Summary of Zscaler (ZS) 2025 Conference Call Company Overview - **Company**: Zscaler (ZS) - **Industry**: Cybersecurity, specifically focusing on Secure Access Service Edge (SASE) and Zero Trust security models Key Points and Arguments Market Dynamics - SASE is a rapidly growing space with increasing competition and new entrants [1] - Zscaler is experiencing accelerating order bookings and growth beyond its historical markets of ZIA (Zscaler Internet Access) and ZPA (Zscaler Private Access) [1][2] Growth Opportunities - Zscaler identifies three major areas of opportunity: 1. Data security, which is becoming increasingly complex, especially with AI integration [5] 2. Agentic operations, leveraging AI to enhance security and IT operations [5] 3. Expansion into new markets beyond traditional offerings [5][12] Zero Trust Security Model - The concept of Zero Trust is evolving, with a shift from user-centric to encompassing cloud workloads, IoT, and AI agents [7][9] - Zscaler's Zero Trust Exchange is positioned as a comprehensive solution for secure communication across various entities [9] Product Development and Innovation - Zscaler has expanded its offerings to include a B2B collaboration exchange and enhanced capabilities for securing AI applications [9] - The company emphasizes the importance of a single vendor for data protection to simplify complex data protection policies [11] Customer Engagement and Sales Strategy - The sales approach has shifted from transactional to account-focused, enhancing customer relationships and sales productivity [62] - Zscaler's solutions are designed to reduce costs significantly for customers, with examples of cost reductions of 50-70% for large enterprises [33] Competitive Landscape - Zscaler faces competition from traditional firewall companies that are attempting to pivot to SASE solutions, but the company believes these offerings do not meet the true Zero Trust criteria [38][39] - The company maintains a strong brand reputation among CIOs and CISOs, focusing on ROI and value delivered rather than just pricing [44] Financial Performance and Metrics - Zscaler reported over $350 million in Annual Recurring Revenue (ARR) from data security, indicating strong growth potential in this area [75] - The company is focused on upselling existing customers, with a reported 40% increase in new logo Annual Contract Value (ACV) year-over-year [56] Data Protection Strategy - Zscaler's approach to data security emphasizes securing data rather than the network itself, positioning itself as a leader in Data Loss Prevention (DLP) [69] - The company has developed a flexible pricing model (Z Flex) to allow customers to choose and adapt their data protection modules according to their needs [78] Future Outlook - Zscaler is optimistic about the future, with plans to expand its Zero Trust offerings to branches and workloads, indicating a phased approach to market penetration [37][50] - The company is committed to continuous innovation and customer satisfaction, aiming to delight customers and win more business [86] Additional Important Insights - The transition to Zero Trust is seen as essential for modern cybersecurity, moving away from traditional firewalls and SD WANs [26] - Zscaler's focus on simplifying security operations and reducing complexity is viewed as a critical factor for resilience in enterprises [34][35] - The company acknowledges the presence of late adopters in the market but believes that its solutions will eventually become mainstream as more enterprises recognize the need for Zero Trust [36]

Financial Data and Key Metrics Changes - First quarter ARR grew 11% year over year in constant currency, with total ARR reaching $492.7 million, reflecting a 10% year-over-year growth on a reported basis [24][25] - First quarter revenue was $118.2 million, exceeding guidance by $2.2 million, representing approximately 4% year-over-year growth on a reported basis [25][26] - Adjusted EBITDA for the first quarter was $31.6 million, reflecting a 27% margin, which was above the high end of guidance [26][27] - Gross margin for the first quarter was 80.6%, down from 84.7% in the same period in 2024 [26] Business Line Data and Key Metrics Changes - Subscription revenue was $116.8 million, representing approximately 5% year-over-year growth on a reported basis [25] - The company ended the quarter with 2,398 customers contributing $50,000 or more of ARR, up approximately 10% year over year [25] - Dollar-based net revenue retention was approximately 101% on both a reported and constant currency basis [25] Market Data and Key Metrics Changes - Approximately 43% of revenue was generated outside of North America during the quarter [28] - The company is targeting $750 million in ARR by 2028, driven by three growth pillars: driving security success, scaling go-to-market efforts, and boosting customer expansion [7][8] Company Strategy and Development Direction - The company is focused on expanding its go-to-market strategy by partnering with a broader range of channel providers, including resellers and system integrators [18][19] - The launch of new security capabilities and the growth of channel partners are seen as key components of the company's innovation and growth strategy [33] - The company is committed to CMMC 2.0 readiness to enhance its appeal in regulated sectors [20] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the demand for cybersecurity solutions, noting that the need for cyber resiliency is a must for businesses [42] - Despite some anecdotal evidence of longer sales cycles, the overall demand remains strong, and the pipeline is robust [42][70] - The company raised its revenue and ARR guidance for the full year, reflecting strong first-quarter results and updated foreign exchange rates [29][30] Other Important Information - The company announced a $75 million share repurchase authorization program, indicating confidence in its business [24] - The adjusted EBITDA guidance for the full year was raised, with expectations of $134 million to $139 million, representing a margin of 27% to 28% [31] Q&A Session Summary Question: Contribution of AdLumin acquisition to revenue growth - The AdLumin acquisition contributed approximately $21 million of ARR at the time of acquisition, which should help in calculating organic growth rates [36][37] Question: Considerations for seasonality in ARR - Management expects ARR growth to be consistent throughout the year, with slight improvements as the year progresses [38] Question: Market spending environment and customer feedback - Demand for cybersecurity solutions remains strong, with no significant changes in metrics, although some deals are taking longer to close [42][70] Question: Dollar-based net revenue retention dynamics - Management expects the current retention rate to be a trough, with improvements driven by cross-selling opportunities [45][47] Question: Reseller traction and growth potential - The company is in the early stages of expanding its reseller network, with expectations for more significant impacts in 2026 [56][58] Question: Integration of offerings into a single platform - The company is focused on automating workflows and integrating its offerings to enhance efficiency and security for customers [96][100]