Unidentified Analyst : Okay, great. Sorry about that. So we were just more so wondering, can you maybe speak a little bit more on the leverage you guys recognize this quarter, and then maybe the meaningful to on the margin expansion. We know that there’s a lot of initiatives you guys are looking to implement, such as verticalization. So we just wanted to get a sense of the source of leverage performance this quarter, and how does your investment philosophy basically differ today versus three months ago, and going forward. Thank you.
Remo Canessa : So I’ll take that you. I believe, Mark, you’re talking about operating leverage. So we exceeded in revenue. Our gross margins were higher, and our operating expenses came lower. Having said that, we did hire significantly during the quarter, and we’ll continue to hire as we go forward. The key thing I think to really think about Zscaler is that we are early in this market. We have a model which we’ve talked about in the past that we can leverage related to operating profitability and free cash flow. We’ve shown 700 basis points increase and operating profitability on a year-over-year basis. In one way that’s great. And another way is we need to continue to invest. So our focus is still growth. We’ll be mindful and manage your operating profitability and free cash flow.
But this is a huge market opportunity. And quite frankly with Mike Rich on board and our focus that we’re going to have towards large accounts and penetrating large accounts. What we talked about is that we have a 6x opportunity in our existing install-based upsell new products. And also when you take a look at the penetration of the market it’s in the teens probably that Zscaler has. So large market opportunity, the ability to leverage upwards profitability and free cash flow. When you take a look at our contribution margin in years two and three, it’s over 60%. A lot of levers we can pull. And so we feel good about where we are. We’re going to continue to invest and we will manage our operating profitability. But again, I’m not concerned about hitting our operating profitability targets or free cash flow.
Our model is well-built, especially with 80% gross margins to do that. Jay, anything to contribute?
Jay Chaudhry : No, right and clear.
Operator: Our next question comes from Roger Boyd with UBS.
Roger Boyd: Thanks for taking the questions. And Bill, first off, congrats. I think pretty much summarized the best when you call it a bittersweet moment. But, Jay, I was wondering if you could expand on how you’re approaching SD-WAN and single-vendor SASE market, really how that approach differs from traditional vendors there and how you see this changing your competitive standpoint in the market for security edge in general. Thanks.
Jay Chaudhry : Yes. So we have always wanted to make sure we deliver Zero Trust solutions. SD-WAN was a good technology because it was cheaper. But D-WAN nothing for security. SD-WAN enabled the same lateral movement that the previous networks did. So, but our customers do want to simply file branches. So, they’ve been talking to us. We launched our Zero Trust for Branch solution a few months ago, and then actually there’s a January, the second release of that. So with that, we actually are making available a plug-in play appliance that you simply ship, you drop in the branch, you plug in the internet, and it’s auto-discovered, and in 15 minutes it’s up and running. No route papers to manage, no Zero Trust architecture makes it wonderful.
So our customers are very excited about it. So really, so that is our Zero Trust SD-WAN, it’s not traditional SD-WAN. So combined with our SSE and Zero Trust, so we are actually offering the full SASE solution for the first time in the market, Zero Trust SASE solution. I can tell you the number of customers who are eager and ready to roll it out is very large. We’re already working with a number of customers, but over the coming quarters, I’m very bullish with the success of this new offering. And it has the full potential to disrupt traditional SD-WANs and traditional SASEs as well.
Operator: Our next question comes from Brian Essex with JPMorgan.
Brian Essex: Great. Good afternoon, and thank you for taking the question. First of all, Bill, congratulations from me as well. It’s great to see your success. Maybe Jay for you. So we’ve seen a little bit of executive turnover here as we watch the story from the sidelines, and would love to get your sense of, and obviously some of these make a lot of sense, right? People come as a team, who believe as a team, there are relationships there, and you did a great job previously calling it out as being a factor of conservatism in your outlook. So maybe two quarter for me. One has turnover been what you expected it to be, particularly given what you’ve kind of like folded into your guidance and then two, maybe frame out what kind of or how deep and meaningful some organizational changes that Mike Rich might be driving within the organization. Thank you.
Jay Chaudhry : Okay, good. So starting with our sales attrition is down in the quarter. And second, when leaders leave, it’s natural for some people to follow. But as Zscaler has become a very big brand. We have become a top destination for top talent. And we are no short in attracting some of the best and the brightest sales leader and account manager in the market. Mike has built and he continues to build a strong team that includes many, many good leaders. Now, when it comes to organization changes, as we mentioned last time, we are evolving our sales model. There’s no wholesale any meaning significant change. We years ago, we had to move to top down conference selling at the sea level because that’s what drives transformation.
Remember I said, when I used to go and sell two box huggers, they would kind of say, please go away. So our process has been top down. It has been strategic. It’s aligned with the background, white, broad form. So we have been doing a lot of that stuff, our business value assessment and topic count stuff and stuff. So these are evolutionary changes. And they’re not really, they’re no large basket change across. So we’re pretty comfortable in evolving from where we are to get to where we need to go.
Operator: Our next question comes from Peter Levine with Evercore ISI.
Peter Levine: Great. Thank you for taking my question and Bill congrats on the opportunity. Two parts. One, can you maybe help us understand where NRR maybe troughs out, where you see that trending throughout ‘24, perhaps into fiscal ‘25? And then Jay, you had comments and maybe piggyback of last question on opportunity centric to more of an account centric sales motion. Maybe explain to us what that means and who kind of somewhat appreciated that change.
Remo Canessa : Yes. I’ll answer the NRR question and Jay can answer the opportunity question. So we don’t guide the NRR and quite frankly we only look at NRR at the end of each quarter. So we’re not providing any guidance in NRR. It can be impacted as we called out on the script related to large deals or more being bought up front, customers buying within the quarter. So, it is a metric that’s it’s going to move around. But again, we do not provide any guidance on NRR.
Jay Chaudhry : Okay. The second part, opportunity-centric versus account-centric. In an opportunity-centric model, the rep normally engages on a tactical basis, the customers are all being, where is my opportunity, where’s the deal, let me brought the deal. In the account-centric sale, we create account plans, we focus on growing the account. Now, when you are a young company, you don’t have that many customers. You naturally are opportunity-centric and it serves you well. At our stage, there will be a large number of customers. It is important for us to move towards being account-centric. We have a large platform to sell. So, once we land, working with account, creating a joint plan to expand becomes far more effective. And as we scale to $5 billion ARR and beyond, so it’s evolving to really become long-term strategic partner with the customer. We have been doing it at a small scale in some pockets of the business. Now, we want to take it across at a larger scale.
Operator: Our next question comes from Gregg Moskowitz with Mizuho.
Gregg Moskowitz: Hey, thank you very much. Bill, congrats to you. It’s been a pleasure. I have a question for either Jay or Remo. Some investors are harping just a bit on short-term billing, slowing down a little this quarter. But conversely, based on my numbers, both RPO bookings and CRPO bookings actually accelerated this quarter, which is impressive. So just to level set for all of us, because we know that these metrics can sometimes be a little noisy, is there any incremental slowdown that you have observed in any facet in the Q2 or any change in the level of execution? Thank you.
Remo Canessa : First of all RPO, CRPO is based on contracted value. And again, those did very well. Billings is actually what’s being built. So there’s always going to be differences between CRPO and RPO versus short-term billings and in billings. As the company gets bigger, it’s just the numbers are growing, but the numbers are, you’re not going to get the type of growth rates when four or five years ago. But again, from my perspective, the short-term billings growth rate of 26%, that’s very good. That’s outstanding.
Operator: Our next question comes from Keith Bachman with BMO.
Keith Bachman: Hi, many thanks. Good evening. Remo, I wanted to start with you, if I could. I wanted to turn the federal comments around a little bit. Your federal business has been very strong for a number of different quarters. And in the past, you’ve actually provided some context of growth on the federal standalone. And I just wanted to see if you could revisit that. And the lens that I’m putting on the question is, there’s been some investor concern that your federal business has been outstanding. And yet, that would suggest a that there’s been a more, a greater slowdown, if you will, on the corporate business. So I just wanted to see if you could provide any context for that. And then Jay, perhaps for you, you actually in your prepared remarks talked about, I think you said one half of your net new bookings were from new logos, if I heard you correctly, which is a very strong metric.
And I just wondered if you could characterize how, you see that unfolding new logos in particular, as you look out over the next number of quarters. Thank you very much and congrats to Bill.
Remo Canessa : Keith, I’ll start. The federal business has been good for us, because as I mentioned, we’re well positioned. We’ll provide color on the contribution of federal on an annual basis. I haven’t said that. I’ll go out and put my neck out, which maybe I should.
Keith Bachman: Bill’s leaving so it’s safe.
Remo Canessa : With Bill’s leaving, that’s right. He’s picking me at the table. We’re well positioned in federal. It really comes down to our executions. Let the numbers play the way they play. We’ll see how it plays through. But we feel good about our federal business. It’s been strong. I would not say it’s been carrying us. That’s the key comment. But it is basically a vertical that I see that we have a lot of potential. We just need to execute.
Jay Chaudhry : Yes, and non-federal is pretty good, too.
Jay Chaudhry : So, I mean, we are bullish, but both sides of the business. Moving on to the second part, yes, business, strong business coming from net new logos. It’s good in terms of future. And as customer base is getting bigger and bigger. And we have lots of platforms to sell. From a directional point of view, I think we have been planning the upsell being in the, whatever, 60%, 65% range somewhere else there Remo, and new logo, the rest. So I think that’s really how we see us moving forward. Now, part of the thing that I’m excited about is we are seeing more and more of million-dollar customers being on board. The number is about almost 500 customers that are a million dollars. Then they are trying to get to $5 million and $10 million. So we are targeting towards getting more and more customers a $1 million to $5 million to $10 million. That’s probably the bigger target than trying to get lots of new logos by count of logos.
Operator: Our next question comes from Joshua Tilton with Wolfe research.
Joshua Tilton: Hey, guys, can you hear me? Congrats, Bill, and I apologize for the amazing cafe music in the background. But the one question I have that’s been on my mind is just none of what you guys are talking about tonight kind of happens overnight. So I guess, were these sales changes factored into the initial guidance that you gave back in Q4? Or are you actually embedding incremental services and related to these changes in the outlook going forward?
Remo Canessa : I’ll speak to basically both Q2 and Q3. In Q2, we said we were expecting close rates to be slightly worse. Things came in pretty much as we thought they would. For Q3, our assumption also there’s a level of conservatism slight. Again, for Q3, they’re related to close rates.
Operator: And we’ll have our last question from the line of Peter Weed with A.B. Bernstein.
Peter Weed: Thank you. And I guess following up, maybe a couple of questions that we’ve had here, I mean, I will agree impressive to see the continued acceleration and new customer contribution. I think that had been a worry maybe a year ago whether or not that was going to continue. And obviously you’ve talked a little bit about expansion coming down with landing orders or deals up front leaving a little bit less upsell, cross-sell opportunity. Maybe help break down a couple of things. One is with a lot more new customers landing in the short term, would this be a good signal for kind of a year from now and in the short term getting some lift just because newer customers expand more. And secondly, how would you think about the opportunity around expansion?
Like what are the things that you think you can do to grow the upsell opportunity even though customers are landing larger today? What are you going to be doing to kind of create some lift there with expansion in the future?
Jay Chaudhry : Yes, so if you think about what we’ve done over the past several years since our IPO, we essentially used to start with, in fact, the ZIA, mostly business. They would ask, what about transformation? Then what about next? When ZPA came in great expansion, CDX came in, a number of new products have been coming in. So we are actually able to expand quite a bit. In fact, even today, as we said in our current customer base, we could literally take our ARR by 6x if we sold all these growth user products to our customers. So even I would even say we have no lack of product to sell. And customers are embracing broader and broader platform. If you look at all that deals, they use that talk about, reading the script and say, huh, CIS, EPS, EDX and data protection.
And so it is becoming pretty significant. So we have a big, big upsell opportunities, things like data protection. They don’t want to go with someone else to do data protection if the traffic is going through our platforms. So that’s one piece. And the second piece is everyone is talking about only users when they talk about Zero Trust safety or they talk about whatever safety. That’s only one piece. Then you talk about how about workloads? That’s a bigger opportunity. IoT/OT is a sigma opportunity. B2B, where your customer, suppliers and partners need to access information through our Zero Trust platform. So I think there’s a big opportunity on the product side, on the sales side, we keep on learning and refining some of the stuff. We do have some of the overlay specialists.
We don’t do overlay sales per se, but there are specialists in certain areas because you need to be able to go deeper. So we are definitely taking advantage of that. We are pleased with the results, but we’ll keep on tweaking and refining to get better and better results.
