Zscaler, Inc. (ZS) Q2 2021 Earnings Report, Transcript and Summary

Good day ladies and gentlemen. And thank you for standing by. Welcome to the Zscaler Second Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder this conference call is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, to Bill Choi, Senior Vice President of Investor Relations and Strategic Finance.

Good afternoon, everyone, and welcome to the Zscaler fiscal second quarter 2021 Earnings Conference Call. On the call with me today are Jay Chaudhry, Chairman and CEO; and Remo Canessa, CFO. Please note that we have posted our earnings release and a supplemental financial schedule to our Investor Relations website. Unless otherwise noted, all numbers we talk about today will be on an adjusted non-GAAP basis. You will find a reconciliation of GAAP to the non-GAAP financial measures in our earnings release. For historical periods, the GAAP to the non-GAAP reconciliations can be found in the supplemental financial information. I'd like to remind you that today's discussion will contain forward-looking statements, including but not limited to, the company's anticipated future revenue, calculated billings, operating performance, gross margin, operating expenses, operating income, net income, free cash flow, dollar-based net retention rate, future hiring decisions, remaining performance obligations, income taxes and earnings per share. These statements and other comments are not guarantees of future performance, but rather are subject to risk and uncertainty, some of which are beyond our control, including but not limited to the duration and impact of COVID-19 on our business, the global economy and the respective businesses of our customers, vendors and partners, market adoption of our offerings and our expectations regarding the development of the markets in which we compete. 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. We will upload a copy of today’s prepared remarks to our Investor Relations website when we move to the Q&A segment of the call. I would also like to inform you that management will be presenting at the following upcoming virtual events: JMP Securities Technology Conference on March 1; Morgan Stanley TMT Conference on March 2; Truist Securities Technology Conference on March 9. These presentations will be webcast, and the links will be available on our Investor Relations website. Now I will turn the call over to Jay.

Thank you, Bill. We are very pleased with our strong performance in Q2, which showed accelerating growth at scale and rapid innovation of our Zero Trust platform. We drove 55% growth in revenue and 71% growth in billings, while also generating growth in operating profits and free cash flow. Our optimized go-to-market engine is driving significant velocity, including a strong pace of new customer additions. During the quarter, we achieved a milestone of over 5,000 customers, including over 500 of the Global 2000. Our strategic decision last year to increase our investments across all areas, particularly the expansion of our go-to-market and R&D teams, is yielding strong results. We drove increased wins in our enterprise segment, as we begin to pursue smaller enterprises with 2,000 to 6,000 employees. We are helping our customers to securely accelerate their digital transformation journey, which remains their top priority. With our Zero Trust Exchange, Zscaler provides secure, any-to-any connectivity for users, applications, workloads and IoT and OT systems, regardless of their location. The recent SolarWinds security incident has further elevated the need for a true zero trust platform like Zscaler. During such sophisticated attacks, our proxy-based architecture would prevent loss of sensitive data and our application-level segmentation eliminates lateral threat movement. We provide users access to applications, not the network, which is fundamentally different from firewalls and legacy network security architecture. The CIO level awareness, engagements and inbound requests for our purpose-built zero trust platform have significantly increased, and we are viewed as a foundation of application, network and security transformation. I’m proud of our speed of innovation, which is accelerating and further expanding our substantial technology lead. There are four pillars of our Zero Trust Exchange: ZIA, ZPA and ZDX for user protection and experience, and ZCP for workload protection. Last quarter, we launched our fourth pillar called Zscaler Cloud Protection or ZCP, which extends our Zero Trust Exchange from users to workloads, and has an expanding portfolio of products including: CSPM to ensure proper configuration and compliance; Workload Communication to secure app-to-app and cloud-to-cloud secure communication; and Workload Segmentation to achieve app segmentation without legacy network segmentation. In our latest major cloud upgrade, we added over 100 new product enhancements. Over the past 12 months, we have significantly increased the number of solutions delivered through our platform, including Zscaler Browser Isolation, Out-of-band CASB, Zscaler B2B and Zscaler Digital Experience or ZDX. All this innovation is making our cloud platform wider and deeper. For enterprises who want network and security modernization, we believe we are the only zero-trust, multitenant platform that meets their needs. Many vendors have tried and failed to build a high performance, highly reliable proxy required for proper cybersecurity protection and data loss prevention. As a true SASE framework, we are deployed across 150 data centers, enforcing policy at the edge instead of a limited number of public cloud locations. Every day, we are processing more than 150 billion transactions, while preventing up to seven billion security incidents and policy violations. We are operating at a massive scale and doing so with environmental sustainability in mind. Our platform uses over 75% renewable energy today with a goal to use over 90%. I would like to thank our engineering teams for an exceptional job in expanding our platform and keeping Zscaler at the forefront of innovation. Now, on to the customer wins. There is an accelerated market shift towards work from anywhere, which is the world Zscaler was built for. In an upsell win, a Fortune 500 chemical company that was using ZIA for a subset of its workforce, accelerated their zero-trust initiative by purchasing ZIA transformation, ZPA and ZDX for all 45,000 employees. In addition, they bought two of our recently announced ZCP solutions. They purchased Workload Communications to secure server traffic out to the Internet from 200 plants, and Workload Segmentation for 7,000 servers to secure east/west traffic in the public cloud and data center. I am excited to see wins like this where the customer is buying all four pillars of the Zscaler platform. In a new logo win, a new Global 2000 customer in the high tech-industry purchased all three pillars of our user protection service. They purchased ZIA Transformation, ZPA and ZDX for all 10,000 employees to move away from network security to a zero-trust architecture. This customer had standardized on next-gen firewalls and VPNs, which left gaps in security leading to a ransomware attack. In spite of an ELA license from their firewall vendor, they couldn’t do SSL inspection at scale. Since Zscaler is a purpose-built proxy architecture, the customer can now inspect encrypted traffic without impacting user experience, leading to better security and reduced business risk. In another new logo win, a customer in the transportation services industry purchased three of our four pillars, ZIA, ZPA and ZDX for their 7,500 employees. With their cloud and mobile first strategy, they purchased our best-in-class DLP and CASB to protect sensitive information from leaking, no matter where the user is. ZDX was purchased to pinpoint and resolve performance issues in real-time by monitoring the digital experience score of every user and application regardless of their location. We are seeing a strong customer interest for our new pillars, ZDX and ZCP. Over 200 customers to-date have purchased ZDX. ZCP is also off to a great start, with a few dozen deals closed in Q2 and great excitement for our ZCP Workload Communication. Moving on to ZPA. Our customers view ZPA as the foundation for their architectural shift to zero-trust access for private applications. ZPA is the clear market leader, with proven maturity and scalability, supporting millions of daily active users and nearly 40% of our global 2000 customers. Today, ZPA is delivering over million unique application segments without operational overhead of traditional network segmentation. Let me highlight several ZPA deals in the quarter. A Global 500 consumer products company with headquarters in EMEA that has been a ZIA customer, purchased ZPA for all 100,000 employees and 10,000 third-party B2B partners. This customer wanted to eliminate the security risk of VPN, which provides unfettered access to network resources. ZPA represents the next step in zero trust adoption for their IT transformation journey. In an upsell deal, a Global 2000 bank with headquarters in EMEA started with ZIA and ZPA for 10,000 employees in July to expand their work-from-home capacity as a result of the pandemic. Within six months of the initial purchase, the customer bought ZIA and ZPA for the remaining 30,000 employees and CASB for all 40,000 employees. In addition, they purchased ZPA to enable 3,000 third-party B2B partners. Let me highlight a ZIA and ZPA new logo win in the federal space. A research organization mandated with advising federal agencies on cybersecurity, purchased our ZIA Transformation bundle and ZPA for all 10,000 employees after evaluating various zero-trust architectures. This customer concluded that if a user connects to the network with a VPN, that is not zero trust. Based on this criteria, the legacy firewall and VPN providers were disqualified. An important consideration for our selection was ZPA’s position as the first and only cloud security service with FedRAMP certification for Zero Trust Remote Access. With the highest levels of FedRAMP certifications for both ZIA and ZPA, we are very well positioned to serve the Federal government. Lastly, I would like to share another new customer win that highlights our continued ZIA success with large enterprises that are embracing direct to cloud architecture and migrating away from their complex, legacy onpremise appliances. A Fortune 100 professional services customer purchased our ZIA Transformation bundle plus CASB, advanced DLP and CSPM for Office 365 to protect 125,000 employees across 150 countries as they embraced work from anywhere. Zscaler eliminated the need for 30 different gateways and consolidated six different legacy point products, while meeting the customer’s environmental goals for their ESG program. With sensitive customer data at risk, security was a major requirement and the customer only considered solutions with a proxy architecture. Let me conclude with some thoughts on our vision and strategy. At our Analyst Day in January, we laid out our audacious goal of serving 200 million users and 100 million workloads on our Zero Trust Exchange. To achieve that: Our entire organization is focused on attracting and developing talent and creating a culture of excellence. Our commitment to culture starts at the top with our executive team and creates an environment where a global and diverse workforce can deliver excellence to help our customers succeed. We are scaling our world-class engineering organization, which continues to rapidly deliver new products and features to our customers. On the go-to-market front, as we have demonstrated over the last 12 months, we have built a sophisticated sales machine to sell value and deliver measurable outcomes at the CXO level. We will continue to scale our sales organization, as we are a destination for top talent. Our Marketing organization is augmenting talent in all critical areas while specializing campaigns by persona and segment to better address our significant opportunity. We are focused on driving broader adoption of our four pillars. We will continue to expand our ecosystem of technology partners and value-based channel partners, who are contributing to sales velocity and expanding our reach. I believe we are on the right track to capture a material share of the $72 billion serviceable market that we outlined on our Analyst Day. We are also seeing opportunities in bringing zero trust to IoT and OT systems, and are excited about 5G, which pushes computing further to the edge and opens up additional opportunities for Zscaler. We are excited about our future. Now, I'd like to turn over the call to Remo for our financial results.

Thank you, Jay. As Jay mentioned, we are pleased with the results for the second quarter of 2021. Revenue for the quarter was a $157.0 million, up 10% sequentially and 55% year-over-year. ZPA product revenue was 14% of total revenue. From a geographic perspective, we had broad strength across our three major regions: Americas represented 51% of revenue, EMEA was 38% and APJ was 11%. Turning to calculated billings, which we define as the change in deferred revenue for the quarter plus total revenue recognized in that quarter. Billings grew 71% year-over-year to $232.0 million, with billing duration around the mid-point of our 10-14 month range. As a reminder our contract terms are typically one to three years, and we primarily invoice our customers one year in advance. Remaining performance obligations or RPO, which represents our total committed non-cancellable future revenue, exceeded $1 billion during the quarter and ended at $1.025 billion as of January 31. RPO grew 68% from one year ago. The current RPO is 53% of the total RPO. Our strong customer retention and ability to upsell have resulted in a consistently high dollar-based net retention rate, which was 127% compared to 122% last quarter and 116% a year ago. As we have highlighted, this metric will vary quarter-to-quarter. While good for our business, our increased success selling bigger transformation bundles, selling both ZIA and ZPA from the start, and faster upsells within a year, can reduce our dollar-based net retention rate in the future. Considering these factors, we feel that 127% is outstanding. Total gross margin of 81% was flat quarter-over-quarter and declined one percentage point year-over-year, but exceeded our expectations. The year-over-year decline was primarily driven by a higher mix of newly introduced products. I would like to remind investors that a number of our emerging products, which includes ZDX, Workload Segmentation and CSPM, will initially have lower gross margins than our core products. As a result, we expect gross margins to be approximately 80% for the full year in fiscal 2021. Turning to operating expenses. Our total operating expenses increased 18% sequentially and 60% year-over-year to $112.9 million. Operating expenses as a percentage of revenue increased by two percentage points from 70% a year ago to 72% in the quarter. Sales and marketing expense increased 19% sequentially and 57% year-over-year to $76.5 million. The year-over-year increase was due to higher compensation expenses and investments in building our teams and go-to-market initiatives offset by lower T&E with our employees working from home. We've been very successful in hiring and onboarding remotely, and we are accelerating our sales and marketing hiring throughout the second half of the fiscal year. R&D expenses increased 15% sequentially and 71% year-over-year to $24.0 million. The increase is primarily due to continued investments in our engineering teams. G&A expenses increased 14% sequentially and 57% year-over-year to $12.5 million. The growth in G&A includes investments in building our teams, compensation-related expenses and professional fees. Our second quarter operating margin was 9% compared to 12% in the same quarter last year. Net income in the quarter was $14 million or a non-GAAP earnings per share of $0.10. We ended the quarter with over $1.4 billion in cash, cash equivalents, and short-term investments. Free cash flow was positive $18 million in the quarter, which compares to negative $2 million during the same quarter last year. The strength in free cash flow was driven by strong receivable collections. Now, moving on to guidance. As a reminder, these numbers are all non-GAAP which excludes stock-based compensation expenses and related payroll taxes, amortization of debt discount, amortization of intangible assets, facility exit costs and any associated tax effects. For the third quarter of fiscal 2021, we expect revenue in the range of $162 million to $164 million reflecting a year-over-year growth of 47% to 48%. Operating profit of $11 million to $12 million, Other Income of $300,000, net of interest payments on our senior convertible notes. Income taxes of $1.5 million and earnings per share of approximately $0.07 assuming approximately 146 million common shares outstanding. Due to better than expected first half performance and our strong pipeline, we are increasing our full year fiscal 2021 guidance for revenue, calculated billings and operating profit. For fiscal 2021 we now expect revenue in the range of $634 million to $638 million or year-over-year growth of 47% to 48%. Calculated billings in the range of $820 million to $825 million or year-over-year growth of 49% to 50%. Operating profit in the range of $59 million to $61 million. Other income of $2.4 million, income taxes of $5.3 million, and earnings per share in the range of $0.39 to $0.40 assuming approximately 145 million to 146 million common shares outstanding. For your modeling, we would like to remind investors that Q2 and Q4 have historically been our strongest billing quarters with declines in Q1 and Q3 quarters, respectively. The average sequential decline in billings during fiscal third quarters over the last five years was approximately 20%. We continue to see the market coming to us and we remain committed to investing aggressively in our company behind the growth in our business. We have a highly efficient business model and are making investments across the organization today in order to capitalize on the large opportunity ahead of us. While we will balance growth and profitability, growth will continue to take priority considering our strong business momentum. Operator, you may now open the call for questions.

[Operator Instructions] Our first question or comment comes from the line of Brad Zelnick from Credit Suisse. Your line is open.

Well, thank you so much. And congratulations guys on all the success really phenomenal results. Jay, I wanted to ask you a high level question around the impact that the Sunburst Breach is having on the industry. At your Analyst Day in January, you'd mentioned that the impact is likely to be larger than the Target breach was in 2013. And if you can maybe parse out for us how the event has impacted your pipeline across your strategic accounts, maybe all the way down to smaller commercial accounts and how, if at all, you've changed the way you approach initial conversations with new prospects?

Thank you, Brad. As we discussed during our Analyst Day, we are having increased conversations with our customers as well as prospects. We had Sunburst related webinar recently and had over 800 customers attended. This week, I was asked to talk to Board of Directors of a pharma company, and the primary topic was protecting against sophisticated threats like Sunburst. So all this is making cyber a bigger priority than it has been. It's a bigger priority for CIOs as well as the Board. So what is that causing? It is increasing engagements. I'm not sure I can quantify the impact on the pipeline, but we're seeing that the customers who are already educated on Zero Trust quite a bit are making implementation of Zero Trust a bigger priority. The number one question ends up being if people get compromised, how do make sure that the lateral movement doesn't happen? The answer is simple. Don't connect people to your network. Don't build a moat with firewalls and VPNs, do Zero Trust implementation where you connect users to applications not to the network.

Thank you so much, Jay. Congrats.

Thank you.

Thank you. Our next question or comment comes from the line of Mike Walkley from Canaccord Genuity. Your line is open.

Hi guys. Good evening. This is Daniel on from Mike. Thanks for taking my question. So I know over the past quarters, you've been working on really improving your sales motion in the SMB and smaller enterprise area. Can you just provide some color on some of the investments you are making. And I guess, where you expect to be moving forward?

I will start and Remo going to add on. Yes, we talked about our expansion towards the enterprise segment that we defined as between 2,000 and 6,000 employees in a company. As you know, we have done extremely well in the higher end in large enterprises for the last several years. So in this segment, the progress we've made is ahead of our expectations. Our growth was faster in this segment. Well, it did come from a smaller base. Having said that, our large enterprise segment is driving the overall strength of our business. We are doing three specific things to grow our business in this enterprise segment, one, adding more sales reps, more sales teams. And we had done a lot of good progress in the past two quarters and we'll do more in the coming quarters. Secondly, adding and expanding channel partners who covered the segment. And third, we are directing our marketing programs to support the segment as well. So in summary, it's a good opportunity to expand the segment and we are doing well. We're pleased with the performance.

Just as a quick follow on, we put together a – or initiated a Summit program a few quarters ago and that is doing well. And so – as a percentage of our revenue, VARs did pick up slightly in the quarter. VARs as a percentage of our revenues in the quarter was about – just above 50% where the quarter before it was in the high 40s. So, as Jay talked about, I mean the segments that we sell into commercial less than 2,000 employees enterprise to the 6,000 – large enterprise, 6,000 to 40,000 and majors at the 40,000. So the channel program, we're expecting to have positive results for us in the lower part of the market.

Great. Thanks for the color.

Thank you. Our next question or comment comes from the line of Alex Henderson from Needham. Your line is open.

Thank you very much. I was to talk to one of the architectural issues that I think is fairly interesting differentiator, which is the argument that you guys have built a network based off per user policy implementation versus architectures from some of your – one of your competitors that are unable to differentiate the traffic flows on a per user basis, or have the policy implementations on a per user basis. Can you talk about that delta between what you're doing and how that shows up in alternative competitors networks?

Yes. The fundamental difference is being a pass through on network security architecture when traffic is flowing over the network and a traditional device, like a firewall is trying to scan what kind of application is, guess it and trying to stop it or not. With our proxy architecture, where we terminate every connection, inspect and decide to connect to a particular user. So we have policies that are per user by design. There's no – in fact, a user coming from company A or company B or company C each looks like an untrusted user. While in the traditional way, they are kind of batch based policies. The end result is – our architecture gives us two big benefits. One with proxy we can do far better inspection at a high scale high performance, including SSL. Two, it allows us to do Zero Trust where you don't connect people to a network. You connect to a specific application. Zero Trust is probably the biggest thing to help you minimize the damage of lateral movement if something gets infected.

Thank you.

Thank you.

Thank you. Our next question or comments comes from the line of Andrew Nowinski from D.A. Davidson. Your line is open.

Great, thanks. And congrats on a great quarter. So I just wanted to follow up on Brad's earlier question regarding SolarWinds. It sounds like that's creating more pipeline but not necessarily contributing to revenue yet. But your billings growth is the strongest that we've seen in over two years. So I'm wondering if you could just comment on what the key drivers are that are contributing to that inflection in your billings growth. Now SolarWinds winds, it doesn't look like it's really had much of an impact yet.

Generally, in all these sessions, analysts like to pinpoint to particular event that may cause something, so COVID was viewed as maybe the catalyst. This is being viewed as a catalyst. As we have said before, the overall catalyst is that everyone is driving towards digital transformation, COVID maybe helping it SolarWinds maybe helping it. But customers are realizing that they believe that they need to accelerate their transformation. And we are the one who enabled the transformation. If you do your transformation without something like Zscaler, your risk goes up significantly. So where is our growth coming from? ZIA, which has been our work course. Yes. Now we've got over 25% of global 2000 companies, but we have 75% more to go. It is generating pretty good sales, ZPA, which was relatively young product two or three years ago now is actually contributing significantly about 40% of our global 2000 customers already have our ZPA. So these two are the biggest contributors of our billings growth. And then the new pillars ZDX is picking up quite well. And also is that the new pillar off cloud protection? I think I'm very pleased that our customers are buying more and more bigger bundles together. I talked about ZIA, ZPA and ZDX being bought together by our customers during our in my prepared remarks. So across the board, we're seeing strength from product side of it, across [indiscernible] Remo, you want to add to my comments?

No, I think, Jay is absolutely right. If you take a look at the breadth of our platform, before we're user centric, now basically we're also cloud protection – so workload protection. So the breadth of the platform is resonating with our customers. In addition when we talked at the Analyst Day that for companies of 5,000 employees on the user side, we'd expect, we're seeing ARPUs in that $145 range. I can say that in the quarter, we've had deals with customers at the 5,000 employee range in that range at $145. So what's happening basically is that there's a huge need in the market. Legacy architecture is not the answer. And so with Zscaler with the breadth of platform – in the increasing platform that we've created and we'll continue to create is really perfectly set to go forward into this market.

Great. Thank you guys so much.

Thank you. Our next question or comment comes from the line of Erik Suppiger from JMP Securities. Your line is open.

Yes, thanks for taking the question. Say given what you were saying earlier about proxy versus firewall, can you comment on how if – how difficult it is to augment firewall architectures with proxy capabilities, because I think one of your competitors is talking about introducing that kind of capability to their solution?

Well, what should I say? Imitation is the best form of flattery. Having said that, I would say that there's something called native architecture, or purpose-built architecture. There's something called bolt-on. Building proxy is hard, because you terminate, you inspect and you reconnect, compare that to a pass through firewall, you don't stop anything. You let it to go. If you catch something, it's great. If you don't, you don't. Many vendors have tried and failed to build a high-performance proxy because it's hard. The only two vendors in the past 20 years have successfully penetrated enterprises for user security, blue code for on-prem and they've done it for the cloud. So I think am I surprised that people try to get by without a proxy? And finally the customer said, no, no, no. So they change it. I think delivering this thing will be tricky. I've seen many companies do it. There have been vendors, who have been saying that they had a proxy for six, seven years. I would rather not name them, but I still haven't seen them in the market. So we keep on, we are not sitting still. We keep on advancing. The most functionality you add browser isolation, to CASB, to content inspection, or DLP and all, your proxy has to do more and more work and still deliver throughput and still do threat inspections. So we welcome the competition, but we are very pleased with our performance, that kind of lead we have over traditional legacy vendors.

Very good. Thank you.

Thank you. Our next question or comment comes from Sterling Auty from JPMorgan. Your line is open.

Yes. Thanks. Hi guys. So how about the networks on the earnings call pointed out the success that they've had with prisma access and given the commentary about the success that you're seeing in the enterprise. I'm curious, are you running into each other in an increasing fashion in that segment? And it's just that the space is so big that you're both able to grow at these rates, or do you think you're serving different segments of the overall opportunity in the market?

New firewall vendors started making noise a couple of years ago, a lot of noise, then it died down about six months after that. In the field, we haven't really changed, seen a whole lot of change to it. When it comes to large enterprises where we dominate, we haven't seen any change in competitive landscape. And I can understand why. Large enterprises are security savvy. They understand the difference between proxy and non proxy. They understand Zero Trust and VPN. And that's why we don't expect to see firewall-based architecture in those enterprises. And all of you guys are so close to banks. Find a large bank who believes in not having proxy, but using firewall architecture for security. I have not found one. I think when it comes to lower end of the spectrum, probably in the 5,000 users or below, we do see firewall vendors from time to time. And from time to time, these guys on that sophisticated, they can be probably tricked into find something that may not be that sophisticated. So I think you'll see less sophisticated solutions being bought on the lower end. But on the higher end, we haven't seen any change in competition.

Thank you.

Thank you. Our next question or comment comes from the lie of Patrick Colville from Deutsche Bank. Your line is open.

Hey, thank you for taking my question and congrats on a very impressive quarter. Just asking about head count and hiring. I mean, that was a major theme of fiscal 2020. And it looks potentially in the numbers that that was probably helping to contribute to growth this quarter. I mean, can you just help us understand how you guys think about hiring now? And if you can share any numbers around net headcount adds year-on-year sequentially, that'd be great.

I'll take that. So the net headcount as we had in the quarter was about 240 and it was about 260 in Q1. Generally speaking, it's around 60% sales and marketing heads. And that's what it was also – and historically, it's been pretty much every quarter, and that was the case in Q2. The comment about accelerating, hiring, yes, we are. We're accelerating, hiring. We see a huge market opportunity. We see that we are doing well. We see that we've got the right product for the market. So we're going to continue to invest across the board in the company in particular with quota [ph] sales reps. We had a record quarter hiring in Q4. We had a comparable quarter in Q1 and we had a very good quarter in Q2 and we plan to continue to hire aggressively throughout the back half of the year. Again, from our perspective, we've talked about putting growth and a profitability. We'll be mindful of profitability. Since our public offering, we've been positive profitability and free cash flow, Jay and I are very mindful of that. And we'll continue to be mindful of that. But this is such a big opportunity that we feel that we want to take advantage of it and we're going to invest in it. And we're going to try to capture it.

Yes, if I may add, over the past four quarters we have pretty openly shared with you a game plan, of scaling our sales organization, building our sales engine from enablement to training and all of those things. And I think you're seen the results being delivered quarter-after-quarter. So, we are bullish about it and we'll keep on increasing our head count, and sales, and engineering, and customer support and all other related areas.

Great. Thank you so much.

Thank you. Our next question comes from the line of Fatima Boolani from UBS. Your line is open.

Good afternoon, thank you for taking my questions. Remo question for you, Jay, in his prepared remarks alluded to a number of very large sort of wall-to-wall transactions that were also multi-product. So, I'm wondering if you could comment on the large deal activity that you saw in the quarter and if it was maybe outsized in any particular regions? It would be really helpful if you can give us some quantification of that?

Yes. A good question. So large deal activity was strong in the quarter, it was comparable to Q1. It was significantly higher than last year. From a geographic perspective, all regions did well. I mean, we are investing in all regions, pretty much the same, same level. APJ, probably a little bit faster than the other regions, but all regions have done well and we continue to invest. Related to the comment I made before, when companies see – with the breadth of the platform that we have and companies see the value of Zscaler. And the ease of implementation, the increased security and also the ROI. The value proposition is resonating with our customers. And so, we're seeing that. And so, by adding ZDX and ZCP and broadening the platform, it actually increases the value of what we're – of Zscaler. If I may add a couple of points to it, we have truly expanded the platform. We haven't gone on a buying spree and throw them in there and call it a platform because those – these unintegrated products don't add a lot of value, our customers see the value. For example, to turn on ZDX, it's literally a few minutes. It hardly takes anything because the traffic is already flowing through everything is happening. The second one, I like to make is, yes, we did have what you call wall-to-wall deals. I guess that meant all teller deals. But there are no mega deals in the quarter. Okay. And there's no one time kind of special deal that artificially increased our billings numbers. It was properly distributed various pillars, and across all geos.

As a follow-on for Jay also it was a new record quarter also for new customers. So, it was broad, it was strong, and as Jay mentioned, there's no mega deals that we've had in the quarter.

Thanks. Thank you so much.

Thank you.

Thank you. Our next question or comment comes from the line of Matt Hedberg from RBC Capital Markets. Your line is open.

Yes, thank you. This is Matt Swanson on for Matt. Jay, kind of going back on some of those large deals, it seemed like you had a lot of success upselling the, INVPA [ph]. I know at the Analyst Day, we talked about maybe six times upsell opportunity within your base. When it comes to kind of realizing that opportunity is it more just a matter of time and as the customer see the value they are coming back, or are there steps you can take to kind of more aggressively pursue that expansion?

So, I think our customers are happy and trusting us. So that's a starting point. If that's not the case, you want to sell; two, you need proper sales, execution, engagement, our engagement, staffs in C-level, the sales machine that built is helping us. So, we are getting pretty good share of upsell deals. In fact, we don't have differentiation between incentive, sales incentive, or sales that we upsell. So, we aren't pleased with the upsell performance and new performance. We have internal debate between how much do we need new versus upsell, Remo and I decide, let the total ACV rule, we have both opportunities. But we have seen good growth, good upsell numbers every quarter.

Yes. And there's a quick follow-on for Jay to some numbers. Upsell was very strong, new business was very strong also. If the split between new and upsell in the first half was approximately fifty-fifty upsell in Q2 was slightly below 50%

Sorry new was 50%.

Excuse me new was slightly below 50%.

Yes.

And going forward, we think a good mix, for Zscaler is fifty-fifty. In the reasons, the point that you brought up, I mean the 6x, ability to upsell into existing customers, just for ZIA and ZPA. And so, it is significant.

Thank you, guys. Great quarter.

Thank you.

Thank you. Our next question or comment comes from the line of Brian Essex from Goldman Sachs. Your line is open.

Hi, good afternoon. Thank you for taking the question. Great to see that billings acceleration. And on that, I was wondering, if we could get a little bit of color around your hiring rate, I think, it was brought up in a previous question, but wondering, have you ever reached some kind of a terminal velocity in terms of the rate of hiring, and the rate of training and the rate of maturation within your salesforce? And maybe a little bit of color too, around how you're attracting talent in the market? Is it primarily in localized area or is it from multiple geographies that you're able to attract better count on your platform?

I will start, then you can add on. So, first of all, we have become the top destination for the top talent. While on the market is competitive, we actually don't have problem in attracting good talent, whether that's in sales organization or engineering. So please obviously with that, you need to make sure you have things in place, a proper team for hiring, but that's happening. Related to Joe's or where the concentration is from sales point of view, we are where the customer is. We are a very global organization with big presence all over U.S., all over Europe, APJ, Japan, India, Singapore, all of these places. So, we are attracting talent from everywhere. And generally, on the sales side, we are looking for talent coming from companies who know how to sell solutions, who need to solve software, who know how to sell transformation sales. That's the first part. The second part was at ability to train. Over the past four quarters we shared with you how we build the sales enablement team, how we built the team with sales leaders that proper – even proper process for interview for these people, with the whole documented process. I think we are very optimized. I would say it's as optimized as I ever seen out there. So that's why you are able to add significantly large number and make them pretty productive in a shorter amount of time that we would do otherwise. We shared a little bit off that during our Analyst Day, the kind of impact that's being made with better training and better enablement.

As just a quick follow-on from my perspective, from being around, sales organizations, my career, really good sales organizations, nothing matches what we have here at Zscaler. Nothing. The organization top to bottom from the way it's structured and the ability to scale. And as Jay talked about the training with the sales enablement group, never seen anything like it in my career. It gives us the ability, as Jay said, we're not looking for people who sell traditional, right. We're looking for people who could sell transformation. And to do that, you need to be trained and we are a destination. So, do we have the ability to increase our hiring phase? We do. Do we have the ability to onboard quickly? We do. Do we see salespeople getting to productivity faster? We are. So, I mean, it's a good place to be.

Got it. That's helpful. Thank you.

Thank you. Next question comes from the line of Tal Liani from Bank of America. Your line is open.

Hi guys. My question is about the comps for 2021. Do you feel, or do you have any data to think that some of the growth this year was related to COVID an increase in license take rate because of COVID. And if that's the case, we might have an issue second half 2021 with the comps. I know that this is on investors’ mind, and I'm wondering if you have any data to support the view one way or another?

Yes, let me start with the general comments Remo, you can be more specific. I give you the hard part.

I will have to give numbers.

Look we do believe that work [indiscernible] has had to stay, I guess, COVID became a catalyst to shake off inertia. It actually changed the mindset and it really not just gave momentum, but also brought to light the limitations of legacy network and security. So, we are seeing our customers saying we are implementing zero trust, which means any ZIA ZPA top on deployments even after everything gets back to normal. If that was not the case, they would be doing short term ZPA deal and saying, I'm going back to the office, I no longer need to renewal of ZPA, beyond seeing that. So, we think the world is changing. So, going back to the office should not be impacting our momentum of the business. That's how I look at it overall. Remo?

Pipeline is strong and interest is high in Zscaler, and engagement is significant.

Got it. Not much – thanks.

Thank you. Our next question or comment comes from the line of Hamza Fodderwala from Morgan Stanley. Your line is open.

Hey guys, thank you for taking my question. Jay my first question for you, you talked about really strong traction with VDX. I think it was over 200 customers on that product. When you initially launched the solution, it seemed like it would be something that would be perhaps more complimentary with the monitoring vendors. I'm wondering, given the strong traction that you've had, what is your sort of ambition with this product?

It is complimentary with application monitoring, right? Okay. So, but it's not complimentary, but network monitoring vendors because network monitoring vendors are monitoring traffic between your branch office and the data center over your private network. Private networks are going away, people are sitting anywhere. When you're sitting at home and going to office 365, all your data center, what network monitoring tools can you use? Hardly any. So, we are sitting on the endpoint, we are connecting to user application, we are sitting in the middle, we see the application side, we see the end point side and the best players to give you end-to-end monitoring and compliment application monitoring vendors.

Got it. And then just maybe a follow-up question for Remo obviously, massive expansion of the Salesforce and the channel over the past couple of years. But I'm curious what percentage of, these reps are fully productive, right, given the traditional ramp period that they have?

Yes, let me just answer it saying that two thirds of our sales reps are still ramping, so they're not fully ramped. When I say ramping, they have been here for less than year.

Got it. That's helpful. Thank you.

Thank you. As a reminder, please limit yourself to one question. Our next question or comment comes from the line of Gray Powell from BTIG. Your line is open.

Great. Thanks for working me in. So yes, I'll be quick. So just looking back last year a lot of companies that they went out and they purchased additional VPN capacity from legacy vendors, really as part of continuity initiatives, are you seeing some of those deals come up for renewal? And do you think that gives you an incremental opportunity to gain share as those companies look to modernize their solutions?

Yes, I would say as I have discussion with our large enterprises and I personally do quite a few. We are yet to find a customer who has I talked to who said, I want to keep VPN for the long run. They're all, in various stages of the journey, the growth you see often ZPA, a former customer base is a result of more and more Zscaler customers embracing Zero Trust and ZPA. I do believe that all there would be some exception, but most of Zscaler ZIA customers will embrace ZPA. And I see them more and more embracing ZDX as well. Our strategy of all prime, up well [ph], design, integrated platform with four pillars is working well. Two years ago, the question used to be, can ZPA take off? Right? That question has been answered over and over. Now, the question is can ZDX and ZCP take off? Early indications are very good. But back to your question s VPN replacement vendors an opportunity for us? Absolutely, yes. Our starting point of ZIA is replacing the user protection, which typically is a proxy. And then we start expanding it to the full bundle. Our ZPA entry point is generally a VPN vendor. And then you expand to, Zero Trust with app segmentation.

Got it. Okay, that's really helpful. Thank you very much.

Thank you. We have time for one last question. Our final question will be from the line of Yun Kim from Loop Capital Market. Your line is open.

So, Jay on the new cloud workload protection product since you are already getting some early traction there, are you seeing an opportunity to partner with hyperscalers, such as AWS and Azure since a lot of the cloud workloads reside on those hyperscaler platforms, and I know you already have partnership with VIA VTA for AWS. And then also in addition, do you see the need to begin to target like dev-ops team for your cloud workload product?

Yes, it's a good question. So, as you said, we have already engaged with leading cloud providers with ZIA and ZPA. On the cloud protection area, we got some early initiative going, there's a good complimentary fit-PC with them. And I think it's a little bit early. I mean, it's only a quarter or so, but the momentum is strong, the pipeline, we’re building is strong. The way you should look at Zscaler Cloud Protection is not the way you look at traditional vendors who say, I'm going to take my firewall and put the virtual firewall in the cloud. We think that trying to replicate your data center in the cloud never worked for even moving apps. How is it going to work for security? We look at workloads like mirror image of users and should be protected like users. So that Zero Trust Exchange, we are able to connect a workload in Region A to workload Region B over the Internet, coming through our Zero Trust Exchange. That's truly what makes us very different architecturally. Now, the next part of your question was left-shift stuff. As we are engaging with our customers, they are having dialogue with us as they are figuring out their left-shift strategy. It's a new area and we are closely monitoring it. As the market evolves, you can rest assured we will be there to serve our customers.

Okay, great. Thank you so much.

Thank you. That concludes our question-and-answer session for today. I'd like to turn the conference back over to Mr. Jay Chaudhry, Chief Executive Officer for any closing remarks.

Great. Thank you for joining us. I hope the session was worthwhile. We hope to see you as our next earnings call or before that in one of the investor events we'll be joining. Thank you.

Thank you,

Good bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.