• Revenue: $648 million, up 23% year over year and 3% sequentially.
• Annual Recurring Revenue (ARR): Over $2.7 billion, a 23% year-over-year growth.
• Net Retention Rate (NRR): Improved to 115%.
• Operating Profit Growth: 36% growth, with operating margin improving by 2 percentage points to nearly 22%.
• Free Cash Flow Margin: Record 22% for Q2.
• Gross Margin: 80.4%, compared to 80.8% in the year-ago quarter.
• Operating Expenses: Increased 19% year over year to $380 million.
• Cash and Investments: Approximately $2.9 billion in cash, cash equivalents, and short-term investments.
• Guidance for Q3 Revenue: Expected to be in the range of $665 million to $667 million, reflecting 20% to 21% year-over-year growth.
• Full Year Revenue Guidance: Expected to be in the range of $2.64 billion to $2.654 billion, reflecting approximately 22% year-over-year growth.
• Full Year Free Cash Flow Margin Guidance: Expected to be approximately 24.5% to 25%.

• Warning! GuruFocus has detected 3 Warning Sign with ZS.

Release Date: March 05, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Zscaler Inc (NASDAQ:ZS) reported a 23% year-over-year revenue growth, surpassing guidance expectations.
• The company's annual recurring revenue (ARR) grew by 23% year over year, reaching over $2.7 billion.
• Operating profit increased by 36%, with operating margin improving by 2 percentage points to nearly 22%.
• Zscaler Inc (NASDAQ:ZS) achieved a record free cash flow margin of 22% for Q2.
• The company is seeing strong customer interest in its Zero Trust Branch solution, with 57% of purchases coming from new logo customers.

Negative Points

• Despite strong performance, there is ongoing scrutiny on large deals, reflecting tighter macroeconomic conditions.
• Gross margin slightly decreased to 80.4% compared to 80.8% in the previous year.
• The company noted that increased success in selling bigger bundles could reduce the dollar-based net retention rate in the future.
• There is a potential impact on sales productivity due to the complexity of closing large deals.
• Zscaler Inc (NASDAQ:ZS) faces competition from legacy security vendors, which could impact its market positioning.

Q & A Highlights

Q: How much of Zscaler's business is coming from CIA and secure web gateway replacements versus broader platform products? A: Jay Chaudhry, CEO, explained that ZIA was the starting point, often replacing blue code and other web gateways. However, the platform now commonly includes ZIA, ZPA, and ZDX. Recently, Zero Trust Branch has become an important starting point, with 57% of customers who bought it being new logos.

Q: What proves that the go-to-market changes are making a difference and are durable? A: Ashwin Kesireddy, VP of Investor Relations, noted the strength of the pipeline, double-digit growth in new ACV, and increased C-level engagements in large enterprises as indicators of successful go-to-market changes.

Q: Can you discuss the traction with customers opting out of legacy systems for Zero Trust Everywhere? A: Jay Chaudhry highlighted that customers are eager to embrace Zero Trust Branch, which simplifies branch security by eliminating firewalls and routers. A survey showed 96% of CXOs are ready to adopt this approach, indicating strong traction.

Q: How is Zscaler addressing the scrutiny on large deals and macroeconomic challenges? A: Remo Canessa, CFO, stated that while macro conditions are tight, the demand for cybersecurity remains strong. Zscaler's ability to offer cost savings alongside Zero Trust cybersecurity is driving pipeline growth, with GSIs playing a crucial role in deal closures.

Q: How does AI change Zscaler's competitive positioning and product offerings? A: Jay Chaudhry explained that AI is integrated into existing products and new offerings. Zscaler leverages its vast data to enhance AI-driven solutions like unified vulnerability management and data protection, positioning itself strongly in the evolving AI landscape.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.