ZS: March 2 and 7 conference

The highlights that stood out to me from the March 2 Berenberg Thematic Software Conference and March 7 JMP conference with Zscaler.

  1. ZScaler CEO comments on partnerships. Crowdstrike is seen as the clear endpoint leader (as we all already know).

CEO: “So our goal overall is to provide what customers want, and customers want integration. So we make APIs available to integrate the leading endpoint vendors or leading identity vendors. But practically speaking, there are leaders in each space. Our customers want to work with leaders. So in the endpoint area, CrowdStrike is a great partner. Microsoft and CrowdStrike often is what our customers ask for. Identity, Okta is a leader out there. Microsoft has done a good job. So we work with scores of vendors, but for go-to market, we work with some of the vendors that are leaders in this space. For example, CrowdStrike and Zscaler, our sales teams work in the field together. In many cases, they help our sales team, we help their sales team. It becomes a very good, mutually beneficial relationship.”

  1. The CEO sees Zscaler as providing more than just security services.

CEO: “And when it came to name Zscaler, some people said, call it security cloud this and that. I said, every company will have a word cloud in the name in every company. I don’t want to use either cloud or security in the name. And I don’t want to restrict us to security. So we will do whatever can be done by sitting in line. When you’re sitting in line like a switchboard, like an international airport, you should do everything…we built Zscaler Digital Experience because we’re sitting in the middle. We see the applications side, we see the user side of it. And our lightweight agent is collecting telemetry to tell us what’s going on where. It became an amazingly useful service because all performance products are built around the given network between the branch office and the data center…So ZDX is an amazing product. It’s the fastest-growing service for us. We were very happy when ZPA grew fast. ZDX is actually growing faster than ZPA. So it’s wonderful. We are very pleased with the performance of it.”

  1. CEO and CFO sees lots of upsell opportunity left with each land.

CEO: "…we could go to 6x if we could sell all of our products to our current customer base…We talked about several deals during our last earnings call, where customers bought ZIA, ZPA, ZDX and cloud protection as well. Now cloud protection is still young and just coming, very young market. But ZIA, ZPA is becoming very, very common. And ZIA, ZPA and ZDX is becoming common as well. And in ZIA, the Transformation Bundle, which is a big bundle is becoming very common. So more and more customers want consolidation of an integrated platform. And that does cost reduction. That reduces complexity. That’s why our customers buy us.
CFO: “And the 6x opportunities just for ZIA and ZPA, it doesn’t include ZDX or ZCP. So that’s incremental to that 6x.”

  1. Zscaler believes they are still in very early innings and lots of untapped market share to take.

Analyst: “I guess if we use an analogy, what inning in a baseball game are we in, in terms of adoption? Despite being a $1 billion company in ARR, it appears to be there’s still lots and lots of room to run. Is that correct?”

CEO: “Indeed, very early innings. Inertia is a powerful thing. It kind of slows. Sometimes, it takes time to get it off things. We started on the large customers. We’ve done a very, very good job. But we’re still only about 3-month numbers we talked with, just over 25% of – sorry, 25% of Global 2000 companies, 35% of Fortune 500 companies. The rest of the world still has a long way to go.”

  1. Zscaler CEO also is skeptical of any real legacy competition against their zero trust architecture. We know ZS is the leader in this ‘niche’ and this should continue.

Analyst: “And just if I think about competition, I mean, how difficult is it for a legacy player to mimic this architecture you’ve built?”

CEO: "In the Zscaler world, we’re sitting in traffic there, taking all traffic. When you take all traffic, you can’t just do 2 things in your cloud and send the traffic to someone else and someone else. It has to be an integrated platform. That’s what we’ve built over the past 10, 12 years.
Building this massive platform is not a trivial task, and it’s so mission-critical. If Salesforce goes down, you’re out of one application for, say, 25% of the people who use Salesforce. If a cloud service like Zscaler doesn’t work, nothing works because all traffic goes. And so it must be very highly reliable, redundant, and that’s what we built over the past 10, 12 years.
So first of all, these legacy companies are taking the firewall, spinning them in the cloud and calling it some cloud. It’s like taking DVD players and say, “I got them in my data center or Netflix streaming service.” And then that’s one part of it and the scale, reliability, availability, functionality. And things are done very differently from architecture point of view. We think we’ve got a sizable lead, and we’re not slowing down. Look at the amount of innovations we’ve done since our IPO 4 years ago, and it’s not slowing down."

  1. This is an interesting keyword used here by ZScaler’s CEO, that we saw coming out of the AMPL CEO’s mouth on their latest earnings call (whoever owned AMPL might be able to weigh in here?). The ‘evangelism’ and “religion” needed to spread your product and get the market traction, which was the excuse given to why their growth wasn’t picking up as desired. Zscaler’s growth precovid versus postcovid is very different, now that the CEO doesn’t have to put in the same effort to preach his products! The Zscaler product is now selling itself with COVID and cybersecurity incidents and now the Russian war.
    Seems like a lesson here, if your company management starts talking about evangelizing to sell, they’re probably not poised to do as well as we’d like in the near term.

Analyst: “I guess with COVID and people kind of understanding the need to kind of change their architecture, do you view the market more as coming to you now than it did maybe a few years back before remote and hybrid work became more prevalent?”

CEO: "Yes. Until pre-COVID, there was an evangelism. I have been evangelizing from day 1, okay? But it got easier over time. With COVID, it was a big mindset change…Then cyber issue got more serious. SolarWinds was an event that shook everyone’s mind. They said, “Wow, if something got on my network, it can move laterally. It’s a dangerous thing.” So that’s where the zero trust got an extra push.
And then we saw Colonial Pipeline, a few other things. And now you see Ukraine thing. All these – I don’t think there will be any war – physical war without a cyber war. Cyber war is a part of it. A lot of need – help is needed.
I’ve been on the phone with so many customers lately in the past 10 days, a number of them from Europe. They’re all worried, and they should be. And we’re helping them make sure things are deployed properly. They don’t have an attack surface and the like. So plenty of opportunity to help our customers, and we are just focused on making sure we take care of that."

  1. The CEO was asked about federal business. As we know from the earnings call, the lighter than expected billings was explained mostly by federal still not kicking in. Apparently the budget this month should open more funding.

CEO: "Now there has been stop-gap funding in the U.S. for the last several quarters. And we expect the actual full budget getting passed this month, that should open up funding more. When it’s stop-gap, that means just do incremental small solutions. So we have a big opportunity in the federal space. In the public sector space, beyond federal, too, state, local, education, lots of customers in that space. And then, of course, enterprises, they’re all worried about it. They need to take care of these things."

  1. The analyst asked about what allows Zscaler to ‘win’ cloud security deals. CEO believes they are positioned for the biggest part of the pie as the ‘switchboard’ while other, for example, endpoint security providers for the cloud, are still really just securing the endpoint.

CEO: "…A lot of companies are calling themselves cloud security. Yes, so if endpoint does security in the cloud, they call it cloud security. But at the end of the day, they’re trying to protect endpoint.
Our goal is the switchboard, who talks to whom. That’s probably the biggest market. It’s the most critical market. It’s the most critical location because we control who talks to whom. We have all the logs for it, for [ analytics, cell ], behavior analysis and the like."

  1. In both JMP and Berenstein conferences, management stated they will be increasing a focus on going downmarket…

CFO: "The last quarter, the large enterprise segments and majors grew the fastest. But we are continuing to invest in all segments.
The focus going forward also is going to be probably investing more in the lower segments as we go forward. Not saying we’re not going to invest as much in the upper segments, we’re going to put more investment in the lower segments as we go forward."

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