Zscaler Inc at Citi Global TMT Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Fatima Boolani - Citi - Analyst : So look, a couple of fireworks. So I want to dig right into the discussion. You did report results earlier in the week. I want to start with the highlights from the quarter, and then I specifically want to talk about how you're thinking about your guidance and the outlook. But some of the milestones and the highlights from the quarter, and then we can unpack things from there.

Question: Fatima Boolani - Citi - Analyst : Remo, you talked about 27% billings growth. It's actually 30% pro forma because you had a $20 million upfront payment in the fourth quarter of last year. But you've talked to us about fiscal '25, the starting point of 19% to 20% billings growth. Can you please help us step through in order of sequence in size in terms of what is being factored into your outlook that is causing this optical deceleration as we work through fiscal '25?

Question: Fatima Boolani - Citi - Analyst : Remo, just to put a finer point on how you've expressed and articulated the notion of scheduled contracted billings. We were all fairly braced for and prepared for the fact that, hey, there is a sales transition going on. You all have worked really hard to rebuild your sales capacity over the last six to seven months. So there was a general sense of, hey, there is going to be a ramp period that's going to manifest in the back half of the year. But specifically on this input of the scheduled contracted piece, what limited your visibility in the fiscal third quarter time frame that change 90 days later in that it became a more important variable that explains why there is this lopsided seasonality for fiscal '25?

Question: Fatima Boolani - Citi - Analyst : And then just to put a bow on this, you talked about having three-year contractual durations with your customers. So fiscal -- the first half of fiscal '23, having a little bit of a maybe anemic demand and macroeconomic backdrop against what you are executing, it's creating hangover effect clearly in the first half of '25. So just mathematically, if it's three years, should we expect some of that to weigh in first half of fiscal '26, maybe not to the same magnitude? But just directionally, is this something we'll have to be mindful of as we think about the trajectory of the business on a calendar 12-month basis? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 05, 2024 / 3:40PM, ZS.OQ - Zscaler Inc at Citi Global TMT Conference

Question: Fatima Boolani - Citi - Analyst : Okay. Okay. Putting aside this topic for a second and just focusing back on fourth quarter and certainly the back half of this past year, still putting up 30% billings growth. That's generally been very respectable in an environment that, I think you would agree, has been confounding with mixed data points at best, right? So in general, how would you articulate in that? How have you been may be more successful in bucking the trends? And I know one of the things that you've been talking about over the course of the last two years is this notion of selling a business value, right, like business value conversation. So how is that resonating and basically helping you stay above the fray in an environment where budgets are no longer free flowing and you don't have open spigots? Even if it's cyber, it's clearly -- spigots are not open.

Question: Fatima Boolani - Citi - Analyst : Jay, you were very early in pioneering and basically creating the blueprint for what we all know as SASE today. Thank you, Gartner, for coining that term. But look, in the success you found in essentially pioneering this category, there has been a surge of entrants, insurgence, competition, both from the lower end but some of -- maybe some of your largest rivals on the traditional incumbent firewall space. So what I want to ask you is, as you continue to focus on bringing on the majors, swimming in the upper most echelon in the enterprise tier of the market, how do you combat -- certainly, some of the -- in the trench warfare with the Palo Alto Networks and with others, but also stay true to your differentiation. I mean, certainly, the landscape today is significantly different than it was five years ago. So how are you navigating this evolution in the landscape? And ultimately, how is that translating in the way your salespeople are communicating the message and you're extracting the business value that you are providing?

Question: Fatima Boolani - Citi - Analyst : It's their toxic trade that's --

Question: Fatima Boolani - Citi - Analyst : And just -- I'm glad you brought this up because it's a segue to my next question around sales productivity resiliency. Remo, I know you're talking about a material degradation in your sales productivity levels. Certainly, in the first part of the year, for some of the obvious reasons around, hey, you've actually just got new capacity that's been onboarded into the organization. But just on a relative basis, you've got maybe five months' worth of data points of the accelerated hiring you've been doing. Can you give us the flavor of, hey -- in so far as you're being conservative around the ramp, what have been the actual data points around how folks have been ramping so far if you were to compare them to vintages and cohorts of past years of hiring?

Question: Fatima Boolani - Citi - Analyst : Remo, I think maybe one of the differences in terms of what your sales folks have in the bag today versus what they had in the bags three years ago, five years ago, very different. So that certainly would have to have played a part in how quickly they ramp, et cetera. But what I specifically wanted to ask you is -- and this is one of the questions we get from investors a lot is your flagship products, ZIA, ZPA. They are a seat-based model, a headcount-based model. And so what is the scope of opportunity with respect to some of those flagship products? And what do you see that we don't see in that there could be a perception that you're potentially saturated from a head count perspective, right? And as we zoom out, it's ARPU conversation. And then we can certainly talk about what else is in your portfolio to help bolster that. But how do you dismiss some of the concerns around, hey, your core products have had a fantastic run and now, you're at the upper limit?

Question: Fatima Boolani - Citi - Analyst : Remo, just to riff off of something Jay mentioned around, hey, you've got $567 million paying customers. There is a pathway to $10 million. So when you think about that path from $1 million to $10 million, right, what are the most obvious ways you can 10x a customer's wallet right? And I'd love for you to spend time on, hey, is this grabbing more seats? Is it grabbing more product? What are some of the vectors to help you get there?

Question: Fatima Boolani - Citi - Analyst : I'm glad you brought this up because US set has been a very important opportunity for you and you've tackled it very well. But I think for a lot of us here, we see all the press releases from your peers and some of your competitors, FedRAMP this and FedRAMP that. So what I want to ask you is what gives you the right to get 100% of the cabinet agencies and get more than your fair share of the DoD budgets? And is there a barrier to entry with the level of certifications that you've amassed that you were leaps and bounds ahead of some of your peers? Can you help us understand that? Because I think that it's still byzantine that you maybe can appreciate. So what is that barrier to entry that gives you so much confidence that your US Fed business has so much opportunity?

Question: Fatima Boolani - Citi - Analyst : Why didn't you get the other two of the 15?

Question: Fatima Boolani - Citi - Analyst : So great perspective on the US Fed. Maybe just from a broader strokes around end market and vertical-based behavior. You have a good cross-section of different parts of the economy that you call customers in your base. What are some of the dynamics you're seeing from an end market perspective, buying behaviors, macro impacting some sectors of the economy and some proportion of customers more than others?

Question: Fatima Boolani - Citi - Analyst : So we talked a lot about the growth avenues and the growth vendors in the business. Remo, when you think about resource allocation from an OpEx and investment standpoint, what's on the fiscal '25 policy agenda as it relates to investment priorities?

Question: Fatima Boolani - Citi - Analyst : And are you comfortable with the level of sales capacity that you have? I mean, certainly, in May and June time frame, you were really stepping on the gas pedal to build out and grow sales capacity and sales headcount. Where are you and what's your temperature on do you have the requisite capacity need to deliver that back half ramp that you're committing to?

Question: Fatima Boolani - Citi - Analyst : And from a free cash flow perspective, there is a unique element of capital intensity in your business. Can you talk about how much of that is structural versus temporary as you build out your back end? Because as Jay mentioned, you don't run your service on hyperscalers, right? This is built and delivered in-house. So how does that influence the way you're thinking about CapEx decisions and, for us, implications from a free cash flow perspective? Because I know there's some shifting around, but there are -- we are expecting to see a spike in CapEx next year.

Question: Fatima Boolani - Citi - Analyst : Jay, I want to end the conversation sticking to this notion about resource allocation and how you think about running the business short to medium term, long term. M&A, you haven't been a stranger to M&A. I think you've been very judicious and selective. Broad thoughts on what the asset landscape looks like, what the valuation expectations of private companies, how they've evolved? And as a founder of this business who has been really involved in the technology, how do you adjudicate the build versus buy decision? Because that's very close to you.

Question: Fatima Boolani - Citi - Analyst : One last one for you. 30 seconds on Remo and Jay, both for you. What is the one thing that you think investors are absolutely misperceiving about the business that you want to put to bed today in data and metrics and things you can see that might not be apparent?

Question: Fatima Boolani - Citi - Analyst : Fantastic. This is an excellent conversation. Thank you for all your candid perspectives. I always love having a conversation with you. Thank you.