved. Revenue for the quarter was $56,200,000, up 14% sequentially and 54% year over year. From a geographic perspective for the quarter, Americas represented 48% of revenue, EMEA was 45% in APJ was 7%. From inception, we've invested across all geographies and have built a strong international sales and operations team with an extensive global cloud infrastructure. We feel these investments have created a strategic advantage allowing C Scalar to provide our services to customers around the world.
For the full year, revenue was $190,200,000, up 51%. ZPA remains the fastest growing new product in our history. DPA contributed 10% of our new and upsell business in fiscal 2018, up from 4% in the prior year. Turning to billings and backlog, we define billings as the change in deferred revenue for the quarter, less total revenue recognized in that quarter. Billings grew 72% year over year to $95,400,000 for the quarter and grew 65% to $257,600,000 for the full year.
This quarter, we benefited from a higher mix of upfront greater than 1 year billings, including $16,500,000 from one customer as Jay previously mentioned. 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 slightly below 60%. Total backlog, which represents remaining performance obligations, was $398,000,000 on July 31, up 81% from $220,000,000 1 year ago, and 30% from $305,000,000 last quarter. Based on our ending July 31st annual recurring revenue for ZIA, Approximately 35% is from our high end transformation bundle, which includes our next generation firewall in SandBox, up from approximately 20% that we referenced during our IPO.
In addition, ZPA, which was released last fiscal year is additive as a cross sell to our existing customers. Our strong customer retention ability to upsell have resulted in a consistently high dollar based net retention rate. Which was 117% for the period ended July 31. This compares to 115% a year ago and 120% 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 117% is outstanding and it will vary quarter to quarter. Total gross margin was 80%, up 2% compared to Q4 last year and down 1% sequentially. The year over year increase was driven by an increased mix of higher price bundles with more functionality as well as operational efficiencies. We feel 80% is a very strong gross margin and our focus is not to maximize our gross margins at this stage. We feel as important to continue to invest in our platform and to drive customer satisfaction to drive top line revenue growth.
Turning to operating expenses, Our total operating expenses grew 11% sequentially and 32% year over year to $47,400,000, but decreased as a percentage of sales Sales and marketing increased 8% sequentially 34% year over year to $30,700,000. We've been building our sales and marketing teams and investing in marketing programs to drive growth and awareness. We incur significant sales and marketing costs initially sell our products But after the 1st year, our sales and marketing costs declined significantly as our commissions and marketing efforts are concentrated on the initial sale. R and D increased 15 percent sequentially and 24 percent year over year to $10,300,000 as we continue to invest to enhance product functionality and to offer new products. Complete FedRAMP certification for ZPA.
G and A increased 17% sequentially and 37% year over year to $6,400,000. These expenses exclude $1,400,000 in litigation related expenses. The growth in G And A includes investments in billionaire teams, consulting and other expenses we had made as we became a public company. Our 4th quarter operating margin was a negative 4%, which compares to negative 20 percent in the same quarter last year. Net loss in the quarter was $1,400,000 or pro form a net loss per share of $0.01.
We ended the year with $299,000,000 in cash, cash equivalents, and short term investments. Free cash flow was positive $11,900,000 in the quarter compared to negative 5,400,000 for the same quarter a year ago. Was positive $2,100,000 for the full year compared to negative $14,200,000 last year. We started our ESPP program in March which contributed approximately $3,000,000 to will be in December, which will reduce our free cash flow by approximately $7,000,000 to $8,000,000 in Q2 and will have no impact on our overall cash balance. Now, moving on to guidance.
As a reminder, these numbers are all non GAAP, which excludes stock based compensation expenses and certain litigation related expenses. For the first quarter, we expect revenue in the range of $58,000,000 to $59,000,000, operating loss in the range of $6,000,000 to $7,000,000 taxes of $600,000 and net loss per share in the range of $0.05 to 0.06 dollars, assuming approximately 121,000,000 common shares outstanding. For the full year 2019, we expect revenue in the range of $250,000,000 to $260,000,000 operating loss in the range of $16,000,000 to $18,000,000, taxes of $2,400,000 and net loss per share in the range of $0.12 to $0.13 assuming approximately 124,000,000 common shares outstanding. Our plan is not to give billing guidance on a go forward basis. However, due to the large upfront billing from one customer in Q4 of 2018, we want to provide some modeling points for billings.
Historically, Q2 and Q4 have been our strongest billing quarter with sequential declines in Q1 and Q3 respectively. For Q1 2019, The large upfront billing in Q4 will provide a difficult sequential comparison. Excluding the effects of the $16,500,000 from our Q4 billings, We expect a sequential percentage decline in Q1 2019 to be consistent to our previous Q4 to Q1 sequential declines. In the last 2 fiscal years, billings declined approximately 25% from Q4 to Q1. For fiscal 20 18, we expect the billings year over year growth rate to be lower than the revenue growth rate, with a difficult comparison in Q4 2019.
If we exclude this large upfront billing of $16,500,000, total billings growth in fiscal 2019 would be comparable to the revenue growth implying billings of $320,000,000 to $330,000,000 for the year. We will not be updating this billings commentary in the future. We're very proud of what we've achieved and look forward to building on our opportunity. Now I will hand the call back over to Jay.
Thank you, Remo. I would like to leave you with these key takeaways from our results. 1, With multiple tailwinds such as SaaS adoption, SD WAN, and app migration to public clouds, the market is coming to us. We are winning bigger deals, including the biggest deal in our company's history. 2, While we replace security appliances in current internet gateways, majority of ZIA sales are coming from creating and securing new local internet breakouts.
It is a greenfield opportunity. 3, our platform strategy is working well. Customers are purchasing our higher end transformation bundles and ZPA services. As they increasingly rely on us to enable cloud transformation. The Zscaler security cloud is delivering not just better and more pervasive security, but also a dramatic return on investment for our customers decreasing network infrastructure and bandwidth costs, while providing better user experience.
4, we have purpose built our cloud platform to be extensible with the ability to quickly introduce new functionality such as DLPDM and user behavior and analytics in our latest cloud update. We thank you for your interest in Zscaler and look forward to reporting on our progress in the future. Operator, you may now
you. We'll go to Brad Zelnick with Credit Suisse.
Excellent, Jay Remo. Congratulations on a strong finish to a spectacular year. I've got one for Jay and one for Remo. Jay, we get asked by investors all the time. Why can't the traditional network security players do what you're doing?
And I think you've done a great job in your prepared remarks. Addressing this with examples of customer success and your performance this quarter would also suggest you're doing something very different, but there's a lot of noise out there. And I think we've seen this is an industry where the best tech doesn't always win. So from a go to market perspective, how do you cut through the noise when most likely the customer you're calling on already owns a box and has a relationship with a legacy network security provider provider that says they do something that sounds like what you do?
It's a good question, Brad. In the high-tech world, there are always incremental changes going on. Every 10 to 15 years, there's some disruptive technologies come because of market changes. We are seeing that kind of disruption. I talked about network security becoming irrelevant.
And I think that's what customers are understanding it. We've always seen the same phenomena happen. Salesforce had to fight Sable. Work they had to fight PeopleSoft to really get the word out. We have seen where proxy vendors talking about a hybrid cloud offering like Zscaler for the last 6 years.
Now we are seeing firewall and other companies trying to do the same. I think we have a growing sales team. We have a very strategic channel. We have some very, very referencing our customers who are helping us to spread the word out. So the momentum is there.
So I feel very comfortable that we'll see the same movie run-in our case that we saw with others as vendors.
That's helpful context, Jay. Thank you. And Remo, as I think about and look at the cash flow and margin upside, at least relative to our model, it makes me wonder about the investments that you're making this year, particularly in sales productivity in the context of the growth that you're putting up. So how do we how do you think about sales productivity and measure it and how is it trending and what are you baking into your forecast for this year specifically if you can comment on sales and marketing, hiring targets that you're solving for in fiscal 2019. Thanks so much.
Thank you, Brad. A lot of questions. I'll try to answer most of them. With our performance that we've had for the 1st 2 quarters of the public company. I think you've seen, you know, the strength of our model one of the things that, Jay and I are acutely aware of is the large market opportunity that we have.
We're going to continue to invest in sales and marketing that, our long term model, that we've talked about is that we'll get to breakeven operating profitability and free cash flow positive on sustained basis sometime in fiscal 2020. So we're going to continue to drive to that. So we'll be hiring aggressively through fiscal 2019 and also into fiscal 2020. Related to sales productivity, sales productivity in the year for fiscal 2018 was up versus fiscal 2017. Our internal plans have sales productivity being slightly up to flattish in fiscal 2019.
The reason for that is we're going to aggressively hire in the sales and marketing organizations. The basis that I use for sales productivity and the company uses is based on new ACV. So we look at new ACV per sales rep, and that's how we base sales productivity. And now I'll turn it over to Jay.
I think that's good. Number of people, we are hiding in sales and marketing. Is increasing. We're being selective. It's a tough market, but we have no problem attracting good talent.
Fantastic. Thank you.
Our next question comes from Alex Henderson with Needham.
Great. Let me start off with just a very simple one. Do you have the ending fully a diluted share count is for the period assuming solid profitability, what would be the share count?
It'd be in the 134, 135,000,001 35,000,000 range.
Thanks. And more to, to the fundamentals and sort of more of a real question. Looking at ZPA, obviously, very nice acceleration. 4% to 10% is is outstanding. But when I met with, your customers at your trade show, virtually every customer I talked to said he was aggressively moving to it.
Can you talk a little bit about what the The backlog of business pipeline of business looks for looks like for ZPA. And second, what is the timeline from the beginning of the discussion to actually closing that, those type of transactions, as you push on that, that opportunity.
Yes, Alex, ZPA has done well and we're seeing tons of momentum. So we expect ZPA to gain to grow at a faster rate than ZIA, but ZIA is growing very fast too. It'll be very hard for Ziplier to catch up with ZIA, even though the market team of both platforms is essentially the same. In terms of a sales cycle, it depends. We have 2 types of use cases in ZPA.
1 is what I call transactional. The customer is saying I hate my VPN. Could you replace it? That's quick. That's faster.
That'll be probably more so in the 3 to 6, 7 month timeframe. The second is more transformational. I want to eliminate all the way of going to cloud. My applications are going to Azure AWS Google. I want to go direct through Zscaler, ZPA.
Those things take a little bit longer because we have to educate the customer formation. But we are bullish on numbers and we expect ZPA market share to grow as a part of the overall product mix.
Related to the backlog inside
the channel. Sorry. What's that?
I'm sorry. I didn't mean to interrupt you, Rima. I didn't know you were coming on.
I was
wondering if you had any statistics around the pipeline of what percentage of the pipeline is, has ZPA entered or is combined Z ZIA ZPA?
Yeah. That that that's what I was going to answer. You know, we're not going to comment on our pipeline and break it out between ZPA and ZIA or our backlog. What what's important to understand is ZPA, has momentum and it's doing well, and we're expecting it to grow as we go forward.
Okay. One last to cut at it then. Could you talk about what percentage of your deals are directly related to digital transformation local breakout initiatives? Thanks.
Yes, I think probably if you were to look at one cater of transformational related deals. That would be the sale of transformation bundles, even though there are some deals we start with cloud transformation and they may still choose to buy a business bundle to start with for pricing and budget reasons. Remo, you have commented on the transformation bundle sales. So I mean, the transformation,
bundled sales is like they're 35% of our business now. And that's up from 20% at the time of our public offering. And that's based on ARR The, we're seeing an uptick on transformation both with new customers and existing customers. So if you look at the split, I'd say it's fairly even between new and existing customers.
And if I were to say the number of deals that are started with cloud transformation use case by Zscaler. That's actually a good majority of them. But some of them will go into transformation bundled, other will go to business bundle and then we upsell from there. Honestly, my preference is actually to sell business bundle and take the deal sooner than try to sell the bigger deal, but we take whatever works.
Great. Thank you very much.
Thank you. We'll continue on to Gabriela Borges with Goldman Sachs.
Great. Good afternoon and congratulations on the quarter. Maybe one for Remo to start on the guidance for fiscal year 2019. I'm hoping you could outline for us a little more on the puts and takes that you're assuming for that mid-thirty percent type growth rate coming off of such strong year. You touched on the productivity a little bit, but any other factors that would be driving the deceleration would be really helpful.
The guidance that we gave was $250,000,000 to $260,000,000 for the year, which is a 32% to 37% increase over our base over fiscal 2018 of $190,000,000. That from our perspective is outstanding. You know, we, we're giving guidance that we feel is prudent, and we're comfortable with the guidance that we're giving. The way we look at it is that, we have an outstanding, opportunity in front of us. And we wanna make sure we are looking forward and building our company for success.
That's been our our focus related to how we ran the business as a private company and how it's gonna be as a public company going forward.
That makes sense. Thank you. And the follow-up is for Jay, which is related to transformation, but more on the SD WAN side, could you maybe talk about how often SDN is coming up as a catalyst or as one of the areas of ROI post as e scale and deployment. I know Calm's infrastructure transitions can sometimes be slower, but given the ROI attached to it, this one seems like it might be progressing nicely. So any color that would be helpful.
Thank you.
Yes. If you think about fundamental value propositions, Zscaler brings to the table is enables secure local internet breakouts. Now we don't require SD WAN to do local internet breakouts because lots of our customers are already in place have been using Zscaler without SD WAN, but SD WAN actually makes it easier for customer to, to roll out and deploy 100 of branches because these are cloud managed, boxes. We are seeing more and more adoptions of SD WAN. And when that thing happens, it actually helps accelerate our business.
So we see it by the very complementary and we are working with most of the SD vendors. 1, joint selling, 2, actually integrating with them. So that deployment of Zscaler and SD WAN can be done quickly because the products are integrated. The momentum is growing and building, and we like it.
I appreciate the color. Congrats again.
Thank you.
We'll continue on and hear from Keith Weiss with Morgan Stanley.
Excellent. Thank you guys for taking the question and very nice quarter. I just wanted to dig down a little bit more into the competitive environment.
Because from your side
of the equation, we see a broader sales happening. You guys have given us the data on it that you're doing these water sales you're getting into, areas outside that core value proposition we were talking about 3, 4 years ago. We're talking about stuff like SD WAN And Access. And we're also hearing other companies outside of the traditional, a competitive set start to talk about, assets and, F UN and the license. It just seems like the competitive environment is broadening out a lot.
Is that still like, is it just marketing or you're actually seeing that in reality or actually seeing a broadening of the competitive environment? That's who you're trying to sell against.
So I look at SD WAN as a very Complimentary market. I think there will be a few SD WAN vendors who try to say I will not only do SD WAN, I'll put the full security stack in every branch office under with done SD WAN deployments. Most of the times, Zscaler shows up as the default, cloud based business policy engine, so to speak. So that part is very natural for us. Was there a second part of the question?
I didn't catch it.
It was just basically, are you seeing that broader competitive environment in appeal? Does it change the way you have to sort of go to market and sell or change your sales cycles? Now that it's expanding beyond just traditional, internet gateway vendors that are competing against?
So, if you look at the evolution, 4, 5, 6 years ago, it used to be we competed against the traditional secure web gateway vendors. Then as we got success, those vendor changes change in message. It became hybrid secure web gateway vendors. And in the past year or so, we have been hearing about the firewall guy is trying to say, keep on buying my firewalls, but if you're on the road, if you've got a branch, I'll spin up these VMs and use me. And I'm sure there'll be some of the same message coming from SD WAN vendors down the road, some of them.
But I think it's a natural part of it. We actually like the fact that there are more vendors who are trying to make noise about the need for doing local internet breakout but being able to solve a proper solution plays, policy then moves around logs and all that come together with full SSL inspection. It's a very hard business problem to solve So we like the more noise because our big challenge has been awareness, and we welcome it.
Got it. Got it. That's helpful. And then one maybe for Remo. Backlog number, it's close to $400,000,000, I think, as of this order.
Can you give us any kind of sense of kind of the duration on that? How much of that is expected to be billed or invoiced over the next for the next 12 months?
Yes. So that'll be in our 10 K and under ASC 606, what that represents, it's a build or unbilled revenue backlog. And of that $398,000,000, we expect 53% to be revenue this
Thank you.
Our next question comes from Shelby Seyrafi with FBN Securities.
Hello everybody. Congratulations on the great quarter. So my question is, it looks like with your guidance, that the operating margin, which was negative 4 percent last quarter, is going to decline about maybe 7 points sequentially. To like negative 11%. And it looks like in the prior fiscal Q1, see we're down like 1 to 4 points sequentially.
Just talk about your increased, I think it's your increased investment in, in OpEx. What are your plans there? Why are you being more aggressive right now. And why is this, guidance on operating margin a little bit more, you know, lower than normal?
Good question. The key thing is that we keep a huge market opportunity with our platform. We don't want to shortchange ourselves. So we're going to invest in in our company. What we said before, and we're staying with it, is that in fiscal 20, We're going to be on, at some point in fiscal 2020, we're going to be on a sustained basis, positive free cash flow and operating profitability.
So that's what we're what we're gonna do. And along the way, we're gonna keep on investing and investing as much as we possibly can. Now Having said that, you know, Jay and myself have been around, you know, Jay has founded 4 companies. I've been CFO of 6 public companies. And so we are like, I think probably 2 of the most frugal people, I know Jay is, and I think I put myself in the same category, incredibly frugal, you know, people We're going to Mac try to maximize the value of the company and the shareholders by driving top line growth And the way to do that is to continue to invest.
And we'll make prudent judgments along the way. We'll make those investments. In Q1, we also had our sales kick off. So there was a significant expense which is coming through in Q1, their sales kick off. We had about 450,500 of our, employees, at a, at a kickoff.
So that, that is going to increase expenses during the quarter a little bit.
Okay. Can you quantify that for us? You estimated?
Yes. The
estimated for the sales kickoff was around $2,000,000 during the quarter in Q1.
$2,000,000. Okay. And then next one for me is on ZPA, I think you said it was around 10% of your business. When you say business, you mean billings, you mean net new ACV, what do you mean by that?
UACV, whether it's a new or upsell.
Okay. And you're not going to give us any kind of revenue estimate. On ZPA?
No. So currently ZPA because it's based on a ratable basis, it's still less than 5%.
Okay. And last one is the the, Fedgov certification for for ZPA. How important is that your opinion?
Well, it's very important because without it, we couldn't play in the federal market. So it opens up a market. We couldn't play in And in fact, we are pursuing the same thing with ZIA as well, which should be happening in the coming months. So brand new opportunity in federal market the ZPA and ZIA boats.
Thank you. Our next question comes Bank of America.
Hi guys, thanks. Great quarter. I have two questions that are related to questions that were asked before. The first one is, how long does it take to translate the, government certification or approval into revenues do you have to now start from scratch presenting the products and going through testing, etcetera? So that means a long sales cycle?
Or have you already done it and you were just waiting for approval? So it could be a quick sales cycle. So that's the first question. The second question, I want to go back to the first risk question you were asked. And the question was how much of a threat you see from firewall companies?
And I want to reverse it. How much of a threat do you represent to the firewall companies? And I know you are asked this question multiple times in the past, but I still get this question from investors and I'm wondering if you can address it. Can you expand the addressable market to traditional firewalls with ZPA and ZIA or is it not the case for technical reasons?
Thanks. Good. The first question, the FedRAMP certification, you know, going through FedRAMP certification for the cloud, hasn't very painful because being the first one to get it done when no one really knows how to interpret some of these certifications was quite a lot of work. So we spent months months and lots of money to become the 1st vendor to get this thing done for ZPA. So that's point number 1.
Point number 2, have we been talking to a number of federal agencies, to understand the need and whatnot. The answer is yes. And there's a lot of receptivity to the solution. That leads to the third part of your question. Well, can sales happen real quickly?
You know, you know, the federal market, can you count on fast sales in federal market I don't think so. We think it's a big market for us. A lot of these federal sales are driven by their year end, and that is end of September. So we, while our federal market share today literally is literally you can say 0 or 1% of the total revenue, it's nothing. We expect to start growing some revenues, but it's hard to speculate.
I think we'll get some revenue in fiscal 19, but we are not counting a big part in our plan being conservative committing to the board could there be an upside, probably, but that's where we are with federal, but bullish and optimistic. Your second question, flat to firewall companies or firewall companies being referred to us. I think what we talked about before is We are not directly going after a replacement of firewalls as you saw me cover a number of use cases, a number of customer wins. It's mostly a greenfield opportunity because enterprises are creating new internet local breakouts and that's where we go in. And that's also our focus is user traffic, traffic that's headed to the internet or the cloud.
So they won't see a whole lot of, impact with that now. We have always said that, and as I said during my, comments, We are not focused on inbound traffic coming to your data centers. So we are not replacing any of the inbound firewalls in your data centers. And that DMZ is so complex that people would rather not mess with it. Now as more and more applications move to the cloud, internal applications go to Azure AWS, our ZPA approach mid eliminates the need to do traditional VPNs and firewalls and the like.
So I think in the long run, we will be probably, reducing the need for that kind of traffic, but there's no need for us to have a head on competition. And we are not trying to go after it directly.
Thank you. Our next question comes from Gary Powell with Deutsche Bank.
Great. Thanks for taking the questions. And I've been juggling calls. So hopefully, this hasn't been asked and answered already, but I'm just going to give it a shot. So, from a competitive standpoint, have you seen any changes in the level of discounting at your plant based peers, the last 6 to 12 months And, does that even have an impact on your customer conversations?
So as we do more and more deals with cloud transformation, we really don't get into any payoffs or real competition because it's very different positioning. So are we seeing a big impact? We don't know. We do know that some of the appliance vendors have standing orders for the field and say, if you see Zscaler out there, drop your pants and you can do whatever you want to do. But we haven't really lost any business because of that.
And this is because of our positioning, and this is because how we go to market.
We'll continue on to Saket Kalia with Barclays.
Hey, thanks for taking my questions and congrats on the very nice quarter as well. Maybe starting with you Remo, first of all, thanks much for the billings guidance for fiscal 2019. If I think about some of the other drivers of cash flow next year, one item that's a little less predictable is is litigation expense. We saw that that was slightly lower, this quarter than last quarter. I know that that can ebb and flow with activity, but was just wondering if you had any thoughts on how that line item could trend throughout fiscal 2019?
Yes, I'm glad you asked that question. In Q4, we had $1,400,000 in litigation expenses. We're expecting $3,000,000 to $4,000,000 in Q1. And for the full fiscal year, we're expecting $15,000,000 to $20,000,000. Again, that can ebb and flow, but that's what we have in our internal plans.
Got it.
Thank you. We'll go to Fatima Boolani with UBS.
Good afternoon. Thank you for taking my questions. Jay, you gave a lot of examples in your prepared remarks around strategic deals and specifically that $16,500,000 deal. And then just various examples of sort of wall to wall deployments for ZIA and ZPA. So I'm curious if you can speak to the enterprise ARR trends that you're seeing.
And sort of frame for us how that's changed over the last year or so.
That's I'll take that question. So, our by customer, our ARR has been going up every quarter. It increased in Q4 over Q3. It's in the low 300,000 range. And this is for customers of greater than 3000 users more.
So it's been consistently going up every quarter.
We'll now hear from Srini Nanduri with Summit Insights Group.
All right. Thank you for taking my question. Jay, can you talk about your trust path acquisition? What does it provide for Zscaler and when will the IPAP within your services? Thank you.
Yes. As we have been collecting billions and billions of logs, it has been natural for us to do some of the data mining, machine learning type of activities. And trust part is actually helping accelerate and get bigger and better benefits. So the platform is extensible. We looked at the technology, we like it.
So we will be integrating more and more with it, but you're not going to see a separate separately priced product that's coming out of it in the near term, you're going to see the kind of analytics we provide, the kind of security detection, we do get much better. So the results, I think there will not be an incremental thing one day and say trust path is part of it. I think our customers will see the benefit of better detection as well as better reporting, the better analytics, and more actionable information they can use to make better decision.
Thank you. At this time, I'd like to turn the floor back over to CEO Jay Chowdhry for any additional or closing remarks.
Well, thank you again for your interest in Zscaler. We'll see some of you at the upcoming conferences Otherwise, talk to you during the next earnings call.
Thank you. Ladies and gentlemen, again, that does conclude today's conference. Thank you all again for your participation. You may now disconnect.