Zscaler(ZS) - 2026 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported a revenue of $816 million, representing a 26% year-over-year growth and a 4% sequential increase, exceeding guidance [25][27] - Annual Recurring Revenue (ARR) grew to $3.4 billion, up 25% year-over-year, with net new ARR of $156 million, a 19% increase [25][27] - Non-GAAP operating income reached $181 million, a 29% increase from $140 million last year, with an operating margin of 22.2% [31] Business Line Data and Key Metrics Changes - The Zero Trust Internet Access (ZIA) and Zero Trust Private Access (ZPA) ARR remained healthy, growing in the mid-teens [26] - The number of Zero Trust Everywhere enterprises increased to over 550, up from over 130 a year ago, indicating strong adoption [17] - Non-seat-based metered usage solutions contributed over a quarter of new Annual Contract Value (ACV), with ARR tied to these offerings growing more than 100% year-over-year [26] 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] - Remaining performance obligation (RPO) grew to $6.1 billion, up approximately 31%, with about 47% classified as current RPO [27] Company Strategy and Development Direction - The company is focusing on AI security, Zero Trust Everywhere, and Data Security Everywhere as its three growth pillars, with significant demand expected in these areas [11][22] - The company aims to secure AI applications and agent communication, positioning itself as a leader in the AI security market [6][10] - The Z-Flex program is designed to provide customers with flexibility in module activation, driving upsell opportunities and shorter sales cycles [28][29] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the outlook for the second half of fiscal 2026, citing a strong pipeline of deals and robust demand for their platform [6][25] - The urgency of securing AI is a top concern among CEOs and CIOs, presenting a significant opportunity for the company [7][10] - The company expects to continue expanding its partnerships and customer base, with a focus on long-term growth and profitability [24][36] Other Important Information - The company closed the acquisition of SquareX, enhancing its zero trust capabilities for browser security [30][92] - The integration of Red Canary is ongoing, with elevated churn levels noted but expected to stabilize as integration progresses [30][67] Q&A Session Summary Question: Competitive backdrop and win rates - Management noted no significant changes in competitive dynamics, with record pipeline conversion and large deal wins indicating strong performance [39][40] 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 [45] Question: Non-seat-based meter usage solutions - Management confirmed that non-seat-based solutions are resonating well with customers, contributing significantly to new ACV [50] Question: AI security project budgets - CIOs are allocating budgets for AI security projects, viewing security spending as a nominal cost compared to overall AI project budgets [56] Question: Sales cycles for AI-inclusive deals - Sales cycles are generally faster for AI-inclusive deals, with customers seeking integrated solutions [62] Question: Red Canary's elevated churn and financial contribution - Management clarified that while Red Canary has higher churn, securing renewals positively impacts ARR [67] Question: Sales productivity and transformational deals - Management reported double-digit sales productivity growth, driven by engagement in transformational deals [72][73] Question: Core ZIA/ZPA growth expectations - Management indicated consistent performance in ZIA/ZPA, with significant upsell opportunities remaining [75][76]