Zscaler, Inc. Q2 FY2025 earnings call

• Q2 results showed improvements in go-to-market execution with billings accelerating and revenue growing 23% YOY, both above guidance. • ARR grew to over $2.7 billion, NRR improved to 115%, operating profit grew 36%, operating margin reached nearly 22%, and free cash flow margin was a Q2 record of 22%. • Pioneered Zero Trust Everywhere, with over 130 enterprises becoming Zero Trust Everywhere and a mandate to triple that number in 18 months. • Zero Trust Branch saw 57% of new logo customers in Q2, and the $1 million plus ARR customer count grew 25% YOY. • Data protection pillar had over 40% YOY growth in net new ACV, driven by consolidation of point products and GenAI adoption. • Leveraged AI in various areas like ZDX Copilot, unified vulnerability management, and data classification, with ZDX Advance Plus bookings up over 45% to nearly $50 million. • GSIs played critical roles in closing deals, and progress was made in the federal vertical, including an 8-figure TCV deal in APAC.

In Q2, Zscaler's revenue was $648 million, up 23% year-over-year. Geographically, Americas represented 54% of revenue, EMEA 30%, and APJ 16%. Annual recurring revenue (ARR) grew 23% year-over-year to over $2.7 billion. The $1 million plus ARR customer count grew 25% year-over-year. The data protection pillar experienced over 40% year-over-year growth in net new ACV.

• Q3 revenue expected to be in the range of $665 million to $667 million, reflecting 20%-21% year-over-year growth; gross margin approximately 80%; operating profit $140 million to $142 million; EPS $0.75 to $0.76. • Full year fiscal 2025 billings expected in the range of $3.153 billion to $3.168 billion, reflecting 20%-21% year-over-year growth; Q3 revenue expected $2.64 billion to $2.654 billion (22% YOY growth); operating profit $562 million to $572 million; EPS $3.04 to $3.09. • Free cash flow margin expected to be approximately 24.5%-25%.

• Forward-looking statements subject to risk and uncertainty beyond control. • Macro-economic factors and scrutiny on large deals. • Variability in dollar-based net retention rate due to sales strategies like larger bundles and faster upsells. • Lumpy nature of federal deals.

Q: How much of the business is coming from ZIA and Secure Web Gateway replacements versus broader platform products?

A: ZIA was a starting point, often starting with a platform including ZIA, ZPA, and CDx. Recently, Zero Trust Branch is an important starting point, with 57% of customers on Zero Trust Branch being new logo customers.

Q: What proves out that the go-to-market changes are making a difference and are durable?

A: Strength in pipeline (leading indicator growing), new ACV up double digits, data protection growing over 40%, and good quality pipeline growing.

Q: Can you color the $1 million cohort in light of go-to-market initiatives?

A: Account-centric sales process and GSIs playing important roles. There's still a 6 times upsell opportunity in the installed base, and GSIs help with upselling additional stuff to large customers.

Q: How is the Zero Trust Everywhere initiative progressing and its anchor point?

A: 96% of CXOs surveyed were ready to embrace Zero Trust Branch. Zero Trust Branch simplifies the branch by removing firewalls and other legacy appliances, and combines with Zero Trust users and cloud for Zero Trust Everywhere.

Q: Can you provide more insight on NRR improving to 115%?

A: Deals are getting bigger, upsell is strong (over 65% upsell expected), landing bigger deals, and expanding the platform with emerging products all contribute to NRR, though the company doesn't guide specifically on NRR.