Zscaler(ZS) - 2026 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported a revenue of $816 million, reflecting a 26% year-over-year growth and a 4% sequential increase, exceeding the high end of guidance [27] - Total Annual Recurring Revenue (ARR) reached $3.4 billion, up 25% year-over-year, with net new ARR of $156 million, a 19% increase [25][26] - Non-GAAP operating income was $181 million, growing 29% year-over-year, with a non-GAAP operating margin of 22.2% [32] Business Line Data and Key Metrics Changes - The Zero Trust Internet Access (ZIA) and Zero Trust Private Access (ZPA) ARR grew in the mid-teens, indicating healthy performance in core offerings [26] - The Zero Trust Everywhere segment saw significant growth, with over 550 enterprises adopting the solution, up from over 130 a year ago [17] - AI Security, including the newly introduced AI Protect solution, is rapidly gaining traction, with demand accelerating and several large enterprises adopting the solution [12][13] Market Data and Key Metrics Changes - The Americas accounted for 57% of revenue, growing approximately 31% year-over-year, while EMEA and APJ accounted for 28% and 15% of revenue, growing approximately 18% and 23% respectively [27] - The remaining performance obligation (RPO) grew approximately 31% to $6.1 billion, with about 47% classified as current RPO [27] Company Strategy and Development Direction - The company is positioning itself as the cybersecurity platform for the AI era, emphasizing the importance of securing AI applications and agent communication [5][6] - The strategy includes expanding the Zero Trust Exchange to secure AI applications and agentic workflows, which is seen as a significant growth opportunity [8][9] - The company aims to drive durable, profitable growth with strong cash generation while expanding its AI security portfolio and Zero Trust Everywhere adoption [36] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the outlook for the second half of fiscal 2026, citing strong demand for the platform and an increasing guidance across the board [5][36] - The urgency of securing AI is a top concern for many CEOs and CIOs, indicating a growing market opportunity for the company's solutions [6][9] - The company expects to continue expanding its partnerships and customer base, with a significant runway for long-term growth [24] Other Important Information - The company closed the acquisition of SquareX, enhancing its zero trust capabilities for unmanaged devices [31] - The Z-Flex program has generated over $290 million in Total Contract Value (TCV), indicating strong customer commitment and upsell opportunities [28][29] Q&A Session Summary Question: Competitive backdrop and win rates - Management noted that competitive dynamics have not changed significantly, with record pipeline conversion and large deal wins indicating strong performance [41][42] Question: Full year ARR expectations and seasonal anomalies - Management highlighted confidence in the second half of the year, attributing the increase in ARR expectations to overall business strength and seasonality [46] Question: Non-seat-based meter usage solutions - Management confirmed that non-seat-based solutions are growing rapidly, contributing significantly to new ACV and expected to continue growing with AI agents [51][53] Question: AI security project budgets - CIOs are increasingly allocating budgets for AI security projects, viewing security spending as nominal compared to overall AI project costs [57] Question: Sales cycles for AI-inclusive deals - Sales cycles are generally faster for AI-inclusive deals, with customers seeking integrated solutions and starting with smaller projects that can grow over time [63][64] Question: Red Canary's elevated churn and financial contribution - Management clarified that while Red Canary has higher churn, securing renewals positively impacts ARR, and integration efforts are ongoing [68] Question: Sales productivity and transformational projects - Management reported double-digit sales productivity growth, driven by transformational deals and improved customer engagement [72][74] Question: Core ZIA/ZPA growth expectations - Core ZIA/ZPA has shown consistent performance, with significant upsell opportunities remaining within existing customers [76][78] Question: Z-Flex deal dynamics - Z-Flex deals provide flexibility and strategic engagement, with similar ARR dynamics to traditional contracts but potentially longer-term commitments [87][88] Question: SquareX acquisition and browser security - The acquisition allows for enhanced security functionality via browser extensions, expanding the total addressable market without the vulnerabilities of a full enterprise browser [93][94] Question: Monetizing increased traffic from AI agents - Increased traffic from AI agents is expected to enhance revenue opportunities as more agents generate more value through the Zero Trust Exchange [98]