Zscaler Inc

NASDAQ:ZS

Earnings Call Analysis

Solid Revenue Growth and Bullish FY2024 Outlook

Closing a strong fiscal year, the company saw a 48% rise in annual revenue to $1.6 billion and a 37% increase in billings above $2 billion. Q4 revenue surged by 43% and billings by 38%, reflecting widespread growth across all sectors and geographies. Fueled by their mission towards a zero trust security model and expanding enterprise customer base, they boasted a record number of large deals and $1 million ARR customers, further evidencing their strong market position. Data protection emerged as a significant growth pillar with ARR escalating by 60% annually, poised to reach a quarter billion. The company’s eye towards federal contracts also paid off with significant multi-year agreements. Operating margins impressively hit 19%, boosting their free cash flow margin to 22%. For FY2024, they forecast revenue between $2.05 and $2.065 billion, equivalent to approximately 27% growth.

Closing a Landmark Fiscal Year with Robust Growth

The company finished the fiscal year on a high note, reporting 43% revenue growth in Q4 and 38% growth in billings. Over the full year, these figures represented 48% growth in revenue to $1.6 billion and 37% growth in billings, surpassing $2 billion. Alongside these record numbers, the company added a record number of $1 million ARR customers and saw a significant increase in operating profit, reaching a 19% margin, doubling operating income year-over-year, and maintaining stellar 80% gross margins. Notably, their Net Promoter Score exceeded 80, indicating high customer satisfaction. Furthermore, the company achieved a milestone of doubling its annual recurring revenue to over $2 billion in just seven quarters, a feat accomplished by only a select few SaaS companies.

Expanding High-Value Customer Base and New Growth Pillars

Demonstrating the strength of their product offerings, customers are purchasing comprehensive protection solutions, leading to a 37% growth in customers with ARR greater than $1 million. The company ended the quarter with nearly 450 customers in this tier, showcasing the appeal of its zero trust solutions for users and workload protection technologies. Its data protection has become a critical growth area, already nearing a quarter billion dollars in ARR and growing at a rate of 60% per year, representing a sizable $10 billion opportunity.

Gaining a Strategic Edge in the Federal Market

The company's dual FedRAMP certifications and the push towards zero trust security mandated by an executive order are providing a significant opportunity in the federal sector. Cybersecurity remains a top priority in IT, and the company's zero trust architecture is increasingly important for corporations to meet new security reporting standards by regulators and investors, reinforcing the company's advantage in the market.

Leveraging Architectural Differentiation and New AI Capabilities

The company's unique technology architecture puts it ahead of competitors, bolstered by the pressure on companies to improve cybersecurity. Innovations such as AI-driven functionalities are available in premium price bundles, and the launch of Risk360 demonstrates the commitment to leveraging AI for both value addition and monetization opportunities. The company believes its AI initiatives will significantly contribute to its future growth and customer trust, reinforcing its position as a trusted provider for securing zero trust journeys.

Strong Financial Performance and Geographic Expansion

Revenue saw a considerable increase, reaching $455 million, a 43% rise from the previous year, and a sequential increase of 9%. The geographic distribution of revenue saw the Americas contributing the most (53%) followed by EMEA (32%) and APJ (15%). The company emphasizes that this will be the last quarter where ZPA product revenue will be separately outlined, due to a shift towards selling solution bundles.

Guidance for the Upcoming Fiscal Year

Looking ahead, the company forecasts billings to be between $2.52 billion to $2.56 billion, marking a 24% to 26% growth year-over-year with Q1 billings expected to grow around 30%. The first half is expected to contribute approximately 42% of the full-year billings guidance. Operating profit is projected to be between $330 million to $340 million, signaling a 100 to 150 basis point improvement in operating margin from the previous year. Earnings per share are estimated to range from $2.20 to $2.25, with free cash flow margin expected to be slightly above 20%.

Earnings Call Transcript 2023-Q4

[Operator]

Thank you for standing by, and welcome to Zscaler Earnings Announcement Fiscal Year 2023 Fourth Quarter Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's call is being recorded.

I would now like to turn the conference over to your host, Mr. Bill Choi, Senior Vice President of Investor Relations and Strategic Finance. Please go ahead.

[Bill Choi, SVP of IR and Strategic Finance]

Good afternoon, everyone, and welcome to the Zscaler fiscal fourth quarter and full year 2023 earnings conference call. On the call with me today are Jay Chaudhry, Chairman and CEO, and Remo Canessa, CFO.

Please note that we have posted our earnings release and a supplemental financial schedule to our investor relations website. Unless otherwise noted, all numbers we talk about today will be on an adjusted non-GAAP basis. You will find the reconciliation of GAAP to the non-GAAP financial measures in our earnings release.

I'd like to remind you that today's discussion will contain forward-looking statements, including, but not limited to, the company's anticipated future revenue, calculated billings, operating performance, gross margin, operating expenses, operating income, net income, free cash flow, dollar-based net retention rate, future hiring decisions, remaining performance obligations, income taxes, earnings per share, our objectives and outlook, our customer response to our products and our market share end market opportunity. These statements and other comments are not guarantees of future performance but rather are subject to risk and uncertainty, some of which are beyond our control. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. For a more complete discussion of the risks and uncertainties, please see our filings with the SEC as well as in today's earnings release.

I would also like to inform you that will be attending the following upcoming events in September. Goldman Sachs Communacopia and Technology Conference on September 6th, Wolfe Research TMT Conference on September 7th, and Piper Sandler Growth Frontiers Conference on September 12th.

Now I'll turn the call over to Jay.

[Jay Chaudhry, Chairman and CEO]

Thank you, Bill. We had a strong close to our fiscal year. In Q4, we delivered 43% revenue growth and 38% billings growth with balanced growth across all verticals, customer segments, and geographies. For the full year, our revenue grew 48% to $1.6 billion and billings grew 37% to over $2 billion. In addition to achieving record billings in the quarter, we also set records across several other measures. We added the highest number of $1 million ARR customers, generated record new pipeline for a Q4 and attained record operating profit margin. I'm proud of our team's achievements and humbled by the trust our customers are placing in our platform.

While the macro environment remains challenging, we are executing well. With cybersecurity as a high priority, IT executives are moving forward with zero trust initiatives driving our business. As I mentioned before, we are partnering earlier with CXOs to create compelling CFO-ready business cases with clear ROI and payback periods. As our results demonstrate, refining our high-touch sales process is helping get large deals across the finish line. We have a blueprint for delivering immediate value, which drives faster upsells, often within 12 months of initial purchase. We closed a record number of deals over $1 million ACV in Q4, driven by broad based strength across our key industry verticals.

In addition to our industry-leading top-line growth, we are generating record profitability. Due to our spending discipline, we achieved a record 19% operating margin as we more than doubled our operating income on a year-over-year basis. These outstanding results reflect the strong unit economics of our business with best in class 80% gross margins. Our innovation and customer obsession drove our Net Promoter Score to exceed 80, which is more than two times the average for SaaS companies and contributed to our high 90% gross retention rate.

I am very pleased to announce that we doubled our annual recurring revenue from $1 billion to over $2 billion in seven quarters. reaching a milestone only a select handful of SaaS companies have achieved. We secure over 7,700 customers and protect over 41 million users. With every customer looking to adopt zero trust architecture in today's world of cloud, AI, and mobility, we believe we are in the early stages of capturing a large share of our $72 billion market opportunity. We have our sights set on achieving our next goal of $5 billion in ARR. We are on a mission to take zero trust everywhere to users, workloads and OT systems and become the go-to platform for vendor consolidation, cost savings, increased business agility and better cyber and data protection.

To fully realize the business value enabled by our platform, customers are increasingly buying Zscaler for users, our complete zero trust solution for user protection, which includes ZIA, ZPA, ZDX, and data protection. In addition, we are gaining traction with workload protection powered by the same core ZIA and ZPA technology. These broader platform purchases drove 37% year-over-year growth in customers with greater than $1 million in ARR. We ended the quarter with nearly 450 such customers, including 43 customers exceeding $5 million.

Let me highlight one deal where the customer purchased all product pillars. A large global system integrator partner headquarter in Asia became a customer and adopted our platform to enable their work from anywhere strategy. They purchased ZIA, ZDX and advanced data protection for 300,000 users and ZPA for 270,000 users. They also purchased workload protection and deception technology to improve application security for their hybrid environment. This customer can now open new offices and offshore development centers much faster and more securely. They are also seeing a 50% in the time to onboard employees. As a highly distributed organization with data everywhere, data protection was a major consideration for them and accounted for 20% of the deal value.

Data protection is an important new pillar of growth for us, approaching a $0.25 billion in ARR. and growing 60% per year. We are increasingly replacing incumbent legacy DLP in the largest of enterprises with data protection representing a $10 billion plus opportunity for us. Due to targeted investments and rapid innovation, we believe our data protection solution is now at the widest and the deepest in the market, and we are taking data protection beyond users to workloads and devices.

Let me highlight a new logo win led by data protection. A large telecom operator purchased Zscaler for users for 80,000 employees. Data protection was a key driver for the win as this customer became increasingly uncomfortable with gaps left by their firewall and VPN based security, which struggles with data protection for TLS encrypted traffic that comprises over 85% of their internet traffic. With Zscaler, this customer is consolidating multiple point products and expects a payback on the purchase within nine months. Our emerging products, including ZDX and Zscaler for Workloads continued to see increased adoption and contributed 18% of our new business in fiscal 2023.

We expect emerging products contribution to increase to over 20% in fiscal ‘24. I'd like to highlight two deals that are driven by our emerging products. In a seven figure ACV upsell deal, a Fortune 50 insurance company purchased ZDX Advanced for all 170,000 users after realizing value from their initial ZIA deployment. With the Zscaler platform already in place, ZDX gets deployed quickly, reduces troubleshooting time and improves field agent productivity. We directly impact the customer's revenue and their agents' ability to earn commissions. ZDX exemplifies the platform benefits of our zero trust exchange and expands our share of customer spending beyond security.

In another seven figure ACV upsell win, a Fortune 10 healthcare company purchased Zscaler for Workloads just one quarter after making their initial purchase of Zscaler for users for all 150,000 employees. With workload protection, this customer is accelerating the plans to move most of their on-prem workloads to the cloud as well as protect workload traffic from over 9,000 locations. Lastly, let me highlight our success in the federal vertical. 12 of the 15 cabinet level agencies are our customers, and we are starting to see larger awards from these agencies. Let me highlight one such agency wide deal.

We were awarded a multiyear contract from an agency with more than 100,000 users. The value of this contract will be realized over time based on deployment with the field units. Against this award, we received a mid seven figure ACV task order for ZIA and ZPA. This customer chose Zscaler over firewall vendors because our cloud native architecture delivers better security and user experience, all while meeting FedRAMP requirements. We remain the only cloud security service to have two key products at the highest level of FedRAMP certification. These certifications and the executive order for zero trust security are driving a significant opportunity for us in the federal market.

Next, let me discuss some key industry trends. Cybersecurity remains the number one IT priority and having the right security architecture is fundamental to reducing cyber risk. According to our latest Zscaler ThreatLabZ VPN Risk Report, nearly half of enterprises reported they were targeted by cyber attackers who exploited a VPN vulnerability, and a third of enterprises fell victim to ransomware attacks within the past year. Growing cyber threats, including ransomware, are driving IT leaders to transform security from legacy network security to zero trust architecture. True zero trust security can't be built by spinning up a bunch of virtual firewalls and VPNs in a public cloud.

Do you know any VPN vendor whose products have not been compromised? Our architectural differentiation gives us long term advantage. As you may have seen, investors and regulators are increasing pressure on companies to improve cyber security. With the new SEC requirement to report a material security incident in four business days, there will be increased executive and Board level focus on cybersecurity. Zscaler zero trust exchange platform delivers comprehensive security controls for visibility and fast reporting, each of which is now a must have for meeting corporate governance requirements.

In this environment, customers cannot risk transformational and mission critical projects with immature offerings from unproven vendors. Both legacy vendors and newcomers in the security industry have tried to mimic our messaging. The reality is that no vendor comes close to providing a depth of functionality and level of performance at our scale. Good enough in cybersecurity is never good enough.

Next, let me discuss AI, which is top of mind for customers and investors. Generative AI has tremendous potential to unlock insights, improve employee productivity and solve complex problems. However, the risk of data loss and issue of data sovereignty are limiting the potential of this new technology. To address these concerns, we already delivered data protection capabilities that prevent the leakage of sensitive data through AI prompts and appropriated into public training models. For example, our browser isolation session would not let employees paste or type any sensitive information into GenAI prompts. This not only enables employees to use AI, but also do so in a secure manner for enterprises.

Our engineering teams have innovated rapidly on new AI driven functionality that's available in our premium price bundles. such as auto classification of unstructured data for advanced data protection and auto segmentation of applications for zero trust access. Second, we will have new products based on AI that will provide significant upsell opportunities with our customers. We recently launched Risk360, which enables executive teams and boards to better understand the risk posture of their organizations and provides unparalleled visibility with up-to-date security status and corrective actions they can implement in a timely fashion.

Using AI, I believe we will be able to use our unique dataset to also predict and prevent most of today's ransomware and other sophisticated attacks on our customers. AI driven cyber insights and prevention has the potential to add tremendous customer value. And we believe we can monetize that opportunity. Zscaler has AI experts and data scientists and valuable, anonymized private data to customize and train LLM models for the security domain. Based on a proxy architecture, our Zero Trust Exchange plus exchange like a private switchboard that captures all communication logs. we have the largest inline security cloud, inspecting over 320 billion transactions daily with transactions doubling every 18 months. These logs provide more than 500 trillion signals per day that feed our AI models for better detection of user and application traffic anomalies, resulting in a positive network effect of superior threat protection for our customers.

We have been investing in AI for quite a while including our first AI acquisition in 2018, and we will continue to invest in fiscal ‘24 for rapid AI innovations, cloud enhancements, and go-to-market to take our AI solutions to the market. All investments will be made within the envelope of margin guidance that Remo will discuss.

In closing, we are excited about the opportunities ahead. We have a track record of building and growing new innovations like ZDX, data protection and Zero Trust of Workloads, and we are now turning our attention to AI. We believe these new products will contribute increasingly to our future growth. Our business value message is resonating in this challenging macro environment, and more customers are adopting our broader platform to consolidate multiple point products. We believe customers trust Zscaler more than any other provider for securing the zero trust journey. We have grown our global team to nearly 6,000 employees with a mission to secure the hyper connected world of cloud AI and mobility.

I'm extremely proud of the strong growth and profitability we delivered in fiscal ‘23. I want to thank our employees and our partners for their tireless efforts and commitment to our customer success. We will invest aggressively to delight our customers and capture the large opportunity ahead of us while continuing to deliver operational excellence.

Now I'd like to turn over the call to Remo for our financial results.

[Remo Canessa, CFO]

Thank you, Jay. We are pleased with our strong performance in Q4 and solid execution, even with ongoing customer scrutiny of large deals, Revenue was $455 million, up 43% year-over-year and up 9% sequentially. ZPA product revenue grew 57% year-over-year. This will be the last quarter that we break out ZPA revenue separately as we're increasingly selling solution bundles that involve multiple product pillars. From a geographic perspective, Americas represented 53% of revenue, EMEA was 32% and APJ was 15%.

For the full year, revenue was $1.62 billion, up 48% year-over-year. Our total calculated billings in Q4 grew 38% year-over-year to $719 million. On a sequential basis, total billings grew 49% quarter-over-quarter. Total billings benefited from a $20 million upfront billing on a multiyear deal. As a reminder, our contract terms are typically one to three years. We primarily invoice our customers one year in advance. Our calculated current billings grew 33% year-over-year and 42% quarter-over-quarter. From a vertical perspective, we saw strong growth across our key verticals.

Our remaining performance obligations or RPO grew 35% from a year ago to $3.51 billion. The current RPO is approximately 49% of the total RPO. We ended the year with 449 customers with greater than $1 million in ARR, adding a record 49 $1 million ARR customers in the quarter. The continued strength of this large customer metric speaks to the strategic role we play in our customer's digital transformation initiatives. We also ended the quarter with 2,609 customers with greater than a $100,000 in ARR. Our 12-month trailing dollar based net retention rate was 121% in Q4.

Turning to the rest of our financial performance. Total gross margin of 80.7% compares to 80.2% in the prior quarter and 81.6% in the year ago quarter. Higher public cloud usage for emerging products drove the year-over-year change in gross margin. As Jay mentioned, emerging products are growing as a percentage of our new business and contributed 18% of new ACV in fiscal 2023 compared to 14% in fiscal 2022.

Moving on, our total operating expenses increased 3% sequentially and 27% year-over-year to $281 million. Due to our focus on spending discipline this year, we generated significant operating leverage in our model, with operating margin reaching 19%, an increase of approximately 700 basis points year-over-year. Our free cash flow margin was 22%, including data center CapEx of approximately 6% of revenue. For the full year, our operating margin was 15% and free cash flow margin was 21%.

We ended the quarter with over $2 billion in cash, cash equivalents and short-term investments. In August, we completed an assessment of the useful lives of our servers and network equipment. With advances in technology and efficiencies in how we operate our server and network equipment starting in fiscal 2024, we're extending the depreciable useful life for these assets in our cloud infrastructure for four to five years. We expect the impact of this change to be approximately a 50 basis point benefit to our gross margin for the fully year.

Next, let me share some observations about the macro environment and our framework for guidance. From our perspective, the global macro environment remains uncertain, and customers continue to scrutinize large deals. In addition, in select instances, we will continue to enable new strategic customers to ramp into larger subscription commitments. Typically, these ramp deals reduce our first year billings but will grow into a higher annual run rate level in the second year.

In Q4, for example, the net impact of ramp deals was a headwind of approximately 1 percentage point to billings growth. We expect the net impact of ramps will be neutral to billings in fiscal 2024. In our outlook for fiscal ‘24, we're balancing our business optimism and confidence in our improved execution with ongoing macroeconomic uncertainties. We are entering Q1 with a record pipeline, and our customer engagements remain strong. However, we are mindful that in this environment, predicting close rates and ramps in any 90 day period remains challenging. With a large market opportunity, and customers increasingly adopting the broader platform, we will invest aggressively to position us for long term growth and profitability.

With that in mind, let me provide our guidance for Q1 and full year fiscal 2024. As a reminder, these numbers are all non-GAAP. For the first quarter, we expect revenue in the range of $472 million to $474 million, reflecting a year-over-year growth of approximately 33%. Gross margins of 80%, including the change in accounting for useful life of server equipment.

I would also like to remind investors that a number of our emerging products, including newer products like ZDX and Zscaler for Workloads will initially have lower gross margins than our core products. We're currently managing the emerging products for time-to-market and growth, not optimizing them for gross margins.

In addition, we'll continue to invest in our cloud and AI infrastructure to scale with the growing demand. Operating profit in the range of $70 million to $72 million, net other income of $14 million, income taxes of $8 million, earnings per share in the range of $0.48 to $0.49, assuming a 159 million fully diluted shares.

For the full year fiscal 2024, we expect revenue in the range of $2.05 billion to $2.065 billion or year-over-year growth of approximately 27% to 28%. Calculated billings in the range of $2.52 billion to $2.56 billion or year-over-year growth of 24% to 26%. We expect Q1 billings to grow approximately 30% on a year-over-year basis. We also expect our first half mix to be approximately 42% of our full year billings guide. Operating profit in the range of $330 million to $340 million, which reflects approximately 100 basis points to 150 basis points of operating margin improvement compared to last year. Income taxes of $35 million, earnings per share in the range of $2.20 to $2.25, assuming approximately 161 million fully diluted shares. We expect our free cash flow margin to be slightly above 20%. Finally, we expect our data center CapEx to be high single digit percentage of revenue for the full year.

Operator, you may now open the call for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Brad Zelnick of Deutsche Bank. Your line is open.

[Brad Zelnick, Deutsche Bank]

Great. Thanks so much and congrats on such a strong finish to the year. Jay, can you address why Zscaler wasn't included in Gartner's most recent Magic Quadrant for Single-Vendor SASE? And if that's slowing you down at all because it certainly doesn't seem to be in. And maybe just a quick one for Remo. Remo guiding 25% billings growth off of a year where you're clearly outperforming peers is quite impressive. What should we be mindful of beyond what you've already told us in terms of your inputs and degrees of upside and downside risk versus what you've delivered historically? Thanks.

[Jay Chaudhry, Chairman and CEO]

Right. So, Brad, this MQ is not slowing us down at all. SASE is a broad genetic [indiscernible]. When Gartner started it a few years ago, it was an integration of SD-WAN and SSE, the gateway products we have. And we've done integration with every FD vendor that matters out there. So but that MQ that got started this time was for single vendor SASE with SD-WAN offering in it. We have often said that SD-WAN is offering zero trust [in space] (ph). We do offer zero trust SASE. But we don't offer SD-WAN SASE. So we're [indiscernible]. We are about changing the world, not really propagating the old world, and we are very successful in doing so.

[Remo Canessa, CFO]

And Brad, related to guidance, you know, the positives are, our pipeline is record pipeline. Our execution was very good in Q4, which gives us confidence. The potential downside is the global macro environment. We've taken that into account. From our view, for fiscal 2024, we're seeing a similar environment as we did in '23. The guidance that we have, as you called out, 24% to 26%, we feel is very strong guidance, which supported by our optimism that we're seeing in our business related to also what we see at the global macro situation.

[Brad Zelnick, Deutsche Bank]

Thank you very much guys.

[Operator]

Thank you. One moment please. Our next question comes from the line of Matt Hedberg of RBC. Your line is open.

[Matt Hedberg, RBC]

Great. Thanks for taking my questions guys. Congrats on the quarter. Jay, I was particularly impressed, comments on emerging product success. Seems to be really kicking in here this year and even more so next year. Now I was curious on workload protection. It seems to be resonating a lot of partner conversations that you mentioned on call. Maybe just a little bit more details on why that's resonating, because I think if some of these add on products continue to do what they're doing, it certainly opens up much larger TAM than kind of the core ZIA and ZPA?

[Jay Chaudhry, Chairman and CEO]

So when we started ZIA, ZPA, we started for users. A user can securely communicate with applications. It's natural to extend ZIA for workflows, ZPA who workflows because workflows need to talk to each other in zero trust fashion. So our customers understand it and appreciate it. It's a great upsell opportunity for us to expand our ARPU as well as, customer spend with us. So we are seeing good success. The deal size is still smaller because the number of workloads in various stages, various customers. But we literally have no competition when it comes to this area because we're the only provider that's actually offering zero trust communication among workloads or workloads through Internet. We are upbeat about it for fiscal ‘24 as well.

[Matt Hedberg, RBC]

Thanks, Jay. Congrats.

[Jay Chaudhry, Chairman and CEO]

Thank you.

[Operator]

Thank you. One moment please. Our next question comes from the line of Roger Boyd of UBS. Again, Roger Boyd of UBS. Your line is open.

[Roger Boyd, UBS]

Hey, great. Thanks for taking the question and congrats on a nice quarter. Jay, a lot has been made about Microsoft’s entry into this market. Very high level, but Microsoft pretty specifically is targeting the SSE security edge space and not SASE space. Just maybe a follow-up to Brad's question, do you see that distinction as maybe further legitimizing the SSE approach relative to single vendor SASE? Thanks.

[Jay Chaudhry, Chairman and CEO]

Thank you. So SSE is widely understood and accepted. It's essentially the combination know, ZIA and ZPA rebuilt. But the time for SSE is large, and it's getting larger, then the market appreciates today. From Microsoft, it was natural to be in the market for identity and endpoint security as they have traditionally owned active directory and Windows operating system. But inline security is a totally new area for them. This area of SSE that we pioneered has a very high bar, high performance, great security, no slowing down and supporting a range of destinations. In fact, it's like being the [indiscernible]. We have to connect to applications that are on Microsoft and AWS and GCP and a thousand SaaS applications out there. So customers like the positioning of a provider like Zscaler that's not tied to applications itself. And Zscaler has earned trust of large enterprises. They'll take time for any new entrant. Yes, Microsoft entries further validation, but we don't believe it'll impact us because of a positioning the large enterprise market and there may be some impact on the lower end of the market.

[Operator]

Thank you. One moment, please. Our next question comes from the line of Ittai Kidron of Oppenheimer and Company. Your line is open.

[Ittai Kidron, Oppenheimer and Company]

Thanks, and hi, gentlemen. Congrats, a great finish for the year. I guess I want to talk about the competitive landscape of the more traditional firewall guys, Palo Alto and Fortinet more recently, and I guess, Check Point [referring and] (ph) acquisition recently as well are clearly trying to make big efforts here. Maybe you could talk about the competitive environment. I mean, what way is it today different than what it was a year ago? And what -- what are you seeing from your competitors more kind of near term here?

[Jay Chaudhry, Chairman and CEO]

Thank you. On the high end of the market, we -- where we do extremely well, we really haven't seen a change. If there's any change, I would say, art position has further solidified, and I would even say it has gotten somewhat easier on the higher end of the market. When it comes to the firewall market, we are replacing firewalls in the branches. When Zscaler gets deployed with zero trust architecture, there's no room for any firewall on the branch office. Now there are still firewalls in the data center and the light because we don't play inside the data center for east-west traffic and alike. But as customers are doing local breakout of traffic from every location, the amount of traffic going through the data center is slowing down, which is bound to impact the sales and demand for firewalls out there. So we do believe that the shift we have been talking about to truly zero trust away from traditional firewalls and VPN is happening and it'll continue.

[Ittai Kidron, Oppenheimer and Company]

Appreciate it. Thank you.

[Jay Chaudhry, Chairman and CEO]

Thank you.

[Operator]

Thank you. One moment, please. Our next question comes from the line of Andrew Nowinski of Wells Fargo. Your line is open.

[Andrew Nowinski, Wells Fargo]

Great. Thank you. Congrats on a great quarter, particularly on the billings. I mean, it looks like you solidly exceeded that even if you pull out that $20 million deal upfront. So I wanted to ask about the data protection products that you call out. You spent a lot of time talking about it on the call, and based on the info on your slide deck, it looks like there's a lot of components to that beyond just data protection. So maybe, could you just talk about some of the vendors that you're competing against there? I think you said one customer, you replaced two of their -- two different vendors. Maybe you can just expand on what you're seeing there from a competitive perspective? And maybe how competitive is it relative to like the markets for ZIA and ZPA? Thanks.

[Jay Chaudhry, Chairman and CEO]

Yeah. So data protection becomes a natural thing for us when traffic starts flowing through Zscaler. So, literally, it's hard to have any other data protection vendor when Zscaler is actually sitting in the traffic path. So what are some of the pieces of success here? First of all, DLP, data loss prevention, which essentially is done on the traffic that's in line. We are replacing the number one vendor, we're replacing there is Symantec 12, which is widely deployed. So first, we deployed Symantec, Blue Coat boxes, and no, the DLP is the secondary piece. The third big area we're replacing is some of the CASB vendors. CASB early on got sold as a point product as a module. For us, it's a feature. So any customer who has pure play SaaS be deployed essentially gets kind of replaced by our data protection platform. So those are two big areas. But in addition, now we are seeing some of the newer areas coming up. For example, our endpoint DLP, which we recently launched, is getting tremendous attraction out there, the email DLP module we added is wonderful as well. Through acquisition of Canonic, we have added the SaaS, the ecosystem, sorry, supply chain via data protection. So all this has made Zscaler the most comprehensive platform, and it's sitting traffic line. That's why we kind of called it out because the growth is great, over 60% year-over-year. And we are close to $0.25 billion in ARR.

[Andrew Nowinski, Wells Fargo]

That's great. Thanks, Jay. Keep up the good work.

[Jay Chaudhry, Chairman and CEO]

Thank you.

[Operator]

Thank you. One moment please. Our next question comes from the line of Brian Essex of JP Morgan. Your line is open.

[Brian Essex, JP Morgan]

Hi. Good afternoon, and thank you for taking the question and congrats on the results. Jay, I was wondering if you maybe or even Remo as well, give us a little bit more color in terms of the ramp deals that you saw this quarter. Is there a way to quantify what percentage of deals were ramp versus prior quarters and how does that typically, how do the dynamics of those deals work in terms of the amounts of commitments, the pricing, and the flexibility around ramping? And does it give you more flexibility? Or does it give you more visibility around what you see in the pipeline in terms of coverage over future periods? Thanks.

[Remo Canessa, CFO]

I mean, I'll start and maybe Jay could contribute also. Ramp was a headwind about 1% for us. Four larger deals that we're doing, as we talked about in the past, is that we use ramp with our customers to basically ramp into the full suite of products that we have. What we're seeing is we're seeing customers buy more of our platform upfront. We're seeing also existing customers expanding their platform with ZIA, ZPA, ZDX and data protection. So when they're buying the full suite of our products, basically, we use it as a vehicle to allow our customers to ramp into our products and we get that type of pricing. I would expect ramps just to kind of follow into fiscal ‘24. I'd expect the same level of ramps in fiscal 2024 at this point. The ramps do give us better visibility into billings because basically they'll start off with lower billings and then ramp up their billings in future periods. But, it is a vehicle that we use. It's been very effective. And so we'll continue to use it. And, Jay?

[Jay Chaudhry, Chairman and CEO]

Yeah, if I may add. The bigger the platform we sell, the more likely you need to provide ramp because the more pieces to be done. Number two, there's some of the tighter macro environment bigger deals scrutiny. Ramp did pick up in the past year or so as compared to two years ago. We factor that in as a part of doing business, and it's not a bad thing. We just have to manage it right way.

[Brian Essex, JP Morgan]

Great. Thank you very much.

[Operator]

Thank you. One moment please. Our next question comes from the line of Gray Powell of BTIG. Your line is open.

[Gray Powell, BTIG]

Okay. Great. Yeah, Gray Powell from BTIG. Thanks for taking the question and, congrats on the good results. So, a couple of related questions on my side. Can you talk about the visibility you have on late stage pipeline today relative to this time last year? And I guess I'm just trying to get your confidence in billings. Does the higher percentage of brand deals today, does that help give you better visibility on the growth outlook?

[Jay Chaudhry, Chairman and CEO]

Our visibility is good. So, as we talked about, we've had, a record pipeline and our execution also in Q4. So I would say, visibility for us is good and supports our guidance. Certainly the billings, with the ramps, give us also a good visibility too. So, our guidance, I feel, 24% to 26% is very good guidance, and takes into account our visibility and all factors. And also, if I may add, we have a record pipeline, and we're seeing pretty good momentum on our business. We were in Vegas doing our sales kickoff a couple of weeks ago. The energy and excitement in the room could be felt. Actually, it was very good because our sales team have a lot of confidence. We talked about the record pipeline, the record deals out there. We talked about the new momentum the channel is adding to us. So we feel very good about our fiscal ‘24 business.

[Gray Powell, BTIG]

That's perfect. Thank you very much.

[Operator]

Thank you. One moment, please. Our next question comes from the line of Jonathan Ruykhaver of Cantor. Your line is open.

[Jonathan Ruykhaver, Cantor]

Yes, thank you. So I have a question on the emerging product portfolio. You highlighted how it represented 18% new business in fiscal '23, you expect that to get to plus 20% in fiscal '24. It just seems to me like plus 20%. I'm not sure what that plus could be, but it seems like a low bar just given your comments on data security, ZDX, and cloud, including, the tailwind that you talked about from AI that is going to benefit some of those products. So can you just help us understand demand dynamics within that portfolio, the puts and takes of specific products where you expect to see the strongest demand?

[Jay Chaudhry, Chairman and CEO]

Yes. If I may start, it is all coming out of 100% only. Okay. That's the most important point when the overall growth is pretty strong. Okay. And for the new product, even if it grows 70%, 80% percent a year, it has to work very hard to even take away 1% or 2% from the total new ACV. That's pretty significant. So the growth of these new products is much faster than the growth of the overall new ACV, but they are fairly small and they're growing into good business. We called out data protection as it became a significant part of the business. And I think here too, you're seeing our combination of workload protection and ZDX both are growing at a much faster rate. So I think we are actually happy with the growth rate, but the point I was trying to make is they are trying to steal away the market share on the rest of the overall portfolio, which has a much bigger base. That's why the math looks small, but it is pretty impressive.

[Jonathan Ruykhaver, Cantor]

Yeah. understood. Good point, Jay. Thank you. Thank you.

[Operator]

Thank you. One moment, please. Our next question comes from the line of Joshua Tilton of Wolfe Research. Your line is open.

[Joshua Tilton, Wolfe Research]

Hey, guys. Thanks for taking my question and I echo my congrats on a good quarter. I kind of want to go back to the first question. And, if you look at the guidance, the implied new billings kind of looks like a little bit more aggressive, I would say, than the last two years. So maybe just, level set for us or set some guardrails or expectations around kind of the puts and takes on what it would take for you guys to kind of outperform what you laid out for the next 12 months for us, please?

[Jay Chaudhry, Chairman and CEO]

Let me start to give you a big picture and Remo, you can add your color to it. So our guidance is starting with first of all, a record pipeline and the momentum we have in the business. And we have plenty of product to sell. We have a growing market opportunity and many business drivers. We have a lot of new customers who are really buying zero trust for better security. Lots of market that's not covered. We are still in about 30% of global 2000 market. And we're seeing public sector coming strong, federal market coming strong. And that's really, further pushed by some of the mandates that are happening out there. And you saw in some of the deals that are announced, customers are increasingly buying more of these kind of platform leading to bigger deals. CI ZPA, our flagship products are still doing strong. We have factored into good growth for data protection, which complements. It actually needs to go on every Zscaler,customer. Emerging products are contributing nicely, and they are contributing. So when you look at all this, that's what we took into factor to give you our guidance. Remo?

[Remo Canessa, CFO]

Yeah. I mean, our guidance basically balances our business optimism that we see with our company, also with the macro environment. We feel in this market, this is very solid guidance.

[Joshua Tilton, Wolfe Research]

Super helpful. Thank you.

[Operator]

Thank you. One moment please. Our next question comes from the line of Saket Kalia of Barclays. Your line is open.

[Saket Kalia, Barclays]

Okay, great. Hey guys, thanks for taking my question here. I want to echo my congrats on the result. Remo, maybe for you, just to switch it up a little bit. Great to see the free cash flow margin expansion thus far. Maybe looking forward, can you just talk about some of the puts and takes on free cash flow margin with I think the 20% plus guide for next year, how are you thinking about things like billings duration or CapEx or anything that's maybe influencing that number? Because it's great to see operating margin expand. Why isn't free cash flow margin maybe expanding in the same way? Thanks.

[Remo Canessa, CFO]

Yeah, Saket, that's a great question. The billing duration, I would assume the similar type billing duration as we had in fiscal '23, so no change. CapEx, we do expect CapEx to be a higher percentage. If you take a look at the last two years, our CapEx has been in the 6% range of our revenue. We expect our CapEx to be in the high single digit type range. We're seeing the expansion of our business. We're going to be making investments in cloud. And again, it's -- that's the main reason.

[Saket Kalia, Barclays]

Very helpful. Thanks.

[Operator]

Thank you. One moment please. Our next question comes from the line of Gregg Moskowitz of Mizuho. Your line is open.

[Gregg Moskowitz, Mizuho]

All right. Thank you for taking the question and I'll echo my congrats. Jay, getting back to data protection, so your multimodal DLP that combines video and audio formats, that's interesting to me. Curious if you had any early customer feedback on that feature. And then secondly, what has been the early uptake around your new Risk360 offering just in terms of visualizing risk, etcetera? Thank you.

[Jay Chaudhry, Chairman and CEO]

So multimodal DLP is still in development. it's not shipping, but there's a bunch of engagement with customers and interest is high because there's nothing like this out there in the market. You don't [indiscernible] pioneer new things that no one has done out there. Risk360, on the other hand, is actually a shipping. We have taken a bunch of orders. This product has more interest up front than any of the other products I can think of because our engagement with CISOs are strong. When a CISO looks at SC60 and say, wow, I have actually a single point to really tell me the holistic view of my business and actually where my risk factors are and what tangible prioritize actions I could take through my wrist. So there is a significant velocity going on, very, very good feedback and the product is growing very rapidly in terms of functionality as well.

[Gregg Moskowitz, Mizuho]

Perfect. Thank you.

[Operator]

Thank you. One moment, please. Our next question comes from the line of John DiFucci of Guggenheim. Your line is open. Again, Mr. DiFucci, your line is open.

[John DiFucci, Guggenheim]

Thank you. So guys, it as everybody has said, the numbers look good. It was a nice quarter. But when we try to look at, like, the new business signings, it looks like it saw a tick down against a similar comp versus what I think was sort of a monster quarter, the third quarter. And Remo, you mentioned the continued macro pressure. And of course, everybody sees that. But is this quarter how we should expect Zscaler to sort of be going forward in regards to business momentum and new business signings. Or was the third quarter a better gauged on what we should expect going forward against this macro backdrop?

[Remo Canessa, CFO]

Yeah. I mean, our new and upsell bookings were up year over year. So, for Q4, so it was a good quarter. From my perspective, John, I mean, it's a huge market opportunity, on the part of Zscaler. I don't want to make any projections related to our doing upsell billings because we don't get that guidance. But let me just say that our pipeline for new and upsell is very strong. and we had really strong and good execution in our Q4 which gives us confidence. So I feel that we're well positioned to go forward, and really do well. As I mentioned, and it's come up a few times, the wild card really is the global macro backdrop. And so we're expecting the global macro environment to stay similar year-over-year. And so we'll see how that plays through. But from a company perspective, for what we did in Q4 and how our business tracked, we had a very strong quarter which gives us optimism going into fiscal ‘24.

The point I'll also add is since Zscaler can actually reduce cost while reducing business [risk, there is added attractions] (ph). We're able to engage with customers and close deals even when the macro is tight. We also kind of felt very good about the record number of $1 million deals we closed in Q4. So I see strength across all major areas, major vertical arrangements, and that's why we feel good about it.

[John DiFucci, Guggenheim]

That all that all makes sense. And thanks for taking my question. I mean, what you guys are doing is better than most everybody out there. But, I guess just quick follow-up, Remo, you said your bookings were up year-over-year. If you look at current billings, and I don't know if you look at it that way, I guess I do, but I'm looking, I'm trying to [back into] (ph) new ACV, new ARR depending upon the company. For you, it's new ACV. Was that up year-over-year? For most companies, it's not. And we calculate it being down a little bit, but still better than most.

[Remo Canessa, CFO]

Yeah. We're not commenting on new ACV, but our bookings were up year-over-year. And I think that's a good way to look at the business.

[John DiFucci, Guggenheim]

Okay. Thank you.

[Remo Canessa, CFO]

Thank you.

[Operator]

Thank you. One moment please. Our next question comes from the line of Adam Borg of Stifel. Your line is open.

[Adam Borg, Stifel]

Awesome. And thanks so much for taking the question. Maybe just for Remo, a couple of related housekeeping follow ups. So NRR, I think, was at 121%, below 125% for the first time after a number of quarters. I was hoping you could talk a little bit more about that and patients to next year. And I apologize if I missed it as a follow-up, but billings duration in the quarter, just what did that turn out to be and without a headwind or tailwind? Thanks so much.

[Remo Canessa, CFO]

Yeah. So NRR at 121%, we feel is outstanding. What we're seeing is that we're seeing more customers buying more of our platform upfront. So when customers are buying more of your platform upfront, that'll impact what they're going to purchase in the future. Also, we called out on the call a Fortune 10 company bought basically within one quarter So if you're buying within the year based on the calculation for NRR, that impacts it. From my perspective, and we've been saying this since our public offering is billings is really the best measure to really look at Zscaler. Like, we still feel that The only time we look at NRR, is really at the end of the quarter. It is a metric that we look at, but really what I look at is basically our total billings, whether it comes from new or upsell. Related to billing duration, it was a tailwind in Q4.

[Adam Borg, Stifel]

Great. Thanks so much.

[Operator]

Thank you. One moment, please. Our next question comes from the line of Peter Levine of Evercore. Your line is open.

[Peter Levine, Evercore]

Great. Thanks for squeezing me in here guys. So I mean want to just follow-up on the GenAI opportunity, you know, at your Analyst Day -- not your Analyst Day but your customer conference a couple of weeks ago, you announced the security autopilot, maybe, Remo, for one. Can you just put a final point in terms of how your plan on monetizing that as usage base? Is it just an upsell to kind of the normal contract subscription? And then second to Jay is your competitors are all saying same thing in terms of your data's proprietary. Maybe the same question to you is, what do you think makes Zscaler's data proprietary what's your competitive advantage when you go into an RFP versus call it like a, you know, Apollo, whoever it might be that your data is proprietary there is a mode around your business. What would your answer to that be?

[Remo Canessa, CFO]

So let's start with, data. Larger companies have larger data. What's exciting about Zscaler is we are designed as a switchboard for all communication between different parties. A firewall, it's not a switchboard. Firewall is a door. It's a gate. It says you are inside, your outside. That's number one. Number two, fiber often what's going to short logs. Still a small number of firewall transaction, whether they're on prem or in the cloud as we are SSL decrypted. If the if record’s on, if the transaction non-decrypted, your logs aren’t of much use at all, or if you take DNS logs, they're not very useful at all. It says with DNS which domain are you going to? We have full logs after decryption about all information, including the full URL. The URL has a lot of useful information that we have. Before any reconnaissance -- before any breach happens, reconnaissance starts, it could be trying to exploit software vulnerabilities. It could be client officials, employees, all of that traffic was to us and we collect those logs. And that's why we can actually do some of the things like being able to predict potential breach and the like. So that's one big part on the log side of it. The second question of how do we monetize AI driven products? Don't think of Zscaler having only AI driven products assembly charge. It is going to influence all of our product lines. Today, some of our premium bundles include AI powered products. So we are actually monetizing it as a part of the premium bundles. and they are actually, clearly, highly priced as [computing] (ph) other bundles. Products like Risk360, Leveraging AIML big time is Charge SKU. Some of the new products we're building, they will have upsell, they'll have their own SKUs. So we think there's plenty of opportunities to charge because customers are seeing values from the products we built in.

[Peter Levine, Evercore]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Patrick Colville. Your line is open. One moment.

[Patrick Colville]

All right, thank you so much for putting me in.

[Jay Chaudhry, Chairman and CEO]

Hey, Patrick. Are you on? Patrick? Hey, Valerie, can we take our last question?

[Operator]

Our last -- Patrick's line was open. I don't know if he disconnected. One moment. [Operator Instructions]

[Jay Chaudhry, Chairman and CEO]

Let me try the next call.

[Operator]

Okay. Thank you. One moment. Our next question comes from the line of Ben Bollin, Cleveland Research. Your line is open.

[Ben Bollin, Cleveland Research]

Good afternoon. Thanks for taking the question. I'm interested in how you feel about your progress throughout the broader channel, traditional two tier cloud marketplace GSI. Any thoughts you have around kind of what you've learned over the last six, 12 months and how that's playing into your strategy over the next couple of years? Thank you.

[Jay Chaudhry, Chairman and CEO]

As you know, traditionally channel has played a limited role for us. We have been working on it. We are seeing more and more progress being made. Just to clarify, I mean, we do take all these through channel with some exceptions, but customers insist on us. So that's one part. We are seeing yesar after year or in the past several quarters channel providing more leverage to us. That means doing more work for us. We recently hired our channel chief Karl Soderlund. He comes from extensive experience and strong relations in the channel, and he's done a lot of work in three areas of channels, system integrators, [bars] (ph), and service providers. In that system integration space, we have actually most of the large SI. They have selected and deployed C Scalar for wound transformation and zero source architecture. So they are not embedding our solution into the SI advisory service switches, very good because then it becomes a lot better. We also, so we're counting on more leverage on broad channel, even the bar channel itself. They're going through some focused training program, enabling program, which will help them do more transformation with us. In fact, we had nearly 200 channel partners come to our sales kickoff and join hands and conduct session with our sales teams. We think that's bringing our team is a lot more closer to work together with common account planning and the like. So we please do progress, and we think we're moving in the right direction.

[Ben Bollin, Cleveland Research]

Thanks, guys. Have a great night.

[Remo Canessa, CFO]

Thank you.

[Bill Choi, SVP of IR and Strategic Finance]

Thank you. I'd like to turn the call back over to Jay Chaudhry for any closing remarks.

[Jay Chaudhry, Chairman and CEO]

Well, thank you all for your interest in Zscaler. I'm looking forward to seeing you at some of our investor conferences. Thank you, again.

[Operator]

Thank you, ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.