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Zscaler (NASDAQ: ZS)
Q1 2025 Earnings Call
Dec 02, 2024, 4:30 p.m. ET

Overview of Earnings and Future Directions:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Zscaler first quarter 2025 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.

[Operator instructions] Please be advised that today’s conference is being recorded. I will now hand the conference over to your speaker today, Ashwin Kesireddy, vice president of investor relations and strategic finance. Please go ahead.

Ashwin Kesireddy — Senior Vice President, Investor Relations and Strategic Finance

Good afternoon, everyone, and welcome to the Zscaler first quarter fiscal year 2025 earnings conference call. Joining me today are Jay Chaudhry, chairman and CEO, and Remo Canessa, CFO. We’ve posted our earnings release and a supplemental financial schedule to our investor relations website. Unless otherwise noted, all numbers discussed today will be on an adjusted non-GAAP basis.

The reconciliation of GAAP to the non-GAAP financial measures can be found in our earnings release. I’d like to remind you that today’s discussion includes forward-looking statements that pertain to anticipated future revenue, operations, expenses, and customer response to our products. These statements are not guarantees of future performance and are subject to risks and uncertainties that may be beyond our control. You should not rely on them as indicative of our views going forward.

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We are under no obligation to update these forward-looking statements after this call. For a comprehensive overview of the risks and uncertainties involved, please refer to our SEC filings and today’s earnings release. I also want to remind you of upcoming conferences: UBS Global Technology and AI Conference on December 4th, Scotiabank Global Technology Conference on December 10th, Barclays Global Technology Conference on December 11th, and the Needham Growth Conference on January 9th and 10th. I will now turn the call over to Jay.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Executive Officer

Thank you, Ashwin. We had a strong Q1, with all metrics surpassing our expectations. Revenue increased by 26% year over year, and our bookings growth accelerated to over 30%. This is reflective of our customers’ increasing commitment to our zero trust exchange platform and heightened interest in our AI solutions. Our billings grew by 13%, significantly outpacing public legacy network security vendors by more than 10 percentage points, illustrating our market share gains in cybersecurity.

Our execution of go-to-market plans and product innovations are showing results. With continued high demand, I’m excited to raise our full-year billing and revenue guidance. Profitability was solid in Q1 as well, with a 50% increase in operating profit from last year, and we set new records for operating margin at 21% and free cash flow margin at 46%.

Many successful SaaS companies aim for a ‘rule of 40’ benchmark, but our figures align more with a ‘rule of 70’ or better, placing us among the elite among the 145 largest public SaaS firms. Customer discussions reveal that executives prioritize zero trust security and AI in their IT budgets. We are meeting this demand by integrating AI into our solutions.

Recently, we rolled out several AI innovations and are growing our AI portfolio in three key areas of customer interest. First, we focus on securing the use of AI applications to enhance and safely adopt public and private AI technologies. Our solutions help clients securely use public AI applications like ChatGPT, Microsoft Copilot, and GitHub Copilot by allowing visibility into data, controlling access, managing data discovery, correcting misconfigurations, and reinforcing data protection policies.

This is reflected in significant customer acquisitions. For instance, a Global 2000 technology services client recently purchased our AI-powered data protection solution, which constituted 50% of a seven-figure annual contract value. Safeguarding the use of Microsoft Copilot and 365 presents a considerable opportunity for us.

Moreover, we ensure visibility and control over public AI applications employees use, assessing the risk levels of these apps, and enabling logging and auditing of prompt queries. As public AI apps gain popularity, the demand for security solutions continues to rise. Our innovations are extending beyond public AI applications to encompass internal AI solutions, including chatbots and machine learning models. We are enhancing the functionality of our inline proxy-based zero trust exchange with an LLM proxy for analysis of prompt queries and results, which helps in detecting and countering malicious activities.

Secondly, we aim to automate digital experiences through AI for operational…

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Innovations Drive Major Wins for Zscaler Amid Growing Cyber Threats

Companies are increasingly looking to enhance efficiency and resolve performance issues quickly through automation. Zscaler has gained traction with its automated digital experience products, notably ZDX Copilot, which has been instrumental in securing significant deals. A prime example includes a seven-figure annual contract value (ACV) upsell with a major healthcare provider that expanded its ZIA subscription to 60,000 seats and acquired ZDX Advanced Plus, incorporating ZDX Copilot for all those seats. The healthcare provider aims to use ZDX Copilot to automate IT operations and shorten ticket resolution times.

This agreement resulted in the healthcare customer’s annual spending more than doubling with Zscaler. To further enhance these offerings, Zscaler is developing the ZDX AI agent, which will automate root cause analysis, thereby decreasing resolution times and providing automated solutions for user performance challenges. Additionally, AI-driven security products bring improved cyber and data protection, along with security operations automation. Innovations such as automated data classification and zero-day vulnerability detection have strengthened Zscaler’s cybersecurity framework.

To bolster security operations, Zscaler introduced a variety of tools, including Risk360 and unified vulnerability management, which expand their zero trust platform through data fabric technology. The company continues to innovate, working on new AI solutions like breach prediction and threat hunting, leveraging the vast amounts of data generated by their zero trust exchange, which processes 500 billion transactions daily. This extensive data pool enhances their ability to expand their AI offerings rapidly.

The integration of zero trust with AI is creating new opportunities for Zscaler, positioning them well in a market where hackers increasingly exploit the weaknesses of traditional security systems. Cybercriminals often begin their attacks by targeting firewall and VPN setups that fail to provide comprehensive protection. Legacy security vendors typically offer fragmented point solutions that complicate customer security strategies rather than streamline them. A Fortune 50 retail customer recently expressed disappointment after discovering that a purported platform from a legacy firewall vendor turned out to be merely a method for consolidated billings.

The complexity introduced by disjointed security tools hampers resilience. Many organizations are experiencing breaches despite significant investments in so-called SASE security, often consisting of virtual firewalls and VPNs. Transitioning to a zero trust architecture enables organizations to enhance their security and adaptability. Zscaler clients have improved their security posture while achieving operational efficiency and cost reductions using the Zscaler platform.

Currently, Zscaler secures over 35% of the Global 2000 and nearly 45% of the Fortune 500. Demand for the platform continues to grow among large enterprises. In a seven-figure ACV deal, a Global 2000 aerospace and defense company opted for ZIA to protect 100,000 users and sought additional workload protection for 5,000 workloads as part of its strategic move towards a cloud-centric infrastructure in collaboration with Zscaler.

Moreover, Zscaler is witnessing substantial opportunities for ZPA upsells. For instance, a Fortune 500 insurance client expanded its ZIA subscription from 45,000 to 70,000 users and also secured ZPA for the same number, focusing on quick mergers and acquisitions (M&A) integration while maintaining secure access to private applications. Under ZPA, these integrations can occur seamlessly, preventing the necessity of connecting the networks of involved companies, a challenge posed by traditional firewall solutions. This particular deal nearly doubled the customer’s annual expenditure to over $5 million. ZPA is expected to be a major growth driver for Zscaler in the upcoming fiscal year.

Turning to data protection, Zscaler outlined its comprehensive data protection vision at Zenith Live, as its clientele increasingly adopts these solutions. For instance, a Fortune 500 pharmaceutical company entered a seven-figure ACV agreement to utilize the data protection solution for 23,000 users, replacing multiple point products, including traditional data loss prevention services. This investment also nearly doubled their annual spend with Zscaler.

Enhancements to the data protection suite include a novel offering merging ZPA capabilities with the cloud browser product, ensuring zero trust access for third-party suppliers and partners. Traditionally, managing access for third-party applications involved costly virtual desktop infrastructures (VDIs) or complicated third-party enterprise browsers that required additional endpoint agents. Zscaler’s solution utilizes standard browsers like Chrome, providing enhanced security while eliminating the complexities associated with traditional access methods.

Recent customers, including a Global 2000 IT services firm, a U.S.-based shipping company, and another Global 2000 insurance provider, have all adopted the cloud browser solution, enhancing security while phasing out outdated access products. Zscaler plans to continue investing in this area to foster further innovations.

Emerging products, such as ZDX and Zero Trust for Branch and Cloud, are contributing to Zscaler’s growing success, seeing their annual recurring revenue (ARR) from these innovations expand at twice the rate of core products. This growth, combined with an account-focused marketing strategy, has spurred numerous seven-figure agreements. One example includes a Fortune 500 transportation client that implemented ZIA for workloads, replacing virtual firewalls in their cloud infrastructure, leading to a 40% increase in their annual spend.

In another significant deal, a large U.S. automotive supplier secured Zscaler’s Zero Trust SD-WAN across all 45 branches and zero trust device segmentation for their 37 manufacturing sites. This combination uniquely inhibits lateral threat movement, an accomplishment beyond the capabilities of traditional SD-WAN. Zscaler continues to aid organizations in migrating from outdated firewalls to zero trust solutions, enabling better security and network performance. Additionally, the company’s presence in the federal sector is expanding, with new cabinet-level agencies joining their roster, bringing Zscaler’s service to 14 out of 15 cabinet-level agencies, including the Department of Defense.

Zscaler Reports Strong Q1 Results Fueled by Zero Trust Expansion

Growing Opportunities within Federal Agencies

The shift toward zero trust architecture continues to gain traction, especially among governmental bodies. Zscaler’s solutions have caught the attention of cabinet-level agencies, presenting significant upsell opportunities that promise to increase annual recurring revenue (ARR) over time. The recent acquisition by a major federal agency of ZPA and ZDX for 22,000 users in a seven-figure annual contract value (ACV) deal demonstrates this trend. Multiple nations, including Australia, the European Union, Japan, Singapore, the United Kingdom, and the United States, have discovered that traditional firewall methods are no match for sophisticated nation-state attackers. As a result, these governments are eager to adopt zero trust models, turning this into a notable opportunity for Zscaler to leverage its U.S. federal success for international growth.

Improving Sales Strategies and Customer Engagement

In terms of market performance, Zscaler is ensuring strong progress with its go-to-market strategy. The company reported a robust hiring quarter, bringing on more experienced account executives while maintaining lower attrition rates. This positive trend is expected to strengthen sales capacity as we progress into the second half of fiscal year ’25.

Last year, Zscaler shifted its focus from opportunity-based selling to an account-centric model, led by Chief Revenue Officer Mike Rich. This transition has resulted in enhanced customer engagement, leading to a robust pipeline, elevated close rates, and increased business with existing clients.

Significant Year-Over-Year Billing Growth

Customer engagement is evident as Zscaler reported over 20% year-over-year growth in unscheduled billings during Q1. Unscheduled billings comprise new, upsell, and renewal billings, showing healthy demand. Moreover, the company increased its $1 million plus ARR customers by 25% year over year, totaling 585, and ended Q1 with over 65 customers spending over $5 million annually.

On the channel front, Zscaler collaborates closely with strategic partners—including global systems integrators (GSIs) and hyperscalers—to enhance customer value. Many partners are now incorporating Zscaler’s platform into their offerings, expanding their joint solutions to also cover new products.

Strong Financial Performance and Future Guidance

Transitioning to financial results, Zscaler has reported a Q1 revenue of $628 million, reflecting a 26% increase year over year. Geographic revenue distribution showed the Americas contributing 54%, followed by EMEA at 30%, and APJ at 16%. Total calculated billings rose 13% year over year to $517 million, and calculated current billings increased by 12% during the same period. Remaining performance obligations (RPO) climbed 26% from last year to $4.411 billion.

Regarding operating performance, Zscaler maintained a gross margin of 80.6% and achieved an operating margin of approximately 21%. The company ended Q1 with over $2.7 billion in cash and investments. Looking ahead, Zscaler forecasts Q2 revenue between $633 million and $635 million, representing around a 21% year-over-year increase.

Strategic Investments and Leadership Changes

Over the full fiscal year 2025, Zscaler anticipates revenue in the range of $2.623 billion to $2.643 billion, indicative of approximately 21% to 22% year-over-year growth. Zscaler plans to invest in its cloud and AI infrastructure, attributing higher data center capex likely affecting margins in the near term.

On a personal note, Chief Financial Officer Remo E. Canessa announced his retirement after an impactful eight-year tenure, where he witnessed Zscaler ascend from around $250 million to over $2.5 billion in ARR. Canessa conveyed his gratitude to the team, stakeholders, and partners, expressing confidence in Zscaler’s future trajectory within the cybersecurity landscape.

Now, I’d like to turn the call over to Jay for additional insights.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Executive Officer

Farewell to CFO Remo E. Canessa: Zscaler Looks Ahead

During a recent conference call, Zscaler expressed gratitude for the significant contributions of Remo E. Canessa, who is set to retire from his role as Chief Financial Officer. His insights were pivotal in guiding the company as it rapidly expanded. Remo will remain in his position until a successor is appointed.

Market Insights and Projections

Operator

[Operator instructions] Our first question will come from Saket Kalia from Barclays. Your line is open.

Saket Kalia — Analyst

Thank you for taking my question, and congratulations on your retirement, Remo.

Remo E. Canessa — Chief Financial Officer

Thank you, Saket. I appreciate that.

Saket Kalia — Analyst

Jay, could you provide more information on the 20% growth in unscheduled billings this quarter? How does this compare to your expectations or to last quarter? Also, are you confident in continuous billings growth as the contracted noncancellable billings pool increases?

Remo E. Canessa — Chief Financial Officer

Sure, Saket. The 20% growth in unscheduled billings was in line with our predictions and even slightly outperformed our expectations. Scheduled contracted billings show a growth of 7% in the first half and are expected to rise to 23% in the second half. We anticipate that unscheduled billings will continue to grow by over 20% in the second half, as discussed in our last call.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Executive Officer

Additionally, I’d like to mention that our performance in Q1 was robust, driven by three primary factors: strong demand for the Zscaler platform, a growing pipeline, and improved sales capacity along with lower sales attrition in Q1.

Saket Kalia — Analyst

Appreciate the details, thank you.

Operator

Our next question comes from Andrew Nowinski from Wells Fargo. Your line is open.

Andrew Nowinski — Analyst

Thank you, and best wishes for your retirement, Remo. It’s been a pleasure working with you.

Remo E. Canessa — Chief Financial Officer

Thank you.

Andrew Nowinski — Analyst

I’m curious about data security. The ZDX Copilot seems promising, especially given your partnership with Microsoft. Can you shed light on that collaboration and any competitive advantages Zscaler has over others like Varonis?

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Executive Officer

Of course, Andrew. Our collaboration with Microsoft has greatly enhanced our data security offerings. We have integrated capabilities for data discovery and classification directly with platforms like OneDrive and SharePoint. Since Zscaler processes all traffic for Office 365, we can offer real-time data protection against leaks and maintain privacy for users leveraging Microsoft Copilot.

For example, we recently secured a seven-figure deal with a G2000 company to protect data when using Microsoft Copilot, highlighting our AI-powered solutions that ensure appropriate data access.

Andrew Nowinski — Analyst

Thank you for the insights.

Operator

Next, we have Gabriela Borges from Goldman Sachs. Your line is open.

Gabriela Borges — Analyst

Hi, good evening. Jay, I wanted to follow up regarding the growth of ZPA in FY ’25. Can you discuss where we stand in the VPN replacement cycle and the factors leading enterprises to rethink their VPN and zero trust strategies post-COVID?

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Executive Officer

Absolutely, Gabriela. I initially thought VPNs would be obsolete by now, yet they remain prevalent. The major opportunity extends beyond just replacing VPNs, as our solutions cover comprehensive network limitations including load balancers, DDoS protection, and firewalls. Zero trust segmentation is our next focus area.

ZPA has dramatically increased in importance. At our IPO, ZPA contributed only a small fraction of our new business, while today it represents over 40% of new business growth alongside ZIA. We expect all our customers to adopt our suite of solutions, including ZIA, ZPA, and ZDX, as standard practice.

Gabriela Borges — Analyst

Thank you for the clarity, and congratulations to both you and Remo.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Executive Officer

Thank you.

Operator

One moment for our next question. Our next inquiry comes from [next analyst].

Zscaler Reports Strong Growth Amidst Firewall Refresh Opportunities

Analyst Insights

Brad Zelnick from Deutsche Bank opened the discussion by congratulating Zscaler on its impressive performance. He noted a strong start to the year in bookings and posed a question about Zscaler’s growth in comparison to traditional firewall companies, highlighting the potential for Zscaler to replace legacy systems.

CEO’s Perspective on Market Positioning

Jagtar Singh Chaudhry, the Founder and CEO of Zscaler, acknowledged Zelnick’s remarks. He explained that while there was hesitation in the past about directly replacing firewalls, the landscape has changed. Today, Zscaler sees firewall refresh as a significant opportunity and aims to target customers wanting to cut costs. Chaudhry remarked on the growing interest among customers looking to replace traditional firewalls with Zscaler’s zero-trust solutions across various platforms, including data centers and cloud environments.

Bookings Growth Explained

Zelnick followed up by praising Zscaler’s over 30% bookings growth, emphasizing that this number is exceptional and should be unpacked further. He wanted to understand better the factors contributing to this growth, especially since it isn’t solely driven by contract duration.

Financial Metrics Highlighted

Remo E. Canessa, Chief Financial Officer, expressed pride in the 30% bookings growth and noted that unscheduled billings increased by more than 20%. He explained that strong performance was evident across various metrics, with a current recurring revenue of 22% and a retired RPO showing a yearly increase of 26%. Upsell opportunities with existing customers have also improved, faring well in the market.

Emerging Products and Their Impact

Mike Cikos from Needham wanted clarification on the contribution of Zscaler’s emerging products to the 20% year-over-year growth in unscheduled billings. Canessa responded by affirming that both emerging and core products helped boost overall growth, particularly in areas like AI and workload protection. He emphasizes that all parts of Zscaler’s offerings are contributing positively.

Branch Connectivity and Workload Protection Efforts

Chaudhry elaborated on the success of emerging products, particularly within branch networks. He highlighted significant deals, including a large contract with an automotive supplier, which showcased Zscaler’s ability to secure numerous branches. Both zero-trust SD-WAN and cloud workload protection have been strong contenders for growth, as customers expand their operations with larger-scale commitments.

Future Targets and Route to $3 Billion ARR

Ittai Kidron from Oppenheimer inquired about Zscaler’s progress on their Annual Recurring Revenue (ARR) target. Canessa confirmed the target of $3 billion for the fiscal year-end, noting a net retention rate of 114%—a sign of strong customer loyalty and increased spending among existing clients. The effective integration of new products into Zscaler’s core services is likely to play a crucial role in achieving this goal.

This discussion showcases Zscaler’s significant growth, its strategic advantage in replacing outdated firewalls, and the effectiveness of its expanding product offerings in the current tech landscape.

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Zscaler’s Emerging Products Show Strong Growth Amid Market Changes

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Executive Officer

Let’s dive deeper into our emerging products. We can categorize them into different groups. The ZDX has performed exceptionally well and continues to be our largest segment.

The zero trust branch operates as a branch connector integrated with our zero trust appliance and zero trust SD-WAN. This remains an exciting area for us. Additionally, zero trust for cloud workloads is generating substantial opportunities.

Currently, our AI products are growing significantly as well. In the past, we discussed a portion of our AI offerings known as AI analytics, which has surged 90% year over year. Although this growth comes from a small base, we are encouraged by the progress of our emerging products.

Remo E. Canessa — Chief Financial Officer

Regarding new business and upsell opportunities, we anticipate growth in the mid-20% range, up from 22% last year. It’s clear that our emerging products are strengthening as we move forward.

Ittai Kidron — Analyst

Thank you for the insight.

Operator

Thank you. Please hold for our next question. The next question comes from Rob Owens of Piper Sandler. Your line is open.

Rob Owens — Analyst

Thanks for taking my question. Remo, in your comments, you mentioned ongoing customer evaluation regarding large deals. Is this related to the general economy, or is there something more specific at play? It seems like AI is a focal point in your new transformational solutions.

Remo E. Canessa — Chief Financial Officer

Rob, that observation is based on general economic conditions, which have remained stable for some time.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Executive Officer

Indeed, we see this as beneficial. There is growing interest in cybersecurity solutions that can effectively minimize ransomware risks. This is critical for implementing a zero trust approach.

Typically, CIOs express their appreciation for our cybersecurity methods but emphasize the need for reduced costs and complexity. Our integration of zero trust with AI addresses these priorities, helping to streamline operations. Unlike legacy firewall vendors, we can revamp our extensive firewall installations for improved efficiency.

Rob Owens — Analyst

Thank you for the clarification.

Operator

Next, we will hear from Brian Essex of JPMorgan. Your line is open.

Brian Essex — Analyst

Good afternoon. Thank you for taking my question. Remo, best of luck in your next chapter; you’ll be missed.

Jay, I’d like to discuss the SecOps side. Can you provide an update on Avalor? You mentioned in the press release that you’ve surpassed half a trillion daily transactions, which is remarkable. How are customers assessing your capacity to manage data and traffic volume considering the evolving SecOps landscape?

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Executive Officer

The SecOps market is poised for change and is substantial. We have adopted a strategic approach by establishing a data fabric, which allows us to handle queries without overwhelming our data lake.

The Avalor acquisition has been crucial in this process. We have launched several initiatives in the market, including Risk360, powered by Avalor’s backend, and a unified vulnerability management system that helps customers prioritize threats effectively. Our digital experience offerings are also expanding.

Unlike competitors, we prioritize scoring and task management within SecOps. Our upcoming products will enhance breach prediction and threat detection, and we are already seeing positive feedback from initial designs. The key is that while technology is important, access to robust enterprise data is vital. ChatGPT, for example, utilized public data, but our logs allow us to benefit each customer uniquely. Thus, we’re increasing investments in this area to produce meaningful results over time.

Brian Essex — Analyst

That’s insightful. Thank you.

Operator

Next, we will hear from Joel Fishbein of Truist. Your line is open.

Joel Fishbein — Analyst

Thank you for your insights. Remo, you will be missed. Jay, you mentioned the public sector, particularly the U.S. federal projects. Can you provide updates regarding the DOD and Thunderdome initiatives? They have been looking for revitalization, and it sounds like you’re well-positioned for that.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Executive Officer

We continue to grow our share in the federal market, having established relationships with 14 of the 15 cabinet-level agencies. Our initiatives in defense are robust, and we see considerable opportunities on the horizon.

With the new administration focusing on cost reduction, we believe this benefits our federal business significantly. Our objective is to simplify infrastructure by removing unnecessary firewalls and other barriers. I’m optimistic about the federal prospects, which extend beyond the U.S. to allied NATO countries as well.

Joel Fishbein — Analyst

Thank you.

Operator

One moment for our next question. Our next question will come from Fatima Boolani of Citi. Your line is open.

Fatima Boolani — Analyst

Good
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Zscaler Insights: Strong Start Yet Cautious Look Ahead

Thank you for the opportunity to ask questions, and congratulations, Remo, on your remarkable career.

I have a question regarding the updated billings guidance and the anticipated second quarter billings based on your seasonal commentary, Remo. With a solid first quarter performance, why should we expect a decrease in the second quarter for fiscal year? Could you provide additional context on this?

Remo E. Canessa — Chief Financial Officer

Our guidance for the second quarter indicates an increase in billings, projected at 39.3% to 39.5%. The critical factor here is our strong performance in the first quarter.

Upon analyzing the trends, it’s clear that our scheduled billings are set at 7% for the first half and 23% for the second half of the year. Essentially, the fundamental aspects of our business remain stable. Our pipeline is robust and aligns well with our guidance. Additionally, we have seen positive dynamics in our sales organization, with improved hiring and reduced attrition rates, contributing to a strong go-to-market team.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Executive Officer

Agreed. The execution of our go-to-market strategy, spearheaded by Mike Rich and the team, has been exceptional.

Fatima Boolani — Analyst

Thank you.

Operator

Thank you. Our next question comes from Shrenik Kothari of Baird. Please go ahead.

Shrenik Kothari — Robert W. Baird and Company — Analyst

Congrats, Remo, on your retirement; it’s been a pleasure working with you. Shifting to account-centric selling has clearly yielded positive results, particularly in pipeline quality. Can you elaborate on the role of Global System Integrators (GSIs) in securing substantial deals? How should we gauge the influence of GSI-led opportunities on future billings?

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Executive Officer

This is an insightful question. We’re witnessing increasing contributions from GSIs, especially in large accounts. For instance, we recently secured two significant deals through GSIs: one with an auto parts supplier utilizing zero trust segmentation and another with a services company for Microsoft protection. GSIs are now engaging earlier in the sales process and standardizing our solutions, leading to better momentum for both established and emerging products.

This transition is advantageous as we eliminate outdated product lines like firewalls, VPNs, and SD-WANs, thus presenting opportunities for expanding service engagements with GSIs.

Shrenik Kothari — Robert W. Baird and Company — Analyst

Understood. Thank you, Jay.

Operator

Next, we have Matt Hedberg from RBC. Please go ahead.

Matthew Hedberg — Analyst

Thanks for taking my questions. I want to revisit the data protection solution. It appears to play a significant role in larger deals. In Q4 of fiscal year ’23, you mentioned approaching $15 million in Annual Recurring Revenue (ARR). Can you provide an update on the growth of that sector? Is it outpacing the overall business?

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Executive Officer

Data protection continues to grow faster than our overall business narrative. Recent advancements, particularly related to AI and data security, have amplified its importance. Companies are increasingly concerned about data leakage as they adopt public AI services like ChatGPT. We offer a comprehensive platform that includes robust solutions for SaaS, cloud-based data, and email security.

Operator

Thank you. Our final question will come from Roger Boyd at UBS. Your line is open.

Roger Boyd — UBS — Analyst

Thank you for allowing me to ask my questions. Remo, best wishes on your retirement. Jay, with the increasing success in upselling your data security portfolio, how is this integrating into new ZPA and ZIA deals? Is this becoming a competitive edge for Zscaler?

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Executive Officer

Data protection is frequently bundled with ZIA and ZPA products. Given our vast install base, it’s common for our customers to start from a data protection standpoint. This synergy not only simplifies the customer experience, but enhances our service offerings considerably.

Zscaler’s Growth Strategy: Capitalizing on New Opportunities in Data Protection

During a recent conference call, executives from Zscaler discussed emerging trends in their data protection offerings. There’s noticeable interest from potential customers in these solutions.

Balancing Product Focus for Optimal Growth

Current engagement numbers are modest. However, Zscaler finds its biggest successes in gaining new clients not through its ZIA and ZPA products but through products like Airgap and Avalor’s unified vulnerability management. The company boasts a substantial platform that allows them ample room for sales opportunities within their existing customer base, as well as new clientele.

Executives emphasized their strategy to pursue both avenues equally. They believe that nurturing both existing relationships and attracting new logos is essential for sustained growth. The market offers significant potential in both areas, and Zscaler feels confident in their ability to succeed across the board.

Closing Remarks from Leadership

Jay Chaudhry, the Founder, Chairman, and CEO of Zscaler, expressed gratitude for the interest shown by investors. He looked forward to engaging with attendees at upcoming conferences.

Operator

Thank you for joining today’s call. We will now conclude.

Duration: 0 minutes

Conference Call Participants

Several key figures participated in the call, including:

• Ashwin Kesireddy — Senior Vice President, Investor Relations and Strategic Finance
• Jagtar Singh Chaudhry — Founder, Chairman, and CEO
• Remo E. Canessa — Chief Financial Officer
• Saket Kalia — Analyst
• Andrew Nowinski — Analyst
• Gabriela Borges — Analyst
• Brad Zelnick — Analyst
• Mike Cikos — Analyst
• Ittai Kidron — Analyst
• Rob Owens — Analyst
• Brian Essex — Analyst
• Joel Fishbein — Analyst
• Fatima Boolani — Analyst
• Shrenik Kothari — Robert W. Baird and Company — Analyst
• Matthew Hedberg — Analyst
• Roger Boyd — UBS — Analyst

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