ZS Q1 FY22 Analyst Questions -My Notes

ZS Q1 FY 22 Earnings Call Analyst Q/A and Remarks From CEO and CFO
11/30/2021, 3:30 Central Time

Analyst Q/A
Note: Nearly all of the analysts were exuberant and extremely congratulatory to the CEO and CFO for an amazing quarter.

Q Path from $1B to $5B in ARR –Do you currently have the products to get you there
A Short answer is yes. With Upsell, they can actually take their upsell with existing customers up to 6x their current revenue w/o adding new customers. On top of this, zero trust for workloads and zero trust for IOT, workload security posture and a couple of acquisitions will be in addition to this. Believes legacy software and systems will go away sooner rather than later.
CFO said IOT, OT BtoC, etc. will be a huge market opportunity and they will prioritize growth and will continue to make increases in sales, marketing and channel. New CMO is doing outstanding. Will be making investments in their expansion.

Q Adds to Q1 and adds.
A Net adds in Q1 was +450 people, mostly in Sales and marketing. Will be hiring more sales reps in FY22 than in FY 21. They see ZS as a destination.

Q On the product level, what surprised you most in the Quarter.
A All products did well. A couple of deals are still coming up strong. Not seeing slowdown in ZIA. ZDX is their most sought after product in the market. The big integration they did recently with MSFT and ZM is driving a bunch of it.
APJ did absolutely outstanding. They’re going to be investing heavily in APJ. And yet across the board, it was an outstanding quarter.

Q CIO/CTO conversations. Clearly the move to cloud is taking off aggressively. Under this scenario, ZS is the connectivity. Have you had conversations with people in the enterprise network, where on prem systems are truly going away.
A Jay said yes, it’s happening with enterprises decommissioning on prem data center systems that are the size of 5,000 to 15,000 users, but not yet at the size of 20,000 employees. Jay is having some c-suite people say they want to phase out their data centers.

Q Headcount. Mentioned 450 net adds in FY1, please give us guidance on hiring in the balance of the year.
A It depends on our performance. See this as a huge market opportunity, and we’re going to continue to invest aggressively at the pace they grow sales.

Q Help us understand the trends in customer acquisition adds. Are you seeing the cost of customer adds go up or down?
A Customer acquisition costs are staying relatively the same, because they’re increasing their marketing spend faster than growth. Their focus is to grow their top line growth.

Q Workload segmentation is something the most advanced companies are talking about. How do you see the adoption compared to 6 months ago?
A Micro segmentation User to App segmentation –more are doing it. Workload to workload (VPC), they actually do that with ZPN. The most advanced micro segmentation is being done by the most advanced companies. The micro segmentation is growing at a decent rate, but user to app and VPC to VPC are the two areas that they’re seeing the most interest and they’ll see the fastest growth in these areas.

Q With the success of multiple emerging products. Talk about bundling strategies and how does that change?
A Deep and broad platform at ZS, and would rather buy/purchase from one vendor who integrates with it’s own offerings. The trend will continue although the timing may be different based on what they learn from their customers.

Q Security architecture and the market moving towards sassy and zero trust architecture, wondering when the tipping point will occur and where we’re at re: adoption.
A Reminds Jay of the question he recently received, since ZS is growing so well, why is bluecoat growing so well? Customers don’t want any firewalls and for the data center, there’s more complexity, and they’ll become more like mainframes over time. Jay has 200% conviction on this. Sassy has become a buzz word that everyone is using and Gardner has a new magic quadrant coming out Secure Service E---- (SSE) to vet this. All of this is driving ZS’s growth, but there’s a large market still buying VPN. Jay thinks in 2 years that VPN will mostly be phased out.

Q Considering the investment you’ve made in cross sell and upsell that is growing more than 2X that of new sales, please elaborate.
A 87% y/y growth with customers who spend over $1M, and 53% growth in customers with over $100K in revenue. To motivate sales people, they don’t pay them any different for upsell vs. new customers. Channel is helping them get new logos.

Q Jay, have you seen uptake for ZPA such that it’s contributing to robust growth for private service edge.
A Not trying to make a lot of money from this, rather their goal is to focus on subscription. As more and more applications are in public clouds, it’s a matter of time before their customers have all 3 of their main offerings.

Q Talk about the progress you’re seeing on the federal front.
A Doing quite well and growing faster than their total overall revenue. EEO directive that came from the Biden Administration is speeding up some of the projects out there. Needed Zero Trust and FedRamp certification. ZS is the only security vendor w/ both. For federal, ZS is in the mid double digits/teens % increase.

Q Competition – In terms of greenfield opportunities. Are you doing 1/1 negotiations or how much are you seeing other competitors. Is the field getting more or less crowded, and does pricing enter in re: new work?
A Not typically that they’ll replace 1/1, they end up driving the agenda from that point of view. When ZPA became important, they began buying ZIA too. ZDX being part of the same thing, the CIO wants one vendor. When they engage and compete against firewalls, ZS usually wins. Price becomes the least important issue for ZS.

Q As we think about the remainder of the year, will there be seasonality?
A Q2 and Q4 are their largest quarters. Keep this in mind re: expectations going forward.
Will be mindful of operating profitability going forward, CFO does not want to give a timeframe on the call. Seen a lot of things in their careers, and have a pretty good idea of how things are going to play out going forward. Their team needs to continue to execute and not become arrogant or complacent.

CEO and CFO Remarks
Note, Q1 FY 22 detailed revenue and EPS information can be accessed here: https://ir.zscaler.com/#s-events

Jay Chaudhry, CEO
More than half of ZS business is from outside the US

$1B in recurring revenue for first time

Over half of CXO’s are planning to move to zero trust architecture for cybersecurity

+300% increase in threats, largely ransomeware that will surpass legacy firewall cybersecurity systems that are run on public clouds

Zero Trust cannot be built on legacy systems

Total number of customers who pay ZS over $100,000 is up to 1,600

New customers:
Fortune 50 Insurance company w/ over 100,000 employees
Large defense contractor who needed to have a system that was FedRamp certified
Fortune 100 Insurance company who purchased ZS for all 30,000 employees
Global 500 enterprise who purchased ZS for 50,000 employees and who acquired/merged w/ a company
7-figure annual contract with a major enterprise

Seeing increased interest in CSBN
ZS Workload communications offering is picking up speed
ZS cloud platform reduces cost of energy consumption associated with operating and cooling these on prem legacy firewall software and hardware systems.
Still in the early earnings of digital

Remo Caessa, CFO
Sources of revenue by georgraphy:
USA 45%
Europe 40
APJ 14%

Net RR is over 125%

$240-242M w/ y/y revenue growth of over 54%
FY 22 y/y revenue growth to 49-50%
Anticipate earnings to be reduced slightly in Q3 FY22
Will continue to prioritize growth over earnings

I hope these notes are helpful. Thank you to Saul, the board managers and everyone who contributes to make Saul’s board such an incredible resource.