Zscaler (ZS 2.75%)
This fall 2023 Earnings Name
Sep 05, 2023, 4:30 p.m. ET

Contents:

• Ready Remarks
• Questions and Solutions
• Name Individuals

Ready Remarks:

Operator

Thanks for standing by, and welcome to Zscaler earnings announcement fiscal yr 2023 fourth quarter convention name. Presently, all individuals are on a listen-only mode. After the audio system’ presentation, there will likely be a question-and-answer session. [Operator instructions] As a reminder, as we speak’s name is being recorded.

I’ll now flip the convention over to your host, Mr. Invoice Choi, senior vp of investor relations and strategic finance. Please go forward.

Invoice Choi — Senior Vice President, Investor Relations and Strategic Finance

Good afternoon, everybody, and welcome to the Zscaler fiscal fourth quarter and full yr 2023 earnings convention name. On the decision with me as we speak are Jay Chaudhry, chairman and CEO; and Remo Canessa, CFO. Please notice that we have now posted our earnings launch and a supplemental monetary schedule to our investor relations web site. Until in any other case famous, all numbers we discuss as we speak will likely be on an adjusted non-GAAP foundation.

You can see the reconciliation of GAAP to the non-GAAP monetary measures in our earnings launch. I would wish to remind you that as we speak’s dialogue will include forward-looking statements, together with however not restricted to the corporate’s anticipated future income, calculated billings, working efficiency, gross margin, working bills, working earnings, web earnings, free money move, dollar-based web retention price, future hiring choices, remaining efficiency obligations, earnings taxes, earnings per share, our targets and outlook, our buyer response to our merchandise, and our market share and market alternative. These statements and different feedback will not be ensures of future efficiency, however quite are topic to danger and uncertainty, a few of that are past our management. These forward-looking statements apply as of as we speak, and you shouldn’t depend on them as representing our views sooner or later.

We undertake no obligation to replace these statements after this name. For a extra full dialogue of the dangers and uncertainties, please see our filings with the SEC, in addition to in as we speak’s earnings launch. I’d additionally like to tell you that we’ll be attending the next upcoming occasions in September: Goldman Sachs Communacopia and Know-how Convention on September sixth, Wolfe Analysis TMT Convention on September seventh, and Piper Sandler Development Frontiers Convention on September twelfth. Now, I am going to flip the decision over to Jay.

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

Thanks, Invoice. We had a powerful near our fiscal yr. In This fall, we delivered 43% income progress and 38% billings progress, with balanced progress throughout all verticals, buyer segments, and geographies. For the total yr, our income grew 48% to $1.6 billion, and billings grew 37% to over $2 billion.

Along with attaining report billings within the quarter, we additionally set information throughout a number of different measures. We added the very best variety of $1 million ARR clients, generated report new pipeline for This fall, and attained report working revenue margin. I am happy with our workforce’s achievements and humbled by the belief our clients are inserting in our platform. Whereas the macro atmosphere stays difficult, we’re executing effectively.

With cybersecurity as a excessive precedence, IT executives are shifting ahead with zero belief initiatives driving our enterprise. As I discussed earlier than, we’re partnering earlier with CXOs to create compelling CFO-ready enterprise circumstances with clear ROI and payback intervals. As our outcomes show, refining our excessive contact gross sales course of helps get giant offers throughout the end line. We have now a blueprint for delivering quick worth, which drives sooner upsells, usually inside 12 months of preliminary buy.

We closed a report variety of offers over $1 million ACV in This fall, pushed by broad-based energy throughout our key {industry} verticals. Along with our industry-leading top-line progress, we’re producing report profitability. As a result of our spending self-discipline, we achieved a report 19% working margin as we greater than doubled our working earnings on a year-over-year foundation. These excellent outcomes mirror the robust unit economics of our enterprise with best-in-class 80% gross margins.

Our innovation and buyer obsession drove our web promoter rating to exceed 80, which is greater than two instances the common for SaaS firms and contributed to our excessive 90% gross retention price. I’m very happy to announce that we doubled our annual recurring income from $1 billion to over $2 billion in seven quarters, reaching a milestone solely a choose handful of SaaS firms have achieved. We safe over 7,700 clients and shield over 41 million customers. With each buyer seeking to undertake zero belief structure in as we speak’s world of cloud, AI, and mobility, we consider we’re within the early levels of capturing a big share of our $72 billion market alternative.

We have now our sights set on attaining our subsequent purpose of $5 billion in ARR. We’re on a mission to take zero belief all over the place to customers, workloads, and OT methods and turn out to be the go-to platform for vendor consolidation, value financial savings, elevated enterprise agility, and higher cyber and information safety. To completely understand the enterprise worth enabled by our platform, clients are more and more shopping for Zscaler for customers, our full zero belief answer for consumer safety, which incorporates ZIA, ZPA, ZDX, and information safety. As well as, we’re gaining traction with workload safety powered by the identical core ZIA and ZPA know-how.

These broader platform purchases drove 37% year-over-year progress in clients with higher than $1 million in ARR. We ended the quarter with practically 450 such clients, together with 43 clients exceeding $5 million. Let me spotlight one deal the place the shopper bought all product pillars. A big world system integrator associate headquartered in Asia turned a buyer and adopted our platform to allow their work-from-anywhere technique.

They bought ZIA, ZDX, and superior information safety for 300,000 customers and ZPA for 270,000 customers. Additionally they bought workload safety and deception know-how to enhance utility safety for his or her hybrid atmosphere. This buyer can now open new places of work and offshore improvement facilities a lot sooner and extra securely. They’re additionally seeing a 50% discount within the time to onboard workers as a extremely distributed group with information all over the place.

Information safety was a significant consideration for them and accounted for 20% of the deal worth. Information safety is a vital new pillar of progress for us, approaching a $250 million in ARR and rising 60% per yr. We’re more and more changing incumbent legacy DLP within the largest of enterprises with information safety representing a $10 billion-plus alternative for us. As a result of focused investments and fast innovation, we consider our information safety answer is now the widest and the deepest out there.

And we’re taking information safety past customers to workloads and gadgets. Let me spotlight a brand new emblem win led by information safety. A big telecom operator bought Zscaler for customers for 80,000 workers. Information safety was a key driver for the win as this buyer turned more and more uncomfortable with gaps left by their firewall and VPN-based safety, which struggles with information safety for TLS-encrypted site visitors that contains over 85% of their web site visitors.

With Zscaler, this buyer is consolidating a number of level merchandise and expects a payback on the acquisition inside 9 months. Our rising merchandise, together with ZDX and Zscaler for Workloads, continued to see elevated adoption and contributed 18% of our new enterprise in fiscal ’23. We anticipate rising merchandise contribution to extend to over 20% in fiscal ’24. I would like to spotlight two offers that have been pushed by our rising merchandise.

In a seven-figure ACV upsell deal, a Fortune 50 insurance coverage firm bought ZDX Superior for all 170,000 customers after realizing worth from their preliminary ZIA deployment. With the Zscaler platform already in place, ZDX will get deployed rapidly, reduces troubleshooting time, and improves area agent productiveness. We straight affect the shoppers income and their brokers means to earn commissions. ZDX exemplifies the platform advantages of our zero belief change and expands our share of buyer spending past safety.

In one other seven-figure ACV upsell win, a Fortune 10 healthcare firm bought Zscaler for Workloads only one quarter after making their preliminary buy of Zscaler for Customers for all 150,000 workers. With workload safety, this buyer is accelerating their plans to maneuver most of their on-prem workloads to the cloud, in addition to shield workload site visitors from over 9,000 areas. Lastly, let me spotlight our success within the federal vertical. Twelve of the 15 cupboard degree companies are our clients, and we’re beginning to see bigger awards from these companies.

Let me spotlight one such agencywide deal. We have been awarded a multiyear contract from an company with greater than 100,000 customers. The worth of this contract will likely be realized over time based mostly on deployment with the sector items. In opposition to this award, we obtained a mid seven-figure ACV activity order for ZIA and ZPA.

This buyer selected the Zscaler over firewall distributors as a result of our cloud-native structure delivers higher safety and consumer expertise, all whereas assembly FedRAMP necessities. We stay the one cloud safety service to have two key merchandise on the highest degree of FedRAMP certification. These certifications and the manager order for zero belief safety are driving a major alternative for us within the federal market. Subsequent, let me talk about some key {industry} developments.

Cybersecurity stays the No. 1 IT precedence, and having the proper safety structure is prime to decreasing cyber danger. Based on our newest Zscaler ThreatLabZ VPN danger report, practically half of enterprises reported they have been focused by cyberattackers who exploited a VPN vulnerability, and a 3rd of enterprises fell sufferer to ransomware assaults throughout the previous yr. Rising cyberthreats, together with ransomware, are driving IT leaders to rework safety from legacy community safety to zero belief structure.

True zero belief safety cannot be constructed by spinning up a bunch of digital firewalls and VPNs in a public cloud. Have you learnt any VPN vendor whose merchandise haven’t been compromised? Our architectural differentiation offers us long-term benefit. As you could have seen, traders and regulators are rising stress on firms to enhance cybersecurity. With the brand new SEC requirement to report a fabric safety incident in 4 enterprise days, there will likely be elevated govt and board degree concentrate on cybersecurity.

Zscaler’s zero belief change platform delivers complete safety controls, full visibility, and quick reporting, every of which is now a will need to have for assembly company governance necessities. On this atmosphere, clients can’t danger transformational and mission-critical tasks with immature choices from unproven distributors. Each legacy distributors and newcomers within the safety {industry} have tried to imitate our messaging. The truth is that no vendor comes near offering a depth of performance and degree of efficiency at our scale.

Adequate in cybersecurity isn’t adequate. Subsequent, let me talk about AI, which is high of thoughts for patrons and traders. Generative AI has large potential to unlock insights, enhance worker productiveness, and resolve advanced issues. Nonetheless, the chance of information loss and difficulty of information sovereignty are limiting the potential of this new know-how.

To handle these considerations, we already delivered information safety capabilities that forestall the leakage of delicate information by AI prompts and appropriated into public coaching fashions. For instance, our browser isolation session wouldn’t let workers paste or sort any delicate info into gen AI prompts. This not solely allows workers to make use of AI, but in addition achieve this in a safe method for enterprises. Our engineering groups have innovated quickly on new AI-driven performance that is out there in our premium value bundles, equivalent to auto classification of unstructured information for superior information safety and auto segmentation of purposes for zero belief entry.

Second, we can have new merchandise based mostly on AI that may present important upsell alternatives with our clients. We lately launched Risk360, which allows govt groups and boards to raised perceive the chance posture of their organizations and offers unparalleled visibility with up-to-date safety standing and corrective actions they’ll implement in a well timed trend. Utilizing AI, I consider we can use our distinctive information set to additionally predict and forestall most of as we speak’s ransomware and different subtle assaults on our clients. AI-driven cyber insights and prevention have the potential so as to add large buyer worth, and we consider we will monetize that chance.

Zscaler has AI specialists and information scientists and priceless anonymized non-public information to customise and practice LLM fashions for the safety area. Based mostly on a proxy structure, our zero belief change is sort of a non-public switchboard that captures all communication logs. We have now the most important inline safety cloud, inspecting over 320 billion transactions every day with transactions doubling each 18 months. These logs present greater than 500 trillion alerts per day that feed our AI fashions for higher detection of consumer and utility site visitors anomalies, leading to a constructive community impact of superior risk safety for our clients.

We have now been investing in AI for fairly some time, together with our first AI acquisition in 2018, and we’ll proceed to put money into fiscal ’24 for fast AI improvements, cloud enhancements, and go-to market to take our AI options to the market. All investments will likely be made throughout the envelope of margin steering that Remo will talk about. In closing, we’re excited in regards to the alternatives forward. We have now a observe report of constructing and rising new improvements like ZDX information safety and 0 belief for workloads, and we at the moment are turning our consideration to AI.

We consider these new merchandise will contribute more and more to our future progress. Our enterprise worth message is resonating on this difficult macro atmosphere, and extra clients are adopting our broader platform to consolidate multiple-point merchandise. We consider clients belief Zscaler greater than some other supplier for securing their zero belief journey. We have now grown our world workforce to just about 6,000 workers with the mission to safe the hyperconnected world of cloud, AI, and mobility.

I am extraordinarily happy with the robust progress and profitability we delivered in fiscal ’23. I need to thank our workers and our companions for his or her tireless efforts and dedication to our clients success. We are going to make investments aggressively to thrill our clients and seize the massive alternative forward of us whereas persevering with to ship operational excellence. Now, I would like to show over the decision to Remo for our monetary outcomes.

Remo Canessa — Chief Monetary Officer

Thanks, Jay. We’re happy with our robust efficiency in This fall and strong execution even with ongoing buyer scrutiny of huge offers. Income was $455 million, up 43% yr over yr and up 9% sequentially. ZPA product income grew 57% yr over yr.

This would be the final quarter that we escape ZPA income individually as we’re more and more promoting answer bundles that contain a number of product pillars. From a geographic perspective, Americas represented 53% of income, EMEA was 32%, and APJ was 15%. For the total yr, income was $1.62 billion, up 48% yr over yr. Our complete calculated billings in This fall grew 38% yr over yr to $719 million.

On a sequential foundation, complete billings grew 49% quarter over quarter. Complete billings benefited from a $20 million upfront billing on a multiyear deal. As a reminder, our contract phrases are usually one to 3 years. We primarily bill our clients one yr upfront.

Our calculated present billings grew 33% yr over yr and 42% quarter over quarter. From a vertical perspective, we noticed robust progress throughout our key verticals. Our remaining efficiency obligations, or RPO, grew 35% from a yr in the past to $3.51 billion. The present RPO is roughly 49% of the entire RPO.

We ended the yr with 449 clients with higher than $1 million in ARR, including a report 49 $1 million ARR clients within the quarter. The continued energy of this massive buyer metric speaks to the strategic position we play in our clients’ digital transformation initiatives. We additionally ended the quarter with 2,609 clients with higher than $100,000 in ARR. Our 12-month trailing dollar-based web retention price was 121% in This fall.

Turning to the remainder of our monetary efficiency complete gross margin of 80.7% compares to 80.2% within the prior quarter and 81.6% within the year-ago quarter. Greater public cloud utilization for rising merchandise drove the year-over-year change in gross margin. As Jay talked about, rising merchandise are rising as a proportion of our new enterprise and contributed 18% of latest ACV in fiscal 2023 in comparison with 14% in fiscal 2022. Shifting on, our complete working bills elevated 3% sequentially and 27% yr over yr to $281 million.

As a result of our concentrate on spending self-discipline this yr, we generated important working leverage in our mannequin, with working margin reaching 19%, a rise of roughly 200 foundation factors yr over yr. Our free money move margin was 22%, together with information heart capex of roughly 6% of income. For the total yr, our working margin was 15%, and free money move margin was 21%. We ended the quarter with over $2 billion in money, money equivalents, and short-term investments.

In August, we have accomplished an evaluation of the helpful lives of our servers and community gear. With advances in know-how and efficiencies in how we function our server and community gear, beginning in fiscal 2024, we’re extending the depreciable helpful life for these belongings in our cloud infrastructure for 4 to 5 years. We anticipate the affect of this modification to be roughly a 50 basis-point profit to our gross margin for the total yr. Subsequent, let me share some observations in regards to the macro atmosphere and our framework for steering.

From our perspective, the worldwide macro atmosphere stays unsure, and clients proceed to scrutinize giant offers. As well as, in choose cases, we’ll proceed to allow new strategic clients to ramp into bigger subscription commitments. Sometimes, these ramp offers cut back our first yr billings however will develop into the next annual run price degree within the second yr. In This fall, for instance, the online affect of ramp offers was a headwind of roughly 1 proportion level to billings progress.

We anticipate the online affect of ramps will likely be impartial to billings in fiscal 2024. In our outlook for fiscal ’24, we’re balancing our enterprise optimism and confidence in our improved execution with ongoing macroeconomic uncertainties. We’re getting into Q1 with a report pipeline, and our buyer engagements stay robust. Nonetheless, we’re aware that on this atmosphere predicting shut charges and ramps in any 90-day interval stays difficult.

With a big market alternative and clients more and more adopting the broader platform, we’ll make investments aggressively to place us for long-term progress and profitability. With that in thoughts, let me present our steering for Q1 and full yr fiscal 2024. As a reminder, these numbers are all non-GAAP. For the primary quarter, we anticipate income within the vary of $472 million to $474 million, reflecting a year-over-year progress of roughly 33%; gross margins of 80%, together with the change in accounting for helpful lifetime of server gear.

I’d additionally wish to remind traders that quite a lot of our rising merchandise, together with newer merchandise like ZDX and Zscaler for workloads will initially have decrease gross margins than our core merchandise. We’re at present managing the rising merchandise for time to market and develop, not optimizing them for gross margins. As well as, we’ll proceed to put money into our cloud and AI infrastructure to scale with the rising demand; working revenue within the vary of $70 million to $72 million; web different earnings of $14 million; earnings taxes of $8 million; earnings per share within the vary of $0.48 to $0.49, assuming 159 million totally diluted shares. For the total yr fiscal 2024, we anticipate income within the vary of $2.05 billion to $2.065 billion, or year-over-year progress of roughly 27% to twenty-eight%; calculated billings within the vary of $2.52 billion to $2.56 billion, or a year-over-year progress of 24% to 26%.

We anticipate Q1 billings to develop roughly 30% on a year-over-year foundation. We additionally anticipate our first-half combine to be roughly 42% of our full yr billings information; working revenue within the vary of $330 million to $340 million, which displays roughly 100 to 150 foundation factors of working margin enchancment in comparison with final yr; earnings taxes of $35 million; earnings per share within the vary of $2.20 to $2.25, assuming roughly 161 million totally diluted shares. We anticipate our free money move margin to be barely above 20%. Lastly, we anticipate our information heart capex to be excessive single-digit proportion of income for the total yr.

Operator, chances are you’ll now open the decision for questions.

Questions & Solutions:

Operator

[Operator instructions] Our first query comes from the road of Brad Zelnick of Deutsche Financial institution. Your line is open.

Brad Zelnick — Deutsche Financial institution — Analyst

Nice, thanks a lot. And congrats on such a powerful end to the yr. Jay, are you able to tackle why Zscaler wasn’t included in Gartner’s most up-to-date Magic Quadrant for Single-Vendor SASE and if that is slowing you down in any respect? As a result of it actually does not appear to be. And possibly only a fast one for Remo.

Remo, guiding 25% billings progress off of a yr the place you are clearly outperforming friends is sort of spectacular. What ought to we be aware of past what you’ve got already advised us when it comes to your inputs and levels of upside and draw back danger versus what you’ve got delivered traditionally? Thanks.

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

Proper. So, Brad, this MQ just isn’t slowing us down in any respect. SASE is a broad generic time period. When Gartner began it a number of years in the past, it was an integration of SD-WAN and SSE, the gateway merchandise we have now.

And we had carried out integration with each SD-WAN vendor that issues on the market. So, however the MQ that obtained began this time was for single distributors SASE with SD-WAN providing in it. You recognize, we have now usually mentioned that SD-WAN is the other of zero belief. We do provide zero belief SASE, however we do not provide SD-WAN SASE.

So, we’re not in MQ. We’re about altering the world, not likely propagating the outdated world, and we’re very profitable in doing so.

Remo Canessa — Chief Monetary Officer

And, Brad, associated to steering, , the positives are, our pipeline is report pipeline. Our execution was superb in This fall, which provides us confidence. You recognize, the potential draw back is the worldwide macro atmosphere. We have taken that under consideration.

From our view, , for fiscal ’24, we’re seeing the same atmosphere as we did in ’23. You recognize, the steering that we have now, you known as out, , 24% to 26%, , we really feel could be very robust steering, which is supported by, , our optimism that we’re seeing in our enterprise associated to additionally what we see, , world macro, , scenario.

Brad Zelnick — Deutsche Financial institution — Analyst

Thanks very a lot, guys.

Operator

Thanks. One second, please. Our subsequent query comes from the road of Matt Hedberg of RBC. Your line is open.

Matt Hedberg — RBC Capital Markets — Analyst

Nice, thanks for taking my questions, guys. Congrats on the quarter. Jay, I used to be significantly impressed. You recognize, feedback on rising product success appears to be actually kicking in right here this yr and even possibly extra so subsequent yr.

I used to be curious on workload safety appears to be resonating in a number of associate conversations, and also you talked about on the decision. Perhaps just a bit bit extra particulars on why that is resonating as a result of I believe if a few of these add-on merchandise proceed to do what they’re doing, it actually opens up much-larger TAM than form of core ZIA/ZPA.

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

So, after we began ZIA/ZPA, we began for customers — a consumer can securely talk with purposes. It is pure to increase ZIA for Workloads, ZPA for Workloads as a result of workflows want to speak to one another in zero belief trend. So, our clients perceive it and respect it. It is an amazing upsell alternative for us to broaden our ARPU, in addition to buyer spend with us.

So, we’re seeing good success. The deal measurement continues to be smaller as a result of the variety of workloads in numerous levels, numerous clients. However we actually don’t have any competitors in terms of this space as a result of we’re the one supplier that is truly providing zero belief communication amongst workloads or workloads by web. We’re upbeat about it for fiscal 24 ‘as effectively.

Matt Hedberg — RBC Capital Markets — Analyst

Thanks, Jay. Congrats.

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

Thanks.

Operator

Thanks. One second, please. Our subsequent query comes from the road of Roger Boyd of UBS. Once more, Roger Boyd of Your Line is open.

Roger Boyd — UBS — Analyst

Hey, nice. Thanks for taking the query, and congrats on a pleasant quarter. Jay, lots has been made about Microsoft’s entry into this market. Very excessive degree, however Microsoft fairly particularly is concentrating on the SSE safety edge area and never SASE area.

And simply possibly a follow-up to Brad’s query, do you see that distinction as possibly additional legitimizing the SSE strategy relative to single-vendor SASE? Thanks.

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

Thanks. So, SSE broadly understood and accepted. It is basically the mix of ZIA and ZPA we constructed. However the TAM for SSE is giant, and it is getting bigger than the market appreciates as we speak.

You recognize, for Microsoft, it was pure to be out there for identification and endpoint safety as they’ve historically owned Lively Listing and Home windows working system. However inline safety is a very new space for them. This space of SSE that we pioneered has a really excessive bar, excessive efficiency, nice safety, no slowing down, and supporting a variety of locations. In actual fact, it is like being the [Inaudible] we have now to hook up with purposes which can be in Microsoft and AWS and GCP and a thousand SaaS purposes on the market.

So, clients just like the positioning of a supplier like Zscaler that is not tied to purposes itself. And Zscaler has earned the belief of huge enterprises that take time for any new entrant. Sure, Microsoft entries additional validation, however we do not consider it is going to affect us due to a positioning of the massive enterprise market. And there could also be some affect on the decrease finish of the market.

Operator

Thanks. One second, please. Our subsequent query comes from the road of Ittai Kidron of Oppenheimer and Firm. Your line is open.

Ittai Kidron — Oppenheimer and Firm — Analyst

Thanks. Hello, gents. Congrats, nice end for the yr. I assume I need to speak in regards to the aggressive panorama of the extra conventional firewall guys, Palo Alto and Fortinet extra lately.

And, I assume, checkpoint for an acquisition lately as effectively and clearly making an attempt to make huge efforts right here. Perhaps you can speak in regards to the aggressive atmosphere. In what method is it as we speak completely different than what it was a yr in the past? And what you seeing out of your opponents extra form of close to time period right here?

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

Thanks. On the excessive finish of the market, we — the place we do extraordinarily effectively, we actually have not seen a change. If there’s any change, I’d say our place has additional solidified, and I would not say it has gotten considerably simpler on the upper finish of the market. Relating to the firewall market, , we’re changing firewalls within the branches.

When Zscaler will get deployed with zero belief structure, there is not any room for any firewall on the department workplace. Now, there are nonetheless firewalls within the information heart and the like as a result of we do not play inside the info heart for east-west site visitors and the like. However as clients are doing native breakout or site visitors from each location, the quantity of site visitors going by the info heart is slowing down, which is sure to affect the gross sales and demand for firewalls on the market. So, we do consider that the shift we have now been speaking about to actually zero belief away from conventional firewalls and VPNs is going on, and it’ll proceed.

Ittai Kidron — Oppenheimer and Firm — Analyst

Recognize it. Thanks.

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

Thanks.

Operator

Thanks. One second, please. Our subsequent query comes from the road of Andrew Nowinski of Wells Fargo. Your line is open.

Andy Nowinski — Wells Fargo Securities — Analyst

Nice, thanks. Congrats on an amazing quarter, significantly on the billings. I imply it appears such as you solidly exceeded that even when you pull out that $20 million deal upfront. So, I wished to ask in regards to the information safety merchandise that you simply name out.

You spent a number of time speaking about it on the decision. And, , based mostly on the information in your slide deck, it appears like there’s a number of elements to that past simply information safety. So, possibly might you simply discuss a few of the distributors that you simply’re competing towards there? I believe you mentioned one buyer, you changed two completely different distributors. In the event you simply broaden on, , what you are seeing there from a aggressive perspective and the way aggressive is it relative to love the markets for Zia and ZPA? Thanks.

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

Yeah. So, information safety turns into a pure factor for us when site visitors begins flowing by Zscaler. So, actually, it is arduous to have some other information safety vendor when Zscaler is definitely sitting within the site visitors path. So, what are a few of the items of success right here? To start with, DLP, information loss prevention, which basically is completed on the site visitors that is in line.

We’re changing — the No. 1 vendor we’re changing there’s Symantec, which is broadly deployed. So, first, we deployed Symantec Blue Coat bins, and now, the DLP, is the secondary piece. The third huge space we’re changing is a few of the CASB distributors.

CASB early on obtained bought as some extent product as a module. For us, it is the characteristic. So, any buyer who has pure-play CASB deployed basically will get form of changed by our information safety platform. So, these are two huge areas.

However as well as, now we’re seeing a few of the newer areas developing. For instance, our end-point DLP which we lately launched, is getting large attraction on the market. The e-mail DLP module we added is fantastic as effectively. By way of acquisition of Canonic, we have now added the SaaS — the ecosystem — sorry, provide chain information safety.

So, all this has made these pillars probably the most complete platform, and it is setting site visitors line. That is why we form of known as it out as a result of the expansion is nice over 60% yr over yr, and we’re near 1 / 4 of $1 billion in. ARR.

Andy Nowinski — Wells Fargo Securities — Analyst

That is nice. Thanks, Jay. Sustain the great work.

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

Thanks.

Operator

Thanks. One second, please. Our subsequent query comes from the road of Brian Essex of JPMorgan. Your line is open.

Brian Essex — JPMorgan Chase and Firm — Analyst

Hello, good afternoon. Thanks for taking the query, and congrats on the outcomes. Jay, I used to be questioning when you could, or Remo as effectively, give us a bit bit extra coloration when it comes to the ramp offers that you simply noticed this quarter. Is there a method to quantify what proportion of offers have been ramp versus prior quarters? And the way does that usually — how do the dynamics of these offers work when it comes to the quantities of commitments, the pricing, and the flexibleness round ramping? And does it offer you extra flexibility? Or does it offer you extra visibility round what you see within the pipeline when it comes to protection over future intervals? Thanks.

Remo Canessa — Chief Monetary Officer

You recognize, I imply — I am going to begin and, , possibly Jay can contribute additionally. Ramp was a headwind about 1%, , for us. For bigger offers that we’re doing as we talked about previously is that, , we used ramp with our clients to mainly ramp into the total, , suite of merchandise that we have now. What we’re seeing is we’re seeing clients purchase extra of our platform upfront.

We’re seeing additionally current clients, , increasing their platform with, , ZIA, ZPA, ZDX, and information safety. So, after they’re shopping for the total suite of our merchandise, , mainly, we use it as a automobile to permit our clients to ramp into our merchandise and we get that sort of pricing. I’d anticipate, , ramps, , simply to form of comply with into fiscal ’24, I’d anticipate the identical degree of ramps in fiscal ’24, , at this level. You recognize, the ramps do give us higher visibility into billings as a result of, mainly, they’re going to begin off with, , decrease billings after which ramp up their billings in future intervals.

However, , it’s a automobile that we use. It has been very efficient, and so we’ll proceed to make use of it. And, Jay?

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

The larger the platform we promote, the extra seemingly it is advisable present ramp due to the extra items to be carried out. Quantity two, there’s a few of the tighter macro atmosphere with larger deal scrutiny, ramp did choose up previously yr or in order in comparison with two years in the past. We issue that in as part of doing enterprise, and it is not a nasty factor. We simply need to handle it immediately.

Brian Essex — JPMorgan Chase and Firm — Analyst

Nice, thanks very a lot.

Operator

Thanks. One second, please. Our subsequent query comes from the road of Grey Powell of BTIG. Your line is open.

Grey Powell — BTIG — Analyst

OK, nice. Yeah, Grey Powell from BTIG. Thanks for taking the query, and congrats on the great outcomes. So, a pair associated questions on my aspect.

Are you able to speak in regards to the visibility you could have on late-stage pipeline as we speak relative to this time final yr? And I assume I am simply making an attempt to get your confidence in billings. The upper proportion of offers as we speak, does that assist offer you higher visibility on the expansion outlook?

Remo Canessa — Chief Monetary Officer

Our visibility is nice. So, , as we talked about, , we have had a report pipeline and our execution additionally in This fall. So, I’d say, , visibility for us is nice and helps our steering. You recognize, actually the billings, , with the ramps, , give us additionally good visibility to.

So, , our steering I really feel, , 24% to 26% is, , superb steering and takes under consideration our visibility and all elements.

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

And in addition, if I could add, we have now a report pipeline, and we’re seeing fairly good momentum on our enterprise. We’re in Vegas doing our gross sales kickoff a few weeks in the past. The vitality and pleasure within the room may very well be felt truly. It was superb as a result of our gross sales workforce have a number of confidence.

We talked in regards to the report pipeline, the report offers on the market. We talked in regards to the new momentum the channel is including to us. So, we really feel superb about our fiscal ’24 enterprise.

Grey Powell — BTIG — Analyst

That is excellent. Thanks very a lot.

Operator

Thanks. One second, please. Our subsequent query comes from the road of Jonathan Ruykhaver of Cantor. Your line is open.

Jonathan Ruykhaver — Cantor Fitzgerald — Analyst

Sure, thanks. So, I’ve a query on the rising product portfolio. You highlighted the way it represented 18% of latest enterprise in fiscal ’23. You anticipate that to get to plus 20% in fiscal ’24.

It simply appears to me like, , plus 20%, I am unsure, , what that plus may very well be. However it looks as if a low bar simply given your feedback on information safety, ZDX, and cloud, together with the tailwind that you simply talked about from AI that’s going to profit a few of these merchandise. So, are you able to simply assist us perceive, , demand dynamics inside that portfolio, the places and takes on particular merchandise the place you anticipate to see the strongest demand?

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

Sure, if I could begin, it is all popping out of 100% solely, OK? That is a very powerful level, when the general progress is fairly robust, OK? And for the brand new product, even when it grows 70%, 80% a yr, it has to work very arduous to even take away 1% or 2% from the entire new ACV. That is fairly important. So, the expansion of those new merchandise is far sooner than the expansion of the general new ACV. However they’re pretty small and so they’re rising into good enterprise.

We known as out information safety because it turned a major a part of the enterprise. And I believe right here, too, you are seeing a mix of workload safety and ZDX. Each are rising at a a lot sooner price. So, I believe we are literally pleased with the expansion price.

However the level I used to be making an attempt to make is they’re making an attempt to steal away the market share from the remainder of the general portfolio, which has a a lot larger base. That is why the maths appears small, however it’s fairly spectacular.

Jonathan Ruykhaver — Cantor Fitzgerald — Analyst

Yeah, understood. Good level, Jay. Thanks.

Operator

Thanks. One second, please. Our subsequent query comes from the road of Joshua Tilton of Wolfe Analysis line is open.

Josh Tilton — Wolfe Analysis — Analyst

Hey, guys, thanks for taking my query, and I echo my congrats on a very good quarter. I form of need to return to the primary query. And when you take a look at the steering, the implied new billings form of appears like a bit bit extra aggressive, I’d say, within the final two years. So, possibly simply, , degree set for us or set some guardrails or expectations round form of the places and takes on what it will take for you guys to form of outperform what you laid out for the subsequent 12 months for us, please.

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

Let me begin to offer you a giant image, and, Remo, you may add your coloration to it. So, our steering is beginning with, to start with, a report pipeline and the momentum we have now within the enterprise. And we have now loads of product to promote. We have now a rising market alternative and lots of enterprise drivers.

We have now a number of new clients who’re actually shopping for zero belief for higher safety, a lot of market that is not lined. We’re nonetheless in about 30% of the World 2000 market. And we’re seeing public sector coming robust, federal market coming robust, and that is actually additional pushed by a few of the mandates which can be taking place on the market. And also you noticed in a few of the offers which can be introduced, clients are more and more shopping for, extra of those form of platform main to greater offers.

ZIA, ZPA, our flagship merchandise, are nonetheless doing robust. We have now factored into good progress for information safety, which enhances — it truly must go in each Zscaler buyer. Rising merchandise are contributing properly, and they’re contributing. So, whenever you take a look at all this, that is what we took into issue to offer you our steering.

Remo Canessa — Chief Monetary Officer

Yeah, I imply, our steering mainly balances our enterprise optimism that we see with our firm, additionally with the macro atmosphere. We really feel, , on this market, that is very strong steering.

Josh Tilton — Wolfe Analysis — Analyst

Tremendous useful. Thanks.

Operator

Thanks. One second, please. Our subsequent query comes from the road of Saket Kalia of Barclays. Your line is open.

Saket Kalia — Barclays — Analyst

OK, nice. Hey, guys, thanks for taking my query right here. And I echo my congrats on the end result. Remo, possibly for you simply to modify it up a bit bit, nice to see the free money move margin growth up to now.

Perhaps wanting ahead, are you able to simply discuss a few of the places and takes on free money move margin with, I believe, the 20%-plus information for subsequent yr? You recognize, how are you fascinated by issues like billing length or capex or something that is possibly influencing that quantity? As a result of it is nice to see, , working margin broaden, why is not free money move margin possibly increasing in the identical method? Thanks.

Remo Canessa — Chief Monetary Officer

Yeah, Saket, that is an amazing query. You recognize, the billing length, I’d assume, so comparable sort billing length as we had in fiscal ’23, so no change. Capex, we do anticipate capex to be the next p.c. In the event you check out the final two years, our capex has been within the 6% vary of our income.

We anticipate our capex to be within the excessive single-digit sort vary. We’re seeing the growth of our enterprise. We’re making investments in our cloud. And once more, it is — that is the principle cause.

Saket Kalia — Barclays — Analyst

Very useful. Thanks.

Operator

Thanks. One second, please. Our subsequent query comes from the road of Gregg Moskowitz of Mizuho. Your line is open.

Gregg Moskowitz — Mizuho Securities — Analyst

All proper, thanks for taking the query, and I am going to echo my congrats. Jay, getting again to information safety. So, your multimodal DLP that mixes video and audio codecs, that is attention-grabbing to me. Curious when you had any early buyer suggestions on that characteristic.

After which, secondly, what has been the early uptake round your new Risk360 providing simply when it comes to visualizing danger, and so on.? Thanks.

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

So, multimodal DLP continues to be in improvement. It is not transport, however there is a bunch of engagement with clients. And curiosity is excessive as a result of there’s nothing like this on the market out there. You recognize, Zscaler all the time likes to pioneer new issues that nobody has carried out on the market.

Risk360, however, is definitely transport. We have now taken a bunch of orders. This product has extra curiosity upfront than any of the opposite merchandise I can consider as a result of our engagement with CISOs are robust. When a CISO appears at Risk360 and say, “Wow, I’ve truly a single level to essentially inform me the holistic view of my enterprise and really the place my danger elements are and what tangible prioritized actions I might take to enhance my danger.” So, this can be a important velocity occurring.

Very, superb suggestions, and the product is rising very quickly when it comes to performance as effectively.

Gregg Moskowitz — Mizuho Securities — Analyst

Excellent. Thanks.

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

Thanks.

Operator

Thanks. One second, please. Our subsequent query comes from the road of John DiFucci of Guggenheim. Your line is open.

Once more, Mr. DiFucci, your line is open.

John DiFucci — Guggenheim Companions — Analyst

Oh, thanks. So, it does — everyone has mentioned it, the numbers look good. It was a pleasant quarter. However after we strive to take a look at the brand new enterprise signings, it appears prefer it noticed a tick down towards the same comp versus, what I believe, was kind of a monster quarter, the third quarter.

And, Remo, you talked about the continued macro stress. And, in fact, everyone sees that. However is that this quarter how we should always anticipate Zscaler to kind of be going ahead with reference to enterprise momentum and new enterprise signings? Or was the third quarter a greater gauge on what we should always anticipate going ahead towards this macro backdrop?

Remo Canessa — Chief Monetary Officer

Yeah, I imply our new and upsell bookings have been up yr over yr, so, , for This fall. So, it was a very good quarter. You recognize, from my perspective, John, I imply, it is an enormous market alternative, , on the a part of Zscaler. I do not need to make any projections associated to our doing upsell billings as a result of we do not give that steering.

However let me simply say that, , our pipeline for brand spanking new and upsell could be very robust. You recognize, we had actually robust and good execution in our This fall which provides us confidence. So, I really feel that we’re effectively positioned to go ahead and actually, , do effectively. As I discussed, it has come up a number of instances, , the wild card actually is the worldwide macro backdrop.

And so, we’re anticipating the worldwide macro atmosphere to remain comparable yr over yr. And so, we’ll see how that performs by. However from an organization perspective, for what we did in This fall and the way our enterprise tracked, we had a really robust quarter, which provides us optimism going into fiscal ’24.

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

The purpose I am going to additionally add is, since Zscaler can truly cut back value whereas decreasing enterprise danger, there’s added points of interest. We’re in a position to have interaction with clients and shut offers even when the macro is tight. We additionally form of felt superb in regards to the report variety of $1 million offers we closed in This fall. So, I see strengths throughout all main areas, main vertical areas, and that is why we be ok with it.

John DiFucci — Guggenheim Companions — Analyst

That each one is sensible, and thanks for taking my query. I imply what you guys are doing is healthier than most everyone on the market. However I assume only a fast follow-up, , you mentioned your bookings have been up yr over yr. In the event you take a look at present billings — and I do not know when you take a look at it that method, I assume I do, however — and I am wanting — I am making an attempt to again it with new ACV or new ARR, relying upon the corporate.

For you, it is new ACV. Was that up yr over yr? For many firms, it is not. And we calculate it being down a bit bit, however it’s nonetheless higher than most.

Remo Canessa — Chief Monetary Officer

Yeah, we’re not commenting on new ACV. However our bookings have been up yr over yr, and I believe that is a great way to take a look at the enterprise.

John DiFucci — Guggenheim Companions — Analyst

Thanks.

Remo Canessa — Chief Monetary Officer

Thanks.

Operator

Thanks. One second, please. Our subsequent query comes from the road of Adam Borg of Stifel. Your line is open.

Adam Borg — Stifel Monetary Corp. — Analyst

Superior, and thanks a lot for taking the query. Perhaps only for Remo, a few associated housekeeping follow-up. So, NRR, I believe, was at 121, beneath 125 for the primary time after quite a lot of quarters, hoped you can speak a bit bit extra about that and expectations for subsequent yr. And I apologize if I missed it as a follow-up, however billing length within the quarter, simply what did that become? Was {that a} headwind or tailwind? Thanks a lot.

Remo Canessa — Chief Monetary Officer

Yeah, so NRR, 121%, , we really feel is excellent. What we’re seeing is that we’re seeing extra clients shopping for extra of our platform upfront. So, when clients are shopping for extra of your platform upfront, that’ll affect, , buy sooner or later. Additionally, , we known as out on the decision a Fortune 10 firm, , purchased mainly inside one quarter.

So, when you’re shopping for throughout the yr based mostly on the calculation for NRR, that impacts it. You recognize, from my perspective, , we have been saying this since our public providing, is billings is admittedly the most effective measure to essentially, , take a look at Zscaler. And we nonetheless really feel that. The one time we take a look at NRR is admittedly on the finish of the quarter.

It is a metric that we take a look at. However, , actually, what I take a look at is mainly our complete billings, whether or not it comes from new or upsell. You recognize, associated to, , billing length, it was a tailwind in This fall.

Adam Borg — Stifel Monetary Corp. — Analyst

Nice. Thanks a lot.

Operator

Thanks. One second, please. Our subsequent query comes from the road of Peter Levine of Evercore. Your line is open.

Peter Levine — Evercore ISI — Analyst

Nice, thanks for squeezing me in right here, guys. Perhaps one simply follow-up on the gen AI alternative, , your analyst — not your analyst day, however your buyer convention a few weeks in the past, you introduced the safety autopilot. Perhaps, Remo, for one, are you able to simply put a closing level when it comes to how you intend on monetizing that as usage-based? Is it simply an upsell to form of the traditional contract subscription? After which, second to Jay, is, , your opponents are all saying the identical factor when it comes to their information is proprietary. Perhaps the identical query to you is what do you suppose makes, , Zscaler information proprietary? What’s your aggressive benefit whenever you go into an RFP versus, name it, like a Palo, whoever it is perhaps, that your information is proprietary? There’s a moat round your corporation.

What would your reply to that be?

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

So, let’s begin with information. There are many firms have a lot of information. What’s thrilling about Zscaler is we’re designed as a switchboard for all communication between completely different events. A firewall just isn’t a switchboard.

A firewall is a door, it is a gate. It says you might be inside, you might be outdoors. That is primary. Quantity two, firewall logs are sometimes what’s often called quick logs.

Nonetheless, a small variety of firewall transactions, whether or not they’re on-prem or within the cloud [Inaudible] entry and decrypted. If the information aren’t — if the transactions aren’t decrypted, your logs aren’t of a lot use in any respect. Or when you take DNS logs, they are not very helpful in any respect. It says which DNS area are you going to? We have now full logs after decryption about all the knowledge, together with the total URL.

The URL has a number of helpful info that we have now. Earlier than any reconnaissance — earlier than any breach occurs, reconnaissance begins, it may very well be making an attempt to take advantage of software program vulnerabilities. It may very well be making an attempt to phish these workers. All of that site visitors goes by us, and we acquire these logs.

And that is why we will truly do a few of the issues like with the ability to predict potential breach and the like. So, that is one huge half on the log aspect of it. The second query of how will we monetize AI-driven merchandise, do not consider Zscaler having solely AI-driven merchandise as a separate cost. It’s going to affect all of our product traces.

At present, a few of our premium bundles embrace AI-powered merchandise. So, we are literally monetizing it as part of the premium bundles. And they’re truly pretty extremely priced as in comparison with different bundles. Merchandise like Risk360, leveraging AI/ML huge time, is charged SKU.

A few of the new merchandise we’re constructing, they may have upsell, they’re going to have their very own SKU. So, we expect there’s loads of alternatives to cost as a result of clients are seeing values from the merchandise we’re constructing.

Peter Levine — Evercore ISI — Analyst

Thanks.

Operator

Thanks. Our subsequent query comes from the road of Patrick Colville. Your line is open. One second.

Patrick Colville — Deutsche Financial institution — Analyst

All proper. Thanks a lot for placing me in.

Remo Canessa — Chief Monetary Officer

 Hiya?

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

Hiya?

Remo Canessa — Chief Monetary Officer

Hey, Patrick, are you on? Patrick? Can we take our final query?

Operator

Our final — Patrick’s line was open. I do not know if he disconnected. One second. Patrick, when you might star 1, 1 once more.

Remo Canessa — Chief Monetary Officer

Let’s strive the subsequent name.

Operator

OK, thanks. One second. Our subsequent query comes from the road of Ben Bollin of Cleveland Analysis. Your line is open.

Ben Bollin — Cleveland Analysis Firm — Analyst

Good afternoon. Thanks for taking the query. I am inquisitive about how you are feeling about your progress all through the broader channel, conventional two-tier cloud market GSI. Any ideas you could have round form of what you’ve got discovered during the last six, 12 months and the way that is enjoying into your technique over the subsequent a number of years? Thanks.

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

Yeah, as , historically channel has performed a restricted position for us. We have now been engaged on it. We’re seeing increasingly more progress being made. Simply to make clear, I imply, we do take all these to channel with some exceptions when clients insist on us.

So, that is one half. We’re seeing yr after yr, or previously a number of quarters, channel offering extra leverage to us. Meaning doing extra work for us. We lately employed our channel chief, Karl Soderlund.

He comes from intensive expertise and robust relationships within the channel. And he has carried out a number of work in three areas of the channel, system integrators, VARs, and repair suppliers. Within the system integration area, we have now truly many of the giant SIs. They’ve chosen and deployed Zscaler for their very own transformation and 0 belief structure.

So, they’re embedding our answer into the SI advisory companies, which is excellent as a result of, then, it turns into lots higher. We additionally — so we’re relying on extra leverage from broad channel, even the broader channel itself. They are going by some centered coaching program, enablement program, which is able to assist them do extra transformation with us. In actual fact, we had practically 200 channel companions come to our gross sales kickoff and be part of palms and conduct session with our gross sales groups.

We expect that is bringing our groups much more nearer to work collectively, widespread account planning, and the like. So, we’re happy of progress, and we expect we’re shifting in the proper course.

Ben Bollin — Cleveland Analysis Firm — Analyst

Thanks guys. Have an amazing night time.

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

Thanks.

Remo Canessa — Chief Monetary Officer

Thanks.

Operator

Thanks. I would like to show the decision again over to Jay Chaudhry for any closing remarks.

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

Nicely, thanks all on your curiosity in Zscaler. I am wanting ahead to seeing you at a few of our investor conferences. Thanks once more.

Remo Canessa — Chief Monetary Officer

Thanks.

Operator

Thanks. Girls and gents, that concludes as we speak’s convention. Thanks all for taking part. [Operator signoff]

Length: 0 minutes

Name individuals:

Invoice Choi — Senior Vice President, Investor Relations and Strategic Finance

Jay Chaudhry — Founder, Chairman, and Chief Govt Officer

Remo Canessa — Chief Monetary Officer

Brad Zelnick — Deutsche Financial institution — Analyst

Matt Hedberg — RBC Capital Markets — Analyst

Roger Boyd — UBS — Analyst

Ittai Kidron — Oppenheimer and Firm — Analyst

Andy Nowinski — Wells Fargo Securities — Analyst

Brian Essex — JPMorgan Chase and Firm — Analyst

Grey Powell — BTIG — Analyst

Jonathan Ruykhaver — Cantor Fitzgerald — Analyst

Josh Tilton — Wolfe Analysis — Analyst

Saket Kalia — Barclays — Analyst

Gregg Moskowitz — Mizuho Securities — Analyst

John DiFucci — Guggenheim Companions — Analyst

Adam Borg — Stifel Monetary Corp. — Analyst

Peter Levine — Evercore ISI — Analyst

Patrick Colville — Deutsche Financial institution — Analyst

Ben Bollin — Cleveland Analysis Firm — Analyst

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