All right, we will kick it off. Good morning, and thanks for joining us at the Zscaler session at the Goldman Sachs conference today. I'm Gabriela Borges. I cover security here at Goldman. Delighted to have on stage with me, Jay Chaudhry, CEO and co-founder, and Remo Canessa, CFO. Thank you for your time, good morning.
Thank you.
Thank you.
Remo and Jay, I wanted to start a little bit on the medium-term outlook, and I figured I'd ask the question to first start with: How did your planning process go this year for FY 2025? What were some of the debates that were top of mind for the leadership team? And then we can dive into some of the more detailed questions on guidance.
Yeah. You know, it's a great question. Regarding basically FY 2025, what you need to consider is that our billings, there's really three parts to them. It's the new and upsell, it's the renewals, and also the contracted scheduled billings. If you listened to our earnings call, what we indicated is that the first half growth in billings was gonna be 13%, and acceleration in the back half of 2023 of 23%. Then the question it comes down to, well, that seems like it's back-half loaded, and what created that? So the scheduled billings is a significant piece of our billings, and when you think about it, what we do is we do three-year contracts, and then we bill annually. So in fiscal 2023 and fiscal 2024, primarily fiscal 2023, you know, with the global macroeconomic impacts, we were challenged.
With those challenging years in the first half of fiscal 2023 and 2024, the residual impact is those scheduled billings, which are contracted, coming through in the first half of fiscal 2025. The growth rate is 7%. That increases to 23% in the second half. So that's what's creating the primary difference, basically, in the billings growth of the first half, which I mentioned 13%, and the back half of 23%. When you take a look at the underlying business, it's strong. So the underlying business, you know, related to the growth that we're seeing in new and upsell and renewals, is growing in the high teens % type range, maybe 20% in the first half, and above 20% in the second half.
In addition, you know, we hired a new Chief Revenue Officer, and we talked about higher attrition in Q3 2024, so we called that out, and we expected. In the fourth quarter also, we indicated that our attrition would stabilize, which it did, but it's still high. It takes a year for new sales reps to get to full quota, so that impact also is coming through in the first half. In the second half, as these sales reps become, you know, more productive, then that's also helping basically with second half growth. But really, the primary reason is the scheduled billings.
So, from my perspective, when I take a look at where we are today versus where we were a year ago, with the leadership changes that we've made in our go-to-market, both the CRO and CMO, we're in a very, very, you know, much, much better place and a strong position to really grow our company and to basically do very well.
Remo, the way that you are describing the year two and year three of the contracted billing sounds very mechanical.
Yep.
Where do you think the swing factors or the risk factors are when you look at the new logos pieces of business and the upsell pieces of business?
Yeah, I mean, you know, from one of the things that we're seeing is we're seeing basically that the sales productivity is increased, will increase next year with the type of salesperson that we're getting. You know, from my view, is that we're just in a great, great position to, you know, do well.
Mm-hmm. I think we've taken into account all the, what you call, risk factors. What, what's the risk? First of all, we have a leadership team that has scaled the business to billions of dollars. So when you have someone proven, who comes to say, "I'll take Zscaler to the next level," the account-based or sales-led motion, it's a wonderful thing. These are proven leaders. In fact, our pipeline is strong, our close rate is good, and we have been prudent on guidance. If you look at our guidance for fiscal twenty-five, it factors some of the sales ramp time in, and I think we're well positioned beyond twenty-five, twenty-six, twenty-seven. The positioning is good.
Our product portfolio is very strong, and we are one of the very few companies that can do actual cost takeout by removing a bunch of products, firewalls, VPN, the like, to show real savings. So I'm pretty pleased with where we're headed.
So Jay and Remo, together, what you're alluding to is the secular growth drivers of the business. Remo, you also mentioned the weakness in 1H 2023 that's impacting some of the unique seasonality this year. How much are you still seeing a potential downdraft from contracts that were signed in the 2020, 2021 timeframe, where customers were expecting perhaps to increase headcount, when in reality, perhaps headcount's been under pressure? Talk about how that's impacting NRR, and if that has any factor on how new business is turning or renewal business.
Yeah, when you take a look at the amount of users that we have, it's increasing. It's increased double digit year over year. So even with, you know, downdraft related to overall economy, with, you know, basically, you know, with head count reductions and so forth, we're not seeing it.
Yeah.
So for us, basically, I think we, you know, indicated we have 47 million users, you know, on our platform. That is a double-digit growth on a year-over-year basis. Regarding, you know, going forward, I would expect the comps to get easier, you know, related to, you know, the contract billings. Our gross retention rate is in the high 90% range. So, you know, you take in, you know, you take all these factors into consideration, basically, when, like Jay mentioned, you know, if you look at our history, we've been prudent, basically, you know, with our projections. And we're prudent also going forward with, you know, taking into account, like I said, the leadership changes, sales productivity, close rates, you know, the emerging products, the existing products, all those factors come into play.
you know, the underlying point that I wanna make is that, you know, the business is strong. The underlying point I wanna make is that basically, it's a huge opportunity. The market size that we've basically looked at is a $96 billion market, SAM. I believe it's much bigger than that. and if you take a look at Zscaler, you know, this past year, we're about $2.1 billion, basically, in revenue, you know, going up to, you know, our projections for fiscal 2025. There's no other company better positioned than Zscaler. We're seeing going through 500 billion transactions per day. That is an order of magnitude of any other security vendor can see that amount, basically, of traffic. When we went public back in, I believe it was fiscal 2018.
Eighteen.
Eighteen.
Eighteen?
Yeah. Thirty billion transactions. We're now at five hundred billion transactions. Our gross margin, which talks... You know, if you take a look at the strength of the platform, our gross margins were 80%, you know, seven years ago. They're still 80% currently.
Yeah. We can scale and keep still margins at that level. I mean, just, just to highlight that point, Remo, if you don't mind. For a provider like Zscaler, that takes so much traffic, and still do it at 80% gross margin, is something very, very remarkable. In fact, anyone who comes from behind try to do this kind of stuff, I bet they'll struggle to get to 60% or 70% gross margins, okay? Because this is the part of the architecture built. Some of the vendors who claim to do lots of revenue in this area, have they ever talked about number of transactions they do? Why haven't? Is the traffic actually flowing or is it shelfware? All the thing need to be kept in mind.
The other, I think, thing you probably implied in your question, we should answer is, some of the deals got done during COVID, and that's the question I read into. So we're not like Zoom, and say, "Hey, this is needed, and after COVID goes away." You need to have secure access to applications, whether you're sitting at home or in the office or where they are. So the notion that some of the deals got done will go away because people are back to the office, not true. There's a part of that could have been question about VPN versus ZPA. Now, ZPA has not been bought for all users all the time, but the zero trust for office as well, that number is becoming the same.
We are seeing that every customer on Zscaler, it's a matter of time, will have ZIA, ZPA, and ZDX for all users. And our number one selling bundle these days is Zscaler for Users, which sells all three of those things. So I think we're pretty well positioned. The issue that COVID contracts will go will have an impact, not really. There's a second factor that you may be thinking about, as some of the companies have gone on reduction of workforce. How is that impacting us? If our business was really heavily focused on Silicon Valley, high-tech startup companies, who went through a lot of bloodbath, then you'll see that impact. Most of our businesses in the Fortune 500, Global 2000, and large, there have been some reductions there, but they're not massive.
And if the sum, our platform is so big, we're able to say, "Okay, if you moved three thousand people out, I can apply that cost to give you product A or product B." That stuff has worked. And also, we have been doing a lot of upsell. In Q4, Remo, what our fiscal twenty-four, what was the upsell?
It was 68%.
68%. There's so much to sell. We're actually not just making up for any loss because of people, but able to add more and more products that help eliminate lots of point products. The question... the point I want to emphasize in this talk is, in today's world, when macro is still tight, deal scrutiny is still tight, cyber has budgets. It's rare to say cyber initiator doesn't have a budget. Now, they need to prioritize with cyber. And Zero Trust architecture ends up being very high because it's number one thing that reduces the risk of ransomware attacks, because ransomware attacks takes advantage of lateral movement. We eliminate lateral movement, which is enabled by firewalls and VPN. Then the second part ends up being, okay, how do you close the deal? There is scrutiny out there.
We're able to show that you're paying $20 million for firewalls and VPNs and stuff. In two years, I can bring it down to $8-$10 million, okay? Tangible savings, because firewalls need to go where they're going away. So we can play that angle very well. That's what helped us do the deal. People who talk about my platform and all that bundling, these are firewall vendors who need to protect legacy firewall. How can you save money when you need, when your core product is at risk? Disruptors can do that, incumbents can't. Did I make sense?
Absolutely. The one medium-term question I want to ask here, do you want to follow up on competition and some of the other points you're making? So as analysts, most of us will run multi-year models to figure this out. We have the Fiscal Year 2025 guidance. Remo, I believe you've commented that FY 2026 is a complicated year. You've also got a go-to-market push towards cross-sell into the enterprise, which makes your business more seasonally back-half weighted. So Remo, what advice would you give us as we think about the three-year profile of the company? How do we reconcile the structural element here, which is more enterprise, with some of the unique idiosyncrasies of 2025?
Yeah. Well, definitely for fiscal 2025, you know, clearly more back-end loaded or more back-end weighted. Going forward, you know, it's hard to say. I would say slightly. It's not going to be significant, but slightly more, you know, back-half weighted would be my, my general direction.
Absolutely. Jay, let's come back to the comments on competition. And you made a comment last week on how one of the bigger disconnects between the investor community and the conversations that you have internally with customers is the level of competition. So help us understand from the outside in, what are some of the questions we should be pushing your competitors on to figure out what's real, and how do you think about, where there could be risks in the competitive environment over the medium?
Yeah, you know, I think about it quite often. Just so many questions that keep on coming on competition. Why is that? Because I don't see that when I talk to customers. That's because perhaps you guys are talking to all the vendors is all you talk to. If you talk to more customers, you'll have a very different perspective on it, okay? Now, when hasn't there been the competition for us? During the IPO timeframe, Blue Coat, Symantec was dominant player. Just to refresh, remind you, but six, seven years ago, Blue Coat had 85% of Fortune 500 companies as their customer. Okay, they're dominant. McAfee, Websense, Cisco, they all competed with us for the ZIA business, okay? And then for ZPA, all these VPN vendors, Juniper, Citrix, Cisco, AnyC onnect, all there. They're all kind of gone by the wayside. Now, lately...
And there used to be a lot of CASB vendors trying to come in. We compete with Zscaler. It's all gone, sold out. One of them is still trying to figure out who to get sold to. And all the firewall vendors are going to say, "Hey, I need to do something." Why? Because firewalls are going away. They will go away, it's a matter of time. All of you could say, you could say, "Well, they're still around." They are. I think inertia is powerful, it takes some time. But the world is moving to a level where every branch office is becoming like Starbucks. They're just an island, just like your home. There's no firewall that will be needed, and even the SD-WAN thing is bound to go away. It's a matter of time.
Just like we've done innovations, you'll see more and more stuff there happening in that space so the move by firewall vendors, guys, is largely a defensive move trying to build and claim Zero Trust on top of firewalls. Zero Trust was created because firewalls, VPNs created the issue. Unless you rebuild it as a clean slate, you can't really do Zero Trust but obviously, vendors who are finding themselves at risk, trying to make all those kind of claims out there and the large end of the market, the customers understand it very well. That's why we are in very good position. We don't really get into a lot of head-to-head competition. We go in, we show the case, we have an architectural win. Yes, some of these firewall vendors have been talking about this story for five, six years. The large customers all heard the story.
They understand it. From my point of view, in the large end of the market, then the competition has become easier because it's clarity. Zscaler has a big brand now. It's almost every CIO, CISO understands what Zscaler has done. We have a good reputation out there. In fact, I was sharing lately that one week and a few months ago, I was looking at my travel and my meetings, who I met, and I said, "Huh, I met this person. Oh, here, here." Then I found that 280 CXO type from Fortune 1000 companies had bought Zscaler twice. That's my own data, my meetings, based on all people I know. About 84 had bought Zscaler three times, and 45 had bought Zscaler four times, okay? And I'm sure this number is growing.
I mean, last year, the number of Global 2000, 2K logos we added was twice as compared to 2023. So I think we are in a wonderful position if you forget the mechanical part of contracted billing, and if you factor that, when you go through proactive change, it, you need to give some room for the new leadership to come. But these changes should be done proactively from time to time. At the time of IPO, I knew I needed to move to the next level of leadership and changes, when we were doing our $350 million or so at that time, and we proactively brought a new leadership to make our sales process from unstructured to more structured, more methodical, more cadence. It gave us a good run, took us to past $2 billion.
Now, this new plan is to take it from $2 billion to $5 billion to $10 billion. It's a more meaningful plan. So the 2025 transition, I'm personally here to grow at a much faster pace because that's what Mike is here for, that's what we are here for. The opportunity is there, platform is there, and we're going through the right set of changes and transitions.
Jay, one of the comments you made there is competition, in your opinion, has actually gone down at the large enterprise, and I think you've consistently been saying for some quarters now that your focus is on cross-sell at the large enterprise rather than competing at the low end.
Mm-hmm.
How do you think, from a go-to-market perspective, about the demarcation between large and medium and small, where it makes sense for you to compete versus where it doesn't?
Right. So, so we do, if you sell, yes, our biggest focus majors, then we've got large enterprises, the low end of the market. We don't want to say no to any purchase orders, okay? We do have some coverage on the lower end, but there's so many accounts on lower end, our coverage is limited. It is contributing meaningful numbers to us. But if you look at. We are. It's 80-20 rule. 80% of our ARR comes from 20% of the customers, which is kinda difficult part of life. So we do have coverage in the lower end. On the lower end, we do see a whole range of people out there. Often, I've been seeing Cisco bundling network and security at the lower end for a long time. Every rival vendors try to do the same thing as well.
Once we engage, we show that the savings simplification. We do win. Our win rate on the low end is pretty good as well, but our coverage on the low end is not very good. Our coverage on the high end is very good. If you look at Global 2000 or even global 5,000 or 6,000 companies, we're very good coverage there.
You've consistently talked in the last few minutes about the upgraded go-to-market. Tell us a little bit about the signals that you were looking at in the business that said to you, "Okay, now is the time to focus on migration, the upgraded talent, and the go-to-market," and maybe share with us some of the highlights from the sales kickoff this year as you think about priorities at FY 2025.
Yes. So, sorry, the first part was signals for what?
Signals on why now to upgrade the go-to-market-
Oh, the sales organization?
Yes.
Yeah, so this, this was a thought-through plan. In fact, about 18-20 months ago, I'm sitting, presenting the board and telling them: "Look, we're doing all these great deals." And my presentation was about 20-25% of my people know how to do these big account-focused deals. A lot of them are more opportunity-centric, a little bit less experienced salespeople. And at, at the discussion that maybe it's time for us to proactively look for how do we take to the model. You can try to do it incrementally, or you bring someone who's been there, who has done it, who has proven track record. And there's so much similarity between us and ServiceNow. Both are platforms, both sell at CIO, CISO level, and both are account-focused, upsell kind of stuff. So that's where the decision was. We need to bring a good leader, like Mike from ServiceNow.
It took me many months to convince him to leave ServiceNow and come to us, because here he could build a new legacy and a more, far more impactful. We knew this change I needed to take, rather than 20, 25% people doing account-focused, large accounts. How do I have 80, 90% people being able to do that? So the process had it wasn't a new thing. It worked in Zscaler. We need to scale it, so bring someone who have brought it here is a good thing. These changes, I call them step function changes. You don't do them every year. Every year, you tweak things, and every five, six years, you look and say, "I've gone X-fold more. Now, how do I fundamentally look at the next level of changes?" It is fairly obvious to us that change had to be made.
The good thing is, we're able to move through it fairly quickly because Mike's leaders, his leaders, and his next leaders are all in place. I was surprised how quickly sales rep got hired. Yes, we had high attrition. A bunch of it made it easier for us because we needed to move some of them out because everyone wasn't accounts-focused, centric stuff, and I thought, "We'll take X months to do it with lots of recruiters," but our leaders were so good. Most of these leaders, salespeople, got handpicked, so we've done very strong hiring in the past four, five, six months. We'll still keep on hiring at a good pace, but we're giving some time for people to get ready. What are the signals, the results we are seeing?
Okay, in fact, even the short amount of time, Remo, you talked about, the quality of pipeline as we judge it, has gone well. The close rate overall has gone well. I call it conversion, so to speak. So these are good indicators. I think we know what to look for. I'm very comfortable about the progress we're making. I would rather say, the things that moved ahead of the pace, I thought it will move. SKO, sorry, sending about 3,000 people to Las Vegas. So our customers sharing some of the fascinating stories of how they had done transformation, saved money, improved cyber posture, and simplified all the stuff. It's very exciting. We had channel partner who joined us there as well. So my team is excited, we are excited, and we're focused on execution.
Yeah, my comment also, you know, looking around, I'm probably the oldest person in this room, so I've been around. You know, from my perspective, when you've got a great product and you've got a huge market opportunity, you know, it really comes down to the people that you hire, which are really gonna take the company to that next level. What are the things that I see? One of the comments I made at the very beginning is we're in a much better place now than we were last year. Why am I making that comment? So when Mike came on board, within his basically first three or four months, maybe five months, he had his entire leadership direct reports in place. Also, he had the next line in place also.
When you take a look at when you want your company to transition from a $2 billion company to a $5 billion and $10 billion company, you need to go to a place where someone's been successful at another company at that size. ServiceNow, you know, it's in that $10 billion type range. Mike ran Americas, 70% of their business came from Americas. And then what you look at also, when you look at the leadership, where are they coming from? You know, are they coming through recruiters? I can tell you, if you go through recruiters, best case, 25% chance it's gonna work. Maybe fifty, you know, between... It's just not, because you don't know.
Yeah.
When you basically put your leadership in place and people are following you, that speaks volumes basically related to the foundation that we're creating. You know, it's just, it feels good. That's all I'm trying to say. It feels good. Now what it comes down to, it's execution. It's execution on our part as a management team to take the company to the next level. From a product platform perspective, no comparison to any company out there. People will tell you that Zscaler is the, you know, well, maybe they won't tell you, our competition won't tell you, but we are. We're the top, you know, cloud security company in the world, with all the transactions going deep into the packets, you know, with basically encrypted traffic, you know, proxy-based firewall. It just doesn't exist.
So really, people make the difference, and with our, you know, go-to-market changes we made, I think we're in a great position.
There is a number of pieces to the platform that you've touched on. We may have just touched on cloud, DLP, certainly, and the VPN-
Mm-hmm.
ZPA replacement cycle as well. Jay, you mentioned just now having relationships at the top of the organization of your customers, and certainly there's so much of a network transformation motion that happens with Zscaler. You have to have buy-in at the top of the house.
Mm-hmm.
Do you feel like you need to expand the number of senior sponsors that you have with customers in order to successfully cross-sell? And when you look at the deals that you talk about on the earnings call, where you have expanded the platform-
Mm-hmm.
What do those customers have in common, and what does that cohort have in common, such that you can move everyone else to look more like the customers that buy more?
Right. When you say sponsors, you mean from the customer side?
Correct.
The three primary leaders we deal with, CIO, who is looking at overall application transformation. When you do application transformation of cloud, you need to change the network, because the old network doesn't work. So you end up dealing with, he or she, the CIO, ends up bringing head of network and infrastructure to the table. Then security also changes, because you're no longer having all this castle and moat security, so head of security comes, and those are the three primary parties we deal with. Our deal could start from CISO, network, or CIO side. We generally end up creating one champion, and the two other end up coming along with that. But that. It's not a long-winded shop. When you say there may be many security products underneath, but they're all under the CISO.
Now, CISO may say, "I have one leader for data protection, I have a second leader for cyber protection," but once you're at the CISO level, the job gets a lot easier.
That makes sense. And particularly on some of the newer products like Cloud and DLP-
Mm-hmm.
So many upgrades have come down the roadmap with DLP just in the last nine months. Do you still have to fight the same architectural fights that you had to fight back on the network security side with cloud and DLP?
Yeah.
Or are those conversations getting easier because customers are already bought into a proxy-first architecture and DLP superiority?
For data protection, conversation is getting a lot easier. Think of it this way: everything bad comes from the internet, everything good leaks to the internet. When ZIA is deployed, first thing customer did was cyber protection. They want to make sure they don't get compromised, and DLP is a little bit more complex to deploy, so a lot of ZIA deployments happen without data DLP or lightweight DLP. Now, with ransomware, data protection is becoming a big issue. When traffic is already going through us, we are opening it, inspecting for malware. We can also inspect it for data loss, so it's natural for every Zscaler customer to buy Zscaler Data Protection. There's no real fight to say, "Let's do an RFP for DLP against someone else." In our customer base, we are a natural party to get there, so it's a big upsell opportunity now.
There's inline DLP, but now DLP is expanding a lot. There's so much data sitting in SaaS applications. That's where data and protection need to be done, in cloud, on the endpoint, email, all of this stuff is being done. So our portfolio has become very strong. We. It's one of the fastest growing solution for us, and we have a very, very good team driving it.
Remo Canessa, the associated pricing and margin question for you is: how do you think about making it easy for customers to buy more, whether that's bundling, discounting, enterprise license agreements? What strategies work best with the Zscaler platform? And then the margin part of this story is, or part of the question is: what does incremental margin look like on the cross sell?
Yeah, I mean, so again, we're at 80% gross margin. And the ROI that we give to our customers is significant. When you take a look at the security landscape, I'm not sure how many companies are out there, but thousands of companies, what you're gonna see over time is you're gonna see more of a consolidation. Security is not getting any simpler, it is getting more complex. So, you know, the advantage of Zscaler is that we take basically a lot of these point-type products, put them into our portfolio and platform, which gives significant ROI to our customers. And from my perspective, long range, you can think of Zscaler, you know. Again, we target about 80% gross margin. I don't think you're gonna really see anything different from that going forward.
From my perspective also, if you take a look at our bottom line operating profitability, I mean, we were, we indicated that our operating profitability target at the time of our public offering was 20-22%. This past year, we're at 20.4%. In Q4, we're at 21.5%. I'm not concerned basically about operating profitability. If you have 80% gross margin, the flexibility that you have in your model to make the right decisions for the company to grow, my view is, as I talked about, it's a $96 billion SAM, serviceable addressable market. We're at the early stages. I feel we have an unfair advantage with Zscaler, with our platform. We will continue to invest in the growth of the company. We'll be mindful, basically, of our bottom line operating profitability.
Our free cash flow margin this past year was 27%. We indicated our free cash flow margin for fiscal 2025 being 23.5% to 24%. We're in a unique position, so we're gonna keep on investing. We're gonna, you know, give ourselves the best opportunity to dominate this market, and I think there's no other company better positioned than Zscaler to do that.
Any comments on the packaging of new products to make it easier for customers to buy?
So we are. We're done. We do keep on refining packaging, but we have created new bundles. For example, data protection has six products. So here's a data protection bundle. There are multiple products. For buying multiple together, there's pricing incentive, but ability to switch within data protection to product A, B, or C, all those things are being built in. Risk management is packaged on its own. Zero Trust Cloud, Branch, and all is packaged on its own. So it's evolving. It's getting bigger. Platform is getting bigger, but we are packaging it across solutions. We have four main solutions, just to refresh your memory: cyber protection, data protection, Zero Trust Branch and Cloud, and risk management. And these four solutions apply to four entities, the most important point. Our so-called competitors are trying to do this protection for employees. That's been done for a long time.
In addition to Zscaler for Users, for employees, now we have Zscaler for Workloads, full protection, a brand new area, Zscaler for IoT/OT, securing IoT/OT, number three. Number four, Zscaler for your customer, suppliers, and partners are becoming more and more important. Everyone is connected with everything else, and the risk of third-party supply side is becoming big.
Excellent. We'll leave it there. Please join me in thanking Jay and Remo for their time. Thank you, gentlemen.
Thank you, guys.