Zscaler (ZS) Q2 2025 Earnings Name Transcript

Zscaler (ZS 1.36%)
Q2 2025 Earnings Name
Mar 05, 2025, 4:30 p.m. ET

Contents:

• Ready Remarks
• Questions and Solutions
• Name Members

Ready Remarks:

Operator

Good day, and thanks for standing by. Welcome to the Zscaler second quarter 2025 earnings name. At the moment, all contributors are in a listen-only mode. Please be suggested that immediately’s convention is being recorded.

After the audio system’ presentation there might be a question-and-answer session. [Operator instructions] I’d now like handy the convention over to your speaker immediately, Ashwin Kesireddy, vice chairman, investor relations and strategic finance.

Ashwin Kesireddy — Senior Vice President, Investor Relations and Strategic Finance

Good afternoon, everybody, and welcome to the Zscaler second quarter fiscal yr 2025 earnings convention name. On the decision with me immediately are Jay Chaudhry, chairman and CEO; and Remo Canessa, CFO. Please be aware, we now have posted our earnings launch and a supplemental monetary schedule to our investor relations web site. Except in any other case famous, all numbers we discuss immediately might be on an adjusted non-GAAP foundation.

You’ll discover the reconciliation of GAAP to non-GAAP monetary measures in our earnings launch. I might wish to remind you that immediately’s dialogue will include forward-looking statements, together with however not restricted to the corporate’s anticipated future income, annual recurring income, calculated billings, working efficiency, gross margin, working bills, working earnings, web earnings, free money circulate, dollar-based web retention fee, future hiring selections, remaining efficiency obligations, earnings taxes, earnings per share, our targets and outlook, our buyer response to our merchandise, and our market share and market alternative. These statements and different feedback should not ensures of future efficiency, however fairly are topic to threat and uncertainty, a few of that are past our management. These forward-looking statements apply as of immediately, and you shouldn’t depend on them as representing our views sooner or later.

We undertake no obligation to replace these statements after this name. For a extra full dialogue of the dangers and uncertainties, please see our filings with the SEC, in addition to in immediately’s earnings launch. I additionally need to inform you that we’ll be attending the next conferences: Morgan Stanley TMT Convention on March sixth; Susquehanna Journey, Tech + Playing Discussion board on March seventh, Loop Capital Markets Investor Convention on March tenth, Stifel Expertise Convention on March 11, Cantor World Expertise Convention on March twelfth. Now, I am going to flip the decision over to Jay.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

Thanks, Ashwin. Our excellent Q2 outcomes display the enhancements in our go-to-market execution in opposition to a backdrop of rising buyer demand for our platform. Billings accelerated in Q2, and income grew by 23% yr over yr, with each metrics coming in above the excessive finish of our steerage. Our go-to-market investments are leading to elevated gross sales productiveness, double-digit new and upsell enterprise progress, and decrease gross sales attrition.

I anticipate gross sales productiveness to proceed progress within the second half, pushed by ongoing success of our go-to-market initiatives and rising variety of ramped gross sales reps. Our annual recurring income, or ARR, grew 23% yr over yr in Q2 to over $2.7 billion. And our web retention fee, or NRR, improved to 115%. With our rising pipeline and higher gross sales productiveness, I anticipate us to attain $3 billion or extra in ARR by the top of the fiscal yr.

Q2 was additionally a powerful quarter for profitability with 36% progress in working revenue, driving 2 proportion factors enchancment in working margin to almost 22%. Free money circulate margin was additionally a Q2 file of twenty-two%. Pushed by robust income progress and free money circulate margin, we operated above the Rule of 45, inserting us within the rarefied class of enormous publicly traded SaaS corporations which might be rising quickly at scale. Zscaler pioneered zero belief structure, which permits our prospects workforces to securely entry functions wherever they reside.

Previous to Zscaler, enterprises relied on firewall and VPN-based safety, which allowed attackers to take advantage of their vulnerabilities and transfer unchecked throughout company networks. Many distributors are advertising SASE constructed on SD-WANs, which solely worsens the rising situation of ransomware assaults. We now have gone far past SASE by pioneering our zero belief change constructed on true zero belief structure, which eliminates lateral propagation of threats and dramatically reduces assault floor. Constructing upon our success in securing customers, we expanded our platform to safe workloads, IoT/OT gadgets, B2B customers, B2B techniques, and extra.

At present, we’re elevating the idea of zero belief to a brand new commonplace that we name zero belief in every single place. For a buyer to be zero belief in every single place, they want zero belief customers the place customers are untrusted and by no means placed on the company community; zero belief cloud, the place workloads are untrusted and might talk solely via our change; and 0 belief department, the place branches, factories, warehouses or IoT/OT gadgets are islands of their very own. Our mission is to create a zero belief in every single place world with the upcoming {hardware} refresh cycle, CXOs are more and more searching for methods to remove the legacy safety stack, together with firewalls, VPNs, SD-WANs and extra. We’re leaning into the chance introduced by the refresh cycle with surgical discipline campaigns to teach our prospects on how they will leapfrog to zero belief in every single place and free themselves from firewalls and different legacy home equipment endlessly.

I am completely happy to share that we’re seeing preliminary success from these campaigns. As of the top of Q2, we surpassed 130 enterprises which have grow to be zero belief in every single place, and my mandate to our groups is to triple that quantity within the subsequent 18 months. One of many core options of zero belief in every single place is zero belief department, which is seeing large buyer curiosity. Let me share a buyer instance.

An present World 2000 manufacturing buyer bought our zero belief department in a seven determine deal, including to their ZIA and ZPA commitments. This buyer is leveraging Zscaler to safe all their important manufacturing websites, eliminating the necessity for firewalls, NACs, costly switches, and routers at these websites. Subsequent, we’re working with this buyer to upsell zero rust cloud to place them on the trail to grow to be zero belief in every single place. In one other instance, a big communications gear firm bought our zero belief department to part out their present SD-WAN.

We’re excited to work with this buyer to assist them notice higher safety and operational simplicity of our platform. Zero belief department can be serving to us win new brand prospects. In Q2, 57% of shoppers who bought zero belief department are new brand prospects. Transferring on to massive buyer metrics, our $1 million-plus ARR buyer rely once more grew 25% yr over yr.

In a single massive buyer win, a brand new brand of Fortune 50 power firm adopted our zero belief platform to safe 25,000 customers with ZIA and ZPA and made preliminary purchases of each zero belief department and 0 belief cloud in a seven-figure deal. This deal showcases how prospects are adopting our broader platform, together with workloads and department in- land offers. By embracing Zscaler because the platform of alternative for his or her safety transformation, the shopper is eliminating firewalls, SD-WANs, legacy safe internet gateways, VPNs, and extra, thus, bettering their safety whereas reducing price and complexity. I’m additionally happy with the momentum in our information safety pillar, which skilled over 40% yr over yr progress in web new ACV.

We see two key drivers of this development. One, consolidation of level merchandise and operational simplicity of knowledge safety. We now have essentially the most complete information safety platform which secures all forms of information, whether or not structured or unstructured, information in movement or information at relaxation, and information throughout all channels, together with internet, e-mail, endpoints, SaaS, cloud workloads, and extra. These capabilities are packaged as varied modules to offer flexibility to prospects to undertake at their very own tempo.

To offer you an instance, a World 2000 retail firm that had three information safety modules within the final fiscal yr adopted three new further modules in Q1 of this fiscal yr and considerably expanded information safety to all customers throughout all their six modules in Q2. This The seven-figure upsell deal practically tripled the annual spend of this already million-dollar-plus ARR buyer. The shopper selected Zscaler to drive what of their phrases is essentially the most important transformation venture of their community and safety historical past. With too many information safety level merchandise of their environments, prospects are pressured to handle a number of insurance policies from a number of merchandise.

In distinction, Zscaler prospects use a standard set of insurance policies that may be seamlessly carried out throughout all information safety modules, leading to fast deployment and decrease operational overhead. For instance, in a seven-figure upsell deal, an present World 2000 monetary companies buyer considerably expanded their information safety purchases for 100,000 customers. This upsell drove a 65% enhance within the annual spend of this already million-dollar-plus ARR buyer. As of the top of Q2, over 85% of our $1 million-plus ARR prospects have two or extra information safety modules and 65% have three or extra modules.

We anticipate this module adoption to proceed to develop. The second key driver for information safety progress is the growing adoption of gen AI. With the widespread use of gen AI, all enterprises in all industries are confronting the chance of knowledge loss to public AI apps, reminiscent of Microsoft 365 Copilot, DeepSeek, ChatGPT, and extra. That is elevating the significance of knowledge safety throughout all prospects.

And prospects are buying our resolution to realize visibility into public AI apps and stop information loss. For instance, in Q2, many shoppers bought information safety to securely undertake public AI, together with a World 2000 hospitality firm, a World 2000 expertise firm, a World 2000 manufacturing firm, and extra. Along with securing using public AI apps, we’re investing to ship options to safe prospects non-public AI apps, reminiscent of LLM and SLM fashions, chatbots, and inference engines. We’re increasing the performance of our zero belief change with an LLM proxy to investigate immediate queries and leads to actual time to detect and stop immediate injections and different malicious actions.

We’re additionally using AI to make our merchandise even higher and ship extra worth to prospects. Lower than a yr in the past, we launched ZDX Copilot, which leverages common AI fashions like Gemini to ship operational effectivity and sooner decision of end-to-end consumer efficiency points. We provide ZDX Copilot in our ZDX Superior Plus package deal. Following the launch of ZDX Copilot, bookings for ZDX Superior Plus grew by over 45% to almost $50 million, demonstrating the expansion potential of AI-powered merchandise.

Constructing on the success, we’re taking ZDX to the following stage by leveraging ZDX’s agentic AI expertise to automate root trigger evaluation and develop IT workflow integrations for sooner remediation and diminished decision instances. We’re additionally leveraging AI in lots of different areas, together with automated information classification; picture classification; zero day vulnerabilities, detection, and prevention; app segmentation, IoT/OT machine discovery, and extra. Our newly launched AI analytics options, together with Risk360, Unified Vulnerability Administration, Enterprise Insights, and others proceed to drive robust progress. And ACV from AI analytics practically doubled yr over yr.

To additional speed up the event of our AI options, we lately employed Phil Tee as our EVP of AI improvements. Phil was the co-founder of an AI-driven enterprise software program firm that offered clever monitoring options for DevOps and IT ops. In his position, Phil will lead an incubation group specializing in AI improvements to drive cutting-edge developments in agentic AI to additional rework our enterprise and speed up progress. AI is in every single place round us.

The discharge of DeepSeek-R1 are one highlights, developments in mannequin coaching which may make gen AI capabilities extra broadly obtainable. Somebody known as it Jevons paradox, which I agree with. The truth is, I feel that is the web second of AI, which can drive fast adoption of AI in each facet of our lives and can create a better want for higher safety. Zscaler may be very well-positioned to guard our prospects.

On the World Financial Discussion board in Davos, I met CEOs of a number of world system integrators, or GSIs. We’re seeing a sea change in GSI engagements in comparison with a yr in the past as an growing variety of them are embedding Zscaler into their community and safety transformation practices. A number of GSIs and strategic nationwide companions now think about Zscaler as certainly one of their prime strategic companions similar to Microsoft and Salesforce. In Q2, GSIs performed a important position in serving to us shut a number of offers.

For instance, we partnered with Cognizant to shut a seven-figure new brand cope with a World 2000 insurance coverage buyer who bought Zscaler for customers for 23,000 workers. And in one other instance, a big GSI helped us shut a seven-figure cope with an present million greenback plus Fortune 500 healthcare buyer. This buyer bought our ZIA, CPA, and information safety options for greater than 100,000 customers, which elevated their annual spend with us by over 350%. I’m happy to see that GSIs are leaning in and dealing intently with Zscaler and dedicating assets to drive progress.

Subsequent, let me spotlight the progress in our federal vertical. All of you might be conscious of the extremely publicized effectivity measures going down below the brand new administration in america. Incumbent safety distributors can’t save prices for a authorities, however Zscaler can and does by eliminating a number of legacy safety merchandise, together with firewalls, VPNs, NACs, DLP, VDI, and extra. Merely put, we provide higher safety at decrease price.

Having landed in practically all the cupboard stage federal companies and with important upsell alternatives nonetheless remaining, we’re well-positioned to profit from the federal government’s effectivity measures. Exterior the U.S., we proceed to make investments to develop our public sector observe, and we’re seeing outcomes. For instance, in an eight-figure TCV deal, a nationwide authorities bought Zscaler for customers to safe all the authorities workforce. It is a monumental win for Zscaler and our APJ gross sales staff, and I am humbled by the belief this nation’s authorities has put in us.

In conclusion, we’re getting into the second half of the fiscal yr with three key drivers. First, our growing gross sales productiveness. Gross sales productiveness elevated in Q2, pushed by robust demand, and I anticipate productiveness to proceed to enhance within the second half. Second, we’re driving zero belief in every single place in our prospects.

We now have launched focused campaigns to teach our prospects on how they will grow to be zero belief in every single place and escape the refresh cycle for home equipment. Third, the rising adoption of AI is driving demand throughout a number of dimensions, together with information safety and our AI-powered safety merchandise. I absolutely anticipate to profit from these tailwind. As I discussed earlier, with robust demand for our platform and rising improvements, I anticipate us to attain $3 billion or extra in ARR by the top of the fiscal yr.

I look ahead to sharing extra about our improvements and platform technique at Zenith Stay in June. Now, I might like to show over the decision to Remo for our monetary outcomes.

Remo E. Canessa — Chief Monetary Officer

Thanks, Jay. Our Q2 outcomes exceeded our steerage on progress and profitability. Even with ongoing buyer scrutiny of enormous offers, income was $648 million, up 23% yr over yr and up 3% sequentially. From a geographic perspective, Americas represented 54% of income, EMEA was 30%, and APJ was 16%.

Our annual recurring income, or ARR, exiting Q2 surpassed $2.7 billion. ARR progress was roughly 23% yr over yr. Remaining efficiency obligations, or RPO, grew 28% from a yr in the past to $4.615 billion. Present RPO was roughly 49% of the overall RPO.

Complete calculated billings grew 18% yr over yr to $743 million. Our unscheduled billings comprised of recent, upsell, and renewal billings grew over 25% yr over yr. Our calculated present billings grew 19% yr over yr. We ended Q2 with 620 prospects with over $1 million in ARR and 3291 prospects with over $100,000 in ARR.

This continued robust progress of enormous prospects speaks to the strategic position we play in our prospects digital transformation journeys. Our 12-month trailing dollar-based web retention fee was 115%. Whereas good for our enterprise, our elevated success in promoting larger bundles promoting a number of pillars from the beginning and sooner upsells inside a yr can cut back our dollar-based web retention fee sooner or later. There could possibly be variability on this metric on a quarterly foundation as a result of elements I simply talked about.

Turning to the remainder of our Q2 monetary efficiency, whole gross margin of 80.4% compares to 80.8% within the year-ago quarter. Our whole working bills elevated 2% sequentially and 19% yr over yr to $380 million. We proceed to generate important leverage in our monetary mannequin with working margin of roughly 22%, a rise of about 200 foundation factors yr over yr. Our free money circulate margin was 22%, together with information middle capex at 2% of income.

We ended the quarter with roughly $2.9 billion in money, money equivalents, and short-term investments. Subsequent, let me present our steerage for Q3 and full yr fiscal 2025. As a reminder, these numbers are all non-GAAP. For the third quarter, we anticipate income within the vary of $665 million to $667 million, reflecting year-over-year progress of 20% to 21%.

Gross margins of roughly 80%. I want to remind buyers that we’re introducing new merchandise which might be experiencing robust progress and are optimized for sooner go-to-market fairly than margins. This can proceed to affect our gross margins. We plan to optimize new merchandise for margins over time as they scale.

Working revenue within the vary of $140 million to $142 million; web different earnings of $18 million; earnings per share within the vary of $0.75 to $0.76, assuming a 23% tax fee and 163 million absolutely diluted shares. For the total yr fiscal 2025, we anticipate billings within the vary of $3.153 billion to $3.168 billion, reflecting a year-over-year progress of roughly 20% to 21%. For Q3, we anticipate billings progress to proceed to enhance and encourage modeling 200 to 260 foundation factors of sequential billings progress; income within the vary of $2.64 billion to $2.654 billion, reflecting year-over-year progress of roughly 22%; working revenue within the vary of $562 million to $572 million; earnings per share within the vary of $3.04 and to $3.09, assuming a 23% tax fee and roughly 163.5 million absolutely diluted shares. We anticipate our free money circulate margin to be roughly 24.5% to 25% with a big market alternative and prospects more and more adopting the broader platform we’ll make investments aggressively to place us for long-term progress and profitability.

With that, operator, you could now open the decision for questions.

Questions & Solutions:

Operator

[Operator instructions] Our first query comes from Saket Kalia with Barclays. You might proceed.

Saket Kalia — Analyst

OK, nice. Hello, guys. Thanks for taking my questions right here, and good quarter. Jay, possibly for you, you realize, you dug into a few merchandise in your ready remarks which might be clearly doing properly, like information safety.

However possibly the higher-level query is, how a lot of your small business is type of coming from ZIA and safe internet gateway replacements versus broader platform merchandise in combination? Once more, I do know we have talked about sure merchandise, and we have gotten information factors on how they’re performing. However curious if you happen to may discuss how the enterprise is trying from that perspective of form of ZIA and every thing else that form of kinds the platform.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

Certain. As you realize, Saket, ZIA was a place to begin. We begin taking out Blue Coat and different internet gateways. There’s nonetheless a number of Blue Coat left on the market.

However after we begin, we very often begin with a platform that features ZIA, ZPA and ZDX. So, ranging from possibly coming from VPN alternative or Blue Coat platform turns into the extra widespread factor. The truth is, lately, the zero belief department is changing into an vital space as a place to begin. The attention-grabbing quantity this quarter was that 57% of shoppers on our zero belief department, our new brand prospects.

So, expanded platform is an excellent factor. Blue Coat proxies as a place to begin, VPN as a place to begin. We’re taking zero belief in every single place, customers, branches, and the cloud.

Saket Kalia — Analyst

Obtained it. Very useful. Thanks.

Operator

Thanks. Our subsequent query comes from Brad Zelnick with Deutsche Financial institution. You might proceed.

Brad Zelnick — Analyst

Nice. Thanks a lot for taking my query. Jay, it is good to see the go-to-market transformation coming to life. And I feel we see it within the power in 1 million-plus prospects and rising product ARR progress.

And Jay, I do know you are not somebody who’s simply glad. What do you see that proves out that the go-to-market adjustments are making a distinction and that these adjustments are sturdy? Thanks.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

Yeah. So, Brad, initially, the power of pipeline, which is a number one indicator that’s rising, that good-quality pipeline is rising. Quantity two, our new ACV is up double digits, that is crucial. After which, different metrics throughout the board, information safety is rising over 40% and so forth and so forth.

It is excellent. And the amount of engagements with C stage in massive enterprises is getting stronger as a result of the newer gross sales staff, the management is excellent and account relationships and increasing these accounts.

Brad Zelnick — Analyst

That is useful. Perhaps a fast follow-up for you, Remo. I feel your commentary round Q3 billings. It is possibly a bit of bit lighter than some anticipated, despite the fact that the total yr appears to be like nice.

Simply curious if there’s been any change to the assumptions round scheduled versus unscheduled billings timing within the again half? Thanks once more, guys. Nice job.

Remo E. Canessa — Chief Monetary Officer

Thanks, Brad. No, no adjustments. We known as out earlier than, you realize, with scheduled billings we anticipated 7% within the first half and 23% within the second half. That’s unchanged.

And likewise on the unscheduled piece, you realize, nearly stays unchanged additionally. You may see that we principally raised our steerage. So, I really feel a bit of bit extra bullish than we did earlier than. It is based mostly on our pipeline and our visibility.

As Jay talked about, you realize, issues are going properly. We’re properly positioned, and we really feel good.

Brad Zelnick — Analyst

Superior. Thanks once more.

Operator

Thanks. Our subsequent query comes from Mike Cikos with Needham. You might proceed.

Mike Cikos — Analyst

Hello, guys. Thanks for taking the questions right here. If I may simply construct off of Brad’s query on the go-to-market, it is nice to see the variety of million-dollar prospects that you simply guys added this quarter. I needed to get a way, I do know we have had Mike Wealthy there for a while now.

You are speaking about GSIs, however are you able to possibly coloration the $1 million cohort that you’ve got in mild of a few of these go-to-market initiatives that you simply guys have been engaged on now?

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

Sure. So, two greatest issues with the gross sales transformation warfare. One was the account-centric gross sales course of, and people are good outcomes. We already talked about them.

The second massive factor was world system integrators enjoying an vital position, and that is taking place. We see that. You noticed me highlighting a few offers in my earnings script the place GSI performed a really lively position to assist us drive that enterprise. They’re embedding us into increasingly more of their platform.

They’re getting increasingly more folks educated as properly. And what we’re seeing is, if you happen to actually take into consideration the 2 G2K corporations, all proper? They’re each massive alternatives for us. And there are — there’s nonetheless a 6x upsell alternative for us in our put in base itself. And even our put in base, when prospects are getting deployed, they need to take away all of the legacy stuff firewalls, VPN, all that type of stuff.

And these GSIs are enjoying an vital position to assist us. The truth is, there’s a big Fortune, I’d say, 50 firm the place ZIA, ZPA, ZDX was offered, after which a GSI is available in to additional simplify the stuff to assist us upsell further stuff. So, more than happy with the efficiency, and that is a part of our plan.

Mike Cikos — Analyst

Glorious. Thanks.

Operator

Our subsequent query comes from Shrenik Kothari with Baird. You might proceed.

Shrenik Kothari — Analyst

Congrats, everybody. Jay, Remo, thanks for taking the query. So, Jay, you emphasised the zero belief in every single place as a core strategic initiative. You guys have fairly bold targets, you mentioned mandate to triple that determine in 18 months.

Simply curious, as you are seeing this upsell {hardware} refresh cycle as a chance, are you able to discuss — is that going to be your anchor level when it comes to CR conversations, trying to exchange the getting old stacks? Are you able to speak concerning the traction we have seen with prospects who’re prepared to choose out of the legacy stack towards their full stack you addressed? And I’ve a fast follow-up for you all.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

Sure. So, our prospects have been telling us for fairly a while that your zero belief change is fantastic, however your department nonetheless wants some assist. I bought some firewalls from routers from SD-WANs sitting the department, creating complexity. So, our zero belief department initiative is to simplify it, so one easy equipment removes every thing.

The department goes darkish from the web, it could’t be found. It can’t be attacked. And the fee and complexity goes low. There was a CXO change summit we had lately, and we requested a survey query to 100 attendees.

And the query was, “Are you able to embrace zero belief department, which turns into like a restaurant, with none firewall and some other stuff? Ninety-six p.c of all CXOs, mentioned they’re able to embrace it. It really exceeded all of my expectations. So, the mixture of zero belief department with zero belief consumer in every single place, with zero belief cloud turns into an excellent story. Our prospects adore it.

Shrenik Kothari — Analyst

Thanks Jay. Simply shortly on the NRR bettering to 115%. Simply are you able to present extra perception? You talked about the elevated variety of rep gross sales. Reps is bettering.

You are speaking concerning the bettering deal touchdown versus deal enlargement of velocity and – are you guys maximizing upfront deal sizes versus extra longer-term enlargement? And the way does it play into the NRR? Thanks.

Remo E. Canessa — Chief Monetary Officer

Yeah. We do not information on NRR a bit. All of the stuff you talked about, all come into play. Offers are getting larger.

You realize, our upsell as we talked about earlier than, we anticipated over 65% upsell this yr, and that is what, you realize, principally got here in at in the course of the quarter. We’re touchdown larger offers. You may see with the big buyer emphasis with the businesses better than $1 million. So, all these elements and likewise the rising merchandise and new merchandise, increasing the platform, all of them come into play.

The 115%, you realize, is an impressive metric. However once more, it is one thing that we have talked about earlier than. We actually do not take a look at aside from on this name. We attempt to drive our top-line principally on new ACV, whether or not it is upsell or new.

Operator

[Operator instructions] Our subsequent query comes from Roger Boyd with UBS. You might proceed.

Roger Boyd — UBS — Analyst

Superior. Thanks for taking the questions. Jay, I needed to return to the eight-figure APAC authorities deal. I feel you talked about type of them going wall to wall with the Zscaler for customers.

I might love to listen to any specifics you may give on the ROI with this buyer, type of the dimensions of the upsell there, and what you are changing. After which, as you consider the pipeline for world authorities offers, this appears like type of a landmark deal for you guys. Simply would love any coloration on how you might be eager about the chance with different governments. Thanks.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

Sure, you mentioned it proper. It was a landmark deal for us. zero belief is essential for governments. And by the best way, this deal wasn’t pushed by ROI.

This was pushed by cybersecurity having higher safety. And what are we inserting — this deal contains zero belief entry for customers, whether or not they’re at house or within the workplace, whether or not they’re accessing web SaaS functions or their inside functions. So, primarily a important a part of our platform, beginning with its whole authorities workforce, which may be very happy with. We’re engaged with a number of different U.S.-friendly international locations to pursue this factor.

However a few of these authorities offers can take longer, however it’s good to see that we’re getting traction. And we have executed a number of work within the U.S. authorities as properly, which I should not neglect about. So, we see it as alternatives, however authorities offers is usually a little bit, what do you name it, bulk — lumpy and might take time, nevertheless it’s fairly distinctive for us.

We’re very, very happy with it.

Operator

Thanks. Our subsequent query comes from Brian Essex with JPMorgan. You might proceed.

Brian Essex — Analyst

Hello, good afternoon. Thanks for taking the query. Jay, I used to be questioning if I may dig into possibly the feedback that you simply had on ZDX. And would like to understand how you are seeing prospects method agentic safety.

And on the information safety facet, is your platform obviating the necessity for information discovery and classification, or are you coming in on prime of that? How are enterprises viewing getting their information property so as earlier than they pursue, you realize, agentic utilization? Thanks.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

Certain. It is an excellent query. Usually, we like to present prospects flexibility and selection the place they will. Knowledge classification is a tough downside.

AI really helps rather a lot in doing information classification. So, we do use gen AI expertise for classification fairly a bit. The truth is, for fairly a while, as your visitors goes out to the web, on the fly at our ZIA, we now have been doing classification with our prospects for coverage enforcement. But additionally, we are able to scan information sitting in a single drive share level or wherever else could also be and might do classification with our AI expertise.

Having mentioned that, we additionally work together with information classification which may be executed by different suppliers. So, we are able to take that classification and tax and utilized a coverage enforcement as a result of we’re sitting within the visitors path. The one manner that information can leak out is that if it goes via us and through the pure coverage enforcement level. Our information safety resolution has been rising very properly.

Our ACV, for instance, has grown 40% yr over yr. So, it is a good alternative, and it isn’t solely information in-line. We’re doing information at RASP and SaaS software. We’re doing DSPM for information within the cloud.

We’re doing information safety and endpoint information scale for e-mail utilizing single coverage engine, which is what prospects like us as a result of they might fairly not purchase 5 totally different level merchandise.

Brian Essex — Analyst

Obtained it. Tremendous useful. And nice to see the higher gross sales productiveness. Admire it.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

Thanks.

Operator

Our subsequent query comes from Gregg Moskowitz with Mizuho. You might proceed.

Gregg Moskowitz — Analyst

Thanks very a lot for taking the query. The zero belief in every single place marketing campaign seems to be off to an excellent begin. I notice it is early, however I used to be curious if you happen to’re seeing extra adoption thus removed from small, midsized, or bigger enterprises. After which additionally from what you — up to now, how does the dimensions of zero belief in every single place lands? How does that examine to Zscaler’s typical web new brand?

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

Proper. So, initially, our focus stays bigger enterprises. There’s a pure progress taking place on the decrease finish of the enterprise which retains on going, however main focus has not modified. I used to be very completely happy to see that over 130 enterprises.

We have gone in with zero belief in every single place. And for that case, we primarily wish to say customers are zero belief, regardless of the place they’re sitting. At house or a espresso store or at your headquarters, your department is zero belief, your cloud is zero belief. That is actually the absence of zero belief in every single place.

Now, what we additionally — we’re bullish. We expect we are able to triple this quantity within the subsequent 18 months. And that is based mostly on the shopper suggestions at reception we’re getting. So, we expect we now have a brand new make, an enormous distinction within the department space, I am excited with the contemporary alternative.

A CIO I used to be speaking to mentioned, “I am glad you are transferring ahead as a result of I don’t need to undergo the refresh cycle of firewall another time.”

Gregg Moskowitz — Analyst

Very useful. Thanks, Jay.

Operator

Thanks. Our subsequent query comes from Fatima Boolani with Citi. You might proceed.

Fatima Boolani — Analyst

Good afternoon. Thanks for taking my questions. Remo, you made a particular reference to the truth that there may be ongoing scrutiny on massive offers. So, needed to ask you each really a really stratospheric query.

Your complete enterprise and the enterprise mannequin and the pipeline is changing into extra tethered and listed to bigger offers. You are speaking about scrutiny and then you definitely layer on the truth that there are segments of the financial system and possibly the worldwide financial system which were a bit of bit in flux by advantage of commerce wars and tariffs and issues like that. I needed to get your perspective on how that is possibly serving to speed up the dialog for you, if in any respect, simply type of given that might have implications for a way sectors of the financial system take into consideration reworking their networks and their safety structure. And, you realize, any type of anecdotal suggestions or coloration you bought really out of your CXO summit that you simply referenced earlier? I’d like to type of get some real-time suggestions from how prospects are internalizing a few of this with their budgetary aspirations and expectations.

Thanks.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

So, Fatima, let me begin. From what we all know up to now, we anticipate restricted direct influence from tariffs to our enterprise. Now as we mentioned in our remarks, macro continues to be tight. Sure, there’s massive deal scrutiny, budgets for ITR, tight generally, however not for cyber.

Now ,if I can go to a CIO or CISO and discuss zero belief cybersecurity, they get . However then if I can say, we’ll do that and cut back price for you. The curiosity turns into double. So, these two issues collectively are literally driving our pipeline.

If we did not have these two elements, the pipeline will battle. However then, it takes no more to shut the pipeline. For those who shut the pipeline, they really need to see price financial savings. And we now have been refining and refining our enterprise worth evaluation to create business-ready instances for CFO approval.

And that stuff helps us. So, after we go in and say we’re going to assist you to with zero belief in every single place, that actually means a much bigger a part of the platform. The fascinating factor is the extra financial savings they need, the larger a part of the platform they should purchase, OK? It turns into an attention-grabbing mixture. However if you happen to can see the — present the saving and might inform them in a single quarter, this goes out; in two quarters, this goes out; three quarter, this goes out.

CXOs grow to be primarily a champion, and so they push to get offers executed. That is actually what we’re seeing. It’s serving to us. And GSIs are additionally serving to us as a result of they arrive alongside as companions to actually drive that transformation.

Somebody has to try this work, and so they’re good companions for us. Remo?

Remo E. Canessa — Chief Monetary Officer

Yeah, I imply simply to comply with on a few of, you realize, Jay’s feedback. For those who check out our information for the second half, good pipeline, robust pipeline, Jay known as out, you realize, stronger gross sales productiveness, which we’re seeing, you realize, demand for the product, we’re not baking in a powerful or banking, you realize, a powerful federal within the second half with the uncertainties which might be at the moment going. Having mentioned that, we’re very well-positioned. We’re in 14 of the 15 cupboard companies.

And we really feel that our product platform associated to the efficiencies and prices and safety, however I imagine we’re properly positioned. However once more, as Jay talked about, these forms of offers are lumpy. The negatives, as we known as out the macro, the roll macro and, you realize, deal scrutiny. Jay name that additionally tariffs.

We’re a service firm. So, we do not imagine tariffs will have an effect on us or important influence at this level, except issues change. So, we’re well-positioned. However these are type of the pluses and minuses associated to our information for the second half going ahead.

Fatima Boolani — Analyst

Thanks.

Operator

Our subsequent query comes from Joseph Gallo with Jefferies. You might proceed.

Joseph Gallo — Analyst

Hello, guys. Thanks for that query. Remo, as a follow-up to your earlier scheduled billings feedback, does that acceleration peak in 4Q? Or how ought to we take into consideration that piece of the enterprise as we transfer into fiscal ’26? Thanks.

Remo E. Canessa — Chief Monetary Officer

Yeah. So, we’re not making a remark for fiscal ’26, nevertheless it does enhance in This fall.

Joseph Gallo — Analyst

OK, thanks.

Operator

Thanks. Our subsequent query comes from Matt Hedberg with RBC. You might proceed.

Matthew Hedberg — Analyst

Hello, thanks for taking my query guys. Congrats on the outcomes. Jay, I needed to return to your feedback about agentic and ZDX. And I suppose, I am curious, like a pure match there.

However I suppose I am questioning like as prospects roll-out brokers, proper, I feel lots of people assume id, they could assume, you realize, what points of cloud safety. You realize, what Zscaler’s position in defending prospects’ brokers as a result of it looks as if that is clearly a large development that is very earl?

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

That is appropriate. So, the query typically will get requested is, if brokers are used, the headcount comes down, what is the influence on fee-based mannequin? If that is what your query is. We have not seen any massive adjustments, however I do imagine a few of these adjustments are coming. It doesn’t matter what occurs to customers, there might be extra communication amongst customers, machines, workloads, and, sooner or later, extra with AI brokers.

Agent — AI brokers is simply one other entity for us. We’re on the zero belief change to implement coverage for all communications. Extra communication means extra visitors. Meaning extra worth delivered to our prospects.

We anticipate our pricing to evolve as brokers visitors grows as properly. Prior to now, we now have seen buyer headcount discount occasionally. And generally, they can sustain, whereas develop our ARR by upselling further modules. We expect that we now have an lively position to play to safe agent communication, but in addition utilizing AI agent expertise in ZDX and information safety to assist our prospects.

And for that, we are able to cost further {dollars} as properly. And we now have been charging, for instance, ZDX the place we began promoting copilot, now we’re transferring to agent. They’re capable of cost greater costs for these merchandise that Zscaler has.

Matthew Hedberg — Analyst

Thanks Jay.

Operator

Our subsequent query comes from Joshua Tilton with Wolfe Analysis. You might proceed.

Joshua Tilton — Analyst

Hey, guys. Thanks for sneaking me in right here, and I am going to echo my congrats on a strong quarter as properly. I’ve a two-parter, nevertheless it’s alongside the strains of the gross sales productiveness feedback. Good to see the enhancements this quarter.

I suppose what I am attempting to grasp is, is the gross sales productiveness that you simply noticed within the quarter type of forward of what you have been anticipating as we entered this yr? After which, if I look to the stability of the yr, like the place does gross sales productiveness has to go from right here as a way to hit the up to date billings steerage that you simply gave us for the yr immediately?

Remo E. Canessa — Chief Monetary Officer

Sure. I imply it’s anticipated. Principally, you realize, what we known as out on our name earlier than is that we anticipated gross sales productiveness to extend all year long, and we did see that in Q2. What I can say concerning the gross sales productiveness, I’d anticipate it to proceed to go up.

I do not need to give any extra coloration than that — than the gross sales productiveness helps our steerage, and we really feel our steerage is prudent.

Joshua Tilton — Analyst

Thanks.

Operator

Our subsequent query comes from Grey Powell with BTIG. You might proceed.

Grey Powell — Analyst

All proper. Nice. Thanks for taking the query. Sure, I simply need to say congrats a number of the good outcomes.

However, sure, so I needed to follow-up, I feel it was Greg’s earlier query concerning the firewall refresh. Are you able to discuss a number of the focused advertising you are doing with present prospects to get in entrance of the firewall refresh? After which, simply how ought to we take into consideration sizing the chance? And I do know it’s early days, however when ought to we really begin to see it materialize within the leads to a extra significant manner? I am guessing it is actually someday subsequent yr, however simply needed to get some normal ideas round that.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

Proper. So, initially, the department resolution we launched, zero belief department, is the underpinning of a driver to interchange firewalls. So, we aren’t actually centered on the information middle inside the information middle, however we now have massive, massive enterprises. They have a whole lot of hundreds of branches on the market.

Most of them are asking for, “How do I make my department like a restaurant?” Your department needs to be no extra difficult than you sitting at house and with the ability to entry functions. That is actually the disruptive and easily a expertise of bringing the desk. So, our prospects’ present prospects immediately have some type of firewalls, some type of routers or some type of SD-WAN with firewalls sitting on the market. And so they’re searching for us to interchange it.

So, we grow to be a single level to gather information and get it to our change and handle it. That is actually what’s driving. So, the firewalls which might be sitting within the department workplace are our main goal. Campus turns into the following pure factor for us.

What are we doing to succeed in our prospects? We do not have 200,000 SMB prospects of this. We’re coping with 8,000 to 9,000 prospects, and the highest primarily 30% to 40% of them are good, massive enterprise measurement. And we now have these, you realize, account-based groups. These groups are in contact with the shopper.

They provide the advertising materials, collateral advantages and a few advertising campaigns to succeed in out to our prospects, webinars, a number of the CXO summits we’re doing. There’s plenty of methods to have interaction with them, get the suggestions and get them transferring on new options. So, it is working properly. We talked a few 57% off.

Prospects who purchased zero belief department are new prospects. That is thrilling for us. What’s telling me is that – our zero belief department helps us develop our new buyer brand base.

Grey Powell — Analyst

OK, that is very useful.

Operator

Our subsequent query comes from Tal Liani with Financial institution of America. You might proceed. Tal, your line is now open.

Tal Liani — Analyst

Right here we go. Sorry. I used to be on mute, I used to be speaking to myself. Are you able to hear me now?

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

Sure.

Tal Liani — Analyst

OK. Thanks, guys. I need to perceive the idea of zero belief, what it means for you. That means, zero belief is an idea I am attempting to interrupt it right down to merchandise.

So, whenever you discuss zero belief department, whenever you discuss zero belief cloud, virtually, what does it imply? What are you promoting to the shoppers? And second, how does it change the aggressive panorama. That means, if we — somebody is within the department and somebody is within the cloud, and there are aggressive options. If I rewind again two years, you competed on SASE, how does it change the aggressive panorama whenever you concentrate on zero belief?

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

To start out with, by the best way, SASE will not be zero belief. SASE is safe entry based mostly on SD-WAN, anybody falls below SASE, each firewall VPN, any community is basically SASE. In our which means, zero belief begins with, no, not being on the community, not having lateral motion left and proper, until our zero belief department a buyer had a department. That they had an SD-WAN or MPLS connection.

And contained in the department, they’d both VLANs for segmentation or they’d east-west firewalls. We remove all of that utilizing the air hole expertise, we undergo acquisition. We’re doing segmentation contained in the department and 0 belief manner with out firewalls with out VLANs. From the department to the huge space community or web, our zero belief equipment makes the zero belief connection means no lateral motion, no SD-WAN.

A given social gathering within the department will get linked to an software via our zero belief change of switchboard, no lateral motion. That is the great thing about zero belief department. Zero belief cloud means entity sitting within the cloud can speak to one another with out transferring laterally on the community. So, our switchboard, our change is sitting within the cloud.

You may say workloads in VPC A can solely speak to workloads in VPC B. None of those north-south however east-west firewalls wanted within the cloud as properly. That is the thrilling a part of it. Did that make sense?

Tal Liani — Analyst

Sure. And whenever you concentrate on it, the second a part of my query was, what’s your competitors? Who do you meet that gives the identical type of worth and it’s a must to compete with them.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

Our competitors is legacy, a lot of firewall distributors, in some instances, in a department, NAC distributors, free land distributors, none of that’s wanted. Legacy versus the brand new zero belief, we’re doing stuff.

Operator

Thanks. Our subsequent query comes from Peter Weed with Bernstein. You might proceed.

Peter Weed — Analyst

Thanks, and glad to listen to the continued progress, notably with upsells. Clearly, NRR increasing is fairly thrilling and possibly sign across the gross sales efficiency. The one factor, although, that it additionally does appear to point is the contribution from web new prospects has been declining. How ought to we take into consideration that trying ahead? Is {that a} short-term deceleration and would choose again up? And so, whenever you put these two issues collectively, we may get even stronger progress? Or ought to we expect decrease type of contribution from web new prospects trying ahead?

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

Proper. So, if you consider it, if you end up a younger firm, you might have only a few prospects. It’s a must to have new brand solely. As you develop, after we bought 45-plus p.c of Fortune 500 corporations and have a really massive platform, there is a ton of upsell alternative.

Internally, Remo and I and our CRO we debate, can we get particular push to new versus upsell? We actually need new ACV coming from upsell or new logos. So, immediately, with a big buyer base, upsell is sitting about two-third, Remo, proper? The brand new brand is smaller. And through the years, I’d anticipate upsell to maintain on going, up from there onwards as a result of we’ll have a bigger put in base of shoppers. I feel it’s a good factor.

Having mentioned that, we do have a large buyer base prospects to go after. There are about 55% of Fortune 500 corporations who aren’t prospects but. They’re a chance for us, whether or not you go to the following stage of shoppers. You go to G2K.

They’re about two-third of them which might be good for us. So, we see alternatives, each new logos and as properly upsell and the platform retains on rising and rising.

Remo E. Canessa — Chief Monetary Officer

The one factor that I need to add with, you realize, what Jay is mentioning is that we now have a 6x alternative in our present base on the consumer facet solely, not together with the brand new prospects. Our focus, if you happen to check out it, you realize, for the World 2000, our penetration is over 35% at the moment. And for the Fortune 500, it is over 45%. You realize, the arduous half is touchdown these prospects.

However when you’re in and also you construct their belief, you might have the power to upsell. So, Jay is 100% appropriate. As you go ahead — as we go ahead as an organization, and at the moment, we mentioned we now have 65% upsell in, you realize, this fiscal yr. I’d anticipate that proportion to extend our penetration within the G2K and Fortune 500 may be very, crucial.

And continued product introduction and promoting throughout our platform actually bodes properly for Zscaler. However I feel we’re simply in a terrific place. And if you happen to check out our penetration into the G2K and Fortune 500, it is fairly spectacular.

Operator

Thanks. And our final query comes from Keith Bachman with BMO. You might proceed.

Keith Bachman — Analyst

Hello. Thanks very a lot. Jay, I needed to direct this to you. And at a excessive stage, I needed to dig a bit deeper on the way you assume AI adjustments your aggressive positioning versus a number of the, you realize, panorama on the market.

And if I modify the query round a bit of bit, you might have in your slide deck, a AI and analytics resolution is a $2 billion TAM relative to $96 million. So, it is a comparatively small half. Now, information safety, we may argue, is a part of that as properly, which is far more significant. But when I break the query down once more into two elements, is I simply need to perceive, from a expertise perspective, how do you modify your options to seize the advantages of AI? And is that embedding into present merchandise? Or is it providing new merchandise downstream or each? Thanks.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

It is a very, excellent query. Sure, level you made AI analytics. It is a small piece about a few merchandise which might be already on the market, they’re rising properly. That was a place to begin.

But when you consider AI, AI is simply nearly as good as the information that powers with zero belief in every single place or zero belief change platform as we’re getting over 5 billion transaction logs a day. That is the biggest safety cloud wherever on the market. So, that is a one North Star. Now, taking that information and constructing merchandise round it turns into a subsequent massive North Star for us, we acquired Avalor, which has grow to be the information material expertise for us to take all that information and harmonize it, synthesize it, dedupe it, and construct worth round it.

What’s the worth that may be constructed round it? We now have already launched issues like Unified Vulnerability Administration. We simply launched asset threat administration. There are increasingly more merchandise which might be going to come back round breach prediction, round safety operations and alike. So, you see plenty of merchandise unfolding, which might be powered by AI engine to try this half.

That is one half. The second half finally ends up being taking digital expertise and utilizing extra AI and AI agentic expertise to make it extra highly effective. ZDX is already a reasonably sizable enterprise, however it’s going to get accelerated due to AI. Third space is information safety.

We now have been performing some excellent information classification already. However along with that, the No. 1 query CIOs ask us is, “My firm is utilizing AI, public AI reminiscent of ChatGPT, Gemini, or others, how can we be sure that my information would not leak?” We’re sitting within the visitors previous the web. We’re utilizing our DLP to verify they will use it safely.

Then finish prospects are utilizing non-public AI software, constructing their very own LLM fashions. We’re constructing an LLM proxy to have the ability to examine and implement coverage. So, a number of alternatives for us. What we imagine is the mixture of zero belief change to safe prospects and generate all of the logs after which use AI to energy it turns into in all probability essentially the most compelling mixture.

Keith Bachman — Analyst

Excellent. Thanks, Jay.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

Thanks.

Operator

Thanks. I’d now like to show the decision again over to Jay Chaudhry for any closing remarks.

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

Nicely, thanks all for becoming a member of us for this name. I look ahead to seeing you in one of many many investor conferences we plan to attend. Thanks once more.

Remo E. Canessa — Chief Monetary Officer

Thanks.

Operator

Thanks. This concludes the convention. Thanks to your participation. [Operator signoff]

Period: 0 minutes

Name contributors:

Ashwin Kesireddy — Senior Vice President, Investor Relations and Strategic Finance

Jagtar Singh Chaudhry — Founder, Chairman, and Chief Government Officer

Remo E. Canessa — Chief Monetary Officer

Saket Kalia — Analyst

Jay Chaudhry — Founder, Chairman, and Chief Government Officer

Brad Zelnick — Analyst

Remo Canessa — Chief Monetary Officer

Mike Cikos — Analyst

Shrenik Kothari — Analyst

Roger Boyd — UBS — Analyst

Brian Essex — Analyst

Gregg Moskowitz — Analyst

Fatima Boolani — Analyst

Joseph Gallo — Analyst

Joe Gallo — Analyst

Matthew Hedberg — Analyst

Matt Hedberg — Analyst

Joshua Tilton — Analyst

Josh Tilton — Analyst

Grey Powell — Analyst

Tal Liani — Analyst

Peter Weed — Analyst

Keith Bachman — Analyst

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