Zscaler, Inc. Q4 FY2024 Earnings Call

Good day, everyone, and thank you for standing by. Welcome to Zscaler Fourth Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Now, I will pass the call over to the Vice President, Investor Relations and Strategic Finance, Ashwin Kesireddy. Please go ahead.

Good afternoon, everyone, and welcome to the Zscaler Fourth Quarter Fiscal Year 2024 Earnings Conference Call. On the call with me today are Jay Chaudhry, Chairman and CEO; and Remo Canessa, CFO. Please note, we have posted our earnings release and a supplemental financial schedule to our Investor Relations website. Unless otherwise noted, all numbers 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, 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, earnings per share, our objectives and outlook, our customer response to our products, and our market-share and market opportunity. These statements and other comments are not guarantees of future performance, but rather are subject to risks and uncertainty, some of which are beyond our control. 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. I also want to inform you that we'll be attending the following conferences: Citi Global TMT Conference in New York City on September 5th, Goldman Sachs Communacopia and Technology Conference in San Francisco on September 11, and Wolfe Research TMT Conference in San Francisco on September 11. Now, I'll turn the call over to Jay.

Thank you, Ashwin. We delivered a strong Q4 with all metrics exceeding the high-end of our guidance. Revenue grew 30% year-over-year. Billings grew 27%, and profitability reached new records with operating margins of approximately 22% and free cash flow margin of 23%. We also achieved a new milestone of $1 billion in quarterly bookings in Q4, driven by an acceleration in new and upsell business in the quarter. For the full year, revenue grew 34% and free cash flow grew 75%, resulting in a free cash flow margin of 27%, a new record for the company. With another year of strong top and bottom-line performance, we exceeded the Rule of 60 for the fourth consecutive year. Despite the recent changes in our go-to-market organization, we delivered these outstanding results, driven by strong customer demand for our Zero Trust Exchange platform. I'm very pleased with the progress we're making in go-to-market execution, the pace of innovation, and customer adoption of our expanded platform. I'm also pleased to share we crossed $2.5 billion in ARR in Q4, and we expect to achieve a new milestone of $3 billion or more in ARR in fiscal '25. Before getting into further details of the quarter, let me share a few observations on the demand environment. First, customer adoption of Zero Trust Platforms is stronger than ever, with Q4 setting a record for new and upsell business. Our platform secures 47 million users across nearly 8,700 customers. While other vendors are still struggling to deliver cloud security for users, we expanded our platform beyond users to deliver Zero Trust security for applications, workloads, and IoT/OT devices. Customers are consolidating their disjointed legacy security products by adopting our comprehensive platform. Second, the increasing use of AI is creating new avenues of growth for us. For example, the rising adoption of Gen AI is exposing new gaps in organizations' security posture. To help our customers address these risks, earlier this year, we launched Gen AI Security, which enables customers to realize the productivity benefits of Gen AI without compromising data security. Using our Gen AI security, customers can gain visibility, apply access control, and enforce data protection policies to prevent their sensitive data from leaking. Third, I'm thrilled to share that we have achieved a major milestone with our cloud platform, surpassing over $0.5 trillion transactions daily. This further demonstrates our widening market leadership position. These transactions generate a vast quantity of proprietary logs that feed our massive data lake. These are not firewall logs that often can't inspect SSL traffic for cyber threat detection. These are complete logs that have structured and unstructured data, including the full URL. We leverage this proprietary data to train AI models that power innovations throughout our platform. Our AI analytics solution, including unified vulnerability management, Risk360, and Business Insights are seeing strong traction. AI analytics contributed nearly 3 points to new and upsell business growth in Q4 and 2 points for the entire fiscal '24 even though some of these products were only available for part of the year. I am pleased with the contribution of AI analytics in fiscal '24, and with continued expansion of this solution, I expect its contribution to continue to grow. With an addressable market of $96 billion, we believe we are in the very early stages of opportunity with Zero Trust and AI. The cyber threat environment continues to worsen as the limitations of firewall and VPN-based architecture are exploited by threat actors to launch an increasing volume of sophisticated attacks. Over the last year, we saw an 18% increase in ransomware attacks blocked by the Zscaler cloud. Our seasoned threat research team is tracking 391 of the most sophisticated ransomware families, including many that were uncovered by Zscaler in the past year. Driven by the increased number of cyber breaches, more customers are adopting our Zero Trust platform. For example, in a new logo win, a Top 10 Fortune 500 industrial machinery company purchased Zscaler for 100,000 users in a multi-year seven-figure ACV deal. The customer previously purchased a firewall-based SASE solution to consolidate firewall, secure web gateways, and MPLS network spend. Subsequently, they realized the so-called SASE solution allows lateral tech movement and does not deliver Zero Trust Security. They chose Zscaler to replace their firewall-based SASE. Our purpose-built proxy-based cloud platform makes our customers' branches and data centers invisible to such actors; hence, they can't be discovered and they can't be attacked. In addition to landing new logo platform purchases, we are also upselling our platform. Our land and expand motion creates a flywheel of continuous engagement and upsell. To give you an example, in a seven-figure upsell deal, a Fortune 200 financial services customer bought ZPA and ZDX after their successful ZIA deployment for 68,000 users. After securing Internet and SaaS access with Zscaler, it was natural for them to expand to our broader platform. ZPA for Zero Trust access to private applications aimed for user-to-application segmentation to eliminate lateral type propagation, and ZDX to quickly identify and resolve end-to-end performance issues. With this purchase, the customer's ARR more than doubled to nearly $10 million. Next, I am happy to share that customers continue to adopt advanced features of our data protection pillar, making it one of our fastest-growing pillars. For example, in a new logo win, an American healthcare provider purchased multiple pillars of our platform, including ZIA transformation, data protection advanced, and ZDX for 124,000 users in a multi-year eight-figure TCV deal. Our data protection pillar was critical to this win due to its comprehensive capabilities, which include securing all types of data whether structured or unstructured. Data in motion or data at rest and data across all channels, including web, email, endpoint, SaaS, cloud workloads, and more. Next, let me discuss our emerging products, including ZDX, Zero Trust for Branch and cloud, and AI analytics. I'm delighted to share that emerging products contributed approximately 22% of new and upsell business in fiscal '24, up from 18% in fiscal '23. We expect this contribution to grow into the mid-20s in fiscal '25. Our Zero Trust for branch and cloud solution, including Zero Trust for workflows, Zero Trust SD-WAN, and Zero Trust segmentation is driving more and more meaningful wins. Let me share two examples, in an upsell win, a Fortune 500 financial services customer purchased Zero Trust for workloads to protect their on-prem applications. Zero Trust for workloads contributed approximately one-third of the seven-figure upsell ACV deal, which doubled the annual spend of this existing $1 million dollar ARR customer. In another upsell win, a Top 10 pharmaceutical company purchased our Zero Trust SD-WAN solution to protect over 30 manufacturing sites, eliminating the need for firewalls and making each site like a Starbucks. Zero Trust SD-WAN was nearly 50% of the seven-figure ACV deal. Our expanding portfolio of emerging products, further strengthened by our acquisition of Avalor and Airgap, is opening doors for sales to new customers. With the addition of Airgap, Zscaler is expanding to provide Zero Trust Security inside branches, factories, and campuses, where customers traditionally relied on East-West firewalls and network access control. By combining Airgap with our Zero Trust SD-WAN, we can not only replace firewalls at the edge, but also eliminate firewalls inside these sites. We are also seeing strong traction for the unified vulnerability management solution we acquired through Avalor. By combining our customers' enterprise security and business system data with our proprietary log data from half a trillion daily transactions, Avalor delivers real-time actionable insights and operational efficiencies for customers to improve their overall security posture. We expect new logo conversations that start with Airgap or Avalor or other emerging products to expand into broader platform opportunities. We will continue to invest in our platform expansion. Moving to the federal vertical, I am excited to share we landed a new cabinet-level agency, increasing our count of cabinet-level agencies to 13. In a seven-figure ACV deal, this customer purchased Zscaler for 5,000 users. With over 100,000 employees, this customer presents a significant 20x upsell opportunity. Having landed 13 of the 15 cabinet-level agencies, including the DoD, we see large upsell opportunities in the federal vertical with the increasing adoption of Zero Trust. Building upon our success in the U.S., we are accelerating our public sector go-to-market investments in other nations that are modeling the Zero Trust security initiatives similarly to the U.S. This is a large opportunity for us, but like many government initiatives, this will take time. Now let me share some updates on our sales organization. First, we had lower-than-expected attrition, and we had a strong hiring quarter. In fiscal '25, we plan to continue hiring reps at a strong pace and expect attrition to further improve. Second, I'm pleased to report that sales productivity was better-than-expected during the quarter, driven by acceleration in new and upsell business. In fiscal '25, we expect sales productivity to continue to improve with the second half stronger than the first. Third, we increased investment in the Global System Integrators channel by hiring leaders experienced in building GSI programs for large enterprises. These hires are driving significant progress in developing mutual go-to-market plans with GSIs that integrate the Zscaler platform with their customers' digital transformation projects. Most large GSIs are already Zscaler customers, allowing them to showcase to their customers the value Zscaler Zero Trust platform delivers. This quarter, we added another large GSI End-User customer, making eight of the top-10 GSIs by revenue Zscaler customers. This GSI purchased Zscaler for over 300,000 users in our largest-ever TCV deal in the services vertical. This GSI is consolidating multiple point products, including secure web gateways, load balancers, VPNs, firewalls, and MPLS networks, which is expected to deliver 200% ROI to this customer. I am pleased with the progress we're making in transforming our go-to-market engine to an account-centric sales motion, contributing to the growth of our large customers. We added nearly double the number of global 2000 logos in fiscal '24 compared to fiscal '23. We ended fiscal '24 with approximately 35% of global 2000 companies and more than 40% of Fortune 500 companies as our customers. Our customer base spending over $1 million plus annually grew by 26% year-over-year to $567 million, and we ended the quarter with over 60 customers spending over $5 million plus annually. We expect this large customer momentum to continue in fiscal '25. Finally, I want to address the topic of cloud resilience that has come to the forefront due to the recent cloud outages of Microsoft and CrowdStrike. When customers rely on a mission-critical cybersecurity service, there's no room for service interruptions. From inception, Zscaler has built a cloud security platform that has been seamlessly scaling with high-reliability and resilience. Operating such a service is no trivial task and requires years of experience. Unproven vendors, including new entrants and legacy firewall companies, do not have this experience. By operating the world's largest security cloud with superior resilience for over a decade, we have earned the trust of the largest enterprises. This is a clear differentiator for us and is driving the growth of our business. As an innovator and a market leader, in January 2023, we became the first cloud security company to introduce a business continuity service that enables customers to continue their operations even during catastrophic events. In conclusion, we are uniquely positioned to benefit from the confluence of two large secular growth drivers: Zero Trust security and AI. We enter fiscal '25 with a stronger go-to-market machine, increased pace of R&D innovation, strong adoption of our emerging products, and high levels of customer satisfaction with an NPS score of over 70. With our customer obsession, expanding platform, and a large addressable market, I expect another strong year, which will move us closer to our goal of $5 billion in ARR. Now, I'd like to turn over the call to Remo for our financial results.

Thank you, Jay. Our Q4 results exceeded our guidance on growth and profitability, even with ongoing customer scrutiny of large deals. Revenue was $593 million, up 30% year-over-year and up 7% sequentially. From a geographic perspective, the Americas represented 55% of revenue, EMEA was 30%, and APJ was 15%. For the full year, revenue was $2.17 billion, up 34% year-over-year. Our total calculated billings in Q4 grew 27% year-over-year and 45% sequentially to $911 million. Our calculated current billings grew 27% year-over-year. Like last year, some customers paid us upfront on multi-year deals, and the percentage of total calculated billings coming from such upfront payments remained relatively unchanged year-over-year. Our remaining performance obligations or RPO grew 26% from a year ago to $4.418 billion, with the current RPO being approximately 48% of the total RPO. We ended Q4 with 567 customers with over $1 million in ARR and 3,100 customers with over $100,000 in ARR. This continued strong growth of large customers speaks to the strategic role we play in our customers' digital transformation journeys. Our 12-month trailing dollar-based net retention rate was 115%. While good for our business, our increased success in selling bigger bundles, selling multiple pillars from the start, and faster upsells within a year can reduce our dollar-based net retention rate in the future. There could be variability in this metric on a quarterly basis due to the factors I just mentioned. Turning to the rest of our Q4 financial performance, the total gross margin was 81.1% compared to 81.4% in the prior quarter and 80.7% in the year-ago quarter. On a year-over-year basis, gross margin benefited by approximately 60 basis points from a change in our accounting structure attributed to the longer useful life of our cloud infrastructure. Moving on, our total operating expenses increased 8% sequentially and 26% year-over-year to $353 million. We continue to generate significant leverage in our financial model with an operating margin of approximately 22%, an increase of about 260 basis points year-over-year. Our free cash flow margin was 23%, including data center CapEx of approximately 8% of revenue. We ended the quarter with over $2.4 billion in cash, cash equivalents, and short-term investments. Before getting to the details of Q1 and full-year fiscal 2025 guidance, I wanted to share additional context about our framework for billing guidance. We expect full-year fiscal '25 calculated billings of $3.110 billion to $3.135 billion, representing year-over-year growth of approximately 19% to 20%. We expect first-half billings to be in the range of 39% to 39.5% of the full-year billings guide, with Q1 to be approximately 16.2% of the full-year billings guide. The midpoint of our guidance implies year-over-year billings growth of approximately 13% in the first half, accelerating to 23% growth in the second half. In no particular order, I'd like to share three key factors that are driving this acceleration. One, as Jay mentioned, we expect sales productivity to continue to improve with the second half stronger than the first. We expect this to contribute to strong new upsell and renewal activity in the year; two, our strong and growing pipeline supports second-half acceleration; and three, from a timing perspective, our contracted non-cancelable billings from prior year's active contracts are scheduled to grow 7% in the first half and 23% in the second half. This naturally implies stronger second-half billings growth, giving us strong visibility into total billings growth in the second half. Moving on to taxes, please note that we expect to continue to be a modest cash taxpayer in fiscal 2025 with an estimated cash tax of approximately $45 million to $50 million. For non-GAAP P&L reporting, I'd like to call your attention to a change we are making to our non-GAAP tax calculations. Starting fiscal 2025 and going forward, we're establishing a non-GAAP tax rate of 23%, which is reflected in our non-GAAP earnings per share guidance for fiscal 2025. Please refer to our earnings release and financial supplemental for fiscal '23 and fiscal '24 comparisons reflecting this new non-GAAP tax rate. Turning to the rest of guidance, as a reminder, these numbers are all non-GAAP. For the first quarter, we expect revenue in the range of $604 million to $606 million, reflecting a year-over-year growth of approximately 22%, gross margins of 80%. I would also like to remind investors that a number of our emerging products, including newer products like ZDX, Zero Trust Branch and cloud, and AI analytics will 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 gross margins. In addition, we'll continue to invest in our cloud and AI infrastructure to scale with the growing demand. Operating profit is expected in the range of $114 million to $116 million, net other income of $18 million, and income taxes of $31 million. Earnings per share is projected to be in the range of $0.62 to $0.63, assuming 164 million fully diluted shares. For the full-year fiscal 2025, we expect revenue in the range of $2.6 billion to $2.62 billion, reflecting a year-over-year growth of 20% to 21%. Operating profit is expected in the range of $530 million to $540 million, and income taxes of approximately $140 million, with earnings per share projected in the range of $2.81 to $2.87, assuming approximately 164 million fully diluted shares. We expect our free cash flow margin to be approximately 23.5% to 24%, including higher CapEx this year. We expect our data center CapEx to be approximately 3 points higher as a percent of revenue compared to fiscal 2024, as we invest in upgrades to our cloud and AI infrastructure. With a large market opportunity and customers increasingly adopting the broader platform, we will invest aggressively to position us for long-term growth and profitability. With that, operator, you may now open the call for questions.

Thank you. Please standby for our first question. And it comes from the line of Saket Kalia with Barclays. Please proceed.

Okay, great. Hey, guys. Thanks for taking my question here and a nice quarter on the billings and on next year's billings guide. Maybe if I give it to one question, Jay, maybe I'll make it for you. Can you drop a little bit there? 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 attacking this with a similar kind of pure-play cloud approach as Zscaler? Thanks.

Saket, thank you. We have not seen any meaningful change in the competitive landscape. In fact, I would say, as the market is looking for a broader platform that's integrated and is looking for a proven vendor because resilience has become a very important factor, our brand has improved. On the high end of the market, we actually feel very good. We mentioned the number of new logos. Last year, we added essentially double in '24 over '25. We've seen whether the firewall vendors or some other vendors, either they lack the proxy architecture or they lack a multi-tenant architecture. Architecture is critical for wins, 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 is massive. These large enterprises have to trust you, and it took us a long time to earn the trust of these customers. So we feel we are in a good position. We keep innovating, and the gap between our offering and what I call as competitors is growing bigger and bigger. So I feel very bullish and comfortable about our platform and the gap we are creating with other competitors.

Very helpful. Thanks.

Thank you. One moment for our next question. And it comes from the line of Brad Zelnick with Deutsche Bank. Please proceed.

Great. Thanks so much. And I'll echo my congrats on a strong finish to the year. 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.

Yes. Brad, it's a good question. After the CrowdStrike outage, customers are more focused on resilience, which is our strength. In fact, I personally got lots of calls right after the incident. They wanted to know about what we're doing about it. We ended up personally inviting a wide invitation briefing to about 1,000 of our largest customers. I was surprised to see that within a matter of a week, about 700 customers registered for the briefings, and we ended up doing multiple of them. The main question was, this is a mission-critical service, and how are we protected? The good thing is Zscaler delivered a business continuity plan or disaster recovery service in January 2023, becoming the first vendor to deliver it, the only vendor that has a true BCP. So the importance of mission criticality has increased significantly since the outage caused by CrowdStrike. In fact, about 40% of Zscaler's large customers have already deployed BCP for ZIA. So while our customers want resilience, they also do want consolidation, but they do not want consolidation such that it makes them dependent on a single vendor, especially a single vendor for applications and security. This sentiment has become even stronger after the Midnight Blizzard of Microsoft issues. So I think we are well-positioned. We did a good job in building mission criticality, and I think it's important that our customers are working closely with us.

Very helpful, Jay. Thank you.

Thank you. One moment for our next question, please. And it comes from the line of Roger Boyd with UBS. Please proceed.

Great. Thank you for taking my questions. 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 Q3 and Q4 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.

Yes, great question. So the billings guide really reflects, again, we broke out the first half versus the second half. As we talked about in the sales organization, we had higher attrition than we expected in Q3, and that attrition has stabilized in Q4. Hiring those account reps takes time for them to reach full productivity. We expect them to achieve strong productivity in the second half, and our pipeline supports our guidance. Additionally, when you take a look at billings, billings are made up of new, upsell, renewals, and contracted billings. One thing we called out on the script is that contracted billings are scheduled to increase year-over-year by 7% in the first half and by 23% in the second half. What I can say is that from my perspective, having been here at Zscaler for almost eight years, there's a positive change in our sales organization. It's a more mature, very strong leadership team, and I believe this organization will be able to sell deeper into accounts and convey the value of Zscaler effectively. The strong demand for Zero Trust is expected to continue as we expand in the Global 2000, which represents around 35% of Fortune 500 customers. However, the broader macro environment still presents some challenges, but I believe Zscaler, with our platform and what we're building, is very well-positioned.

No, it's good. I think the last comment I mentioned is that in today's environment, CIOs do want ROI, cost savings, and cost efficiency measures. We're in a unique position to remove a number of point products, which helps justify closing our deals.

Great.

Thank you. One moment for our next question, please. And it comes from the line of Joseph Gallo with Jefferies. Please proceed.

Hey guys, thanks for the question. 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 thinking about NRR in your fiscal '25 billings guide? Thanks.

So that's a very good question. CrowdStrike wasn't really an issue of putting all your eggs into one basket. CrowdStrike was one of the point products. Each product must work well. On one side, customers do want consolidation. If you have two dozen products, they want to bring it down to a handful of key platform providers, but they do not want to go to the extreme of going with a single vendor that wants to sell all security products or a single vendor that wants to sell you all the applications and security products. In fact, most of the CIOs I speak with want to standardize on in-line access to three providers: one for EDR, one for identity, and one for Zero Trust actions. I think that's a good combination because you end up getting a few extra layers while maintaining separation. So in this environment, our customers aren't really pushing back on us because we tell them not to buy everything through Zscaler. You've got an EDR provider, you've got an identity provider, and we'll cover the rest of the Zero Trust activities. I think we feel comfortable about our expansion and the selection of areas where we want to compete.

From an NRR perspective, Joseph, 115% I believe is outstanding. We're not guiding to NRR. The only time we really look at it is, as we mentioned before on these calls, the key for me is just driving top-line business, whether it comes from existing customers or new customers, but 115% at our scale is significant.

Thank you.

Thank you. One moment for our next question, please. And it comes from the line of Ittai Kidron with Oppenheimer. Please proceed.

Thanks guys. Great solid finish for the year. Remo, I'm sorry, I'm going to have to try and beat the dead horse here again on the billings. Just want to make sure I understand this right. I mean, in '24, you didn't have any unusual seasonality in the first half, second half on year-over-year patterns. They were quite similar in billings. So what is it that's driving the 7% and 23% differences in the first and the second half? Are things being pushed out? Do you just expect deals to push out, hence you expect to close more or renew more in the second half? Is that a macro comment? Was there something that happened two, three years ago that somehow comes back into play here? Anything that you can do to dig in a little bit more on that would be greatly appreciated.

Yes. If you look at the scheduled billings, the growth in the first half was 7%, and we anticipate a 23% growth year-over-year for this year. In the first half of fiscal '23 and fiscal '24, we faced macro challenges, which resulted in lower scheduled billings during that period. This contributes to the 7% year-over-year growth in the first half. Additionally, I mentioned earlier that our business is becoming more weighted towards the second half of the year as we grow larger. Our guidance reflects that we expect to realize the contracted scheduled billings for the 23% growth.

Thank you.

Thank you. One moment for our next question, and it comes from the line of Brian Essex with JPMorgan. Please proceed.

Great. Thank you, and good afternoon. Thank you for taking the question. Jay, I think you touched on this in your prepared remarks, but I want to circle back into the macro, specifically the competitive environment regarding pricing. There are certainly initiatives to consolidate on certain platforms with flexible pricing, different duration, and even giving away products for free. How is that impacting the pricing environment that you're dealing with? I understand that there are many times an architectural change that's attractive with your platform, but just wanted to peel back a layer on the pricing dynamics to better understand what you see in your environment? Thank you.

Yes, as I said during my prepared remarks, the macro remains challenging, and there's deal scrutiny. But also, at the same time, cybersecurity is critical. In many areas, good enough is sufficient, but in cyber and large enterprises, good enough is unacceptable. So customers do require a very good cyber solution. First, in cyber, a real Zero Trust architecture that's cloud-native plays an important role and matters. Once you do that, your pipeline actually builds, and the next part comes in, can you close the deal? Closing the deal in today's environment requires you to demonstrate the ability to eliminate multiple products and save money for the customers. We can replace a number of point products like firewalls, VPNs, network access control, and the like. When we can show that we can eliminate those products, customers appreciate it. Our new and upsell business has accelerated, showing strength in that area. So personally, I'm not worried about the competition and feel confident to manage pricing situations by eliminating a number of products. Think of other vendors. Do you really think a firewall vendor is going to want to remove many of their point products? The biggest installed base of products today is firewalls, and they want to protect those firewalls. We continue to get better at making sure we engage at the C-level and create a solid business value assessment, which we've taken ownership of.

Got it. Thank you.

One moment for our next question, please. And it's from the line of Matt Hedberg with RBC Capital Markets. Please proceed.

Thank you for the questions. Could you discuss the quarter a bit more? Given that it's Q4, it seems back-end loaded. Was there anything unusual about the deals during the quarter? Also, if you could elaborate on the trends in August, that would be appreciated.

The trends in August, I'll let Jay speak about that. Q4, we discussed that quarters have become more back-end loaded. Nothing unusual happened with Q4 from a linearity perspective. Regarding trends in August, we can't give specific trends on dollar amounts or anything like that, but maybe Jay can provide a few comments.

I think nothing unusual to talk about in August. Our business is making progress as usual.

Maybe if I could just squeeze one more in. It seems like in the spirit of consolidation, it feels like you guys are in a good position to consolidate a lot of customer spend. Can you talk about large deal visibility, understanding it is hard to predict the timing of those things, but could you discuss the growth in your large deal pipeline and the focus on playing the consolidation role?

Yes, there is no slowing down on the consolidation of point products. We have been seeing our deals in general getting bigger. Customers are spending more with us. I shared several deals where customers started spending an initial amount and then it has gone up significantly. The main thing for customers looking for consolidation is, number one, can you provide better cyber and data protection? Number two, can I operationally run and manage these things better? Number three, can you provide cost savings? That message is loud and clear, and we're addressing all of that. A growing area for consolidation is data protection. When customers began with Zscaler, they focused primarily on cybersecurity to avoid compromises. Now with ransomware attacks where data often gets exfiltrated, data protection has become a more critical item. Since we operate in-line with the traffic that travels via the Internet, we are the natural provider for data protection.

From my perspective, Matt, just to showcase some numbers from the script: we have 567 customers with greater than $1 million ARR, 3,100 customers with greater than $100,000 ARR, and over 60 customers with over $5 million ARR. We've also increased from doing 30 billion transactions per day to 500 billion transactions per day. The data and information we receive significantly help our customers from a security perspective. I believe we are in a great position to capture this market. With the go-to-market changes that we've made over the last nine months, we expect to sell deeper into accounts. I think the opportunity is substantial.

Thanks. Super helpful.

Thank you. One moment for our next question. That comes from the line of Shrenik Kothari with Baird. Please proceed.

Hey, guys, thanks for taking my question. So, Jay, in light of what you said, you guys are expanding the platform beyond just securing users and now delivering Zero Trust for applications, workloads, and IoT, and you gave an example of a new logo win with Top 10, strong customer demand for the broad approach. Just can you elaborate on the nature and composition of these contracts, the non-cancelable billings, the compensation of this pipeline in terms of users and seats versus workloads and applications that you called out? And does that help with the overall kind of land and expand motion moving more towards the workloads and application base and a follow-up for Remo as well?

Yes. Let me start with the platform expansion. As I mentioned in my prepared remarks, most vendors are trying to really mature a product for protecting users. They've done that extremely well, with 47 million users protected. We naturally expanded to our workloads, IoT, OT devices, and related offerings. In terms of growth, emerging products, including those associated with workload protection and IoT, accounted for about 22% in fiscal '24. This increased from 18% in fiscal '23, and we expect this contribution to grow into the mid-20s in fiscal '25. The exciting aspect of this area is that there is minimal competition for Zero Trust in this capacity. Many of the workloads and related offerings are dealt with through firewalls, communication, IoT, and OT methods. Firewalls and VPNs must be eliminated. We are well-positioned and the sales approach is slightly different since we need to reach out to different audiences. However, CSOs and CIOs all play a common role, especially with the acquisition of Airgap, which addresses device segmentation for IoT and OT without the reliance on firewalls. We've significantly increased engagement with device segmentation for IoT and OT. Therefore, I believe the gap between our offerings and competitors trying to catch up is widening, and the barrier to entry is high in this space.

Yes. From a contracted billing perspective, the key point is that we sign three-year contracts upfront. Obtaining certainty with those contracts is beneficial. The billing happens annually afterwards. We're seeing an increase in contract lengths, which is positive. We're also witnessing an uptick in deal sizes, which is also positive. Customers are buying more of our product across our platform. Getting a three-year contract with scheduled billing ensures certainty regarding billings and provides us invested time to sell that customer more. Additionally, our sales organization is focused on deepening our account engagements. We will seek new customers while also aiming to sell deeper into existing accounts. Longer contracts are definitely a positive aspect.

Got it. Thanks a lot, Jay and Remo. Appreciate it.

Thank you. One moment for our next question. That comes from the line of Patrick Colville with Scotiabank. Please proceed.

Thank you, Jay, for taking my question. I'd like to ask about emerging products. It accounted for 22% of new and upsell in fiscal '24, which is impressive. We will see this in the 10-K, but can you share what ZPA and ZIA contributed to new and upsell in fiscal '24? Additionally, how do you anticipate ZPA and ZIA will perform in fiscal '25? What are the prospects for sustainability and remaining total addressable market for those two product lines?

So very good question. Let's start with ZIA and ZPA. When we went public, we only had ZIA, while ZPA represented a smaller portion. However, ZPA has grown considerably. Now ZPA accounts for over 40% of new business. This growth is remarkable. Looking ahead, I do expect ZIA to continue growing, though it might not match ZPA's pace. Ultimately, my goal is that every Zscaler customer utilizes ZIA, ZPA, and ZDX, which we refer to as our Zscaler for Users package. This has become our leading solution. Now regarding the second part of your question, which is about market penetration: ZIA was our starting product, and all customers typically begin with it, although some customers are starting with ZPA. We have successfully engaged around 35% of G2K customers. That implies there are still about 300 companies we haven't approached yet. Currently, 60% of large ZIA customers also have ZPA. This indicates that there is considerable opportunity in upselling, translating from 35% G2K to a higher percentage and among those 35% selling more ZIA and ZPA. There exists no shortage of market for us. In large enterprises, we excel at meeting their sophisticated needs for broad functionality, depth, reliability, and resilience. We're confident that our account-focused program is helping us deepen engagements within our existing accounts while acquiring new large logos.

Wonderful. Thank you so much.

Thank you. Our next question comes from the line of Adam Borg with Stifel. Please proceed.

Awesome. And thanks for taking the question. For Jay, Remo, I know you talked about this a bit in the script, but I was hoping you could elaborate on headcount growth in fiscal '25 and where you're really investing most across sales, marketing, and R&D? Thanks so much.

Yes. We do expect to increase headcount in fiscal '25. Our fiscal '25 headcount increase will be across all areas: R&D, sales and marketing, G&A, and cloud. I would say the pace of hiring in fiscal '25 will be less than what it was in fiscal '24. In fiscal '24, we added about 1,400 employees, going from 5,900 to 7,300. Therefore, I would expect a more moderate hiring pace in fiscal '25 as compared to fiscal '24.

Awesome. Thanks so much.

Thank you. And our last question, one moment please. Next question comes from the line of Hamza Fodderwala with Morgan Stanley. Please proceed.

Good evening. Thanks for fitting me in. Either for Jay or Remo, curious since Mike and the new sales leadership have been on in the last few quarters. What are some of the early indications that you're seeing as proof points that give you confidence heading into fiscal '25?

So that's a good question. Remember when we set out to make some changes, the key was to shift from early-stage companies that focus on opportunity-centric stuff to account-centric strategies. We implemented a program, trained the sales force, and are making good progress in this area. We see results in terms of upsell in the account base. We are also adding new logos. For example, the number of $1 million ARR customers increased to 567, and those spending $5 million or more have gone up to over 60. While this new team recently began working, several results point to our platform's promise. Additionally, the involvement from GSIs is significant, and we focus on embedding our offerings into their services. I'm optimistic about the quality of sales leaders and reps we're hiring, most of whom come from account-centric backgrounds. Overall, our transition is going better than expected, and I'm very pleased with it.

Yes, and from my perspective, we have a great company with a strong platform that meets global demand. Ultimately, it comes down to people. I believe in the leadership we have across the board, which sets us up well for the future, as Jay mentioned earlier. Strong leadership will attract strong talent, and we are seeing this in our team.

The barrier to entry for achieving what Zscaler has done is substantial. Cybersecurity is becoming increasingly vital. We are excited about the opportunities that lie ahead. Thank you for your interest in Zscaler. We look forward to seeing you at one of these investor conferences. Thanks again.

Thank you.

Thank you all for participating in today's conference. You may now disconnect.