Release Date: September 03, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Revenue grew 30% year over year, reaching $593 million in Q4.
- Achieved a new milestone of $1 billion in quarterly bookings in Q4.
- Free cash flow margin reached a record 27% for the full year.
- Customer adoption of the Zero Trust platform is stronger than ever, securing 47 million users across nearly 8,700 customers.
- Emerging products contributed approximately 22% of new and upsell business in fiscal '24, up from 18% in fiscal '23.
Negative Points
- Ongoing customer scrutiny of large deals continues to be a challenge.
- Sales productivity improvements are expected to be stronger in the second half of fiscal '25, indicating a slower start.
- The macroeconomic environment remains challenging, impacting spending decisions.
- Increased investment in cloud and AI infrastructure will result in higher CapEx, impacting free cash flow margins.
- The competitive landscape remains intense, with pressure on pricing and the need to demonstrate ROI and cost savings to close deals.
Q & A Highlights
Q: Jay, maybe I'll make it for you. (technical difficulty) a little bit, I think we all know your views on firewall-based solutions. But maybe out of curiosity, how about some of the newer players in SASE that are maybe attacking this with a similar pure-play cloud approach as Zscaler? Thanks.
A: Saket, thank you. We have not seen any meaningful change on the competitive landscape. In fact, if I would say, as the market is looking for a broader platform that's integrated and it's looking for approval vendor because the resilience has become a very important thing, our brand has gotten better. On the high end of the market, we actually feel like very good. We mentioned about the number of new logos. Last year, we added -- essentially doubled in '24 over '23. We've seen, whether the firewall vendors or some of the other vendors, either they lack a proxy architecture or they lack the [multi-tenant] architecture. Architecture is critical for winning, and that's a big advantage for us. Even if you build the architecture, the time and experience it takes to build a highly reliable, highly resilient cloud massive. And then these large enterprises have to trust you. It took us a long time to earn the trust of these customers. So we feel we're in a good position. We keep on innovating. The gap between our offering and, what I call so, would be -- competitors is growing bigger and bigger. So I feel very bullish and comfortable for the platform and the gap we are creating with other competitors.
Q: Jay, I appreciate your comments about the Microsoft and CrowdStrike related outage in July and why Zscaler is designed in a way that's highly available and, frankly, relied upon by customers as an in-line solution. But I'm wondering if that event, in any way, from what you can tell, has changed the way customers are thinking about their cyber strategies and Zscaler's place within that. Thank you.
A: Yeah, right. It's a good question. After the CrowdStrike outage, customers are more focused on resilience, which is our strength. In fact, I firstly got lots and lots of calls. Right after the incident, they wanted to know about what we're doing about it. But we ended up firstly inviting -- actually by invitation, briefing to 1,000 or so our largest customers. A surprise to see that within a matter of a week or so, about 700 customers registered for the briefings. We ended up doing multiple of them. The main question was, this is mission-critical service. And how are we protected? The good thing is Zscaler delivered business continuity plan or DR service in Jan [2023], the first vendor to deliver the only vendor that has a true VCP. So the importance of mission criticality has gone up significantly since the outage that was caused by CrowdStrike. In fact, about 40% of Zscaler's large customers have already deployed BCP or ZIA. So while our customers want resilience, they also do want consolidation. But they do not want consolidation such that it makes them dependent upon a single vendor, especially a single vendor for applications and security. This sentiment has become even stronger after the midnight desert of Microsoft issue. So I think we are all positioned. We did a good job in building mission criticality. And I think it's important, and our customers are working totally with us.
Q: Remo, I wanted to ask you about the billings guide and if you could just speak to the general level of conservatism there. You've been pretty clear even before this quarter about the expected headwind coming out of the go-to-market transition, but it does sound like sales productivity was better than expected in both 3Q and 4Q this year. So just beyond that, anything else giving you more pause or tempering your expectations around the broader macro environment, sales cycles, or anything else? Thanks.
A: Yeah, great question. So I mean billings guide really reflects -- again, we broke out the first half versus second half. And as we talked about -- in the sales organization, we had higher attrition than we expected in Q3, and that attrition stabilized in Q4. Hiring those account reps, it's going to take time for those account reps to basically get to full productivity. We expect them to get to strong productivity in the second half. Our pipeline supports our guidance. And as we called out also when you take a look at billings, billings is made up of new and upsell renewals and contracted billings. And one of the things we called out on the script is contracted billings are scheduled billings from prior-year contracts. So those are what we're seeing. We're seeing that because of the business is getting more second half weighted, we're seeing that this -- our guide reflects that. And as we called out in the first half, contracted billings is expected to increase on a year-over-year basis, 7%; end of the second half, 23%. What I can say also is that from my perspective, being here at Zscaler for almost eight years, there's a change in our sales organization. The change is basically -- it's a more mature, very strong leadership and also an organization that I feel is going to be able to sell deeper into accounts and really sell the value of Zscaler. So the puts and takes are, from my perspective, that strong demand for Zero Trust. We're going to continue to expand in the G2K, which represents around 35% in the Fortune 500 customers. The key thing with Zscaler also is that we're innovating. So you look at our emerging products, they represented 22% of our total new and upsell in fiscal '24. We expect that to go up to 25%. So that's going to be our continued focus. It's not only selling our existing core products, but also innovating. As I mentioned, strong momentum in the go-to-market team. We just had our SKO, and the feedback from everybody who went there was just very, very positive. Just really feel good about where we're at. Having said that, the backdrop, it's still a challenging spending environment. But I feel that Zscaler, with our platform, with what we're building our go-to-market, I just think we're just very, very well positioned. Jay, anything?
Jay Chaudhry: No, it's good. I think the last comment I mentioned is in today's environment, CIOs do want ROI cost savings, cost takeout. We're in a unique position to remove a number of point products that help justify closing our deals.
Q: Jay, I want to follow up on that last question. I mean, you've obviously started to branch out very successfully beyond ZIA and ZPA evidenced by AI and data protection success. However, post the CrowdStrike incident, we've heard customers don't want to put all their eggs in one basket. Does this hinder your ability to sell incremental products? And then Remo, maybe you can just elaborate on how you're
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
