Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Zscaler Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, this conference call is being recorded.
At this time, I would like to turn the conference over to Mr. Bill Choi, Senior Vice President, Investor Relations and Strategic Finance. Mr. Choi, you may begin.
The first we talk about today will be on an adjusted non GAAP basis. You will find the reconciliation of GAAP to the non GAAP financial measures in our earnings release. I'd like to remind you that today's discussion will contain forward looking statements, including but not limited to the company's anticipated future revenue and market share, Calculated billings, operating performance, gross margin, operating expenses, operating income, net income, Free cash flow, dollar based net retention rate, future hiring decisions, remaining performance obligations, 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, including but not limited to the duration and impact of COVID-nineteen on our business, the global economy and the respective businesses of our customers, vendors and partners, Market adoption of our offerings, the impact of any previous or future acquisitions and the development of the markets in which we compete. 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, please see our filings with the SEC as well as in today's earnings release. We will upload a copy of today's prepared remarks to our Investor Relations website when we move to the Q and A segment of the call. I would also like to inform you that management will be presenting at the following upcoming virtual events: JPMorgan Technology Media and Communications Conference Tomorrow on May 26, Bernstein's Strategic Decisions Conference on June 4th, Bank of America Global Technology Conference on June 8th, Bayer's Global Consumer Technology and Services Conference on June 10 and Mizuho Cybersecurity Summit on June 15. Sessions which offer a webcast will be available on our Investor Relations website.
Lastly, we would like to invite you to Zenith Live 2021, which is our virtual customer and partner Cloud Summit. The Americas and EMEA events will run from June 15 through 17 And for APJ will be June 22 to 23rd. We encourage everyone to register and attend our summit from our website, zscaler.com/xenaFly. Now I'll turn the call over to Jay.
Thank you, Bill. As you saw in our earnings release, we delivered outstanding results for the Q3 with accelerating growth at scale, while increasing adoption of our broader platform. We drove 60% growth in revenue and 71% growth in billings. We also generated strong growth in operating profits and delivered record free cash flow. Enterprises are looking to Zscaler To secure the digital transformation and architect for the work from anywhere economy, which we believe is the new normal.
Our results exceeded our expectations and we are again Increasing our guidance for fiscal 2021. Our business is fighting on all cylinders. Our superior architecture An optimized go to market engine is elevating us above the competitive noise. Our 0 Trust Exchange platform connects Users, devices and applications, which is fundamentally different from firewall based, castle and mode security, Our platform prevents lateral threat movement and eliminates the attack surface by making applications Invisible from the Internet, hence reducing business risk. Furthermore, our proxy architecture Designed to inspect SSL encrypted traffic, blocks sophisticated threats and prevents loss of sensitive data.
Faced with the latest news making ransomware and other cyber attacks, CSOs and CIOs are turning to Zscaler to dramatically improve their security posture While reducing the legacy IT costs, as you have heard me say before, architecture matters. Zscaler purpose built the right high performance multi tenant proxy architecture from day 1, Whereas many vendors are trying to retrofit their existing solutions, which inevitably fails. Built from the start to enforce policy at the edge as advocated by Sassy Framework, We are deployed across 150 data centers with 5 nines of availability. We are processing more than 160,000,000,000 transactions daily, preventing up to 7,000,000,000 security incidents and policy violations. This unmatched network effect provides better security and user experience.
Let me highlight 3 factors that drove our strong performance in the quarter. 1st, building on our strength with large enterprises, we closed a record number of 7 figure ACV deals Application, network and security transformation. 2nd, an increasing share of our sales is coming from broader Platform purchases by new and existing customers. Strong platform upsells drove our 126% Zscaler Digital Experience or ZDX and Zscaler Cloud Protection or ZCP are increasingly contributing to our wins. The breadth and depth of our platform is resonating with customers And I believe Zscaler is the go to platform for vendor consolidation, cost savings, Increased user productivity and better cyber protection.
3rd, our strategic decision last to increase our investments in go to market is yielding fantastic results. I'm very pleased with our performance and momentum across all geos, all market segments and all products. Earlier this year, We expanded our investment in the Enterprise segment, which consists of organizations with 2000 to 6000 employees. This quarter, we saw a higher mix of new business from this segment. Now let me highlight key wins in the quarter Starting with ZIA, because of the pandemic, a global 500 technology company In Asia was routing Internet traffic of their employees working from home over VPN through the corporate data center.
This created a poor user experience for SaaS applications like Office 365 and overwhelmed their security appliances to power their workplace modernization initiative for their 80,000 employees. The customer purchased ZIA Transformation Edition, including SSL inspection, cloud firewall and sandboxing, as well as zDx. ZDx improves productivity by identifying and helping resolve User performance issues over the entire cloud network path in real time before users complain. In another new logo win, a global business services company facing challenges supporting work from anywhere, Purchased our business edition, Plus Cloud Firewall, CASB, DLP and zDx All 46,000 employees could directly access SaaS applications to reduce business risk and improved user experience. In addition, they replaced a legacy VPN with ZPA to provide 0 trust access Private applications for the 29,000 call center employees.
With the purchase Of 3 of our 4 platform pillars, this customer is accelerating the digital transformation From a 5 year goal into a 6 month reality. Next, let me share 2 significant deals That show our growing momentum in the financial services vertical and our increasing success working with our tech partners. A top tier global investment bank is pursuing a 0 Trust strategy by rebuilding its security architecture For the modern hybrid work environment, they purchased our ZIA Business Edition, Plus DLP, Cloud Sandbox and ZDx for 50,000 users. With security as a major requirement, only a proxy architecture With SSL inspection at scale was considered, our 10 year track record of running a massive, Highly reliable and available in line security cloud made us the best choice. Taking advantage of the breadth of our platform, This customer also started limited deployments of additional products including browser isolation, CASB, Workload segmentation and ZPA.
This deal is a great example of the successful field sales collaboration Between Zscaler and our tech partner, CrowdStrike, in another financial services win, A multinational company embracing cloud transformation purchased the entire ZIA portfolio, including CASB, Advanced DLP and CSPM for Microsoft Office 365 plus zdx for 30,000 employees. Like the prior deal, this customer only considered a proxy architecture And firewall architectures were disqualified. The Zscaler platform purchased consolidated 4 vendors, Streamlined their operations and reduced IT costs. This is another great example Our field sales engagement with another important tech partner, in this case, Microsoft. As these new customer wins show, the attach rate of our data protection products, including DLP, out of band CASB, Browser isolation and CSPM for SaaS is growing.
Now let me discuss an upsell deal that was primarily driven by data protection. An existing Global 200 Pharma customer With headquarters in Europe, purchased CASB, Advanced DLP and SandBox for all 79,000 employees To up level their security, we displaced the incumbent Autoband CASB point product, A trend we are increasingly seeing as customers are standardizing on Zscaler's integrated platform. In addition to access private applications, they bought 3,000 ZPSCs, the first step To eliminate the legacy VPN, this latest purchase was a 7 figure ACV deal with double the customer's ARR. As we look forward to a post pandemic world in which employees unwittingly bring infected laptops back to the office. Organizations need A true 0 Trust platform to eliminate the risk of lateral threat movement.
Secondly, We are also seeing SD WAN projects restarting with companies moving to direct to cloud architecture from the legacy hub and spoke network and Castle and Mode Security. In the quarter, An existing Global 200 manufacturing customer with headquarters in Europe upgraded their 120,000 user subscription From business to transformation bundle to secure local breakouts at the 1,000 locations worldwide, some with SD WAN and some without SD WAN. The transformation bundle added Cloud Sandbox And cloud firewall, which doubled this customer's ARR. And finally, I will highlight an up sell win with the global pharma company that previously purchased the transmission bundle and ZPA for 15,000 users. The SD WAN deployment was delayed last year and now they are accelerating the network and application transformation With a 5 year commitment to Zscaler, this quarter, we purchased an additional 50,000 ZIA And ZPA seats to cover all 65,000 employees, while also adding DLP for all users.
They also purchased our new ZPA Private Service Edge to enable 0 trust access for the employees returning to the office. This demonstrates customers are implementing ZPA for all employees, not just for remote users. In addition to our ongoing success in protecting users, our next big opportunity is protecting workloads With Zscaler Cloud Protection, we are rapidly expanding our Zscaler portfolio through organic innovation and targeted acquisitions. Let me highlight our recent M and A activity. As announced last month, we acquired TrustDome, a leading provider of cloud infrastructure and entitlement management or CIEM to complement our CSPM solutions.
CIEM and CSPM together, Properly integrated can correlate identity information with configuration data and enforce least privileged access for cloud environments, hence reducing business risk. This further expands our market opportunity for workload security. In addition, today we announced a definitive agreement to acquire Smokescreen Technologies, which provides us with a deception technology to detect active attacks and lateral threat movement. We plan to integrate smokescreen with our CIA and CPA solutions to enhance our active defense capabilities. You will hear more about these solutions at our Zenith Live Cloud Summit next month.
As we look forward to the next few years, we're focused on driving broader adoption of our 4 platform pillars, which together maximize the success of digital transformation. Our core ZI and ZPA business has never been stronger And we are excited about the early traction of ZDx and ZCP, the next growth engines for the company. Now I will highlight 3 points about our go to market machine, which is scaling very well. Our field organization continues to scale and is executing on all cylinders. Moving to our partners.
As I mentioned in our deal wins, we have strong and growing technology partnerships. In addition to incremental product integrations, we continue to grow our go to market partnership with CrowdStrike, who also became a customer this quarter. I'm proud that Zscaler was named the 0 Trust Champion at Microsoft's 2020 Partner Awards. Further expanding our technology relationships, we recently partnered with IBM to add Zscaler services to the 0 Trust security offerings. This partnership includes integrating with their identity MDM and SIM solutions and joint go to market initiatives.
On the channel front, We're expanding our Summit Partner Program and adding VARs that are building cloud transformation practices. Our service provider relationships are strong and we're building joint engagements with system integrators. On the marketing front, we are aggressively investing in thought leadership for 0 Trust Security and expanding demand generation programs. In summary, we are making tremendous progress across all three areas, Sales organization, marketing and channel partners, Inc. Delivering strong results quarter after quarter.
I believe we are on track to capture a material share of our $72,000,000,000 serviceable market. Now I would like to turn over the call to Remo for our financial results.
Thank you, Jay. As Jay mentioned, we are pleased with the results for the Q3 of 2021. Revenue for the quarter was $176,400,000 up 12% sequentially and 60% year over year. ZPA product revenue was 16% of total revenue. From a geographic perspective, we have broad strength across our 3 major regions.
Americas represented 51% of revenue, EMEA was 38% and APJ was 11%. 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 71% year over year to $225,000,000 With billing duration towards the upper end of our 10 to 14 month range, we had several customers choosing to pay upfront for their multi year contracts. As a reminder, our contract terms are typically 1 to 3 years and we do not offer any special incentives for upfront payments. With that in mind, we are also pleased that short term billings, which are calculated based on the change in short term deferred revenue Plus reported revenue for the period grew 61% over the prior year. Remaining performance obligations or RPO, which represent our total committed non cancelable future revenue were $1,200,000,000 as of April 30.
RPO grew 85% from 1 year ago. The current RPO is 51% of the total RPO. Our strong customer retention and ability to upsell the broader platform have resulted in a consistently high dollar based net retention rate, which is 126% compared to 127% last quarter and 119% a year ago. As we've highlighted, this metric will vary quarter to quarter. While good for our business, our increased success selling bigger bundles and selling multiple pillars from the start and faster upsells within a year can reduce our dollar based net retention rate in the future.
Considering these factors, we feel that 126% is outstanding. Total gross margin of 81% was flat quarter over quarter and improved by 1 percentage point year over year. As a reminder, gross margins in the second half The last fiscal year were pressured by the augmented use of public cloud to meet the 10x surge in ZTA traffic as pandemic lockdowns began. Turning to operating expenses, our total operating expenses increased 6% sequentially and 53% year over year to $119,700,000 Operating expenses as a percentage of revenue declined by 3 percentage points from 71% a year ago to 68% in the quarter, primarily due to lower T and E, which was partially offset by increased hiring And M and A expenses, sales and marketing expense increased 6% sequentially and 56% year over year to $80,900,000 The year over year increase was due to higher compensation expenses and investments in building our teams and go to market initiatives. R and D expenses increased 8% sequentially and 55% year over year to $25,900,000 The increase is primarily due to continued investments in our engineering teams.
G and A expenses increased 4% sequentially and 33% year over year to $12,900,000 The growth in G and A includes investments in billionaire teams, compensation related expenses and professional fees. Our 3rd quarter operating margin was 13% compared to 9% in the same quarter last year NTE spending had a positive 270 basis point benefit. Operating margin was better than our guidance range due to stronger than expected performance in the business and due to timing of certain sales and marketing spend. Net income in the quarter was $21,400,000 or a non GAAP earnings per share of $0.15 We ended the quarter with over $1,400,000,000 in cash, cash equivalents and short term investments. Free cash flow was positive $56,000,000 in the quarter, which compares to $9,000,000 during the same quarter last year.
The increase was driven by our strong billings growth, Receivables collection and operating performance. Now moving to guidance. As a reminder, these numbers are all non GAAP, which excludes stock based compensation expenses and related payroll taxes, amortization of debt discount, amortization of intangible assets and any associated tax effects. For the Q4 of fiscal 2021, we expect revenue in the range of 185,000,000 $187,000,000 reflecting year over year growth of 47% to 49%, gross margins of 79%. I would like to remind investors that a number of our emerging products, including ZDx, Workload Segmentation and CSPM We'll initially have lower gross margins than our core products.
We are currently managing the emerging products for time to market and growth, Not optimizing them for those margins. With this in mind, we believe 79% to 80% is a good range for us in the near term. Operating profit in the range of $13,500,000 to $14,500,000 other income of $300,000 net of interest payments On the senior convertible notes, income taxes of $1,700,000 earnings per share of $0.08 to $0.09 assuming approximately 146,000,000 fully diluted shares. For the full year fiscal 2021, we now expect Revenue in the range of $660,000,000 to $664,000,000 or year over year growth of 53% to 54% Calculated billings in the range of $878,000,000 to $880,000,000 were year over year growth of approximately 60%. Operating profit in the range of $71,000,000 to $72,000,000 earnings per share of 0.4 $0.07 assuming approximately 145,000,000 fully diluted shares.
The acquisitions of TrustDome and Smokescreen are expected to have an immaterial impact on revenue in Q4 and in fiscal 2022 as they are early stage companies. Our plan is to further develop these products and incorporate their technologies into our platform. We expect to incur 2.5 $3,000,000 in additional operating expenses in Q4 related to the acquisitions, including a new R and D center of excellence in Israel. This is incorporated into our Q4 guidance. For your modeling purposes, we expect to incur approximately $13,000,000 to $15,000,000 and operating expenses related to the acquisitions in fiscal 2022.
With a huge market opportunity, we remain committed to investing aggressively in our company behind the growth in our business. We have a highly efficient business model and are making investments across the organization today in order to capitalize on the large opportunity ahead of us. While we will balance growth and profitability, growth will continue to take priority considering our strong business momentum. Operator, you may now open the call for questions.
Our first question or comment comes from the line of Alex Henderson. Your line is open.
Why don't we move to the next question, please? Howard, can we move to the next question?
Howard, are you on?
Mr. Inniston, please repeat your question.
Can you hear me?
Yes, sir.
Nobody's going to take
a moment, wasn't picking it up. First off, let me thank you for a superb quarter, outstanding results. And the question I have is really on the sales capacity that you've been adding over the last year. To what extent do you see that Thanks.
Alex, thank you. As you know, we have been adding and rather accelerating sales capacity. We are pleased with performance and we are counting on it To deliver us accelerating growth, Remo, you want to give a better color to it?
Yes. The majority of our FuelClip sales reps are still ramping. So a significant portion of our organization is still on ramp base. The key thing that we brought up in the past is that we are aggressively hiring. And we had a good quarter hiring in Q3.
We're expecting to have a very good quarter in Q4. So our plans, as Jay talked about in the earnings call, is that The market is really strong. It's moving to us. All indications are that we're in a great position. So we're going to continue to aggressively hire And really go after the growth of Zscaler going forward.
And if I
may add one more statement. 1, it's a competitive market for talent. Zscaler has become a top destination for top talent. So we're able to attract good talent And grow our sales team stronger.
Thank you. Our next question or comment comes from the line of Matt Hedberg from RBC Capital. Your line is open.
Hey, guys. Thanks for taking my question and congrats on very strong results, obviously. Jay, there's obviously a lot of success you're Seeing in the enterprise on upsell and large deals. But I had a question on the federal or I guess public sector market. Obviously, the Colonial Pipeline attack Highlighted the risk here that some utilities are at.
Just can you talk to us about how
you think about 0 Trust architecture could benefit the public sector. And might that be an accelerant as we look forward for the next year or 2?
We have been hearing enterprises talk about 0 Trust more and more for the last 12 to 18 months, especially after some of the solar wind type of attacks, this is picked up steam. But no, it's good to see that federal government is waking up and saying they need to do something. It's good to see a very clear directive coming from Biden administration, which highlight the need for 0 Trust, and by the way, I must say that many vendors are Trying to hijack the term 0 Trust, but 0 Trust has written by the EU based on the NIST Research paper, it is not done by firewall. It is connecting Entities to entities without a pass through connection and we believe we'll have a big advantage of it. We started investing in federal space about 3 years ago, had to go through a lengthy process of certifications of FedRAMP and the like.
We are very well certified. We started investing in sales organization about 2 years ago, have a strong team, a strong and growing pipeline. So federal business seems great. And the second part of your question is actually public sector, which is the non federal part, With the state, local and educational staff, we are doing in that part very well as well. Remo?
No, I think Jay, you hit it. I mean the key thing is that we've invested significantly in federal. As Jay talked about, the FedRAMP certifications, FedRAMP high for ZPA and also we are moving towards FedRAMP high for ZIA, which puts us in a Completely different position than other companies. In addition, I think one of the strengths is that we've been able to build the sales organization, The organization very strongly and partners in federal. So I feel we're well positioned in the federal market going forward.
Thanks, guys. Well done.
Thank you. Our next question or comment comes from the line of Gregg Moskowitz from Mizuho. Your line is open.
Okay. Thanks for taking the question and congratulations on a phenomenal quarter. Jay, maybe to follow-up a bit on the last question and you sort of touched on this a little bit, but From what you're able to gather, have the recent high profile breaches dating back to SolarWinds and inclusive of the Colonial Pipeline attack, Have they had any discernible impact on your pipeline? So again, we hear the anecdotes much like you do. I'm just kind of curious if there's anything that is able to translate to some extent from what you're able to tell?
So first of all, the number of inbound engagement Not just CIO and CISOs and in many instances, the Board have stepped up.
So it's clear
That is high degree of interest in making sure that companies are secure. That's point number 1. Point number 2, When those level or C level get engaged, the budgets open up, they become less of an issue. When you're dealing with a CIO whose budget says 100 of 1,000,000 of dollars to get a few $1,000,000 deal for us, generally becomes a lot easier. So we are seeing tremendous interest.
Our customers having discussions that they need to do 0 Trust implementation because of Security factors including Colonial's and SolarWinds, yes. Can I quantify what part of business and pipeline? Probably I'll be guesstimating too much. So I'll leave it open to say a positive impact, but hard to quantify.
Okay. Very helpful context. Thank you.
Thank you. Our next question or comment comes from the line of Gray Powell from BTIG. Your line is open. Great.
Thank you very much for taking the question and congratulations on
the good results.
So yes, you mentioned that your expanded investment in the mid market or the mid enterprise segment or companies with 2000 to 6000 employees contributed a higher mix this quarter. Is there a way to roughly quantify How much of the upside this segment is driving? And then how should we think about the potential contribution from the segment ramping over the next 6 to 12
Yes. I mean, just for clarification, the enterprise segment is for employees of 2000 to 6000 employees per company, And it is the fastest growing segment that we have. On a quarter over quarter basis, the growth for new and upsell business has been a couple of percentage points. What it shows basically is our investments in the Summit program that we've made. So the Summit program targeted primarily towards VARs and VARs primarily towards the segment.
We are seeing very, very good growth and we're happy with the growth. As I mentioned, it's the fastest growing segment that we have. The segments we have are majors, large enterprise, enterprise and commercial. So this is the largest one.
Got it.
Yes. This will grow in large fastest.
If I may add, it was natural for us to expand into enterprise. We started from the high end, Having strong presence in majors and large enterprises is a natural part for us and we are pleased to see the performance. In this area, we have been adding quite a bit of sales force in this area and partner program together. It's delivering good results.
Got it. And are sales cycles faster there? Or is there anything different in the competitive environment?
Yes, they are faster. As you would expect, typically, the bigger the deal, the longer the sell cycle. The smaller the company, fewer the stakeholders And faster than sell cycle.
Understood. Okay. Thank you very much.
Thank you. Our next question or comment comes from the line of Mike Walkley from Canaccord. Your line is open.
Great. Thank you. And my congrats also on the strong results. Just wanted to dig in on the comments on ZPA about it's going to all users, not just remote. Any way to size the opportunity of further penetration within your customer base?
And just thinking about ZPA with it taking off with the pandemic, Any thoughts on longer term modeling, giving potential tougher comps even though the pipeline sounds strong? Thank you.
So first of all, from day 1, our belief was that ZPA was never designed for remote It was designed as a 0 Trust architectural implementation. No matter where the users are, they go through Our switchboard, so they're never on the corporate network. And when pandemic happens, since everyone was remote, So ZPA actually got bought for almost every employee in most of the companies. That was a big shift we saw, whereby previously Companies will buy ZPA for 20%, 30%, 40%, 50%, 60% of their employees, but we knew The number will get to 100%. And as employees are coming back to office, in fact customers are worried about These people are bringing their infected machines back to the office, so they want to do 0 trust even when they're in the office.
So for that, we want to go through RZ's Zero Trust Exchange. In fact, for that, we built another Service, we call it Private Service Edge. Imagine a private switchboard running in your data center to implement 0 Trust for on prem users, which is actually a great opportunity further giving customers segmentations for the applications, which is what customers are looking for. So I think it's a matter of time when every employee of our customers will have ZIA, ZPA and actually ZDx as well. Because while ZYN ZPA allows you to work from anywhere and access any applications, ZDx makes Sure.
Users have a great experience and the issues, they can be easily resolved.
And from a penetration perspective, For our G2K customers, a little over 40% have ZPA. So significant opportunity for us to upsell into our existing customers. So a little over 40% of
the CIA customers have CIC. That is correct.
Yes, that is correct.
Great. That's helpful. Thank you.
Thank you. Next question or comment comes from the line of Andrew Nowinski from D. A. Davidson. Your line is open.
Okay. Thank you. Congrats on Another great quarter. So I had a question on the CrowdStrike win. You hear a lot about how endpoint security and specifically EDR technology is necessary to Breaches like the Colonial Pipeline attack.
Given that CrowdStrike prides themselves on stopping those breaches, I'm wondering why they would need Zscaler, so if you could provide any more color on maybe on what they're deploying and how they're using Zscaler and whether you think any other enterprise You may follow their lead and deploy both CrowdStrike and Zscaler together.
Yes. I have yet to come across a serious largeenter Who doesn't believe in layered security approach, but endpoint serves as an important layer And cloud serves as a second layer. That's the most common thing out there. So it's when you Buying to that notion, which is what we do and most customers do, it's natural for customers to say endpoint from CrowdStrike And cloud security from Zscaler. And what's exciting for customers is for the 2 to be able to work together with proper API based integration.
CrowdStrike and Zscaler had done this product integration over the past 12 to 18 months and that integration keeps on going to the next level, where we can help each other and customers get the benefit of it. So driven by product integration that customers wanted and then our joint sales engagements in the field where our teams are working together Because we complement each other. It's a great win win partnership for both of us, CrowdStrike and us. Did I answer your question?
Yes, it did. Thanks, Jay.
Thank you.
Thank you. Our next question or comment comes from the line of Keith Bachman from Bank of Montreal. Your line is open.
Good evening and thank you for taking the question. Jay, I wanted to see if you could give Some more color around both ZCP and ZDx. And the question really is, any comments or color on attach rates? How much you're contributing? Where the wins are?
Any more color so we could get a sense about how much those assets, New solutions rather contributed today and how you see that unfolding over the next 12 months? Many thanks.
Yes. Thank you. I'll start with the strategic positioning and Remo can add on the quantitative side of it. As you know, ZCP, it's cloud protection, is a massive opportunity for protecting workloads. There are a couple of areas there.
One big one is communication among workloads, which is traditionally done the old school way by Connecting various workloads and availability zones with a wide area network, side to side, VPN and the like, which creates big risks because of lateral movement. So with workload segmentation, We have implemented a 0 plus architecture, which will disrupt legacy network based security for workload just like with direct for users ZI and ZPA, that's one part of it. And obviously, it's easy for us to start with our own customers and that's a large customer base and that's where early traction is. And then on second side is the security posture type of stuff. This is where some of the offerings like Cloud Security Posture Management, CSPM And TrustDome acquisition combined give us a strong offering.
We are bullish about the CCP market, which is nascent, but it's growing rapidly. The CDX part is very interesting. This is complementing CI and ZPA to identify and resolve any user performance issues. So this is a natural add on to any ZI as EPS sale. Remember, we used to sell ZI only.
Then we started selling ZI and ZPA together. More and more deals are with ZI and ZPA together At the start, and now we are seeing more and more deals with ZIA, ZP and ZDx together, which makes a natural bundle for our customers To enable the employees to work manually and have great experience. Remo, color on Yes.
I mean just some from a numbers perspective, we still expect The contribution for new and upsell for CCT and CDX to be mid single digit this year. As Jay mentioned, the reception of both products has been high and we feel good about those products going forward. But think about the contribution this year for new and upsell That's mid single digit range.
Okay, perfect. Thank you. Thank you. Our next question or comment comes from the line of Patrick Colville from Deutsche Bank. Your line is open.
Hey there. Thank you so much for taking
my question. So just on the math,
CRPO billings, if I'm not mistaken, rose 85% this quarter, which looking at the disclosure, since you guys have been kind of giving RPO and CRPO seems to be the kind of highest growth rate ever, so hugely impressive. What are you guys seeing To kind of have this real acceleration this quarter, what are the kind of conferencing factors? And I guess kind of importantly, how sustainable are they as we look forward into the rest of calendar 2021 2022?
Yes. I'll take the first part and have J. Get some color. You're right, Patrick. It's outstanding results.
Mean the CRPO growth is 68% and the RPO growth is 85%, which is absolutely outstanding. When you couple that with our billings growth of 71%, it just shows that basically things are going very well for us. What's changing is basically what we've seen. We've been talking about what was the accelerant last year related to when COVID hit and Companies recognized that they had to get their employees connected to their networks in order to or applications in order to do business. And we saw that.
Now that was the big increase for last year with CTA, which is 43% of our new and upsell business. Since then, basically, what that brought to light is basically that yesterday's networks aren't going to work. Infrastructure is still not going to work. Those are discussions that we've been having with customers. That is basically the change which is occurring is recognizing The current infrastructure in place is really not the optimal infrastructure that companies need going forward.
With that, What we've done as a company, we've broadened our platform. We've broadened our platform as we just talked about, CDX, workload protection And additional basically features onto our product. So the broadening of the platform related to the movement to really Transforming your networks has led to basically deal sizes becoming larger, more strategic partnership And also just the credibility that Zscaler had now that we've been a public company for 3 plus years. And we've got a strong balance sheet and we've got a strong team. And again, the key thing is Zscaler was The platform was built for this world over 10 years ago.
And it was if you take a look at the expansion basically Of the amount of traffic that we put through, to have the type of gross margins with the type of traffic across over 150 data centers, With SLAs being almost 0, quite frankly, on a quarterly basis is a testament to the strength of Zscaler. And I think that's Going through with our communications with our customers.
Jay? I can't say it all, but accelerating digital transformation being 1, Expanded portfolio and platform being 2, large great sales force being 3 and our brand and customer references, all 4 are Accelerating our sales.
Great. Thank
you so much for taking the time.
Yes.
Thank you. Our next question or comment comes from the line of Catharine Trebnick from Colliers. Your line is open.
Thanks for taking my question and congratulations, phenomenal quarter. Can you unpack a little bit the Summit program and how well you're doing there versus your sales through the service provider channel to give us a better idea Are you really seeing explosion in your opportunities? Thanks.
Yes. Our service provider channel evolved Fairly early on as our customers want new transformation and CIOs told SPs to work with us to make that happen. It's a strong channel. It's a growing channel. VARs took time.
In the past couple of years, more and more of the VARs have realized that The box sales are not going to last forever, so they are pivoting more. The one who are pivoting to embrace cloud transformation services, They are our favorites. They're actually becoming part of our Summit program. That's what the part program was built And we have a lot of good participation from VAR programs. And as a result of that, we're seeing The growth of VAR contribution to business growing at a faster rate.
From a numbers perspective also VARs You know as a percentage of our revenue is in the low 50% range. SPs and SIs combined is in the low 40% And direct is mid single digit. The growth rate in SP's SIs has been significant year over year also. We've had significant growth in SP's SIs on a year over year basis.
Thank you.
Thank you. Our next question or comment comes from the line of Saket Kalia from Barclays. Your line is open.
Great. Hey, thanks for taking my question here, guys. Actually, maybe just to piggyback off that last question on channel, Maybe a little bit more of a strategic one for you, Jay. The service provider channel has been an area that Zscaler has worked with for years, as you noted. And it felt like this quarter you're starting to see some other security vendors maybe start to work with them a little bit as well.
I guess the question is how are your conversations with those Service Providers and how do you think that sort of plays out in the future as other security vendors maybe start to work with that channel as well On SaaSie specifically.
Yes. So first of all, as Remo said, our business with SBSI year over year is growing quite well. In terms of other firewall type of vendors, that's not new news. Service providers I have been selling firewall type of stuff, especially for MSSP service for years years, so not a new area. Yes.
Adding the SD WAN to those firewalls is probably a new area of a year ago, but most of that stuff Has happened on the lower end. When you talk about large enterprises, they actually engage with us and then partnered together and drive the transformation. None of that has changed. On the lower end, Probably there's combination of some SD WAN combined with Firewall, but we are bullish about the SP channel, SI channel As well as of our channel. In fact, our investments in channel are growing significantly because that's giving us more and more leverage and we will continue to do so.
Very helpful. Thanks.
Thank you. Next question comes from the line of Tal Liani from Bank of America. Your line is open.
When I ask you why are you successful, the answer is always the same. So I'm not going to ask you again. But I want to ask you About competition and the fact that you're so successful for such a long period of time And we do see new players in the space. I'm wondering how the competitive landscape changed. What's the what do you who do you see today In competitive bids versus what you've seen before and how is the gap between you and the competitors?
So anything you can share with us on the competitive landscape? Thanks.
Well, we asked this question to ourselves many, many times. We analyzed it every Frankly, the truth is not a whole lot had changed on the competitive landscape. We We're hearing so much noise from firewall vendors and the like. Have we seen any change on the larger segment, larger customers that we always talked We haven't seen a change much at all. We have seen a few cases and I mentioned a couple of them during our prepared remarks We are 5 of our vendors trying to go in and compete, but got disqualified because they didn't have the architecture.
Well, you could say that now some They're not saying, yes, we have a proxy architecture. But announcing is one thing, building a scalable, reliable proxy that a large enterprise will depend upon is a very different thing altogether. Having said that, when we come down to the lower end of the Spectrum, say, under 5,000 users. So we do see some of the vendors, where it's kind of less Security savvy customers, but as we are engaging more and more in the space with our enterprise segment, We do some of them, but once we engage, we are winning pretty handsomely. So very comfortable on the comparative front, because Customers are more and more actually on every segment looking for consolidation and simplification.
So low end players that are coming from point product Trying to expand, so to speak. Don't really make it well. Some of the bigger ones are legacy vendors with old story. Our 0 Trust Exchange platform does much better because we are truly a Zero Trust architecture. And as I said, you can convert a firewall Into a Zero Trust architecture.
That's kind of oxymoron.
Got it. And do you feel that you need to make Acquisitions in order to grow the TAM or is it more time to focus on execution and Sales and marketing and just try to within your current TAM try to get more market share. Where is your focus between the 2?
That's a good question. Both. Why not? Now having said that, I would say, We won't be looking for acquisitions to grow TAM. They're looking for acquisition to fill in any potential areas that need to Kind of strengthen or expand into adjacent markets, okay?
It's pretty open to it. We've done a few small acquisitions At the right opportunity, the right technology, we'll look for everything that makes business sense. We see that as a market opportunity for us, our momentum is so good, so why not keep on moving at a faster pace. And on sales and marketing, We are investing. We're investing heavily.
In fact, Remo and I have lots of internal debates on top line growth versus bottom line. We kind of say, hey, top line is a priority. So both of us happen to be such that we can't be spending like drunken sailors. You'll also see our bottom line being pretty
good. Thank you.
Thank you. Our next question or comment comes from the line of Erik Suppiger from JMP. Your line is open.
Yes. Thanks for taking the question and congrats. Just in the SD WAN space, who are your best partners at this point? Are there different architectures For SD WAN that fit well with you or how do you look at that space?
SD WAN, so The answer is pretty simple. Starting with vendors who compete on the higher end, who have an enterprise class architecture, They are natural to work with us because our large customers want that. As I said kind of before, there are Three vendors we see frequently for SD WAN deployments of large enterprises. It's VMware, it's HP Aruba and it is Cisco. Most of our customers have 1 of the 3 deployed on the high end.
Then the low end customers coming from the firewall side of it, Do they have some large enterprise customers? Yes. But a lot of their business ends up being on the lower end and we see them less often. But we do have customers Who may have and other SD WAN vendors, but they decided that we were the security cloud of choice And we're open. We integrate with everyone.
I can take traffic from almost any SD WAN vendor, but with some of them we have stronger working relationships. VMware is our best partner when it comes to go to market.
Very good. Thank you.
Thank you. Our next question or comment comes from the line of Hamzah Fodderwala from Morgan Stanley. Your line is open. Hey,
Jay, just maybe a high level market question for you. I think some of this you touched on earlier, but We're clearly seeing a critical mass in terms of adoption of trends such as Sassy and Zero Trust network access. A lot of the stuff that obviously you've been Aligned towards day 1 and you're clearly a big beneficiary of that and have been. But at the same time, I think At least in the short term, it seems to be kind of a rising tight lift all boats, right? And many of the firewall competitors that you mentioned earlier are talking about similar approaches.
Not to necessarily coach you to talk about any one particular vendor, but
At what point do
you think that some of the FUD, right, from your perspective kind of winnows down and people are look for a A solution that's truly architected for this trend like you talk about.
Yes. We've seen this movie before. If you recall, there's some proxy vendors whose sales were rising and depressing, Jay. You guys are winning, why aren't they losing? So, Men, we are still young.
We still have a small part of the market, which 25%, 30% of the customers I deployed us. What are other guys doing to keep on dealing with data Centric architecture, network centric architecture, they're buying more and more firewalls, right? It'll take some time. Inertia is a powerful thing. But I think when it comes to doing truly the new architecture with 0 Trust where you don't put people on the network, You don't have a pass through architecture.
That's the only way to stop colonial type of threats, pipe kind of threats and SolarWinds type of threats. I think you'll see things changing. And that's what I think overall. The market is pretty big Right now, we aren't really inhibited or impacted by any of those Competitors who are doing well, I think inertia will keep them going for some time till the architecture really changes. Take for example, Spinning a VPN in the cloud doesn't make anyone 0 trust.
It's still VPN. Are customers buying and deploying it? Of course, they are, All right. Will that change over time? Of course, it will.
Can you make VPN into a 0 Trust? You can't.
All right.
Thank you.
Thank you. Thank you. Our next question or comment comes from the line of Rob Owens from Piper Sandler. Your line is open.
Great. Thanks for taking my question. Jay, relative to return to work, when you think about reopening, How would you expect the pace of digital transformation and therefore network transformation potentially change? And where are customer conversations right now around the
So customers are beginning to make plans to come and work From the office, many of them have partially opened up. What they learned during the COVID crisis The corporate network doesn't play a very important role. They could work from anywhere. But having said that, when employees are in the branch office, they need to make sure that traffic can go directly from the branch office to the cloud just like It went from employees home directly without going back to data centers. So that is actually restarting some of the SD WAN projects, So they can do local breakout, but the bigger issue that's helping us or the bigger opportunity that's helping us is They want to make sure employees in the office still do 0 trust architecture with a product like ZPA.
So we are seeing good interest And fully 0 trust, so they don't have an issue where the lateral movement of threats like solar winds can get them in trouble Our Dynfactor machines coming back to office can get in trouble and we are helping companies implement a better security, full security Overall, a good positive opportunity for us.
Thank you. We have time for one final question. Our last question comes from the line of Brian Essex from Goldman Sachs.
Your line is open. All right.
Back to the bus. Thank you for taking the question. I really appreciate it and congrats on
the results.
I was wondering, maybe Jay, if you could expand a little bit on some of the drivers here in You've got macro headwinds, you've got sales productivity, you've got transformational shift to the cloud, expansion of your platform. How does that That relate to customer growth. Is there any way you can kind of quantify customer growth and then grade those tailwinds in terms of which are the most meaningful with regard to the growth
When you said customer growth, are you talking number of customers or Revenue growth?
Yes, I guess I'm looking for logo growth relative to some of the kind of a Platform expansion and sales productivity initiatives that we have currently in play.
Right. We are doing Well, in both areas, new logo growth and upsell. In fact, it's interesting to bear inside the company should we pay more But new logo are not, okay. And we've decided not to because there's so much an opportunity to sell the platform, which falls under upsell. The new logo, we have a good mix of business coming from new logo as well as upsell.
So the opportunities, as you said, the macro environment is helping more focus on security, is helping us. Salesforce has done a phenomenal job In the sales organization, now we are seeing very good results from our early focus and channel with Summit Partners, Marketing, we got a new CMO. We expanded and strengthened the marketing team, a lot more investments in the marketing area. And platform and product machine is really coming at a very good speed. Very bullish on our opportunity Going forward,
yes, from a total customer perspective, we grew our customer base by about 20% year over year.
Got it. That's super helpful. Thank you very much.
Thank you. That concludes our Q and A session. At this time, I'd like to turn the conference over to Mr. Jade Chowdhury for any closing remarks.
I would like to thank you all for your continued support. Please join us at our Zenith Live Annual Clunk Summit in mid June. Thank you again.