Zscaler, Inc. Price & Performance (ZS)

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. Morgan Stanley TMT Conference on March 6, Susquehanna Travel Tech plus Gambling Forum on March 7, Loop Capital Markets Investor Conference on March 10, Stifel Technology Conference on March 11 Cantor Global Technology Conference on March 12 Now, I'll turn the call over to Jay. Thank you, Ashwin. Our outstanding Q2 results demonstrate the improvements in our go to market execution against a backdrop of growing customer demand for our platform. Billings accelerated in Q2. And revenue grew by 23% year over year. With both metrics coming in above the high end of our guidance. Our go to market investments are resulting in increased sales productivity. Double digit new and upsell business growth, [indiscernible] lower sales attrition I expect sales productivity to continue growth in the second half driven by ongoing success of our go to market initiatives, and growing number of ramped sales reps.

Our annual recurring revenue or ARR grew 23% Year over year, in Q2, two over $2,700,000,000 and our net retention rate or NRR improved to 115%. With our growing pipeline and better sales productivity, I expect us to achieve $3,000,000,000 or more in ARR by the end of the fiscal year. Q2 was also a strong quarter for profitability with 36% growth in operating profit driving two percentage points improvement in operating margin to nearly 22%. Free cash flow margin was also a Q2 record of 22%. Driven by strong revenue growth and free cash flow margin, we operated above the rule of 45. Placing us in the ratified category of large publicly traded SaaS companies that are growing rapidly at scale. Zscaler pioneered Zero Trust architecture which enables our customers' workforces to securely access applications wherever they reside. Prior to Zscaler, enterprises relied on firewall and VPN based security which allowed attackers to exploit the vulnerabilities and move unchecked across corporate networks. Many vendors are marketing SaaS built on SD WANs which only worsens the growing issue of ransomware attacks. We have gone far beyond SASE by pioneering our Zero Trust Exchange built on true Zero Trust architecture. Which eliminates lateral propagation of threats.

And dramatically reduces attack surface. Building upon our success in securing users, we expanded our platform to secure workloads IoT, OT devices, B2B users, B2B systems and more. Today, we are elevating the concept of Zero Trust to a new standard that we call Zero Trust [indiscernible] For a customer to be Zero Trust everywhere, They need CIDROS users where users are untrusted and never put on the corporate network. Zero Trust Cloud where workloads are untrusted and can communicate only through our exchange. And Zero Trust branch, where branches, factories, warehouses, or IoT, OT devices are islands of their own. Our mission is to create a zero trust everywhere world. With the upcoming hardware refresh cycle. CXOs are increasingly looking for ways to eliminate the legacy security stack including firewalls, VPNs, SD WANs and more. We are leaning into the opportunity presented by the refresh cycle the surgical field campaigns to educate our customers on how they can leave Frog to Zero Trust and free themselves from firewalls and other legacy appliances [indiscernible] I'm happy to share that we are seeing initial success from these campaigns. As of the end of Q2, we surpassed 130 enterprises that have become Zero Trust everywhere.

And my mandate to our teams is to triple that number in the next eighteen months. One of the core solutions of Zero Trust Everywhere is Zero Trust Branch. Which is seeing tremendous customer interest. Let me share a customer example. An existing 2,000 manufacturing customer purchased our Zero Trust branch in a 7 figure deal adding to their ZIA and ZPA commitments. This customer is leveraging Zscaler to secure all their critical manufacturing sites eliminating the need for firewalls, NACs, expensive switches and routers at these sites. Next, we are working with this customer to upsell Zero Trust Cloud to put them on the path to become Zero Trust everywhere. In another example, a large communications equipment company purchased our Zero Trust branch to phase out their existing SD WAN We are excited to work with this customer to help them realize better security and operational simplicity of our platform. Zero Trust branch is also helping us win new logo customers. In Q2, 57% of customers who purchased Zero Trust branch are new logo customers. Moving on to large customer metrics, our $1,000,000 plus ARR customer count again grew 25% year over year. In one large customer win, a new logo of Fortune 50 energy company adopted our Zero Trust platform to secure 25,000 users with ZIA and ZPA.

And made initial purchases of both Zero Trust branch and Xero TUS cloud in a 7 figure deal. This deal showcases how customers are adopting our broader platform including workloads, and branch inland deals. By embracing Zscaler as the platform of choice for this security transformation, The customer is eliminating firewalls SD WANs, legacy secure up gateways VPNs and more Thus, improving their security while lowering cost and complexity. I am also pleased with the momentum in our data protection pillar which experienced over 40% year over year growth in net new ACV. We see two key drivers of this trend. One, consolidation of point products and operational simplicity of data protection. We have the most comprehensive data protection platform which secures all types of data. Whether structured or unstructured. Data in motion or data at rest and data across all channels. Including web, email, endpoints, SaaS, cloud workloads, and more. These capabilities are packaged as various modules to provide flexibility to customers to adopt at their own pace. To give you an example, a global 2,000 retail company that had Expanded data protection to all users [indiscernible] all their six modules In Q2, This 7 figure upsell deal nearly tripled the annual spend of this already $1,000,000 plus ARR customer The customer chose Zscaler to drive what in their words is the most significant transformation project in the network and security history.

With too many data protection point products in their environments, Customers are forced to manage multiple policies from multiple products In contrast, Zscaler customers use a common set of policies that can be seamlessly implemented across all data protection modules resulting in rapid deployment and lower operational overhead. For example, in a 7 figure upsell deal, an existing global 2,000 financial services customer significantly expanded the data protection purchases for 100,000 users. This upsell drove a 65% increase in the annual spend of this already million dollars plus ARR customer. As of the end of Q2, over 85% of our $1,000,000 plus ARR customers have two or more data protection modules, and 65% have three or more modules. We expect this module adoption to continue to grow. The second key driver for data protection growth is the increasing adoption of Gen AI. With the widespread use of GenAI, all enterprises in all of data loss to public AI apps. Such as Microsoft three sixty five Copilot. Deepsea, Chat GPT and more. This is elevating the importance of data protection across all customers and customers are purchasing our solution to gain visibility into public AI apps and prevent data loss. For example, in Q2, many customers purchased data protection to securely adopt public AI including a global 2,000 hospitality company.

A global 2,000 technology company, a global 2,000 manufacturing [indiscernible] and more. In addition to securing the use of public AI apps, we are investing to deliver solutions to secure customers' private AI apps such as LLM and SLM models. Chatbots and inference engines. We are expanding the functionality of our Zero plus Exchange with an LLM proxy to analyze prompt queries and results in real time to detect and prevent prompt rejections and other malicious activities. We are also utilizing AI to make our products even better and deliver more value to customers. Less than a year ago, we introduced ZDx Copilot which leverages popular AI models like Gemini to deliver operational efficiency and faster resolution of end to end user performance issues. We offer ZDx Copilot in our ZDx Advanced Plus package. Following the launch of ZDX Copilot, bookings for ZDx Advanced Plus grew by over 45% to nearly $50,000,000 demonstrating the growth potential of AI powered products. Building on the success we are taking ZDx to the next level. By leveraging ZDx's agentic AI technology to automate root cause analysis, and expand IT workflow integrations for faster remediation and reduce resolution times. We are also leveraging AI in many other areas, including automated data classification, image classification, zero day vulnerabilities detection and prevention, app segmentation, IoT, OT device discovery, and more.

Our newly introduced AI analytics solutions including RISK360, unified vulnerability management, business insights and others and ACV from AI analytics nearly doubled year over year. To further accelerate the development of our AI solutions, we recently hired Quilt Tea as our EVP of AI innovations. Phil was the co founder of an AI driven enterprise software company that provided intelligent monitoring solutions for DevOps and ITOps. In his role, Phil will lead an incubation group focusing on AI innovations to drive cutting edge advancements in agentic AI to further transform our business and accelerate growth. AI is everywhere around us, The reason of DeepSci CAR1 highlights advancements in model training which can make Gen AI capabilities more widely available. Someone called it Javan's paradox. Which I agree with. In fact, I think this is the Internet moment of AI, which will drive rapid adoption of AI in every aspect of our lives and will create a greater need for better security. Zscaler is very well positioned to protect our customers. At the World Economic Forum in Davos, I met CEOs of several global system integrators or GSIs. We are seeing a sea change in GSI engagements compared to a year ago as an increasing number of them are embedding Zscaler into the network [indiscernible] security transformation [indiscernible] Several GSIs and strategic national partners now consider Zscaler as one of their top strategic partners just like Microsoft and Salesforce.

In Q2, GSIs played a critical role in helping us close several deals. For example, we partner with Cognizant, to close a 7 figure new logo deal with a global 2,000 insurance customer who purchased Zscaler for users for 23,000 employees. In another example, a large GSI helped us close a 7 figure deal with an existing $1,000,000 Fortune 500 healthcare customer. This customer purchased our ZIA, ZPA and data protection solutions for more than 100,000 users which increased the annual spend with us by over 350%. I am pleased to see that GSIs are leaning in working closely with Zscaler. And dedicating resources to drive growth. Next, let me highlight the progress in our federal vertical. All of you are aware of the highly publicized efficiency measures taking place under the new administration in The United States. Incumbent security vendors cannot save costs for a government, but Zscaler can and does by eliminating multi legacy security products, including firewalls, VPNs, NACs, DLP, VDI and more. Simply put, we offer better security at lower cost. Having landed in nearly all the cabinet level federal agencies, and with significant upsell opportunities still remaining, we are well positioned to benefit from the government's efficiency measures.

Outside The U. S, we continue to make investments For example, in an 8 figure TCV deal, a national government purchased Zscaler for users to secure the entire government workforce. This is a monumental win for Zscaler and our APJ sales team. And I'm humbled by the trust this nation's government has put in us. In conclusion, we're entering the second half of the fiscal year with three key drivers. First, our increasing sales productivity. Sales productivity increased in Q2 driven by strong demand. And I expect productivity to continue to improve in the second half. Second, we're driving zero trust everywhere in our customers. We have launched targeted campaigns to educate our customers on how they can become Zero Trust everywhere. And escape that refresh cycle for appliances. Third, the growing adoption of AI is driving demand across multiple dimensions including data protection, and our AI powered security products. I fully expect to benefit from these tailwinds. As I mentioned earlier, with strong demand for our Plaque I expect us to achieve $3,000,000,000 or more in ARR by the end of the fiscal year. I look forward to sharing more about our innovations and platform strategy at XenofLIVE in June.

Now, I'd like to turn over the call to Rimo for our financial results. Thank you, Jay. Our Q2 results exceeded our guidance on growth and profitability. Even with ongoing customer scrutiny of large deals, revenue was $648,000,000 up 23% year over year and up 3% sequentially. From a geographic perspective, Americas represented 54% of revenue, EMEA was 30% and APJ was 16%. Our annual recurring revenue or ARR exiting Q2 surpassed $2,700,000,000 ARR growth was approximately 23% year over year remaining performance obligations [indiscernible] grew 28% the $4,615,000,000 Current RPO was approximately 49% Total calculated billings grew 18% over year to $743,000,000 Our unscheduled billings comprised of new [indiscernible] renewal billings grew over 25% year over year. Our calculated current billings grew 19% year over year. We ended Q2 with six twenty customers with over $1,000,000 in ARR. And 3,291 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 twelve month trailing dollar based net retention rate was 115%. While good for our business, our increased success 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 Q2 financial performance. Total gross margin of 80.4% compares to 80.8% in the year ago quarter. Our total operating expenses increased 2% sequentially and 19% year over year to $380,000,000 We continue to generate significant leverage in our financial model with operating margin of approximately 22% an increase of about 200 basis points over year. Our free cash flow margin was 22% including data center CapEx at 2% of revenue. We ended the quarter with approximately $2,900,000,000 in cash cash equivalents and short term investments. Next, let me provide our guidance for Q3 and full year fiscal 2025. As a reminder, these numbers are all non GAAP. For the third quarter, we expect revenue in the range of $665,000,000 $667,000,000 reflecting year over year growth of 20% to 21%. Gross margins of approximately 80%, I would like to remind investors that we're introducing new products that are experiencing strong growth and are optimized for faster go to market rather than margins. This will continue to influence our gross margins We plan to optimize new products for margins over time as they scale.

Operating profit in the range of $140,000,000 $142,000,000 Net other income of $18,000,000 earnings per share in the range of $0.75 to $0.76 assuming a 23% tax rate and 163,000,000 fully diluted shares, For the full year fiscal twenty twenty five, we expect billings in the range of $3,153,000,000 to $3,168,000,000 reflecting the year over year growth of approximately 2021% For Q3, we expect billings growth to continue to improve and encourage modeling 200 to two sixty basis points of sequential billings growth, Revenue in the range of $2,640,000,000 to $2,654,000,000 reflecting year over year growth of approximately 22%. Operating profit the range of $562,000,000 to $572,000,000 earnings per share in the range of $3.04 to $3.09 assuming a 23% tax rate and approximately 163,500,000.0 fully diluted shares. We expect our free cash flow margin to be approximately 24.5% twenty five percent 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. Our first question comes from Saket Kalia with Barclays. You may proceed. Okay, great. Hey, guys. Thanks for taking my questions here and good quarter.

Jay, maybe for you, You dug into a couple of products in your prepared remarks that are clearly doing well like data protection. But maybe the higher level question is, how much of your business is kind of coming from ZIA and and secure web gateway replacements versus broader platform products in aggregate. Again, I know we've talked about certain products and we've gotten data points on how they're performing. But curious if you could talk about how the business is looking from that perspective of sort of ZIA and everything else from a everything else that sort of forms the platform? Sure. As you know, Socket, ZIA was the starting point We started taking our Glucode and other five gateways. There's still a lot of Bluecode left out there. But when we start, we quite often start with a platform that includes ZIA, CPA, and CDYX. So starting from maybe coming from VPN replacement or Blue Coat, platform becomes a more common thing. In fact, recently the Zero Trust branch is becoming an important area as a starting point Interesting number this quarter was that 57% of customers who bought our Zero Trust branch our new logo customers So expanded platform a wonderful thing [indiscernible] VPN is a starting point, We are taking zero trust everywhere.

Users, branches, and the cloud.

Got it. Very helpful. Thank you. Thank you.

Our next question comes from Brad Zelnick with Deutsche Bank. You may proceed. Great. Thanks so much for taking my question. Jay, it's good to see the go to market transformation coming to life. And I think we see it in the strength in million dollar plus customers, and emerging product ARR growth And Jay, I know you're not someone who's easily satisfied What do you see that proves out that the go to market changes are making a difference and that those changes are durable? Thank you.

So Brad, first of all, the strength of [indiscernible] which is a leading indicator that has been going Good quality pipeline is growing. Number two, our new ACV is up double digits that's very important. And then other metrics across the board, data protection, growing over 40% and so on and so forth. It's very good. And quantity of engagements with C level in large enterprises is getting stronger because that newer sales team the leadership is very good in account relationships and expanding those accounts.

That's helpful. Maybe a quick follow-up for you, Remo. I think your commentary around Q3 billings is maybe a little bit lighter than some expect even though the full year looks great. Just curious if there's been any change to the assumptions around scheduled versus unscheduled billings timing in the back half? Thanks again, guys. Great job.

Thank you, Brad. No changes. We called out the before with scheduled billings, we expected 7% in the first half and 23% in the second half. That is unchanged. And also on the unscheduled piece, [indiscernible] virtually remains unchanged also. You can see that we basically raised our guidance. So feel a little bit more bullish than we did before.

It's based on our pipeline and our visibility. As Jay mentioned, things are going well. We're well positioned and we feel good. Awesome. Thanks again.

Thank you.

Our next question comes from Mike Sykes with Needham. You may proceed.

Hey, guys. Thanks for taking the questions here. I could just build off of Brad's question on the go to market, it's It's great to see the number of million dollar customers that you guys added this quarter.

Wanted to get a sense, I know we've had acreage there for some time now. You're talking about GSIs, but can you maybe color the $1,000,000 cohort that you have in light of some of these go to market initiatives that you guys have been working on now?

Yes. So two biggest things. One was the account centric sales process and those are good results. We already talked about them. The second big thing was global system integrators playing an important role and that's happening. We see that you saw me highlighting a couple of deals in my earnings script. With GSI Plano. Very active role to help us drive that business They are embedding us into more and more of their platform. They're getting more and more people trained as well. And what we're seeing is if you really think about the two G2K companies, right? They're both big opportunities for us. And there are still a 6x upsell opportunity for us in our installed base itself. And [indiscernible] deployed, they want to remove all the legacy stuff firewalls, V all that kind of stuff These GSIs are playing an important role to help us. In fact, there's a large Fortune I would say 50 company We are ZIS, ZPA CDX was sold and then a GSI comes in to further simplify the stuff and help us upsell additional stuff. So very pleased the performance and that's part of our plan. Excellent. Thank you. Thank you.

Our next question comes from Fenik Khattari with Baird. You may proceed. [indiscernible] [indiscernible] So, Jade, you emphasized the zero plus everywhere as a core strategic guys have pretty ambitious targets said mandate to triple that figure in eighteen months. [indiscernible] cycle as an opportunity Can you talk about is that going to be your anchor point in terms of the Seattle conversations looking to replace the aging stacks. Can you talk about the traction we've seen with customers who are willing to opt out of the [indiscernible] Yes. So our customers have been telling us for quite some time that your zero tax change is wonderful. But your branch still needs some help. I got some firewalls, some routers, some SD WAN sitting in the branch creating complexity. So our single trust branch initiative is to simplify it. So one simple appliance removes everything The branch goes dark from the Internet It can't be discovered. It cannot be attacked. [indiscernible] a CXO exchange summit we had Recently, and we asked a survey question to 100 attendees and the question was are you ready to embrace Zero Trust branch, which becomes like a cafe without any firewall and any other stuff. 96% of calls CXOs said they are ready to embrace it.

He's actually exceeded all of my expectations. So the combination of zero plus branch with Zero Trust user everywhere with Xerotus cloud becomes a very good story, our customers love it. Thanks, Jan. Just quickly on the NRR improving to 115%.

Just to kind of provide more insights, mentioned the increased number of ramp sales reps is improving.

Can you talk about the improving deal landing versus deal expansion velocity and are you guys maximizing upfront deal sizes versus more longer term expansion and how does it play into the NRR things? Going forward? Yes, we don't guide on the NRR, but all the things you mentioned, Paul, come into play. Deals are getting bigger. Our upsell as we talked about before, we expected over 65% upsell this year and that's what basically came in at during the quarter. We are landing bigger deals. You can see with the large customer emphasis with the So all those factors and also the emerging products and new products expanding the platform, they all come into play.

The 115% is an outstanding metric. But again, it's something that we've talked about before, we really don't look at. Other than on this call. We try to drive our top line basically on on new ACV, whether it's upsell or new. Our next question comes from Roger Boyd with UBS. You may Jay, I wanted to go back to the 8 figure APAC government deal. I think you talked about kind of them going wall to wall with the Zscaler for users. I'd love to hear any specifics you can give on the ROI with this customer, kind of the Zscaler, the up sell there and what you're replacing? And then as you think about the pipeline for global government deals, this feels like kind of a landmark deal for you guys. Just would love any color on how you're thinking about Yes, you said it right. It was a landmark deal for us. Zero trust is very important for governments. And by the way, this deal wasn't driven by ROI. This was driven by cybersecurity having better protection And what are we basing still includes [indiscernible] for users whether they're at home, or in the office, whether they're accessing Internet, SaaS applications, or their internal applications.

So essentially a critical part of our platform Just starting with this entire government workforce, which is we're very proud of. We are engaged with several other U. S. Friendly countries to pursue this thing, but some of these government deals can take longer. But it is good to see that we're getting traction and we've done a lot of work in the U. S. Government as well, which I shouldn't forget about. So we see it as a good opportunities, but government deals can be a little bit what do you call it bulk [indiscernible] And can take time, but it's pretty unique for us. We are very, very proud of Thank you.

Next question comes from Brian Essex with JPMorgan. You may proceed. Hi, good afternoon and thank you for taking the question. Jay, I was wondering if I could dig into maybe the comments that you had on DDX And would love to know how you're seeing customers approach agentic protection and on the data on the data protection side, your platform obviating the need for data discovery and classification or are you coming in on top of that? How are enterprises viewing getting their data estate in order before they they pursue AgenTek utilization. Thank you. [indiscernible] It's a very good question. Often we like to give customers flexibility and choice where they can Data classification is a hard problem AI actually is helping a lot in doing data classification. So we do use Gen AI technology for classification quite a bit. In fact, for quite some time, as your traffic goes out to the Internet, on the fly at our ZIA, we have been doing classification where customers for policy enforcement. But also we can scan data sitting in OneDrive, SharePoint or wherever else maybe and can do classification. With our AI technology Having said that, we also work along with data classification that may be done by other providers.

So we can take that classification and tax and apply it a policy enforcement because we are sitting in the traffic path. The only way the data can leak out is if it goes through us and we are the natural policy enforcement point. Our data protection solution has been growing very nicely. Our ACV, for example, has grown 40% year over year. So it's a good opportunity and it's not only data in line [indiscernible] We're doing DSPM for data in the cloud. We're doing data security endpoint. We're data secure for email, using single policy engine. Which is what customers like us because they rather not buy five different point products.

Got it. Super helpful and great to see the better sales productivity. Appreciate it.

Thank you.

Our next question comes from Greg Muscovitz with Mizuho.

You may proceed. Thank you very much for taking the question.

Zero Trust Everywhere campaign appears to be off to a very good start.

I realize it's early, but curious if you're seeing more adoption thus far from small, midsize larger enterprises? And then also, from what you've so far, how does the size of Zero Truck Everywhere lands How does that compare to Zscaler's typical net new logo? Right. So first of all, our focus remains larger enterprises. There is a natural growth happening on the lower end of the business, which keeps on going. Our primary focus has not changed. I was very happy to see that over 130 enterprises who've gone in with zero trust everywhere And for that case, we essentially like to say, users are at zero trust no matter where they're sitting. At home or coffee shop or at you headquarters, [indiscernible] your cloud is zero trust. That's really the essence of zero trust everywhere. What we also we are bullish. We think we can triple this number In the next eighteen months and and that's based on the customer feedback and reception we're getting. So we think we have a new make. A big difference in the branch area. I'm excited with the refresh opportunity CIO, I was talking to Seth, I'm glad you're moving forward because I do not want to go through the refresh cycles of firewall one more time.

Very helpful. Thanks, Jay.

Thank you.

Our next question comes from Fatima Boolani with Citi. You may proceed.

Good afternoon. Thank you for taking my questions.

Remo, you made a specific reference to the fact that there is ongoing scrutiny on large deals. So I wanted to ask you both actually a very stratospheric question The entire business and the business model and the pipeline is becoming more tethered and indexed to larger deals. You're talking about scrutiny and then you layer on the fact that there are segments of the economy and maybe the global economy that have been a little bit influx by virtue of trade wars and tariffs and things like that. I wanted to get your perspective on how that's maybe helping accelerate the conversation for you if at all, just kind of given that could have implications for how sectors of the economy think about transforming their network and their security architecture? And any kind of anecdotal feedback or color you got actually from your CXO Summit that you referenced earlier, I would love to kind of get some real time feedback from customers are internalizing some of the with their budgetary aspirations and expectations? Thank you.

So Fatima, let me start. Yes. From what we know so far, we expect limited direct impact from tariffs to our business. Now as we said in our remarks, macro is still tight. Yes, there's large deal scrutiny.

Budgets for ITR IT in general but not for cyber.

Now if I can go to a CIO or CISO, and talk about Zero Trust Cybersecurity they get interested. But then if I can say, we'll do this, and reduce cost for you, The interest becomes double. So these two things together are actually driving our pipeline. If we didn't have these two factors, the pipeline will struggle. But then it takes a lot more to close the pipeline. To close the pipeline, they actually want to see cost savings And we have been refining and refining our business value assessment to create business ready cases for CF approval. And that stuff is helping us. So when we go in and say, we are going to help you with Zero Trust everywhere, definitely means a bigger part of the platform. Fascinating thing is the more savings they want.

The bigger part of the platform they need to buy, okay? It becomes an interesting combination. But if you can see the show the saving, and can tell them in one quarter, this goes out, in two quarters, this goes out, three quarters, this goes out. CXO has become essentially a champion and their push to get deals up. That's really what we're seeing.

It is helping us. And And GSIs are also helping us because they come along as partners to really drive that transformation. Someone has to do their work and they're good partners for us. Sameer? Yes. I mean, just to Follow on. On some of Jay's comments. I mean, if you take a look at our guide for the second half, good pipeline, strong pipeline, Jay called out stronger sales productivity, which we're seeing demand for the product We're not baking in a strong or banking on a strong federal in the second half with the uncertainties that are currently going on. Having said that, we are very well positioned We're in 14 of the 15 capet agencies.

And we feel that our product platform related to the efficiencies and cost and security, I believe we're well positioned. But again, as Jay mentioned, those types of deals are lumpy.

The negatives, as we called out the macro, the overall macro and deal scrutiny. Jake, hold that also tariffs. A service company. So we don't believe tariffs will have an impact on us or anything like that at this point unless things change. So So we're well positioned, but those are kind of the pluses and minuses related to our guide for the second half and going forward.

Thank you.

Our next question comes from Joseph Gallo with Jefferies. You may proceed. Hey, guys. Thanks for the question. Barimo, as a follow-up to your earlier scheduled billings comments, does that acceleration peak in 4Q? Or how should we think about that piece of the business as we move into fiscal Yes.

So we're not making a comment for fiscal twenty twenty six, but it does increase in [indiscernible] [indiscernible] Thank you.

Our next question comes from Matt Hedberg with RBC. You may proceed. All right. Thanks for taking my question guys. Congrats on the results. Jay, I wanted to go back to your comments about AZEMTIC and ZDX. And I guess, I'm curious it feels like a natural fit there. But I guess I'm wondering like as customers roll out agents, I think a lot of people think identity, they might think what aspects of cloud security, What's Zscaler's role in protecting customers agents? Because it seems like that's obviously a massive trend that's very early.

That's correct. So the question often gets asked is, if agents are used, the headcount comes down. What's the impact on the seed based model if that's what your question is. We haven't seen any big changes yet. But I do believe some of those changes are coming. No matter what happens to users, there will be more communication among users, machines, [indiscernible] and in the future more with AI agents. Agent AI agents is just another entity for us we are under zero trust exchange to enforce policy for all communications, board communication, means more traffic that means more value delivered to our customers. We expect our pricing to evolve as agents traffic grows as well.

Even in the past, we've seen customer headcount reduction from time to time And in most cases, they're able to keep up or grow our ARR by upselling additional modules We think that we have an active role to play to secure agent communication but also using AI agent technology in ZEDEX and data protection to help our customers and for that we can charge additional dollars as well. And we have been charging, for example, CDX where we started selling Copilot, now we're moving to agent. And able to charge higher prices for those products that each could have. [indiscernible] Our next question comes from Joshua Tilton with Wolfe Research. You may proceed. Hey, guys. Thanks for sneaking me in here and I'll echo congrats on a solid quarter. As well. I have a two parter, but it's along the lines of the sales productivity comments Good to see the improvements this quarter. I guess what I'm trying to understand is is the sales productivity that you saw in the quarter kind of ahead of what you were expecting as we entered this year? And then if I look to the balance of the year, like where does sales productivity have to go from here?

In order to hit the updated billings guidance that you gave us for the year today?

Yes. I mean, it's expected.

Basically, what we've called out on our call before is that we expect sales growth to need to increase throughout the year. And we did see that in Q2.

All I can say about the sales productivity, I would expect it to continue to go up I don't want to give any more color than that other than the sales productivity supports our guidance. And we feel our guidance is prudent.

Thank you, Our next question comes from Gray Powell with BTIG. You may proceed.

All right, great. Thanks for taking the question. And yes, I just want to say congrats on the good results. But yes, so I want to follow-up I think it was Greg's earlier question about the firewall refresh.

Can you talk about some of the targeted marketing you're doing with existing customers to get in front of the firewall refresh? And then just how should we think about sizing the opportunity And I know it's early days, when should we actually start to see it materialize in the results a more meaningful way? I'm guessing it's really sometime next year, but just wanted to get some General thoughts around that? Right. So rest of all, The branch solution we launched, Zero Trust Bronze. Is the underpinning of our driver to replace firewall. So we aren't really focused on the data center inside the data center. But we have large, large enterprises. They've got hundreds of thousands of branches.

Most of them are asking for how do I make my branch like a cafe Your branch should be no more complicated than you sitting at home and being able to [indiscernible] That's really the disruptive and simply of a technology we bring to the table. So our customers existing customers today have some kind of firewall, some kind of routers or some kind of SD band with firewalls. Sitting out there and they're looking for us to replace it. So we become a single point to collect data and get it to our exchange and take care of it.

That's really what's driving. So the final ones that are sitting in the branch office are our primary target. Our campus becomes the next natural thing for us. What are we doing to reach our customers? We don't have 200,000 SMB customers out there. They're dealing with 8,000 to 9,000 customers and the top essentially 30% to 40% of them are.

Good large enterprise size and we have these Account based change these teams are in touch with our customer. They give them market material, collateral benefits, some marketing campaigns to reach out to our customers webinars, some of these CXS, some ins we're doing. There's a number of ways to engage with them get the feedback and get them moving on.

Our new solution. So it's working well. We talk about 57% of customers who bought Zero Trust products are new customers. That's exciting for us. What's telling me is that the zero plus branch is helping us grow our new customer logo base. Okay.

That's very helpful.

Thank you. Our next question comes from Taliani with of America.

You may proceed. Yes. Tal, your line is now open.

Here we go. Sorry, I was on mute. I was talking to myself. Can you hear me now? Yes. Okay. Thank you, guys. I want to understand the concept of Zero Trust, what it means for you. Meaning Zero Trust is a concept and I'm trying to break it down to products.

So when you talk about Zero Trust branch, when you talk about Zero Trust cloud, practically what does it mean? What are you selling to the customers? And second, how does it change the competitive landscape landscape? Meaning, if before someone is in the branch and someone is in the cloud, there are competitive solutions. If I rewind back two years, you competed on SaaS How does it change the competitive landscape?

When you focus on Zero Trust? So to start with, by the way, SaaS is not zero trust. SASE is secure access based on SD WAN, anyone falls under a SASE [indiscernible] any network is essentially SASE. In our meeting, Zero Trust starts with no not being on the network, not having lateral movement left and right. Kill our Zero Trust branch. A customer had a branch, they had a SD WAN or MPLS connection, And inside the branch, they had either VLANs for segmentation or they had east west firewalls. Eliminate all of that. [indiscernible] Airgas technology, we go through acquisition We are doing segmentation inside of bronze in zero trust way. Without without firewalls without VLANs. From the branch to the wide area network or Internet [indiscernible] makes the zero test connection means no lateral movement, no SD band, A given party in the branch gets connected to an application, through our Zero Trust exchange or switchboard olefthor movement. That's the beauty of Zero Trust branch.

Zero trust cloud means entities sitting in the cloud can talk to each other.

Without moving laterally on the network. So our switchboard, our exchange is sitting in the cloud You can say workloads and VPCA can only talk to workloads in VPCB. None of these north, south or east west far off needed. In the cloud as well. That's the exciting part of [indiscernible] Yes. And [indiscernible] When you focus on it, the second part of my question was what's your competition?

Who do you meet that provides the same kind of value and you have to compete with them?

Our competition is legacy. Lots of firewall vendors, in some case in a branch, NAC vendors, VLAN vendors, of that is needed. Legacy versus the new ZAROS way of doing stuff.

Thank you.

Our next question comes from Peter Week with Bernstein. You may proceed.

Thank you. And glad to hear the continued progress, particularly with upsells. Obviously, NRR expanding is pretty exciting and probably a good signal around the sales performance.

The one thing though that it also does seem to indicate is the contribution from net new customers has been declining. How should we think about that looking forward? Is that a short term deceleration and would pick back up. And so when you put those two things [indiscernible] we could get even stronger growth or should we be expecting lower kind of contribution from net new customers looking forward?

Right.

So if you think about it, when you're a young company, you have very few customers you have to have new log only. As you grow, 45% -plus of Fortune 500 companies and have a very big platform tons of upsell opportunity. In fact, internally, Remo and I and our CRO we debate, do we give special push to new versus upsell? We really want new ACV coming from upsell or new logos. So today with a large customer base, upsell is sitting about two third, right? The new logos Zscaler. And over the years, I would expect upsell to keep on going up from there onwards because we'll have a larger installed base of customers. I think it's a good thing. Having said that, we do have a sizable customer base customers to go after.

There are about 55% of Fortune 500 companies who aren't customers yet. They are an opportunity for us.

When you go to the next level of customers, you are at G2K, they are about two third of them. They are good for us. So we see opportunities and as well upsell in the platform keeps on growing and The only thing that I want to add with what Jay is mentioning is that We have a 6x opportunity in our existing base on the user side only, not including the new customers. Our focus, if you take a look at it, For the Global 2,000, our penetration is over 35 currently. And for the Fortune 500, it's over 45%. The hard part is landing these customers, but once you're in and you build their trust, you have the ability to upsell So Jay is 100% correct. As you go forward, as we go forward as a company internally, we said we'd have 65% upsell in this fiscal year I would expect that percentage to increase Our penetration in these in the G2K and Fortune 500 is very, very important.

And continued product introduction and selling across our platform really bodes well for Zscaler and But I think we're just in a great position and you take a look at our penetration into the G2 and Fortune 500.

It's quite impressive.

But does it Thank you. Thank you.

And our last question comes from Keith Bachman with BMO. You may proceed.

Hi, thank you very much. Jay, I wanted to direct this to you. And at a high level, I wanted to dig a bit deeper on how you think AI changes your competitive positioning versus some of the landscape out there? And if I change the question around a little bit, you have in your Slide deck AI and analytics solution is a $2,000,000,000 TAM relative to $96,000,000,000 So it's a relatively small part. Now data protection we could argue is is part of that as well, which is much more meaningful. But if I break the question down again into two parts, is I just want to understand from a technology perspective, how do you change your solutions to capture the benefits of AI? And is that embedding into existing products Or is it offering new products downstream or both? Thank you.

It's a very, very good question. Yes, the point you made of AI analytics. It's a small piece about a couple of products that are already out there that are growing nicely. That was a starting point. But if you think about AI, AI is only as good as the data that powers it. With Zero Trust Everywhere or Zero Trust Exchange platform, as we're getting over 5,000,000,000 transaction logs a day. That's the largest security cloud anywhere out there. So that's our one North Star. Now taking that data and building products around it becomes a next big north star for us we acquired Avalor, which has become the data fabric technology for us to take all of that data and harmonize it, synthesize it, de loop it, and build value around it. What is the value that can be built around it? We have already launched things like Unified Vulnerability Management, We just launched Asset Risk Management. There are more and more products that are going to come around bridge prediction, around security operations alike. You see a number of products unfolding that are powered by AI engine to do that part.

That's one part.

The second part ends up being taking digital experience and using more AI and AI agnostic technology to make it more powerful. CDX is already a pretty sizable business, but it will get accelerated Because of [indiscernible] Third area is data. Protection. We have been doing some very good data classification already. In addition to that, the number one question CIOs ask us is, my company is using AI, public AI such as chat GPT, [indiscernible] others do we make sure that my data doesn't leak? We are sitting in the traffic past the Internet. We're using our DLP to make sure they can use it safely. Then customers are using private AI application and building their own LLM models. We are building an LLM proxy to be able to inspect and enforce policy. So several opportunities for us What we believe is the combination of zero touch exchange, to secure customers and generate all the logs and then use AI to power it [indiscernible] probably the most compelling combination. Perfect. Thank you, Jay. Thank you.

Thank you. I would now like to turn the call back over to Jay Choudhary for any Well, thank you all for joining us for this call. I look forward to seeing you in one of the many investor conferences we plan to attend Thank you again.

Goodbye.

Thank you.

This concludes the conference. Thank you for your participation. You may now disconnect. [indiscernible]