Q3 2024 Summary
Published Mar 5, 2025, 11:16 PM UTC- Durable Competitive Advantage through Architectural Superiority and Continuous Innovation: Zscaler's architectural advantage is maintained through continuous innovation, allowing it to stay ahead of both large and small competitors. The company believes that smaller SASE vendors and firewall vendors will not be able to catch up due to Zscaler's pace of innovation and expansion into new areas such as Zero Trust segmentation.
- Strong Demand Despite Macroeconomic Challenges: Even in a tough macro environment with high deal scrutiny, Zscaler continues to see strong demand because CIOs and CISOs prioritize cybersecurity and cost-saving initiatives. Zscaler's ability to demonstrate tangible cost savings while enhancing security helps to secure executive-level attention and win deals.
- Resilient Business Model with High Win Rates and Strong Execution: Despite higher-than-expected sales attrition, Zscaler has delivered outstanding execution, maintaining very high win rates and stable pricing trends. The company's strategic relationships with CXOs and its solution-centric approach contribute to its resilience and position it well for continued growth.
- Higher-than-expected sales attrition, including the departure of key executives, could impact Zscaler's sales performance and growth. Management acknowledged "higher-than-expected sales attrition in the quarter" and noted that "with the departure of our COO, we saw higher attrition in Q3 than expected".
- Zscaler's Q4 guidance indicates a significant deceleration in growth, partly due to sales attrition. An analyst highlighted that "there's a significant deceleration in your Q4 guide this time", and management confirmed that "Q3 was a very strong quarter... the attrition did play into it".
- Management expects a few points of headwind to total billings growth in fiscal '25 due to sales capacity issues. They stated that "new hires will take time to ramp to full productivity, which we believe will result in a few points of headwind to our total billings growth in fiscal '25".
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Sales Attrition Impact
Q: Why is sales attrition high, and what's the impact?
A: Sales attrition increased due to the departure of the COO but is expected to stabilize in Q4. New sales leadership is in place, and they are accelerating the hiring of quota-carrying reps. The company believes this will drive growth from $2 billion to $5 billion. -
Competitive Environment and Pricing
Q: How is competition affecting pricing and win rates?
A: Despite intensifying competition, win rates remain very high, and pricing trends are stable. Sales cycles for large deals are around 12 months. Zscaler emphasizes its architectural advantage and continues to innovate ahead of competitors. -
Guidance Deceleration
Q: Why is there deceleration in Q4 guidance?
A: The Q4 guidance reflects prudence, a tough comparison due to a large $20 million deal in the prior year, and the impact of higher sales attrition. Despite these factors, the company remains confident in its outlook. -
Sustainability of Growth
Q: Is growth sustainable, and what are the upside drivers?
A: Growth is expected to continue, driven by innovations in existing products like ZPA and data protection, as well as new products and sales force ramping. The company is bullish about its product portfolio and go-to-market initiatives. -
Declining Net Retention Rate
Q: Net retention rate declined; how does this align with upsells?
A: NRR decreased to 116%, but this is still considered strong. Factors affecting NRR include selling larger bundles upfront and customers buying within the year, which isn't captured in NRR calculations. -
Growth vs. Profitability Framework
Q: How are you balancing growth and profitability?
A: Zscaler focuses on investing for top-line growth while maintaining operating profitability. Operating profit margins are expected to increase slightly in fiscal '25. The company prioritizes growth in its emerging market over short-term profitability. -
Data Protection and TAM Expansion
Q: How will data protection and new use cases expand TAM?
A: The growing need for comprehensive data protection and AI workloads is expanding Zscaler's total addressable market. The company estimates adding $10 billion to $20 billion to its TAM through new products and verticals. -
Impact of Competitors' Vulnerabilities
Q: How have competitors' vulnerabilities affected demand?
A: Recent firewall and VPN vulnerabilities from competitors have led to increased demand for Zscaler's solutions, especially in the federal sector. There's a meaningful number of engagements replacing vulnerable VPNs. -
Workload Protection Inflection
Q: Is workload protection at an inflection point?
A: Workload protection is strategic and growing, with increasing deal sizes in technology companies. While it hasn't yet significantly impacted revenue, it's expected to become more impactful over time as more customers adopt it. -
Advanced Plus Bundle
Q: How is the Advanced Plus bundle resonating?
A: The Advanced Plus bundle, which includes new AI capabilities, is gaining traction. Customers are purchasing larger bundles, leading to higher annual recurring revenue. The company anticipates broader adoption across its customer base.