Zscaler Reports Record Growth and Bullish Outlook in Q4 2024 Earnings Call

Zscaler (ZS) Q4 2024 Earnings Call Transcript

Good day, everyone, and thank you for standing by. Welcome to Zscaler fourth quarter 2024 earnings call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Again, please be advised that today's conference is being recorded. Now, I will pass the call over to the vice president of investor relations and strategic finance, Ashwin Kesireddy. Please go ahead. Ashwin Kesireddy -- Senior Vice President, Investor Relations and Strategic Finance Good afternoon, everyone and welcome to the Zscaler fourth quarter fiscal year 2024 earnings conference call. On the call with me today are Jay Chaudhry, chairman and CEO; and Remo Canessa, CFO. Please note 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 and 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 also want to inform you that we'll be attending the following conferences: Citi Global TMT Conference in New York City on September 5th, Goldman Sachs Communacopia and Technology Conference in San Francisco on September 11th, Wolfe Research TMT Conference in San Francisco on September 11th. Now I'll turn the call over to Jay. Jagtar Singh Chaudhry -- Founder, Chairman, and Chief Executive Officer Thank you, Ashwin. We delivered a strong Q4 with all metrics exceeding the high end of our guidance. Revenue grew 30% year over year. Billings grew 27% and profitability reached new records with operating margin of approximately 22% and free cash flow margin of 23%. We also achieved a new milestone of $1 billion in quarterly bookings in Q4, driven by an acceleration in new and upsell business in the quarter. For the full year, revenue grew 34% and free cash flow grew 75% and resulting in free cash flow margin of 27%, a new record for the company. With another year of strong top and bottom-line performance, we exceeded the Rule of 60 for the fourth consecutive year. Despite the recent changes in our go-to-market organization, we delivered these outstanding results driven by strong customer demand for our Zero Trust Exchange platform. I'm very pleased with the progress we're making in go-to-market execution. The pace of innovation and customer adoption of our expanded platform. I'm also pleased to share we crossed $2.5 billion in ARR in Q4, and we expect to achieve a new milestone of $3 billion or more in ARR in fiscal '25. Before getting into further details of the quarter, let me share a few observations on the demand environment. First, customer adoption of our Zero Trust platform is stronger than ever with Q4 setting a record for new and upsell business. Our platform secures 47 million users across nearly 8,700 customers. While other vendors are still struggling to deliver cloud security for users, we expanded our platform beyond users to deliver zero trust security for applications, workloads, and IoT/OT devices. Customers are consolidating their disjointed legacy security products by adopting our comprehensive platform. Second, the increasing use of AI is creating new avenues of growth for us. For example, the rising adoption of GenAI is exposing new gaps in organization's security posture. To help our customers address these risks, earlier this year, we launched GenAI security, which enables customers to realize the productivity benefits of GenAI without compromising data security. Using our GenAI security, customers can gain visibility, apply access control, and enforce data protection policies to prevent their sensitive data from leaking. Third, I'm thrilled to share that we have achieved a major milestone with our cloud platform, surpassing over half a trillion transactions daily. That is T, as in trillion. This further demonstrates our widening market leadership position. These transactions generate a vast quantity of proprietary logs that feed our massive data lake. These are not firewall logs that often can't inspect SSL traffic for cyber threat detection. These are complete logs that have structured and unstructured data, including the full URL. We leverage this proprietary data to train AI models that power innovations throughout our platform. Our AI analytics solution, including Unified Vulnerability Management, Risk360, Business Insights are seeing strong traction. AI analytics contributed nearly three points to new and upsell business growth in Q4 and two points for the entire fiscal '24, even though some of these products were only available for a part of the year. I am pleased with the contribution of AI Analytics in fiscal '24 and with continued expansion of the solution, I expect its contribution to continue to grow with an addressable market of $96 billion. We believe we are in the very early stages of opportunities with Zero Trust and AI. The cyber threat environment continues to worsen as the limitations of firewall and VPN-based architecture are exploited by threat actors to launch an increasing volume of sophisticated attacks. Over the last year, we saw an 18% increase in ransomware attacks blocked by the Zscaler cloud. Our seasoned ThreatLabz research team is tracking 391 of the most sophisticated ransomware families, including many that were uncovered by Zscaler in the past year. Driven by the increased number of cyber breaches, more customers are adopting our Zero Trust platform. For example, in a new logo win, a top 10 Fortune 500 industry machinery company purchased Zscaler for users, for 100,000 users, in a multiyear seven-figure ACV deal. The customer previously purchased a firewall-based SASE solution to consolidate firewalls, secure web gateways, and MPLS network strength. Subsequently, they realized the so-called SASE solution allows literal site movement and does not deliver zero trust security. They chose Zscaler to replace their firewall-based SASE. Our purpose-built proxy-based cloud platform makes our customers' branches and data centers invisible to threat actors. Hence, they can't be discovered and they can't be attacked. In addition to landing new logo platform purchases, we are also upselling our platform. Our land and expand motion creates a flywheel of continuous engagement and upsell. To give you an example, in a seven-figure upsell deal, a Fortune 200 financial services customer, bought ZPA and ZDX, after the successful ZIA deployment for 68,000 users. After securing internet and SaaS access with Zscaler, it was natural for them to expand to our broader platform, ZPA for zero trust access to private applications and for user-to-application segmentation to eliminate lateral threat propagation and ZDX to quickly identify and resolve end-to-end performance issues. With this purchase, the customer's ARR more than doubled to nearly $10 million. Next, I am happy to share that customers continue to adopt the advanced features of our data protection pillar making it one of our fastest-growing pillars. For example, in a new logo win, an American healthcare provider purchased multiple pillars of our platform, including ZIA transformation, data protection advanced, and ZDX for 124,000 users in a multiyear eight-figure TCV deal. Our data protection pillar was critical to this win due to its comprehensive capabilities, which include securing all types of data, whether structured or unstructured, data in motion or data at rest, and data across all channels, including web, email, endpoint SaaS, cloud workloads, and more. Next, let me discuss our emerging thoughts, including ZDX, zero trust for branch and cloud, and AI analytics. I'm delighted to share that emerging products contributed approximately 22% of new and upsell business in fiscal '24, up from 18% in fiscal '23. We expect this contribution to grow to mid-20s in fiscal '25. Our zero trust for branch and cloud solution, including zero trust for workloads, Zero Trust SD-WAN, and zero trust segmentation is driving more and more meaningful wins. Let me share two examples. In an upsell win of Fortune 500 financial services customer purchased zero trust for workloads to protect their on-prem applications. Zero Trust for workloads contributed approximately one-third of the seven-figure upsell ACV deal which doubled the annual spend of this existing million-dollar ARR customer. In another upsell win, a top 10 pharmaceutical company purchased our Zero Trust SD-WAN solution to protect over 30 manufacturing sites, eliminating the need for firewalls and making each site like a Starbucks. Zero Trust SD-WAN was nearly 50% of the seven-figure ACV deal. Our expanding portfolio of emerging products further strengthened by our acquisition of Avalor and Airgap is opening dose or sales to new customers. With the addition of Airgap, Zscaler is expanding to provide zero trust security inside branches, factories, and campuses where customers traditionally relied on east-west firewalls and network access control or NAC. By combining Airgap with our Zero Trust SD-WAN, we cannot only replace firewalls at the edge, but also eliminate firewalls inside these sites. We are also seeing strong traction for the Unified Vulnerability Management solution we acquired through Avalor. By combining our customers' enterprise security and business system data with our proprietary log data from half a trillion daily transactions, Avalor delivers real-time actionable insights and operational efficiencies for customers to improve their overall security posture. We expect new logo conversations that start with Airgap or Avalor, and all other emerging products to expand into broader platform opportunities. We will continue to invest in our platform expansion. Moving to the federal vertical, I am excited to share we landed a new cabinet-level agency, increasing our count of cabinet-level agencies to 13. In a seven-figure ACV deal, this customer purchased Zscaler for users, for 5,000 users. With over 100,000 employees, this customer presents a significant 20x upsell opportunity. Having landed 13 of the 15 cabinet-level agencies including the DoD, we see large upsell opportunities in the federal vertical with the increasing adoption of Zero Trust. Building upon our success in the U.S., we are accelerating our public sector go-to-market investments in other nations that are modeling their Zero Trust security initiatives similarly to the U.S. This is a large opportunity for us. But like many government initiatives, this will take time. Now let me share some updates on our sales organization. First, we had lower-than-expected attrition and we had a strong hiring quarter. In fiscal '25, we plan to continue hiring reps at a strong pace and expect attrition to further improve. Second, I am pleased to report that sales productivity was better than expected during the quarter, driven by acceleration in new and upsell business. In fiscal '25, we expect sales productivity to continue to improve with the second half stronger than the first. Third, we increased investment in the global system integrators, or GSI channel, by hiring leaders experienced in building GSI programs for large enterprises. These hires are driving significant progress in developing mutual go-to-market plans with GSIs that integrate the Zscaler platform with their customers' digital transformation projects. Most large GSIs are already Zscaler customers, and that enables them to showcase to their customers the value Zscaler zero trust platform delivers. This quarter, we added another large GSI end-user customer, making 8 of the top 10 GSIs by revenues Zscaler customers. This GSI purchased Zscaler for users for over 300,000 users in our largest-ever TCV deal in the services vertical. This GSI is consolidating multiple point products, including secure web gateways, load balances, VPNs, firewalls, and MPLS network, which is expected to deliver 200% ROI to this customer. I am pleased with the progress we're making in transforming our go-to-market engine to an account-centric sales motion, which is contributing to growth of our large customers. We added nearly double the number of Global 2000 logos in fiscal '24 as compared to fiscal '23. We ended fiscal '24 with approximately 35% of Global 2000 companies and more than 40% of Fortune 500 companies as our customers. Our customer base spending $1 million plus annually grew by 26% year over year to 567, and we ended the quarter with over 60 customers spending $5 million plus annually. We expect this large customer momentum to continue in fiscal '25. Finally, I want to address the topic of cloud resilience that has come to the forefront due to the recent cloud outages of Microsoft and CrowdStrike. When customers rely on a mission-critical cybersecurity service, there's no room for service interruptions. From inception, Zscaler has built a cloud security platform that has been seamlessly scaling with high reliability and resilience. Operating such a service is no trivial task and requires years of experience. Unproven vendors, including new entrants and legacy firewall companies do not have this experience. By operating the world's largest security cloud with superior resilience for over a decade, we have earned the trust of the largest enterprises. This is a clear differentiator for us and is driving the growth of our business. As an innovator and a market leader in January 2023, we became the first cloud security company to introduce a business continuity service that enables customers to continue their operations even during catastrophic events. In conclusion, we are uniquely positioned to benefit from the confluence of two large secular growth drivers, Zero Trust security and AI. We enter fiscal '25 with a stronger go-to-market machine, increased pace of R&D innovation, strong adoption of our emerging products, and high levels of customer satisfaction, with an NPS score of over 70. With our customer obsession, expanding platform, and a large addressable market, I expect another strong year, which will move us closer to our goal of $5 billion in ARR. Now I'd like to turn over the call to Remo for our financial results. Remo E. Canessa -- Chief Financial Officer Thank you, Jay. Our Q4 results exceeded our guidance on growth and profitability, even with ongoing customer scrutiny of large deals. Revenue was $593 million, up 30% year over year and up 7% sequentially. From a geographic perspective, Americas represented 55% of revenue, EMEA was 30%, and APJ was 15%. For the full year, revenue was $2.17 billion, up 34% year over year. Our total calculated billings in Q4 grew 27% year over year and 45% sequentially to $911 million. Our calculated current billings grew 27% year over year. Like last year, some customers paid us upfront on multiyear deals, and the percentage of total calculated billings coming from such upfront payments was relatively unchanged year over year. Our remaining performance obligations, or RPO, grew 26% from a year ago to $4.418 billion. Current RPO was approximately 48% of the total RPO. We ended Q4 with 567 customers with over $1 million in ARR and 3,100 customers with over $100,000 in ARR. This continued strong growth of large customers speaks to the strategic role we play in our customers' digital transformation journeys. Our 12-month trailing dollar-based net retention rate was 115%. While good for our business, our increased success in selling bigger bundles, selling multiple pillars from the start, and faster upsells within a year, can reduce our dollar-based retention rate in the future. There could be variability in this metric on a quarterly basis due to the factors I just mentioned. Turning to the rest of our Q4 financial performance. Total gross margin of 81.1% compared to 81.4% in the prior quarter and 80.7% in the year-ago quarter. On a year-over-year basis, gross margin benefited by approximately 60 basis points from a change in our accounting attributed to the longer useful life of our cloud infrastructure. Moving on our total operating expenses increased 8% sequentially and 26% year over year to $353 million. We continue to generate significant leverage in our financial model, with operating margin of approximately 22%, an increase of about 260 basis points year over year. Our free cash flow margin was 23%, including data center capex of approximately 8% of revenue. We ended the quarter with over $2.4 billion in cash, cash equivalents, and short-term investments. Before getting to the details of the Q1 and full year fiscal 2025 guidance, I wanted to share additional context about our framework for billings guidance. We expect full year fiscal '25 calculated billings of $3.110 billion to $3.135 billion, or year-over-year growth of approximately 19% to 20%. We expect first-half billings to be in the range of 39% to 39.5% of full year billings guide with Q1 to be approximately 16.2% of full year billings guide. The midpoint of our guidance implies year-over-year billings growth of approximately 13% in the first half, accelerating to 23% growth in the second half. In no particular order, I'd like to share three key factors that are driving this acceleration. One, as Jay mentioned, we expect sales productivity to continue to improve with the second half stronger than the first, we expect this to contribute to strong new upsell and renewal activity in the year. Two, our strong and growing pipeline supports second half acceleration. And three, from a timing perspective, our contracted noncancellable billings from prior year's active contracts are scheduled to grow 7% in the first half and 23% in the second half. This naturally implies a stronger second half in billings growth giving us strong visibility into total billings growth in the second half. Moving on to taxes. Please note that we expect to continue to be a modest cash taxpayer in fiscal 2025, with an estimated cash tax of approximately $45 million to $50 million. For non-GAAP P&L reporting, I'd like to call your attention to a change we are making to our non-GAAP tax calculations. Starting fiscal 2025 and going forward, we're establishing a non-GAAP tax rate of 23%, which is reflected in our non-GAAP earnings per share guidance for fiscal 2025. Please refer to our earnings release and financial supplemental for fiscal '23 and fiscal '24 comparisons, reflecting this new non-GAAP tax rate. Turning to the rest of the guidance. As a reminder, these numbers are all non-GAAP. For the first quarter, we expect revenue in the range of $604 million to $606 million, reflecting a year-over-year growth of approximately 22%, gross margins of 80%. I would also like to remind investors that a number of our emerging products, including newer products like ZDX, Zero Trust for Branch and Cloud, and AI analytics will initially have lower gross margins than our core products. We are 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 $114 million to $116 million, net other income of $18 million, income taxes of $31 million, earnings per share in the range of $0.62 and to $0.63, assuming 164 million fully diluted shares. For the full year fiscal 2025, revenue was in the range of $2.6 billion to $2.62 billion, reflecting a year-over-year growth of 20% to 21%. Operating profit in the range of $530 million to $540 million, income taxes of approximately $140 million, earnings per share in the range of $2.81 to $2.87 assuming approximately 164 million fully diluted shares. We expect our free cash flow margin to be approximately 23.5% to 24%, including higher capex this year. We expect our data center capex to be approximately 3 points higher as a percent of revenue compared to fiscal 2024 as we invest in upgrades to our cloud and AI infrastructure. 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, operator, you may now open the call for questions. Thank you. [Operator instructions] Again, we ask that you please keep your questions to one. Please stand by for our first question, and it comes from the line of Saket Kalia with Barclays. Please proceed. Saket Kalia -- Analyst OK, great. Hey, guys, thanks for taking my question here and a nice quarter on the billings and all next year's billings guide. Maybe if I get to one question, Jay, maybe I'll make it for you. Can you drop a little bit -- I think we all know your views on firewall-based solutions. But maybe out of curiosity, how about some of the newer players in SASE, that are maybe attacking this with a similar kind of pure-play cloud approach as Zscaler? Thanks. Jagtar Singh Chaudhry -- Founder, Chairman, and Chief Executive Officer Saket, thank you. We have not seen any meaningful change in the competitive landscape. In fact, if I would say, as the market is looking for a broader platform that's integrated and it's looking for a proven vendor because resilience has become a very important thing, our brand has gotten better. On the high end of the market, we actually feel like we're very good. We mentioned about the number of new logos. Last year, we added essentially doubled in '24 over '23. We've seen, whether the firewall vendors or some of the other vendors, either they lack a proxy architecture or they lack the multitenant architecture. Architecture is critical for vendors, and that's a big advantage for us. Even if you build the architecture, the time and experience it takes to build a highly reliable, highly resilient cloud is massive. And then these large enterprises have to trust you, it took us a long time to earn the trust of these customers. So we feel we're in a good position. We keep on innovating. The gap between our offering and, what I call so, would-be competitors is growing bigger and bigger. So I feel very bullish and comfortable with the platform and the gap we are creating with other competitors. Thank you. One moment for our next question, and it comes from the line of Brad Zelnick with Deutsche Bank. Please proceed. Brad Zelnick -- Analyst Great. Thanks so much. I'll echo my congrats on a real strong finish to the year. Jay, I appreciate your comments about the Microsoft and CrowdStrike related outage in July. And why Zscaler is designed in a way that's highly available and frankly, relied upon by customers as an inline solution. But I'm wondering if that event in any way from what you can tell, has changed the way customers are thinking about their cyber strategies and Zscalers place within that? Thank you. Jagtar Singh Chaudhry -- Founder, Chairman, and Chief Executive Officer Yes, Brad, it's a good question. After the CrowdStrike outage, customers are more focused on resilience, which is our strength. In fact, I personally got lots and lots of calls right after the incident, they wanted to know about what we're doing about it, that we ended up personally inviting -- actually my invitation briefing to 1,000 or so our largest customers, a surprise to see that within a matter of a week or so, about 700 customers registered for the briefings, we ended up doing multiple of them. The main question was, this is mission-critical service and how are we protected? The good thing is Zscaler delivered business continuity plan or VR service in Jan 2023, the first vendor to deliver the only vendor that has a true BCP. So the importance of mission criticality has gone up significantly since the outage that was caused by CrowdStrike. In fact, about 40% of Zscaler's large customers have already deployed BCP for ZIA. So while our customers want resilience, they also do want consolidation but they do not want consolidation such that it makes them dependent upon a single vendor, especially single vendor for applications and security. This sentiment has become even stronger after the Midnight Blizzard of Microsoft issue. So I think we are well-positioned. We did a good job in building mission criticality. And I think it's important and our customers are working closely with us. Thank you. One moment for our next question please, and it comes from the line of Roger Boyd with UBS. Please proceed. Roger Boyd -- UBS -- Analyst Great, thank you for taking my questions. I wanted to ask you about the billings guide. And if you could just speak to the general level of conservatism there. You've been pretty clear even before this quarter about the expected headwind coming out of the go-to-market transition, but it does sound like sales productivity was better than expected in both 3Q and 4Q this year. So just beyond that, anything else giving you more pause or tempering your expectations around the broader macro environment, sales cycles or anything else? Thanks. Remo E. Canessa -- Chief Financial Officer Great question. So I mean billings guide really reflects -- again, we broke out the first half versus second half. And as we talked about in the sales organization, we had higher attrition than we expected in Q3, and that attrition stabilized in Q4. Hiring those account reps, it's going to take time for those account reps to basically get to full productivity. We expect them to get to strong productivity in the second half. Our pipeline supports our guidance. And as we called out also when you take a look at billings, billings is made up of new and upsell renewals and contracted billings. And one of the things we called out on the script is contracted billings are scheduled billings from prior-year contracts. So those are what we're seeing. We're seeing that because of the business is getting more second half weighted, we're seeing that this -- our guide reflects that. And as we called out in the first half, contracted billings is expected to increase on a year-over-year basis, 7% and in the second half, 23%. What I can say also is that from my perspective, being here at Zscaler for almost eight years, there's a change in our sales organization. The change is basically -- it's a more mature, very strong leadership and also an organization that I feel is going to be able to sell deeper into accounts and really sell the value of Zscaler. So the puts and takes are from my perspective is that strong demand for Zero Trust. We're going to continue to expand in the G2K, which represents around 35% in the Fortune 500 customers. The key thing with Zscaler also is that we're innovating. So you look at our emerging products, they represented 22% of our total new and upsell in fiscal '24. We expect that to go up to 25%. So that's going to be our continued focus. It's not only selling our existing core products, but also innovating. As I mentioned, strong momentum in the go-to-market team. We just had our SKO and the feedback from everybody who went there was just very, very positive. Just really feel good about where we're at. Having said that, the backdrop, it's still a challenging spending environment. But I feel that Zscaler with our platform with what we're building our go-to-market, I just think we're just very, very well-positioned. Jay, anything? Jagtar Singh Chaudhry -- Founder, Chairman, and Chief Executive Officer No, it's good. I think the last comment I mentioned is in today's environment, CIOs do want ROI cost savings, cost takeout. We're in a unique position to remove a number of point products that help justify closing our deals. Operator Thank you. One moment for our next question, please, and it comes from the line of Joseph Gallo with Jefferies. Please proceed. Joseph Gallo -- Analyst Hey, guys. Thanks for the question. Jay, I wanted to follow up on that last question. I mean you've obviously started to branch out very successfully beyond ZIA and ZPA evidenced by AI and data protection success. However, post the CrowdStrike incident, we've heard customers don't want to put all their eggs in one basket. Does this hinder your ability to sell incremental products? And then Remo, maybe you can just elaborate on how you're thinking about NRR in your fiscal '25 billings guide. Thanks. Jagtar Singh Chaudhry -- Founder, Chairman, and Chief Executive Officer Yeah. So it's a very good question. Now CrowdStrike wasn't really an issue of putting all of your eggs in one basket. CrowdStrike was one of the point products, each product must work well. So on one side, customers do want consolidation. If you got two dozen products, they want to bring it down to a handful of key platform providers, but they do not want to go to the extreme of going with a single vendor that wants to sell all security products or a single vendor that wants to sell you all the applications and security products. In fact, most of the CIOs, I want to -- they have been standardizing inline access to three providers, one for EDR, one for identity and one for zero trust access. I think that's a good combination because you end up getting a couple of extra layers, but you still have separation. So in this environment, our customers aren't really pushing back on us because we tell them, don't buy everything from Zscaler. You've got an EDR provider, you've got identity provider, and we'll do the rest of zero trust connectivity. And that's how we carefully choose the markets we get into. So we feel comfortable and good about the expansion and selection of areas where we want to compete in. Remo E. Canessa -- Chief Financial Officer From an NRR perspective, Joseph, 115%, I believe, is outstanding. We're not guiding to NRR. The only time we really look at it is, as we mentioned before on these calls, really, the key for me is just driving top-line business. Whether it comes from existing customers or new customers, about 115% at our scale, I think, is outstanding. Thank you. One moment for our next question, and it comes from the line of Ittai Kidron with Oppenheimer. Please proceed. Ittai Kidron -- Analyst Thanks, guys. Great solid finish for the year. Remo. I'm sorry, I'm going to have to try and beat the dead horse here again on the billings. I just want to make sure I understand this right. I mean, in '24, you didn't have any unusual seasonality in the first half, second half on year-over-year patterns, they were quite similar in billings. So what is it that's driving the 7% and 23% differences in the first and the second half? Are things being pushed out? You just expect deals to push out. Hence, you expect to close more or renew more in the second half? Is that a macro comment? Was there something that happened two, three years ago, lump sum that somehow comes back into play here. Anything that you can do to dig in just a little bit more on that would be greatly appreciated. Remo E. Canessa -- Chief Financial Officer Yes. So it's really -- if you take a look at the call out of scheduled billings and scheduled billings growth in the first half was 7% and scheduled billings growth, but on a year-over-year basis, we see a 23% for this year. So then the question you got to step back and what creates that? So we signed three-year contracts and the three-year contracts they're scheduled billings. So we have those scheduled billings, those billings are coming through. Now if you take a look and go back into fiscal '23 first half and fiscal '24 first half, there were macro challenges. So it was a challenging environment from Zscaler's perspective. So therefore, with that challenging environment, in the first half of fiscal '23 and fiscal '24, now those scheduled billings are coming through, and those scheduled billings are lower. That is creating that growth rate of 7% year over year in the first half. Now having said that, what I made -- the comment I made before, was that the business is getting more second half. We're becoming a larger company, becoming more second half. So our guidance reflects that, and that scheduled billings of 23%, those are contracted billings they're scheduled and we expect to get those billings. Thank you. One moment for our next question comes from the line of Brian Essex with JPMorgan. Please proceed. Brian Essex -- Analyst Great. Thank you and good afternoon. Thank you for taking the question. Jay, I think you may have touched on this in your prepared remarks, but I want to circle back into the macro, specifically the competitive environment with regard to pricing. And there are certainly, in the Zero Trust space, we're seeing a lot of initiatives to consolidate on certain platforms. Some of that is flexible pricing, different duration, giving away products for free. How is that impacting the pricing environment that you're dealing with? I understand that there's a lot of times an architectural change that's attractive with your platform. But I just wanted to touch maybe if you could peel back a layer on the pricing dynamics, just to understand what you see in your environment? Thank you. Jagtar Singh Chaudhry -- Founder, Chairman, and Chief Executive Officer Sure. As I said during my prepared remarks, yes, the macro remains challenging and there's still scrutiny. Also at the same time, cyber is very important. In many areas, good enough is good enough. In cyber in large enterprises, good enough is not good enough. So customers do want a good, a very good cyber solution. That's number one. And number two, in the cyber area, real zero trust architecture that's cloud-native does play an important role that matters. Now once you do that, your pipeline actually builds, you are engaged with the customers, then the next part comes in, can you close the deal now? Closing the deal in today's environment does require that you're able to actually show the customer that you can take a bunch of products out and you can save money for the customers. And we are able to release. We are able to replace a number of new -- number of products, whether firewalls, VPNs, NAC products, and the like, and we are able to show that we are able to eliminate those products, the customer likes it. That's helped us both. ow we have a new and upsell business has accelerated actually. So we are seeing strength in area. So, personally, I'm not worried about the competition. I'm able to handle pricing situations by showing the number of products you can move. Think of other vendors. Do you think a firewall vendor wants to remove a bunch of point products? The biggest installed base in terms of products today is firewalls. They want to protect those firewalls. We take on those firewalls. We take all those VPNs. So, we just have to -- if there's an area we keep on getting better at is making sure we engaged at the C level, number one. Number two, make sure we create a good business value assessment, and we have honed that process quite a bit. Thank you. One moment for our next question please, and is from the line of Matt Hedberg with RBC Capital Markets. Please proceed. Matthew Hedberg -- Analyst Great. Thanks, guys, for the questions. Maybe one on the quarter. Could you talk a little bit about -- obviously, it was a Q4, but we assume it's back-end loaded, but how the linearity of the quarter, anything abnormal with deals that pushed or pulled? And I guess, maybe if you could comment a little bit more specifically on trends in August thus far, that would be -- or I guess now we're in the first part of September, but through August, that would be helpful. Remo E. Canessa -- Chief Financial Officer The trends in August, I'll let Jay speak about that. The Q4, we talked about how the quarters have become more back-end loaded. Nothing was similar to the prior few quarters, Q4, so nothing unusual with Q4 from a linearity perspective. And regarding trends in August, can't give specific trends on dollar amounts or anything like that or business, but maybe Jay can give a few comments. Jagtar Singh Chaudhry -- Founder, Chairman, and Chief Executive Officer Yes. I think nothing unusual to talk about in August business is making progress as usual. So I think you'll probably hear more about us as we get better. Matthew Hedberg -- Analyst All right. Maybe if I could just squeeze one more in. It seems like in the spirit of consolidation, it feels like you guys are in a good spot to consolidate a lot of customer spend. Can you talk about large deal visibility, understanding it is hard to predict the timing of those things? But could you talk about sort of the growth in your large-scale pipeline and kind of the focus on increasingly playing that consolidation role? Jagtar Singh Chaudhry -- Founder, Chairman, and Chief Executive Officer Yes. There is no slowing down on consolidation of point products. We have been seeing our deals in general, getting bigger. They're seeing upsell going more and more. So if customers spend X, they're spending more with us. I shared several large deals where customers started at X and has gone up to Y or Z and whatnot. So the main thing for customers are looking for consolidation is, number one, can you give me better cyber and deal detection? Number two, can it operationally run and manage these things better? Number three, can you do cost savings? That message is loud and clear, and we're handling all of that. In the one area I'll highlight for consolidation, which is playing a bigger role for us is data protection. When customers started with Zscaler, ZI, they started with cyber protection was the primary focus to make sure they don't get compromised. Now with ransomware attacks where data is often exfiltrated, data protection has become a bigger and more important item than it used to be. Since we are sitting in line with the traffic that goes to the internet, we are the natural provider, a natural partner to do data protection. And we're seeing a growth in data protection that has become one of the fastest-growing areas for us. I think a few quarters ago, we mentioned that it has surpassed $4 billion for us. And also, we expanded this platform quite a bit. We used to do inline DLP as the primary thing. Now, we also got DLP for email as a big thing, SaaS, SSPM, CASB kind of stuff and now the DSPM are becoming more areas. So I think we've got a great expanding platform. With cost savings, I think they're extremely well-positioned. Remo E. Canessa -- Chief Financial Officer From my perspective, also, Matt, I mean just some numbers we called out on the script, 567 customers with greater than a million ARR, 3,100 customers greater than 100,000. And I believe 60 -- over 60 customers with $5 million in ARR. Half a trillion transactions per day. Just to put it in perspective, the order of magnitude, that's more than anybody's seen. At the time of our public offering, we're doing 30 billion transactions per day. So we've got from 30 billion transactions to 500 billion transactions. The data that we received, the information that we receive, that we're able to basically help our customers from a security perspective. I just don't think there's anybody else out there we can do it. It's my view that we are in a great position to capture this market. I also believe that with the go-to-market changes that we've made over the last nine months, we're going to sell deeper in the accounts, and also, one of the things we called out GSI. That's going to be an area that we're going to focus on as we go forward. I think the opportunity is really big. And I believe the platform is well-positioned to really protect customers and governments throughout the world. And I think we feel good about where we're at right now. Thank you. One moment for our next question that comes from the line of Shrenik Kothari with Baird. Please proceed. Shrenik Kothari -- Robert W. Baird and Company -- Analyst Hey, thanks for taking my question. So Jay, in light of what you said, right, you guys are expanding the platform beyond just securing users and now delivering zero trust for applications, workloads and IoT. And you gave example of a new logo win with top 10 and strong customer demand for the broad approach. Can you kind of elaborate on the nature and composition of these contracts, the noncancelable billings, the compensation of this pipeline in terms of users and seats versus workloads and applications that you called out? And does that help with the overall kind of land and expand motion moving more toward the workload and application base and a follow-up for Remo as well. Jagtar Singh Chaudhry -- Founder, Chairman, and Chief Executive Officer Yes. Let me start with the platform expansion, as I said during my prepared remarks. Most of the core vendors are trying to really mature a product for protecting users. We've done that extremely well, 47 million some users protected. So it is natural for us to expand into workloads, IoT/OT devices and the like. In terms of growth, to give you some data points, we talk about emerging products in some of the newer areas and then we got the mature flagship products. Our emerging products, which is where the workload protection, IoT/OT type of stuff falls in, it was about 22% in fiscal '24. It had gone up from 18% in fiscal '23, and we expect it to go to mid-20s in fiscal '25. So that's growing faster. That's why it's able to carve out market share out of that. The exciting thing about that area is, there is literally no real competition to do these things in zero trust fashion. Yes, some of the workloads and all is done through firewalls, communication, IoT/OT, what you do, firewall and VPNs. We all know that firewalls and VPNs have to go away. And we are well-positioned. It's just that it's a little bit different sale. It's the same audience, a lot different. IoT/OT, a lot of stuff is linked to manufacturing and plants and the like. So you need to reach on the audience, but CISO and CIO do play a common role. With the acquisition of Airgap, which does actually device segmentation for IoT/OT, extremely well without needing any firewalls, without needing any network access control devices. It's one of the area that's being really showing tons of interest in our customer base. In fact, our number of engagements with device segmentation for IoT/OT based on Airgap has gone up significantly. So that's why I feel like the gap between us and people trying to come from behind is growing and the barrier to entry is not trivial in this case. Remo, do you want to talk about that? Remo E. Canessa -- Chief Financial Officer Yeah. But from a contracted billing perspective, again, the key point is that we signed three-year contracts upfront. And so getting that certainty with that contract is good. And then the billing happens on an annual basis afterwards. That's the scheduled contract billing. So what we're seeing is that our contract lengths are increasing, which is positive. And also, we're seeing our deal size increasing, which is positive, too. We're also seeing customers buying more of our product and across our platform. And again, getting a three-year contract with the schedule billing gives you certainty related to the billings, but also getting that three-year contract gives you time to basically sell that customer more. And as I mentioned before, which is really key, is that the sales organization, go-to-market organization, we're selling deeper into the accounts. That's going to be our focus. We look for new customers but we're also going to look to sell deeper into our accounts. Thank you. One moment for our next question that comes from the line of Patrick Colville with Scotiabank. Please proceed. Patrick Colville -- Analyst Jay, thank you so much for taking my question here. I guess I want to ask about emerging products. I mean it was 22% of new and upsell in fiscal '24. I mean, very impressive to see those emerging products ramp. I mean we're going to get this in the 10-K, but what was ZPA and then ZIA as a proportion of new and upsell in fiscal '24? And I guess, probably, the second part of the question is, how do you expect ZPA and ZIA to trend in fiscal '25. I mean what's the sustainability and remaining TAM for those two product lines? Jagtar Singh Chaudhry -- Founder, Chairman, and Chief Executive Officer So very good question. So let's start with ZIA and ZPA. At the time of IPO, there was only one product. ZPA was kind of a rounding adder, so to speak. But today, if you look at the mix between ZIA and ZPA, ZPA has gone from literally nothing to about 40% -- over 40% of the new business that we are doing between the two of the products. So that's very marketable. In fact, if it goes too high, I'll be kind of wondering is ZIA is going fast enough. So I expect it to grow somewhat more, but not quite at the end of the day, it could get to 50-50. I expect every Zscaler customer, for every user to have ZIA, ZPA and ZDX. Those three products make a complete package, and we call it Zscaler for users. Zscaler for users has become our single largest queue basically because that's what our sales team leads with which really says that our goal is for every customer to buy those three products. That's kind of one key area. Now what is the second part of your question? Sorry, I forgot. Patrick Colville -- Analyst I guess it's -- the question we get from investors is what is the sustainability of those business lines? And I guess what you just articulated is that there's a lot to go in ZPA, but maybe talk about ZIA, is there a lot to go there? Or is that a more mature segment? Jagtar Singh Chaudhry -- Founder, Chairman, and Chief Executive Officer So let's talk about the second part. That is how much market penetration were done and how much market penetration we have left today. ZIA was a starter product. Obviously, almost all customers start with ZIA. So, we are seeing some customers starting with ZPA, but that number is relatively small. But take G2K, we reached nearly 35% G2K, which means there are about 300 companies -- yes, 300 companies that are spent -- sorry, 35% of them are Zscaler customers. Now, probably in the area of 60% of our large ZIA customers, also a ZPA. So that's good penetration. But in terms of the opportunity for us only about 35% G2K, about 300 of them spend over $1 million with us. That means they offer the existing customers, the 400 more that could easily go to $1 million for us. But many of the customers in that same group have done to $5 million. So what I'm saying, there's an opportunity for us to upsell, go from 35% G2K to a higher number, and among those 35% to sell both ZIA and ZPA. So there's no lack of market for us. Other point I'll make is, on the higher end of the market, we do extremely, extremely well. Those customers are sophisticated. They need the functionality, breadth, depth, and reliability and resilience we offer. So we are counting on this thing. Our account focused program that our new CRO is driving is actually focused on going deeper and wider into our existing accounts and getting new large logo accounts as well. I hope that gives you the color you look. Thank you. Our next question comes from the line of Adam Borg with Stifel. Please proceed. Adam Borg -- Analyst Awesome, and thanks for taking the question. For Jay and Remo, I know you talked about this a bit in the script, but I was hoping you could talk a little bit more about headcount growth in fiscal '25 and where you're really investing most across sales and marketing and R&D? Thanks so much. Remo E. Canessa -- Chief Financial Officer Yeah. We do expect to increase headcount in fiscal '25. Our fiscal '25 headcount increase will be across all the areas, R&D, sales and marketing, G&A and cloud. I would say the pace of hiring in fiscal '25 will be less than what it was in fiscal '24. In fiscal '24, we added about 1,400 employees. We went from 5,900 employees to 7,300. So I would think about more of a moderate pace in hiring in fiscal '25 versus '24. Thank you. And our last question comes from the line of Hamza Fodderwala with Morgan Stanley. Please proceed. Hamza Fodderwala -- Analyst Good evening. Thanks for fitting me in. Either for Jay or Remo, curious since Mike and the new sales leadership have been on in the last few quarters, what are some of the early indications that you're seeing early proof points that give you confidence heading into fiscal '25? Jagtar Singh Chaudhry -- Founder, Chairman, and Chief Executive Officer So good question. Remember, when we set out to make some of these changes. The key thing for us was we wanted to move from early stage companies that focus on opportunity-centric stuff to account-centric stuff. That was one of the key fronts. We have put a program in place. We've trained the sales force and we are actually making good progress in assuming this process. How do you see the results? You start seeing more upsell in the account base and then you start seeing new logo as well. So we are seeing good upsell large deals and large accounts, that's what we expected. In fact, if you think about it, our overall number of $1 million ARR customers has gone up to 567. Our customers with $5 million or more ARR has gone to 60. Now all of that is not attributable to the new team because the new team started working on past couple of quarters, but we're seeing key reasons for that. The second thing we're seeing as a result is the GSI involvement. We have a special focus on GSIs, who actually are embedding our offering into their offerings. So it becomes part of your offerings as well. We're seeing good early indications of that. Number three, the quality of sales leaders we're hiring, a number of them come from the background with a focus on account, focused on selling and working with large accounts for larger deals. We are seeing the quality of those people. So from my point of view, the transition is going better than I expected, I'm very pleased with it, and I'm very bullish about it. From my perspective, yes, from my perspective, I'll give you my two cents, and I'll make it really quick. At the end of the day, you've got a great company with a great platform for a significant need for your product on a worldwide basis. That's required, quite frankly, it comes down to one thing, and that is people. And I believe what I'm seeing with the leadership that we have, is that it's in our go-to-market team across the board. It is great to see. And it really, I think, sets us up well going forward. And as Jay mentioned, strong leaders will hire strong people. And I believe the leadership we have on board is very, very strong. Jagtar Singh Chaudhry -- Founder, Chairman, and Chief Executive Officer Yeah. I think another comment I'll make is a barrier to entry to do what Zscaler has done, it's very hard and cyber is becoming more and more important and we're excited about the opportunity ahead of us. With that, I will thank you for your interest in Zscaler. We look forward to seeing you at one of these investor conferences. Thanks, again.

Sprinklr, Inc. (CXM) Q2 2025 Earnings Call Transcript

Willow Miller - William Blair Pinjalim Bora - JPMorgan Elizabeth Porter - Morgan Stanley Jackson Ader - KeyBanc Capital Markets Matt VanVliet - BTIG Michael Berg - Wells Fargo Jack McShane - Stifel Catharine Trebnick - Rosenblatt Securities Austin Cole - Citizens JMP Clark Wright - D.A. Davidson Greetings and welcome to the Sprinklr Second Quarter Fiscal Year 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. As a reminder, this call is being recorded. I would now like to turn the call over to Eric Scro, Vice President of Finance. Thank you, Eric. You may begin. Eric Scro Hey. Thank you, Paul. Welcome everybody to Sprinklr's second quarter fiscal year 2025 financial results call. Joining us today are Ragy Thomas, Sprinklr's Founder and Co-CEO; Trac Pham, Co-CEO; and Manish Sarin, Chief Financial Officer. We issued our earnings release a short time ago, filed the related Form 8-K with the SEC, and we've made them available on the Investor Relations section of our website along with the supplementary investor presentation. Please note that on today's call, management will refer to certain non-GAAP financial measures. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP. You are directed to our press release and supplementary investor presentation for a reconciliation of such measures to GAAP. In addition, during today's call, we'll be making some forward-looking statements about the business and about the financial results of Sprinklr that involve many assumptions, risks and uncertainties, including our guidance for the third fiscal quarter and full year of 2025, the impact of our corporate strategies and changes to our leadership, the benefits of our platform and our market opportunity. Our actual results might differ materially from such forward-looking statements. Any forward-looking statements that we make on this call are based on our beliefs and assumptions as of today, and we disclaim any obligation to update them. For more details on the risks associated with these forward-looking statements, please refer to our filings with the SEC, also posted on our website including Sprinkler's quarterly report on Form 10-Q for the quarter ended July 31, 2024. Thank you, Eric, and hello, everyone. Q2 total revenue grew 11% year-over-year to $197.2 million and subscription revenue grew 9% year-over-year to $177.9 million. We generated $15.2 million in non-GAAP operating income, which resulted in an 8% non-GAAP operating margin for the quarter. Included in these results is a credit loss charge of $10.1 million. Our free cash flow for the quarter was not impacted by this charge. Manish will discuss this topic in more detail during his remarks. As we acknowledged on previous calls, the transformation we're working through will take several quarters. Trac will discuss the progress we're making and our plan to capitalize on our strength to reaccelerate growth. Before I hand it over to Trac, I would like to reflect on some recent successes we have achieved. To begin with, Sprinklr's platform has several building blocks that we believe will underpin our turnaround in growth and profitability. We operate in attractive and growing markets and support a gold star list of customers through an AI-powered unified customer experience management platform. We have differentiated leadership position in our core product suites and we're also an emerging disruptor within the CCaaS space, where our product is already top quadrant generating tangible benefits for our customers. During the second quarter, we added several new customers and expanded with existing ones such as UBS, Ford, T-Mobile, Grupo Bimbo and Planet Fitness across all our product suites. Some specific examples include one of the largest global asset managers in the world. At this industry-leading company, our platform replaced multiple social tools and point solutions, including an incumbent vendor who was in place for 12 years. Sprinklr is unifying AI-powered listening, publishing, engagement, marketing and customer service across all social channels, which will allow these teams to work better together and improve their customers' experiences. Another example is a global EV company who is using our core product suite to support their aggressive launch in multiple countries. This company uses Sprinklr's insight suite to understand market opportunities and our social capabilities to market on different channels that may be popular in each country. We're also seeing some remarkable business results as customers deploy our AI capabilities. Notably, with our service suite, a large North American retailer was able to use our AI to increase their call deflection up to 35%. This resulted in an estimated 420,000 fewer calls a year that needed to be handled by expensive agents. Another example is a large global bank that saw their customers' use of AI self-service increase to over 60%. This customer has implemented Sprinklr's CCaaS and saw their outbound virtual agent productivity improve by 50% as well. These are just a few recent examples of how our value proposition is resonating with some of the world's largest enterprise customers. In addition to these customer validations, our innovation is also being recognized by industry analysts. In Q2, Sprinklr was named a leader in digital customer interaction solutions, Forrester Wave. As cited by Forrester and I quote, Sprinklr boasts the most feature-complete solution, bar none. We were also named a major player in the 2024 IDC MarketScape for Contact Center-as-a-Service. As you know, we've been building out our executive leadership team. Over the last several quarters, we've attracted and hired leaders who are experts in their fields and are deeply passionate about driving our business forward. One of these leaders is our Co-CEO, Trac. I'd now like to invite Trac to share his thoughts on the work we're doing and the improvements we're making here at Sprinklr. Trac, over to you. Trac Pham Thanks, Ragy. We have strong conviction for the power of our technology vision and the significant progress we have made in building a recognized market-leading platform. We acknowledge the near-term challenges we are facing, including lower net bookings we've been experiencing over the past few quarters. This is due to execution challenges exacerbated by macroeconomic factors that have impacted customer budgets and spending. Specifically, first, our unified platform enables us to operate in two distinct markets with our core suites and CCaaS. Related to our core suites, we have seen pressure on renewals due to tightening customer budgets compounded by a renewal process that was not effective enough in demonstrating value. Second, our push into CCaaS has required us to make investments in both product and implementation as we gain scale in a competitive market. We have a strong offering, but have not yet achieved brand recognition. Third, as we enter new markets and push for growth, we launched new product innovations very quickly over the past three years. This has created product and operational complexity which we are addressing. We are now rebalancing our focus between building on our leadership position in our core suites, while pressing our advantage in CCaaS. We're taking decisive action and with great urgency to ensure the business is on a solid foundation. These are actions we are taking to address these issues. We are sharpening our strategic focus to improve execution and scale. Once sold and implemented successfully, our customers love our products. We are, therefore, focusing more closely on those segments and products where we can create the most value for our customers. We're most successful when we sell the full value of our platform and the breadth of its capabilities, while aligning with the priorities and expectations of our executive clients. Related to our go-to-market efforts, for the broader platform, we are refining execution processes and activities designed to reaccelerate revenue growth and meaningfully expand operating margins. Some of these initiatives include, one, we are reorienting our sales team with the support of our new renewals team to increase renewal rates and reduce churn. This will improve swift engagement with customers throughout the life cycle, helping them unlock the full value of our offerings. We are also measuring health factors and renewal likelihood, directing efforts where they have the greatest impact. Second, we are changing our geographic support model to be closer to where the customers operate. We're doing this in two ways, first, by moving our implementation teams closer to client geographies, and secondly, better aligning our success and solution consultants with our territory model. Additionally, we are deploying specialists to match expertise with customer needs to the right deal opportunities. As mentioned earlier, we are elevating our sales and field expertise to focus on C-suite selling for both users and technology buyers. Third, we are driving improvements in pricing and packaging aimed at simplifying our product and solution offerings. We believe this will enable us to create fewer but more targeted bundles aligned with customer expectations and will help remove sales and purchase friction. There are early signs of success with some of these targeted initiatives. In the second quarter, we closed several large deals within our global strategic accounts across the tech, telecom and retail industries. We believe we have a strong product market fit with our marketing, social, insights and services suites across these segments and we're building the organization to better serve and scale these customers. Another key priority is ensuring we sufficiently invest in areas foundational to our ability to scale. We are examining all areas of the company, including third-party spending, for opportunities to increase productivity and efficiencies. While we are in the early stages of this effort, we believe that these actions are required to fund necessary investments to reaccelerate growth and increase margins. In closing, we are confronting the challenges we are facing with a clear and aggressive agenda. We're acting with urgency, reassessing our focus areas and strategically reallocating our resources to align with our top priorities. Our commitment to driving excellence across the company is unwavering and we are diligently evaluating our cost structure to drive margin expansion. By executing our agenda, we believe we are building a solid operational foundation that will better position us for sustainable success. We believe these efforts will enable us to deliver long-term value for our customers, partners, shareholders and employees. With that, I'll turn it over to Manish to discuss the financials. Manish Sarin Thank you, Trac, and good afternoon, everyone. For the second quarter, total revenue was $197.2 million, up 11% year-over-year. This was driven by a subscription revenue of $177.9 million, which grew 9% year-over-year. Services revenue for the second quarter came in at $19.3 million. The broader demand environment that we have seen for over a year now has continued with longer sales cycles and heightened budgetary scrutiny. In addition, we continue to experience elevated churn in our core product suites and expect this level of churn to continue for the full year FY '25. Our subscription revenue based net dollar expansion rate in the second quarter was 111%. As a reminder, we calculate NDE on a trailing 12-month subscription revenue basis, which makes it a lagging indicator. While we do not forecast NDE, we expect this number to come down over the next few quarters as the lower quantum of new business and elevated churn rolls through the revenue waterfall and works its way through the calculation. As of the end of the second quarter, we had 145 customers contributing $1 million or more in subscription revenue over the preceding 12 months, which is a 21% increase year-over-year. We believe our continued success in winning and growing seven-figure customers is an indicator of the value of the platform we deliver for our customers. Regarding gross margins for the second quarter, on a non-GAAP basis, our subscription gross margin was 81% and professional services gross margin was negative 1%, resulting in a total non-GAAP gross margin of 73%. Turning to profitability for the quarter, non-GAAP operating income was $15.2 million or an 8% margin, which drove non-GAAP net income of $0.06 per diluted share. Included in this non-GAAP operating income is a $10.1 million credit loss charge. Excluding this charge would have resulted in a non-GAAP operating income of $25.3 million or a 13% non-GAAP operating margin and higher than the guidance range provided for the quarter. This charge was booked to the G&A expense line in Q2 and is largely driven by two factors. As we entered new markets and launched new products in recent years, we saw early traction in international markets. Business practices in these markets result in elongated collection cycles. Furthermore, we experienced implementation challenges in some of these markets where we did not have established partnerships and implementation teams with deep technical expertise in our new product offerings. As such, we have taken specific reserves against select accounts, which will impact both revenue recognition and cash collection from these accounts. We have since invested in both to shore up our implementation performance as we continue to expand and scale our product offerings. This charge had no effect on free cash flow for the quarter. However, these customer situations resulted in approximately $5 million being removed from our cRPO calculation as of July 31. With respect to free cash flow, we generated $16.5 million during the second quarter, which represents an 8% free cash flow margin compared to free cash flow of $8.7 million in the same period last year. This cash flow generation contributed to our healthy balance sheet, which now stands at $468.5 million in cash and equivalents with no debt outstanding. During the second quarter, pursuant to the company's stock buyback program, we purchased 17.1 million shares of our Class A common stock for a total cost of $169.8 million. With these purchases, we have completed the full $300 million buyback that was authorized by the Board. A total of 27.9 million shares were repurchased and returned to the company's authorized but unissued share reserve during the buyback program. Calculated billings for the second quarter were $192.8 million, an increase of 8% year-over-year. As of July 31, total remaining performance obligations, or RPO, which represents revenue from committed customer contracts that has not yet been recognized, was $887.1 million, up 10% compared to the same period last year, and cRPO was $557.8 million, up 9% year-over-year. The sequential decline in RPO and cRPO was driven by the soft demand environment, elevated churn, and the approximately $5 million impact from specific customer situations as described earlier. Moving now to the Q3 and full year FY '25 non-GAAP guidance and business outlook. We continue to see elevated churn and our current assumption is that the macro softness that we are experiencing will continue through the entirety of FY '25. For Q3, we expect total revenue to be in the range of $196 million to $197 million, representing 5% growth year-over-year at the midpoint. Within this, we expect subscription revenue to be in the range of $177.5 million to $178.5 million, representing 4% growth year-over-year at the midpoint. The Q3 guide implies approximately $18.5 million in professional services revenue. As we have signaled on prior earnings calls, we are continuing to invest in our CCaaS delivery capabilities given the growth opportunities available to us in that market. As such, we expect services gross margins to decline in Q3 to approximately negative 15%. As we continue to gain scale in CCaaS, we will begin to focus on billing rates and utilization, which should improve services gross margins going forward. We expect non-GAAP operating income to be in the range of $19 million to $20 million, resulting in non-GAAP net income per diluted share of approximately $0.08, assuming 266 million diluted weighted average shares outstanding. The sequential decline in non-GAAP operating income from the Q2 adjusted level of $25.3 million is driven by two factors. First, an increase in subscription costs from higher data and hosting costs as we launch new environments. And second, from the higher professional services costs related to CCaaS delivery as mentioned earlier. For the full year FY '25, we expect subscription revenue of $710.5 million to $712.5 million, representing 6% growth year-over-year at the midpoint. We expect total revenue to be in the range of $785 million to $787 million, representing 7% growth year-over-year at the midpoint. Note that the approximately $5 million impact to CRPO described earlier equates to an approximately $3.5 million impact to FY '25 subscription revenue and is factored in the revised guide for both Q3 and full year FY '25. Implicit in the above numbers is that we are increasing our FY '25 services guidance from $65 million to $74.5 million. For the full year FY '25, we are reducing our non-GAAP operating income to be in the range of $80.5 million to $81.5 million, equating to non-GAAP net income per diluted share of $0.32 to $0.33, assuming 270 million diluted weighted average shares outstanding. This implies a 10% non-GAAP operating margin at the midpoint. When adjusted for non-recurring expense categories, as well as the $11 million credit loss charges taken in the first half of FY '25, this is in line with the previously issued guidance of $104 million to $105 million. These items include, first, severance and related costs of $4 million incurred in Q3 for the reduction in force we executed in May. Second, $5 million spent on consulting resources for strategic and operational initiatives to be spent during FY '25. And third, approximately $3.5 million FY '25 revenue impact from the approximately $5 million impact to cRPO as discussed previously. In deriving the net income per share for modeling purposes, we estimate $24 million in other income for the full year with $5 million of that to be earned here in Q3. This other income line primarily consists of interest income. Furthermore, a $15 million total tax provision for the full year FY '25 needs to be added to the non-GAAP operating income ranges provided. We estimate a tax provision of $4 million here in Q3. We are still tracking to be GAAP net income positive for the full year FY '25, consistent with our comments on the past few earnings calls. With respect to billings, Q3 is traditionally our weakest quarter, and we estimate billings to be down approximately 10% compared to the same quarter last year. And consistent with the billings trend from last year, we expect a billings reacceleration in the fourth quarter such that full year FY '25 billings will be up 6%, in line with the subscription revenue growth rate for the full year. With respect to free cash flow, we now estimate to generate approximately $55 million in free cash flow for the full year. Lastly, I would like to thank all our employees for their dedication and passion for what we are building at Sprinklr. And with that, let's open it up for questions. Operator? [Operator Instructions] Our first question is from Arjun Bhatia with William Blair. Please proceed with your question. Willow Miller Hi, everyone. I'm Willow Miller on for Arjun. Thanks for taking our question. So, to start off, it sounds like pricing pressure is continuing. We're hoping to get a more color there. Is it to the same extent as last quarter? I'm just trying to see if there's any changes there. Ragy Thomas Yeah, this is Ragy. I'll take that question. We were continuing to see budgetary pressures. In terms of is it better or worse than last quarter, I'd say it's not getting any better. And so I'd say kind of consistent with what we've seen in the past quarter and quarter before. Willow Miller Okay. And then in your prepared remarks, you called out pricing and packaging changes, hoping for you to unpack that a little bit more. Ragy Thomas Yeah, so we have a unified platform that was organically built out over the last 14, 15 years. And it's evolved quite a bit in terms of its functionality and capabilities. So where it stands now is we have been consolidating point solutions that our customers use and replacing it with this unified platform. Now, pricing and packaging kind of has been evolving organically based on the products we compete. We realize that there are opportunities to be more efficient and more accretive for the business by re-looking at the pricing and packaging and aligning it more to how customers buy now, given that in the 15 years each one of these sub industries have also dramatically changed. So, we are working -- we've hired a pricing -- we're building a pricing team internally as well as working with a pricing consulting company to evaluate the market and talk to our customers comprehensively. Willow Miller Got you. Okay. This is helpful. Thanks for taking our questions. Ragy Thomas And I might just also add that we have an opportunity to look at how we're pricing our AI. And we have been throwing it in because we are an AI-first platform, but there's an opportunity to re-look and examine that as well. Thank you. Our next question is from Raimo Lenschow. Please proceed with your question. Unidentified Analyst Hi, this is Franklin for Raimo. Thanks for taking the question. So, last quarter you called out a bit of an AI crowding out effect in marketing spend specifically. I just want to check in and see how you've seen this trend play out with another quarter of data and customer conversations. Thank you. Ragy Thomas Yeah. So, we're seeing pretty interesting success in terms of business outcomes with AI, more on our CCaaS and our service suite. Our marketing product suite, it's got a ton of AI, but I think it's more pronounced in our service suite, where we are able to deflect calls using our bots and our IVR capabilities powered by AI. And as I called out in my prepared remarks, I have a couple of case studies that are pretty interesting. One where the customers are 60% of the time, more than 60% are relying on an AI powered bot now as opposed to finding their way to the human agent. We have another one with a large telecom company where we replaced their current AI powered bot that had 12% containment and out of the gate after implementation we were able to boost that containment up to 20%. So we're seeing some, and this is in addition to making the inbound and the outbound agents more productive. So we're seeing some pretty interesting numbers there. Thank you. Our next question is from Pinjalim Bora with JPMorgan. Please proceed with your question. Pinjalim Bora Great. Thank you for taking the questions. Just moving in that thread that you were answering before, the -- you have obviously -- it seems like some of your customers are seeing some pretty good productivity increases. But what are you hearing from these companies in terms of agent growth as they see these productivity improvements? And then how do you feel about that transition of Sprinklr as potentially, there is some pressure on agent growth going forward. And you talked about pricing and packaging? Could we see some kind of a consumption-based element when it comes to AI specifically? Ragy Thomas With a few questions, Pinjalim. Good to connect. Well, number one, we're seeing sort of companies bifurcate a couple of ways. One, there are companies who are really looking to cut down human labor cost in the contact center and using AI as a way to do so. To be fair, though, the turnover in the context and is pretty high. So if you get 25% more efficient, you're just covering one year's worth of attrition. Two, we are finding companies who are translating that newfound productivity into sales improvement. Well, most of the contact centers we go into both have inbound as well as outbound activity, inbound customer service as well as outbound TV sales. And so as they cut down on one, they're able to repurpose those dollars and time into more outbound spot and cross-selling from the inbound service. So those are the two trends we see. With AI, we know that the agent seat count is going to come down. So we've priced our AI differently as different modules, and we are evaluating as a part of this sort of more comprehensive exercise evaluating interaction-based models as well. Pinjalim Bora Got it. One follow-up for Manish. If I heard that correctly, I think billing is supposed to be down 10% year-over-year in Q3 and then it seems like a big sequential ramp in Q4. Wondering what gives you confidence in that? Maybe talk about the pipeline/visibility going to the second half of the year at this point? Manish Sarin Yeah. Hi, Pinjalim. So one is, if you look at Q3 of last year and even Q3 of FY '22, so you will note that there is always a big sequential decline. So last year was 10%. And I think the one the year before that was also in the same range. There was just given the quantum of new business that we were booking back then and just given the renewal streams, Q3 for us is always a little pronounced because it's our slowest quarter. The book of business is the smallest. So I think it has a more pronounced impact in Q3, which is what we are reflecting now in this guide. And then Q4, you'd remember, is always our strongest quarter. It always accounts for, give or take, 40% of our business. So I think just going by what we have seen and what visibility we have, that's what's factored into the guide that I've provided. Thank you. Our next question is from Elizabeth Porter with Morgan Stanley. Please proceed with your question. Elizabeth Porter Great. Thanks for the question. I wanted to go back on the AI debate. It's really interesting to hear some of the case studies on improvements that customers are seeing when they leverage Sprinklr's AI capabilities. I think the other side of the debate that we often here is what happens when customers decide to build AI themselves where we've seen also some headlines in the news. So I'd love to just get your view on the build versus buy debate and kind of what drives your confidence that the deal slowdown is more macro versus customers trying to do more themselves versus buy? Thank you. Ragy Thomas Elizabeth, that's a great question, and thank you for asking that. We -- to be clear, I think when you talk about AI, I want to just frame it the way we see it, okay? We see the foundation of AI, which is this insatiable need for more hardware, of which I'm sure NVIDIA is being a very, very successful company because of it. We see what we call as the infrastructure layer of AI, which is the general purpose models that companies like OpenAI and Google and Meta and others are building. And there's a lot of value in that stack. And what you're going to build on top of it is going to be based on the best models that are currently available. Building models are expensive. We have our own that's built on open source available models, and we enhance them. But Sprinklr has traditionally focused on what we call as the application layer of AI, which is the third layer that sits on top of these general purpose models. When you look at large companies, they have large corpuses of internal data in the contact center, that's your knowledge base, that's your product spec, that is customer feedback. All of that today resides on Internet and documents and some old legacy knowledge base. If you look at marketing and product information, that's in a dam, that's on a website. So it's all over the place. So companies are going to need to bring these together somewhere where they can sanctify it because the change in the document going forward, if AI is answering customer inquiries, wrong change in the document can be catastrophic for customer experience. So there's a whole need to bring the data together, have closed-loop feedback and training, workflows and version control of your internal data, all of which Sprinklr provides. Second is the ability to provide governance and compliance on that data. Who made the change? Why did AI say this? What was the approval workflow. And third, on top of that is guardrailing. What is the AI allowed to do and not allowed to do. And depending on how you move that slider left to right, it can have undesirable effects. So these are application level things that we specialize in which makes us very confident that what we bring to the enterprise is very unique and is very enterprise grade and is built to be on top of general purpose models. Yeah, and I'd also stress Elizabeth that AI, we all know that there's going to be a huge economic boom that's going to happen because of AI. And it's tempting to think it's going to be just AI then these models that do everything. In reality, this AI has to be applied to every channel. That's number one. This AI has to be applied to every function. And this AI has to be applied across every customer-facing team, through a car company from the dealership to the global marketing back in Japan. So, all of these have to be driven off centralized ontologies and unification, and we're in a very unique position, not downplaying our execution focus that we need to have in the short term. We're in a very unique place where we've spent 14 years unifying the fabric of this independent business units and market, which we have solved very well in -- starting in social channels, which has been a differentiator for us. Elizabeth Porter Great, thank you so much for that very comprehensive answer. I just wanted to get a quick follow up in it as well. You've made a lot of changes internally just around elevating the sales and expertise of fields. Could you just speak to some of the productivity level that you're seeing within the sales force, kind of where you are on ramped capacity and where you expect to be heading into next year? Trac Pham This is Trac. Elizabeth, I think we're making the right changes. We've got good leaders in place. They're building up their bench strength. And it takes time for those things to change. I think there's a degree of stabilization that we're seeing, which is really good. Despite the macro headwinds that we're facing, there are some very encouraging signs that we're stabilizing the business and that we're moving ahead in certain areas, but we're still in the very early stages of that given that when you make these organizational changes, it does take time for it to flow through. Thank you. Our next question is from Jackson Ader with Keybanc Capital Markets. Please proceed with your question. Jackson Ader Great. Thanks for taking our questions, guys. First one, when customers are either electing to churn or reduce their spend or just, maybe not expand as much with Sprinklr upon renewal, where are they going? Is there a specific competitor that where people are headed, or is there other parts of the IT budget that are getting dollars that maybe Sprinklr is not? Ragy Thomas So we're seeing budget cuts as sort of a common theme, which are the things we can't really control. But when customers, again, as we mentioned on the last call, we're seeing more like down sales and not logo churns. So customers are truing up is probably one way to look at it, but when we -- when they go to a competitor, we're not seeing that landscape change dramatically at all. We are not seeing any new shift in where they go or how they go. But I think the more pronounced things that we're seeing are down sales and truing up and cutting back. Jackson Ader Okay. All right. Understood. And then, Manish, on the -- can we just go through the mechanics of the credit charge? Have you recognized revenue from these customers and if you have, how much? And then if I just think about $10 million or $11 million in total, $5 million taken out of current RPO, does that mean that the balance is still left to come out of revenue in future periods? Thanks. Manish Sarin Yeah, so I think the way to think about, let's just look at Q2, the $10.1 million charge. Give or take, $3.5 million or $4 million is just write-offs. These are older accounts for a variety of reasons we've deemed uncollectible. And then I said, as I said in my prepared remarks, $6 million is for specific accounts where either given their geography or some of the implementation challenges that I referenced earlier, for that $6 million of specific reserves, the cRPO associated with those accounts is approximately $5 million. So that would be for the duration of those accounts. For FY '25, till the end of January, the revenue we would have recognized had we not taken the $6 million worth specific reserves would have been $3.5 million. So that $3.5 million we have then removed, and that is factored into the guidance that I gave for the full year. Does that square for you? Jackson Ader Yes, so then the just $6 million minus the $3.5 million, that's just going to come in -- will be a headwind to FY '26 as the rest of that cRPO would have fallen into revenue. Manish Sarin Correct. But just for this year, if the midpoint of the guide right now it's $711.5 million for subscription revenue, add back the $3.5 million you are sort of at where we were before. But I would just try and provide you that bridge for this year and you're correct in your view around there is a headwind for next year. Yeah. Thank you. Our next question is from Matt VanVliet with BTIG. Please proceed with your question. Matt VanVliet Hey. Good afternoon. Thanks for taking the question. Just wanted to come back to the new pricing and packaging initiatives you put in place. Curious as you've gone through your analysis and now putting that into place, sort of what the expectation is on overall deal sizes coming out of that as you sort of streamline and simplify what you're doing there? And then what, if any, impact would you expect that to also have on the renewals with existing customers? Ragy Thomas Matt, I want to be very clear, we have not completed that project. In fact, we've just rolled it out in the last quarter. So I would expect that project to run through another quarter or so, and it will not have any impact for this year. Trac was outlining it as a series of things that we're doing as we foundationally set this up for reacceleration in the out quarters. Matt VanVliet Okay. Helpful. And then I guess on the renewal team that you put in place, can you give us a sense of sort of the size of that team and any, I guess, headcount related expenses that are associated with that? And maybe what the discussion internally was about building out that team rather than just hiring more account executives that would still handle some of that renewal pressure as part of their overall quota? Trac Pham Hey, Matt. This is Trac. I think there's two things I would add. One is in the past and part of the problem is that the renewal effort was distributed across a variety of different teams and different folks. The idea of building out the renewal team is to create a central focus that can drive that effort. And to your -- that's the first point. Second, to your point, why wouldn't we hire more AEs? We are going to do both. We are making sure we hire folks to drive better bookings as well as supporting the renewal effort. All those things that I'm describing is factored into the guidance that Manish has given, so it's not incremental to that. Thank you. Our next question is from Michael Berg with Wells Fargo. Please proceed with your question. Michael Berg Hey. Thanks for taking my question. I have a -- I have one for Manish here on margin impact from the charge. You mentioned on your opening remarks that adjusting for the charge as well as a handful of other items that the operating income would be in line with the prior guidance. Can we think about that prior guidance of $104 million as a starting point for modeling out your operating income versus coming off of a lower number? I know you're not guiding for out here yet, but just for modeling purposes. Manish Sarin Yeah. So if I understand your question, what you're trying to ask is assuming the $104 million to $105 million, the operating margin derived from there, should that be used as a rough rule of thumb for the out years? I think we will provide more color. Right now, as I think both Ragy and Trac alluded, we're squarely focused on the second half of this year. There is a lot of initiatives underway. So we will provide more constructive color commentary around operating income numbers for the out years, I think, in the subsequent calls. Thank you. Our next question is from Parker Lane with Stifel. Please proceed with your question. Jack McShane Great. Thanks, guys. This is Jack McShane on for Parker. Thanks for taking my question. Trac, you mentioned sharpening your strategic strategy, saying you're going to focus more on segments and products that are delivering most value. Would you mind providing a little color on what products or segments you may be more or less focused on going forward? And I know you guys are just kind of starting this project, but any initial thoughts around where you might be a little more focused? Trac Pham I think a really good way to describe it is that really going back to what we've been good at. When you look at how we built this company over the course of 14 years, we've done really well when we've targeted enterprises and large companies, we've done well when we've been able to sell the platform and its full capabilities, we've done well, we've sold up to executives. And over the years, as we've expanded the capabilities of the products and we've added more suites to it and we've added more capabilities, we lost focus of that strategy. So in some ways, that strategic intent I described is just going back to what made us successful and really being diligent about driving the discipline on focusing that. And if we do that, we should actually be able to reaccelerate growth -- actually reaccelerate growth and drive healthier -- a healthier business. Jack McShane Got it. Thanks. That's super helpful. And then one quick one for me. I wanted to ask for an update on your guys self-serve social media management solution that you guys announced earlier last year. How has it fared in the market? And is it maybe picking up some demand from traditional social SKU deals that maybe aren't crossing the finish line given the tougher macro? Thanks again. Ragy Thomas Yeah. Jack, we had mentioned this in previous earnings call very clearly that our strategy in introducing the self-serve product in the short term was not as a revenue driver, but more as -- when a company has very, very independent teams that don't want -- they just want a simple tool and we wanted to give them an alternative instead of having to go out of Sprinklr, number one. Number two, we wanted to have our enterprise customers have an opportunity to play around, touch and feel what the Sprinklr product looks like. So those were our stated goals. And consistent with that theme, this is more experimental and it's not something that put any substantial focus on by designing intentionally. So when -- to Trac's comment earlier, the strategy where we've been successful is the large enterprise. And as you know, the large global companies in the world are very complex and very fragmented and require a very hands-on enterprise selling approach, which is where we're going to put our energy on. Thank you. Our next question is from Catharine Trebnick with Rosenblatt Securities. Please proceed with your question. Catharine Trebnick Yeah. Thank you for taking my question. Can we go back and talk about renewals for a minute? I'm trying to understand -- I understand when you piece parted, the -- how you're changing your team up? What I'm trying to really get a better handle on, what's going on within your customer base and why is there a delay and what do you see some of the issues around the renewals from that aspect? Thank you. Ragy Thomas Catharine, this is Ragy. So we can broadly bucket the pressure on renewals into two categories. One is obviously things we can control, budget cuts and restructuring and macro stuff, and that's pretty evident. Two, the interesting thing about Sprinklr, where we're more pronounced in the churn is the internal execution implementation stuff that we've referred to in the past that we are putting more discipline around. The platform is evolved pretty substantially. The implementation of that complex platform and the templatizing of that implementation so that we are standardizing how we implement products by industry, that's something that we are working on right now that we know will impact. So the second category are things where we can fix, like implementation, like making sure that we have consistent AE, success manager, SE supporting the account. Those are things that we know we can do a better job and we are squarely focused on. Catharine Trebnick Okay. And then how about the overhang of AI from marketing departments, not from the CCaaS perspective, but more from your marketing, MarTech departments? What are you seeing there? Ragy Thomas I mean again, our marketing suite is probably our smallest of the other of the four, right? And so it is -- we're seeing pressure there, but it's hard to pinpoint that on an AI, just the AI overhang. We see things we can fix and we're not able to put it on an AI overhang. Thank you. Our next question is from [Brian Knoblauch] (ph) with Cantor Fitzgerald. Please proceed with your question. Unidentified Analyst Hi guys, thanks for taking my question. I guess I'm just looking at this year, we're going to grow, I guess, based on your guidance for the full year of subscription revenue. Subscription revenue is going to grow maybe $1 million or $2 million year-over-year, and we're spending, call it, north of $300 million in sales and marketing. So I guess, what in the go-to-market are you specifically doing that's going to change the productivity of your go-to-market motion to the point where we can start to see growth come back? Or is it just entirely dependent on macro? Trac Pham No, Matt, this is Trac. It's going to be more than -- a lot of this can be driven by internal execution. The macro is a contextual element that we had to be aware of, but a lot of this is going to be our internal execution. You're highlighting the cost structure and the results that we're getting. We're clearly aware of that. And our focus right now is recognizing that we haven't built up the structure and the discipline and the operational rigor to drive growth. We do have a cost structure that is -- that needs to be optimized. I think the key for us right now is balance the need to look at the challenges that we have, shoring up the areas that need to be -- that need to be strengthened to turn this business around. And then through that, we expect that we should be driving better productivity that will get our cost structure in a place that's commensurate with the growth. Unidentified Analyst Perfect. And then maybe just one follow-up on the share buyback program, I think you said that you guys completed. Is there any plans for you guys to authorize another one given the quite flexible balance sheet you guys have? Thank you. Trac Pham Matt, we'll always look at leveraging our balance sheet to create the most value for shareholders. The thing about where we stand right now, it gives us a lot of flexibility, and we'll continue to evaluate the best use of cash going forward. Thank you. Our next question is from Patrick Walravens with Citizens JMP. Please proceed with your question. Austin Cole Yeah. Great. Thank you. This is Austin Cole on for Pat. I just wanted to drill down on one of these operational complexities. I mean I think you guys mentioned the implementation challenges last quarter. It seems like that's a little bit more front and center. Can you just talk about, like, is this a friction to CCaaS adoption? Or like what specifically do you need to do to shore it up? Like when might that happen? Is it adding more partners or something internally? Thanks. Ragy Thomas Well, it's different for our core suites and CCaaS. Since you mentioned, let me start with CCaaS first. CCaaS is a new muscle for us. and it's regulated in all markets, and it's pretty different carrier rules and landing zones, they're all pretty complex as you do global rollout. So it's a new muscle and we are developing that muscle, and we need regional partners and global partners, and we're doing that in each market as we land a customer and we go through that experience. And admittedly, there's 40 years of learning that we're going through in an executive fashion. So that's what [taxing] (ph) the implementation there. What we're doing though is developing partners and building our own internal muscle, creating playbooks, working with an external company to document it so we can enable our partners on it. All of that is undergoing. And I'd say it is probably the first quarter that we feel like the bulk of the heavy lifting and development is kind of done. We're going to continue to evolve some modules that need to be upgraded and built out to be the best. But the bulk of the heavy lifting is done. So there's a lot of focus on how do we now simplify implementation because we are, in many cases, migrating legacy solutions that have been in place for some cases, 20 years. So there's a lot of institutional stuff. There's a lot of learning on how do you troubleshoot the customers' infrastructure instrument and fix things quickly when they're not in your control. So, all of that are things that we're learning, and I'm pretty happy with the way we are progressing. That's on the CCaaS side. On our core products, they have evolved as well, right? What started out in social media management is now social marketing and advertising is our Insights product has evolved to be very, very AI-driven for unstructured data into product insights. So we have to now figure out how to do that correctly 100% at the time. We're in a world where if we're not setting up the product because we're a premium platform. If we're not setting it correctly, the customer doesn't get value commensurate with the premium that they pay, they're going to go to a cheaper solution or churn it, right? So blueprinting by industry for each solution so that the implementation team can be consistent and deliver it and turning it over to customers with a run book so they can maintain and get value is something that we are focused on. And that, again, these are not trivial things to undertake. So I want to make sure that we know these are multi-quarter projects that are underway to solve it. Thank you. Our next question is from Clark Wright with D.A. Davidson. Please proceed with your question. Clark Wright Hi. Thank you. So on a net basis, you added seven new million dollar plus customers. Can you provide commentary on how [Technical Difficulty] this has impacted this account and how many of these new customers are a result of CCaaS adoption? Trac Pham I'm sorry, there's a lot of feedback during your question. Would you mind repeating that? Clark Wright Yeah, sure. So on a net basis, you added seven new million dollar plus customers. Can you provide any commentary on how that churn impacted this count and then how many of these new customers are a result of CCaaS adoption? Manish Sarin This is Manish. So that I understand your question, is the 145 $1 million or more, you're saying that grew sequentially and you want to understand the breakdown of that growth between CCaaS and core? Yeah, so first and foremost, I want to make sure you understand the 145 is not ARR driven. It's all trailing 12 months of revenue. So it's possible we sold these accounts in prior quarters. As we have built up the revenue recognition for those accounts, it's hedged over a million dollars. So I don't think it's a fair sort of representation looking at the breakdown because these customers as you also know, we upsell regularly. We've shared in the past that call it two-thirds of our new business comes from upsell. So it can be any number of these suites that we sell to the account. And as you know, we're really good at selling the full platform. So I think that in the aggregate is what's driving growth in here, which is what Ragy alluded to earlier saying as we go back to our core strategy of sticking to selling the full platform really into larger accounts. That's where we find more success. Clark Wright Got it. And then, speaking about that success, how did enterprise specific bookings trend compared to your internal expectations this quarter? Trac Pham Overall, I think we continue to do well in our sweet spot, which is the enterprise and above. Thank you, there are no further questions at this time. I'd like to hand the floor back over to Ragy Thomas for any closing comments. Ragy Thomas Thank you, Paul. And thank you all for joining us today. Let me close by reiterating that we have a strong conviction for our platform. We have a strategy that supports our vision, and we are doubling down on execution. I'd like to thank our employees, our partners, and most importantly, our customers for their trust and continued support. We look forward to updating you all again on our next quarterly call as we continue our journey. Thank you very much and have a wonderful evening. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Verint Systems Inc. (VRNT) Q2 2025 Earnings Call Transcript

Matthew Frankel - Investor Relations and Corporate Development Director Dan Bodner - Chief Executive Officer and Chairman of the Board of Directors Grant Highlander - Chief Financial Officer Good day, and thank you for standing by. Welcome to the Verint Q2 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Matthew Frankel, Investor Relations and Corporate Development Director. Matthew Frankel Thank you, operator. Good afternoon, and thank you for joining our conference call today. I'm here with Dan Bodner, Verint's CEO; Grant Highlander, Verint's CFO; and Alan Roden, Verint's Chief Corporate Development Officer. Before getting started, I'd like to mention that accompanying our call today is a slide presentation. If you'd like to view these slides in real-time during the call, please visit the IR section of our website at verint.com, click on the Investor Relations tab, then click on the webcast link and select today's conference call. I would also like to draw your attention to the fact that certain matters discussed in this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions under federal securities laws. These forward-looking statements are based on management's current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed in or implied by these forward-looking statements. The forward-looking statements are made as of the date of this call and, except as required by law, Verint assumes no obligation to update or revise them. Investors are cautioned not to place undue reliance on these forward-looking statements. For a more detailed discussion on how these and other risks and uncertainties could cause Verint's actual results to differ materially from those indicated in these forward-looking statements, please see our Form 10-K for the fiscal year ended January 31, 2024, our Form 10-Q for the quarter ended April 30, 2024, our Form 10-Q for the quarter ended July 31, 2024, when filed, and other filings we've made with the SEC. The financial measures discussed today include non-GAAP measures as we believe investors focus on those measures and comparing results between periods and among our peer companies. Please see today's slide presentation, our earnings release and the Investor Relations section of our website at verint.com for a reconciliation of non-GAAP financial measures to GAAP measures. Non-GAAP financial information should not be considered in isolation from, as a substitute for, or superior to GAAP financial information, but is included because management believes it provides meaningful supplemental information regarding our operating results when assessing our business and is useful to investors for informational and comparative purposes. The non-GAAP financial measures the company uses have limitations and may differ from those used by other companies. Thank you, Matt. I'm pleased to report another quarter of continued AI momentum including strong AI bookings and AI business outcomes reported by customers. New AI bookings increased over 40% in Q2 year-over-year. Bundled SaaS revenue driven by AI increased 15% year-over-year an acceleration compared to approximately 10% growth in Q1. We expect our AI momentum to continue and drive strong AI bookings and Bundled SaaS revenue growth in the second half of the year. Beyond our AI momentum is our ability to deliver AI business outcomes now. Today, we have many customers including some of the world's leading brands reporting strong AI business outcomes from Verint's AI-powered bots. We believe our ability to deliver measurable AI business outcomes now is a significant differentiator. Turning to our fiscal 2025 outlook, we are on-track to achieve our guidance for the year. Q2 revenue came in at $210 million within our guidance range and for the full-year we are maintaining our guidance of 5% growth adjusted for the divestiture. For non-GAAP diluted EPS, we are also maintaining our full-year guidance of $2.90. We expect another year of margin expansion and adjusted EBITDA growing faster than revenue with 10% EBITDA growth for the full-year. We believe the AI opportunity in the contact center market is very large. The CX industry is spending about $2 trillion annually on labor costs and brands are seeking AI-powered bots that can deliver tangible business outcomes. We are addressing this very large TAM with a differentiated open platform delivering tangible results to our customers. AI adoption in our market is currently in its early stages and we are pleased to report many data points that demonstrate our competitive differentiation. There is significant AI noise in the market and brand seek vendors that have proven capabilities that can increase agent capacity, elevate CX, and automate workflows within their existing ecosystems. Our ability to demonstrate tangible AI business outcomes now for some of the world's leading brands is resonating well within our customer base and new logos. In Q2, we continued to win large contracts based on our AI business outcome differentiation. As discussed on prior earning calls, the Verint Open Platform quickly transforms the latest AI technology into tangible AI business outcomes better than any other contact center vendor. Behind our differentiation is the unique design of our platform with behavioral data and Verint Da Vinci AI at the platform core. Verint Da Vinci acts as the factory for our bots leveraging the latest AI technology available today in the market. As Verint bots emerge from the bot factory, they train continuously in the bot gym on relevant behavioral data. Data is critical to building powerful AI bots and we believe the data available in the Verint platform data hub is another significant differentiator driving stronger AI business outcomes. And finally, the very bots are embedded in the same workflows our customers use every day enabling brands to quickly deploy bots and benefit from outcomes now. Our competitors are generally unable to show strong proven results that require disruptive changes to the customer ecosystem and take long before any outcomes can be demonstrated. Our competitive advantage comes from the strong and proven AI business outcomes that we can very quickly deliver into existing customer ecosystems for some of the largest brands in the world. As a reminder, we launched our Open Platform with 40 AI-powered bots one year ago. Since that time, customers that have purchased a bot typically started with low consumption to validate the AI business outcomes the bots can deliver. I'm pleased to share that many of these customers are now reporting very strong AI business outcomes. They're also starting to increase consumption levels of the bots that already purchased and add more bots to generate additional AI business outcomes. We're tracking AI adoption across our customer base. Looking at the cohorts of our largest customers, those generating at least $1 million ARR, we see more than half have already purchased at least one AI-powered bot. I'm very pleased with the progress we are making in our customer base and our ability to demonstrate strong AI business outcomes. You can find many examples of customer reported AI business outcomes on our website. Here are a few examples. A leading bank created a $10 million in agent capacity by containing 80% of its interactions in self-service. A top BPO avoided $6 million of self-service fraud attempts in a single month. A financial services company created $5 million in agent capacity by cutting 20 seconds per call on average. And, an insurance company paid $4.5 million by reducing agent attrition by 30%. Let's look at the case study from a healthcare customer in more details. One of the largest healthcare providers in the U.S. has been deploying multiple variant bots. Let me walk you through their AI journey starting with one of their Verint bots. The specific bot is designed to automate the wrap up portion of the call and reduce average call duration by 30 seconds. In January 2024, the customer deployed this bot for 300 agents in a hybrid cloud model. This was a quick deployment into Verint Cloud connected to the customer on-prem existing ecosystem. Our differentiated hybrid cloud architecture enable the customer to deploy our latest AI innovation without the need for cloud conversion shares. In just few months, the Verint bot delivered tangible AI business outcomes. And, in July 2024, these AI outcomes led the customer to dramatically expand their bot deployment from 300 agents to 30,000 agents. To help you understand the ROI of this specific bot, reducing call duration by 30 seconds across 30,000 agents increases agent capacity equivalent to $17 million annually. The AI journey for this customer includes the deployment of multiple bots at initial consumption levels and our platform enables them to quickly increase consumption levels as they validate strong AI business outcomes. Over the last year, our ARR from this customer doubled from $5.3 million at the end of Q2 last year to $10.7 million at the end of Q2 this year. Our customers are at different stages of their AI journey, and in Q2 we continue to announce winning large deals including the Fortune 25 Brand awarding Verint a $13 million deal, a top 10 U.S. Public Utility Company awarding Verint a $6.5 million deal, and a leading insurance company awarding Verint a $5 million deal. Now, let's take a closer look at this insurance deal. This existing Verint customer just started their Verint AI journey with one of their business units. Their initial goal was to increase agent capacity in this business unit using five Verint AI-powered bots. They chose these five specific bots over many other bots available in the Verint Open Platform based on the business outcomes they wanted to achieve first. They initially purchased licenses to cover 600 agents, which is approximately 20% of their overall contact center capacity of 3,000 agents. Similar to my earlier healthcare example, we believe there is a large growth opportunity for us with this insurance customer as they expand consumption level of these five bots and deploy additional bots over time. As you can see from these examples, Verint is well-positioned for contact center AI leadership due to our ability to deliver tangible AI business outcomes that are stronger and faster than the competition. Stronger outcomes are important because they represent higher ROI for customers. We deliver stronger AI outcomes due to our Open Platform designed with data and AI at the core based on deep contact center domain expertise and anticipating AI trends early by working closely with the world's leading companies. Faster outcomes are important because customers need to reduce labor costs and elevate CX now. We deliver faster AI outcomes due to our hybrid cloud design and AI consumption models, which enable customers to quickly deploy AI in their existing ecosystems and increase AI consumption over time avoiding long and disruptive rip and replace programs. Our AI business outcomes are not only stronger and faster than the competition, but also more cost effective than internal development. In some companies, we see IT departments purchase GenAI technology and look for use cases across the enterprise including the contact center. We are able to demonstrate to IT that for the contact center, our platform delivers stronger, faster, and more cost effective solutions. Overall, we believe our ability to deliver AI business outcomes now is a unique and sustainable differentiator. To recap, we had a strong AI bookings and Bundled SaaS revenue growth in Q2. We entered H2 with a strong Bundled SaaS pipeline and expect AI bookings and Bundled SaaS revenue momentum to continue in the second half of the year. We are maintaining our guidance for the year for 5% adjusted revenue growth and 10% adjusted EBITDA growth. Finally, consistent with our Rule of 40 goal previously discussed, we target 10% revenue growth and 30% adjusted EBITDA margin in our fiscal '27. With that, I'll turn it over to Grant, to discuss our financial results in more details. Grant? Our discussion today will include non-GAAP financial measures. A reconciliation between our GAAP and non-GAAP financial measures is available, as Matt mentioned, in our earnings release and in the IR section of our website. Differences between our GAAP and non-GAAP financial measures include adjustments related to acquisitions and divestitures, including fair value revenue adjustments, amortization of acquisition related intangibles, certain other acquisition and divestiture related expenses, stock-based compensation expenses, accelerated lease costs, IT, facilities and infrastructure realignment, as well as certain other items that can vary significantly in amount and frequency from period-to-period. Today, I will cover three topics. First, I will review our Q2 results and our strong AI momentum. Second, I will do a mid-year review and discuss progression of the remainder of the year. Finally, I will discuss how demand for AI will benefit our financial model longer-term. Let me start with an overview of our Q2 results. Non-GAAP revenue increased 3% year-over-year to $210 million adjusted for our divestiture. Bundled SaaS revenue came in as expected with strong sequential and year-over-year growth driven by market AI adoption. Unbundled SaaS revenue came in a bit lower than our expectations due to deal timing, which does not change our annual guidance. Non-GAAP gross margins came in strong in Q2 with non-GAAP margins at 71.2% up 170 basis points year-over-year. We are pleased with our gross margin expansion and believe our ability to increase gross margins reflects the strength of the AI business outcomes we deliver to our customers. Adjusted EBITDA was up 7% year-over-year due to our margin expansion. Non-GAAP diluted EPS came in at $0.49 consistent with our adjusted revenue in the quarter and up 3% year-over-year. Now, let's look at our AI growth metrics more closely. As we have discussed on past calls, 100% of our AI innovations deployed in Bundled SaaS and the following two Bundled SaaS metrics are shared to help investors understand our AI growth. In Q2, Bundled SaaS revenue growth accelerated to 15% year-over-year, up from approximately 10% in Q1. New Bundled SaaS ACV bookings from new deals increased 37% year-over-year, and I will discuss our positive bookings trends in more detail in a moment. Another SaaS metric that relates to AI adoption is term length. I am pleased to report that in Q2, our term lengths on SaaS renewal contracts was about 20% longer than a year ago. We believe these longer term lengths reflect growing customer confidence in our platform and commitment to their AI journey with Verint. Additionally, the key leading indicator of our AI momentum is our Bundled SaaS pipeline. As of the end of Q2, our advanced stage pipeline for the remainder of the year was up around 20% year-over-year, driven by AI demand. I would also like to note that the AI market is in its early stage and we see a growing number of customers with initial deployment of bots. As Dan discussed earlier, looking at our largest customers with greater than 1 million of ARR, more than half have already deployed at least one bot from Verint. Many of our customers have already started their AI journey with Verint, typically with an initial low level of consumption, which represents a large revenue growth opportunity for Verint over time. Given we are halfway through the year, I would like to review our Bundled SaaS booking trends in the first half of the year and our expectations for the second half. Bundled SaaS bookings is comprised of two types of deals, new deals, which include new functionality and conversion deals, which include like-for-like conversions of on-premise deployments to the Verint Cloud. Bookings from new deals in H1 increased 39% year-over-year, and we expect a similar level of growth in the second half of the year. We are pleased with the strong growth of new deals driven by market AI adoption. The large majority of the Bundled SaaS bookings from new deals included AI-powered bots. And, these AI bookings in Q2 increased more than 40% year-over-year. Bookings from conversion deals in H1 decreased year-over-year, consistent with our expectations that customers would adopt AI-powered bots first and do conversion second. As Dan explained, customers are looking for AI business outcomes now without disrupting their existing ecosystems. Verint Open Platform is highly differentiated, enabling customers to get access to our new AI innovation and a hybrid cloud deployment without the prerequisite of having to convert existing applications first. Near-term, we believe customers will remain focused on AI adoption, and therefore we expect a small amount of conversions in H2. Longer-term, we expect our customers to convert to the Verint Cloud after they have deployed a number of our AI-powered bots. A historical breakdown of bookings has been added to our IR dashboard on our website. Next, I would like to review bundled and unbundled SaaS revenue trends in the first half of the year and what we expect in the second half. In Q2, we had strong sequential growth in Bundled SaaS revenue and we expect this trend to continue in Q3 and Q4, driven by AI adoption. As we have discussed in the past, unbundled revenue each quarter is heavily influenced by the timing of renewals. For Q3, we expect a similar amount of unbundled SaaS revenue as in Q2. And in Q4, we expect a large sequential increase to around 115 million similar to the dynamics we saw in Q4 of last year. I would like to mention that it is possible that about $20 million of our expected unbundled SaaS revenue may shift left and move forward to Q3 as a large contract up for renewal in Q4 may be renewed earlier. At this time, however, this revenue was included in our Q4 guidance. Turning to our guidance for fiscal '25, we are maintaining our revenue and non-GAAP diluted EPS guidance for the full-year. On a non-GAAP basis, our revenue outlook for fiscal '25 is $933 million plus or minus 2%, reflecting a bit more than 5% growth compared to fiscal '24 adjusted revenue. We expect gross margin increase again this year and expect at least 150 basis points of expansion year-over-year. The combination of revenue growth and continued margin expansion is expected to increase adjusted EBITDA growth to approximately 10% for the year. And for diluted EPS, we expect $2.90 at the midpoint of our revenue guidance. Regarding below the line assumptions for the full-year, we expect interest and other expense net a little over $2 million. Net income from a non-controlling interest of around $1 million a cash tax rate of around 12% and approximately 72.5 million fully diluted shares. Let me also discuss how we see the second half of the year progressing. In the first half of the year, we delivered 4% revenue growth adjusted for the divestiture, with an 8% increase in adjusted EBITDA year-over-year. In the second half of the year, we expect around 6% adjusted revenue growth with an approximate 11% increase in adjusted EBITDA year-over-year. Our outlook for H2 reflects continued Bundled SaaS revenue growth driven by our AI momentum, as well as unbundled SaaS revenue growth driven by a large amount of renewals that we expect in Q4. For modeling purposes, for Q3, we expect $210 million revenue plus or minus 2% similar to Q2. I'd like to mention that due to timing, gross margin will be a little lower in Q3 than Q2 and operating expenses will be higher in Q3 than Q2. And, we expect diluted EPS coming in around $0.43. For Q4, we expect around $291 million of revenue, very strong gross margins, operating expenses in a similar range to Q3 and $1.40 of diluted EPS. To help better understand the step up of revenue we expect in Q4, I would like to bridge our adjusted revenue from Q4 last year to our projected Q4 revenue this year. Revenue is expected to increase around $30 million year-over-year in Q4. Approximately $10 million of the increase is from Bundled SaaS revenue, reflecting steady sequential revenue growth throughout this year. Approximately $10 million of the increase is from unbundled SaaS revenue reflecting the value of renewal contracts coming up for renewal in Q4 this year compared to Q4 of last year. And, approximately $10 million of the increase is from non-recurring revenue, which relates to existing contracts that have a revenue component that will be recognized in Q4. Overall, the quarterly progression of this year is similar to last year. Turning to our balance sheet. We continue to be in a very good financial position. Our net debt remains well under one-times last 12 month EBITDA and is further supported by our strong cash flow. With regard to cash flow, we are targeting about a 40% increase in free cash flow to approximately $180 million for the full-year. With regard to stock buybacks, in Q2, we completed our previously announced $200 million share buyback program. Going forward, we plan to use around half of our free cash flow to buy back stock. And today, we are announcing a new $200 million buyback program over two years. Before wrapping up, I'd like to talk about how market AI adoption is benefiting our financial model and how we expect it will help us achieve our Rule of 40 target. First, AI has significantly increased our TAM. There are very few industries, has right for automation as the contact center market and we are very well-positioned to capture this opportunity. Second, the AI opportunity is in its early stages and as customers experience strong AI business outcomes, we expect adoption to increase driving more consumption of our bots and accelerating revenue for Verint. Third, we expect our gross margin to continue to expand over time, driven by our strong AI innovation and the high value we deliver to our customers. And fourth, we expect operating leverage from increased sales productivity as early stage markets take more education and sales effort. Many of our largest customers have already started the AI journey with Verint, and we expect sales productivity to increase as the market matures. Overall, we are pleased with our AI momentum and believe that market AI adoption will have a positive impact on our revenue growth rate, margins and cash flows as we work towards a Rule of 40 target in fiscal '27. With that, operator, please open the line for questions. Thank you. [Operator Instructions] Our first question comes from Joshua Reilly with Needham. You may proceed. Joshua Reilly All right. Thanks for taking my questions. Maybe just starting off on the unbundled deals here that pushed in the quarter, maybe just some additional information there would be helpful. Was it driven by the macro, competitive issues or customers just considering how many seats that they may need on renewal and that's kind of having them try to figure out what is the impact of AI on the seat count that they need on these renewals? Just maybe some additional info there would be helpful. Dan Bodner Sure. Happy to address. So as Grant said, we came with the Bundled SaaS revenue were strong 15% growth and basically exactly where we expected them. So obviously Bundled SaaS is more predictable and it's growing nicely linearly every quarter. With unbundled SaaS there was a deal that was pushed. It's one deal. It's nothing to do with AI. There is no AI in unbundled SaaS. It's only in Bundled SaaS deals. And unbundled SaaS as we saw in the past can move quarter-to-quarter. Grant also mentioned that there's a $20 million deal that currently we're guiding to Q4 but actually may come in Q3. So, there could be some movement in timing. These are large deals from very large customers. And this one deal that we came $1.5 million in unbundled below expectations and that's one deal is from a very large customer who is spending much more money with Verint. This has nothing to do with AI. It's also nothing to do with agent counts. As we discussed before we see customers that are starting to get some very strong AI business outcomes and they're reporting back to us. And we launched the platform a year ago. That was like the end of the summer last year. Then we had customers starting with initial AI purchases. And as they validated the business outcomes that we have promised, they increased the AI consumption and now we think more and more customers are reporting strong business outcomes, including very strong increase in agent capacity. But we looked at our overall customer base, we do not see a change in the agent count, so it's about the same. At the same time, we are in a very early stage of maturity and we have some customers that are early in their AI journey and already achieving increased agent capacity and reducing number of agents. So, it's the very beginning of AI impacting the capacity. It's also interesting that from those customers that now have the capacity increased, they're not just choosing to reduce agent count, some of them are choosing to dedicate agents to improve customer retention, and some of them are actually dedicating agents to increased sales. So, we see really an interesting trend. AI can turn the contact center from a service center to a revenue generating center. So, there's more agent capacity available and also the bots that we deliver today like the coaching bots are coaching agents how to become better salespeople and how to identify the right time during the call in real time to propose some upsell products to their customers. So, to address your question about agent capacity, again we don't see that across the base but we're starting to see some customer reporting very strong increase in capacity. Joshua Reilly Got it. That's super helpful, because I think if you look at the actual SaaS ARR, the net new SaaS ARR add in the quarter is actually pretty strong. So, I think that that's probably the more important data point to be focused on here. And if you look at it, it was nearly up by $19 million sequentially. And if I look at the new SaaS ACV in the quarter was $21.06 million, that tells me that actually your customer retention actually improved over the last couple of quarters. Is that what you're seeing internally? And maybe you can just talk about, what you're seeing with customer churn and retention here on overall renewals? Thank you. Grant Highlander Yes. That's very true. So, we started with booking, AI booking more than 40% that's very strong. Then booking obviously converts to Bundled SaaS revenue and that's 15% reported in Q2, 15% growth and then the SaaS ARR improving which is a result of booking and better retention. It's a combination of the two. So, all those metrics that are affected by AI are actually improving because the AI business outcomes that reports are not only strong, but the customers are paying attention. There's a lot of noise in the market with AI and customers really look for not just the promise of Gen AI, but can you actually turn Gen AI into business outcomes now in my contact center, in my existing ecosystem. And of course that's what we told customers we can do, but we were also like any other company just promising the future. And over the last year as customers started with initial consumption to prove and this healthcare company that started with 300 agents, obviously they have 30,000 that so it was just an initial consumption, but once they saw the results they expanded 100x. And this is the kind of reaction we're getting from customers who actually see the results and of course now we can use the stories to tell to other customers and we get their attention. And you can find on our website, you can find 30 case studies of AI business outcomes that were reported by customers. And of course, a year ago, we had nothing. And then over the year, we just started to sell bots and we waited until those bots created real outcomes which are now being reported on the website publicly and of course we share those customers references and so on as we continue to and that helps retention, that helps new booking, that's the future of AI for Verint is increasing our TAM and a much better growth opportunity. Joshua Reilly Got it. Very helpful. Thank you. I'll get back in the queue. Thank you. Our next question comes from Shaul Eyal with TD Cowen. You may proceed. Shaul Eyal Thank you. Hi. Good afternoon, guys. Two quick questions on my end. I'm getting some investors asking me as the call is progressing, whether Dan or Grant you're seeing any change on the competitive landscape. So, on the one hand, totally understand the fact that the annual guidance has been reiterated. Second quarter probably slightly more a timing flash mix. You just addressed it I think in your recent reply to the prior analyst. But anything that might have changed over the course of the past quarter or so? Dan Bodner Well, it's a competitive market, but growing the bookings from new deals 40% is very strong. So, I would say the demand is there and we're working through the competitive process and we're winning our first share. I can say that if you -- to answer your question about what changed in the market, I believe that our Switzerland approach is actually even more attractive now to our customer than it was before, because customers are really looking to achieve the AI business outcomes now and they don't want to wait for their telephony to move to the cloud. So, being able to lead with AI and deal with infrastructure later is important. And Switzerland really ensures them that they can start with Verint with AI now and then whatever they choose later for their telephony infrastructure, we will be compatible. They're not going to have to disrupt the AI journey that they are on. So, I think that's changed and of course we are able to deliver AI first. There is no need for rip and replace programs. There is no need to wait a year or two to make an infrastructure change because we designed this hybrid cloud that you can deliver AI now into your existing ecosystem. So, that resonates well and for example that again helped the company example that I gave before where we increased our ARR from $5 million to $10 million over one year. They still did not change their telephony to the cloud. They're still on prep, but they are consuming more and more AI very, very quickly. So, they can turn their energy, budget and their internal teams are all focused on accelerating the AI journey. And they will convert to the cloud their infrastructure at some point and they know that that's going to be something that they can rely on Verint that will be compatible with whatever they choose to do. So, we see that as a change. And then one more change is there's a lot of companies that are now attracted to the contact center market because obviously there's a growing TAM and it looks like a great opportunity to for more automation based on Gen AI. But we see companies coming to the market with Gen AI and then IT is struggling to really take that Gen AI technology and create real business outcomes. And that's true for the hyperscalers, but also for smaller companies who just want to deliver Gen AI tools. And there's a big difference between a generic Gen AI model and basically to train the model, to embed the model into existing workflow based on the contact center expertise that we have. We're working with some of the largest companies in the world to learn how to deliver real outcomes in this market. So, I think this is a competitive threat that once we are able to demonstrate the business outcomes that we can deliver, it's also not that difficult for the customers to make that distinction between. AI promise is huge, but what it can do for me now in my existing ecosystems and I think Verint is a great differentiation in this regard. Shaul Eyal Got it. And my follow-on question, maybe slightly more from a product perspective, Dan. On the business outcomes, I think in the context of your AI portfolio, have you seen customers coming and asking about some new outcomes, new use cases that you haven't seen, let's say, over the course of the past six months or so? Dan Bodner Yes, we do. And the most common use cases today the customers are asking for are, I want to improve my self-service, so that my customers will talk to a boss rather than an agent. And I want to buy some agent co-pilots that are going to help my agents in real time. So, these are the two most common use cases and we have obviously very differentiated outcomes in those two areas. But in addition, we automate all the workflows around the contact center and we see our customers are looking at reducing attrition, looking at better coaching and training for the agents, better knowledge for the agents and more automated knowledge because knowledge has been a big struggle and AI has great opportunity for pushing the right knowledge to the agents. So, they don't have to go and search. We see a lot of companies interested in fraud and using AI to avoid fraud and we report some very strong outcomes. One company avoided $6 million of self-service fraud attempts in just one month. So, it depends on what the industry, we see different focus areas. But more and more customers realize that AI has a lot of potential and they actually come into Verint and say, what are the business outcomes do you think we need? And we're happy to share our experience that we have now. We got a lot of experience over the last year and we share that with customers that help them to decide. I mentioned the insurance company that started with 20% of their contact centers, so 600 agents of total of 3,000. They started with five bots. You can see those bots are doing different things, but they concluded this is where they want to start. So, they started only with five and only with 20% of the total volume and we believe that as they prove the outcomes that we laid out for them they will expand. And that's the basis of AI is not just one time deal, it's a journey. And as the customers go through the journey and validate the outcomes, they increase consumption, which creates huge ROI for them, but also increase TAM and growth for Verint. Thank you. [Operator Instructions]. Our next question comes from Samad Samana with Jefferies. You may proceed. Billy Fitzsimmons Hey, guys. This is Billy Fitzsimmons on for Samad. Appreciate the color and disclosure on the breakdown of the Bundled SaaS ACV mix between new deals and conversions. And Grant, in the prepared remarks, you talked about this a little bit. Obviously, conversions were strong last year, fell this year, Bundled SaaS ACV from new deals grew 37% year-over-year. Maybe going kind of a step further, how is that mix maybe differed from what you would have expected when targets were given at the December 2023 Investor Day? We talked about how customers are adopting AI-powered bots first and doing conversion second. But trying to get at is the magnitude of either of those different than maybe what you would have expected a couple of quarters ago? And is that causing any changes maybe either in the ACV line and by extent the revenue line relative to some of your expectations at the start of the year? Grant Highlander Yes. I'd be happy to address it because you got the numbers correct. So relative to what we discussed in Investor Day, our AI booking which is the Bundle SaaS from new deals is actually ahead of our expectations. We expected growth but we are exceeding it with the 37% and we are projecting around 40% booking growth in H2 as well. The conversion we expected will be flat. So, we didn't expect growth because all the reasons that we discussed like customers don't have to convert, they can go AI first. So we expect that that will be flat year-over-year but actually they are down, which is not affecting revenue because if they don't convert they stay in unbundled SaaS and they expand in unbundled SaaS. So, they'll convert later and we know that when they convert there is a 2x uplift opportunity. But we give them the opportunity to get to AI quickly and that's what they want and they don't want to slow down with conversion. So that's where we see conversion down this year. There will be coming later, but in terms of situation how does it impact our guidance, we net-net it doesn't because if they don't convert they stay in unbundled SaaS and they do something there. Billy Fitzsimmons Got it. Super helpful. And if I could sneak in a second one, this is just more general and long-term. Just in terms of bot billing, obviously, the revenue base today is pretty small relative to your total revenue, but we're kind of getting some questions on the mechanics of that and how it flows through the model relative to kind of the historic pricing. How do we kind of think about the floor or minimum for consumption based pricing versus overages? Just trying to get a sense of the impact of the model as that consumption element grows? Dan Bodner Yes. No, this is very, very important question relative to AI consumption because that's going to drive great economic subvariant over time. The way we build with AI, obviously it's not SIP based. It's all based on AI and it's a volume metric. And we work with large enterprise customers. So, there's always a minimum commit and they're committed to a certain term one year, three year, five years whatever. Grant, so mentioned before that actually the term of commitment is getting longer by 20%. And I think that's a great sign that customers just get comfortable that they want to sign longer term. But more importantly the way the minimum commits work is when they exceed the minimum commits they have two options. They can go on and consume more and pay overage or they can step up the commits by just giving us a piece of paper, a simple purchase order and will increase the commits in the cloud. They will always prefer to increase commit versus overage because it's going to be more expensive for them to pay overage. When they step up the commit, they get out to a higher level of volume and obviously to a better pricing. So, overage is not important for us because we expect customers to plan. Once we validate the consumption is actually giving them the AI business outcomes that they expected, they are just upping the commit through a purchase order and not through overage. And they can up the commit anytime during the term. So, they don't have to extend the term, they can just within the term increase commit. And we designed this pricing model to make it really easy for customers to do two things. First, to validate the results so they don't have to take a word for it, so they can start small, but they can easily increase within the same term, doesn't require negotiation, it's all pre negotiated and obviously as they increase, we just need to deploy those extra licenses in the cloud, so that's easy for them and easy for us. And that's what we've seen over the last year. We've seen basically customers starting at initial volume and then at their own pace increasing and by the way, they're increasing those are starting with multiple bots and not necessarily increasing all bots at the same time. So, one bot for this healthcare company, they increased one bot from 300 to 30,000 but other bots were at different consumption levels. So, there's a total flexibility for each of the bots because each bot is doing one thing and creating value for that one thing they automate and they don't have to make decisions across the entire platform that are uniform. So, they can try AI for different purposes at different pace. It's really very, very flexible model and obviously the platform design support it and the pricing model is designed based on this open and modular platform. Very helpful. Appreciate it, Dan? No. That was helpful and looking forward to Verint Engage in a few weeks. Thanks, guys. Thank you. I would now like to turn the call back over to Matthew Frankel for any closing remarks. Matthew Frankel Thanks, Josh, and thank you, everyone, for joining us today. Of course, if you have any questions, please feel free to reach out and we'll talk to you soon. Have a good night everyone. Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Earnings call: Zscaler reports record growth and bullish outlook By Investing.com

Zscaler, Inc. (NASDAQ: NASDAQ:ZS) has delivered strong financial results in its fourth quarter, with a notable 30% year-over-year (YoY) increase in revenue and a 27% growth in billings. The company, specializing in cloud-based security, achieved a significant milestone with $1 billion in quarterly bookings and surpassed $2.5 billion in annual recurring revenue (ARR). Looking ahead, Zscaler anticipates reaching or exceeding $3 billion in ARR by fiscal year 2025. The call highlighted the increasing demand for Zero Trust security platforms and the successful integration of artificial intelligence (AI) in creating new growth avenues. Zscaler's shares responded positively to the news, reflecting investor confidence in the company's robust performance and strategic direction. Zscaler's earnings call showcased the company's strong performance and optimistic future. Despite a challenging macro environment, Zscaler has managed to expand its customer base, enhance its product portfolio, and maintain a solid growth trajectory. The company's focus on Zero Trust security, AI, and cloud resilience positions it well to capitalize on market trends and customer needs. With a strategic approach to sales and product development, Zscaler is poised for continued success in the evolving cybersecurity landscape. Zscaler, Inc.'s (NASDAQ: ZS) recent financial results have indeed been impressive, and real-time data from InvestingPro further enriches the narrative of the company's growth and market valuation. Here are some key metrics and insights: InvestingPro Tips that add context to Zscaler's financial health include: For readers looking for a deeper dive into Zscaler's financials and future prospects, there are an additional 10 InvestingPro Tips available at https://www.investing.com/pro/ZS. These tips offer valuable insights that could further inform investment decisions and provide a comprehensive understanding of the company's potential. Operator: Good day, everyone, and thank you for standing by. Welcome to Zscaler Fourth Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Now, I will pass the call over to the Vice President, Investor Relations and Strategic Finance, Ashwin Kesireddy. Please go ahead. Ashwin Kesireddy: Good afternoon, everyone, and welcome to the Zscaler Fourth Quarter Fiscal Year 2024 Earnings Conference Call. On the call with me today are Jay Chaudhry, Chairman and CEO; and Remo Canessa, CFO. Please note, 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 and market opportunity. These statements and other comments are not guarantees of future performance, but rather are subject to risks 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 also want to inform you that we'll be attending the following conferences: Citi Global TMT Conference in New York City on September 5th, Goldman Sachs (NYSE:GS) Communacopia and Technology Conference in San Francisco on September 11, Wolfe Research TMT Conference in San Francisco on September 11. Now, I'll turn the call over to Jay. Jay Chaudhry: Thank you, Ashwin. We delivered a strong Q4 with all metrics exceeding the high-end of our guidance. Revenue grew 30% year-over-year. Billings grew 27% and profitability reached new records with operating margins of approximately 22% and free cash flow margin of 23%. We also achieved a new milestone of $1 billion in quarterly bookings in Q4, driven by an acceleration in new and upsell business in the quarter. For the full-year, revenue grew 34% and free cash flow grew 75%, resulting in free cash flow margin of 27%, a new record for the company. With another year of strong top and bottom-line performance, we exceeded the Rule of 60 for the fourth consecutive year. Despite the recent changes in our go-to-market organization, we delivered these outstanding results, driven by strong customer demand for our Zero Trust Exchange platform. I'm very pleased with the progress we're making in go-to-market execution, the pace of innovation and customer adoption of our expanded platform. I'm also pleased to share we crossed $2.5 billion in ARR in Q4, and we expect to achieve a new milestone of $3 billion or more in ARR in fiscal '25. Before getting into further details of the quarter, let me share a few observations on the demand environment. First, customer adoption Zero Trust Platforms is stronger than ever, with Q4 setting a record for new and upsell business. Our platform secures 47 million users across nearly 8,700 customers. While other vendors are still struggling to deliver cloud security for users, we expanded our platform beyond users to deliver Zero Trust security for applications, workloads and, IoT/OT devices. Customers are consolidating their disjointed legacy security products by adopting our comprehensive platform. Second, the increasing use of AI is creating new avenues of growth for us. For example, the rising adoption of Gen AI is exposing new gaps in organizations' security posture. To help our customers address these risks, earlier this year, we launched Gen AI Security, which enables customers to realize the productivity benefits of Gen AI without compromising data security. Using our Gen AI security, customers can gain visibility, apply access control and enforce data protection policies to prevent their sensitive data from leaking. Third, I'm thrilled to share that we have achieved a major milestone with our cloud platform, surpassing over $0.5 trillion transactions daily, that is T as in trillion. This further demonstrates our widening market leadership position. These transactions generate a vast quantity of proprietary loans that feed our massive data lake. These are not firewall logs that often can't inspect SSL traffic for cyber threat detection. These are complete logs that have structured and unstructured data, including the full URL. We leverage this proprietary data to train AI models that power innovations throughout our platform. Our AI analytics solution, including unified vulnerability management, Risk360, Business Insights are seeing strong traction. AI analytics contributed nearly 3 points to new and upsell business growth in Q4 and 2 points for the entire fiscal '24, even though some of these products were only available for a part of the year. I am pleased with the contribution of AI analytics in fiscal '24 and with continued expansion of this solution, I expect its contribution to continue to grow. With an addressable market of $96 billion, we believe we are in the very early stages of opportunity with Zero Trust and AI. The cyber threat environment continues to worsen as the limitations of firewall and VPN-based architecture are exploited by threat actors to launch an increasing volume of sophisticated attacks. Over the last year, we saw an 18% increase in ransomware attacks blocked by the Zscaler cloud. Our season threat research team is tracking 391 of the most sophisticated ransomware families, including many that were uncovered by Zscaler in the past year. Driven by the increased number of cyber breaches, more customers are adopting our Zero Trust platform. For example, in a new logo win, a Top 10 Fortune 500 industry machinery company purchased Zscaler for users for 100,000 users in a multi-year seven-figure ACV deal. The customer previously purchased a firewall-based SASE solution to consolidate firewall, secure web gateways, and MPLS network spend. Subsequently, they realized the so-called SASE solution allows lateral tech movement and does not deliver Zero Trust Security. They chose Zscaler to replace their firewall-based SASE. Our purpose-built proxy-based cloud platform makes our customers' branches and data centers invisible to such actors, hence they can't be discovered and they can't be attacked. In addition to landing new logo platform purchases, we are also upselling our platform. Our land and expand motion creates a flywheel of continuous engagement and upsell. To give you an example, in a seven-figure upsell deal, a Fortune 200 financial services customer bought ZPA and ZDX after their successful ZIA deployment for 68,000 users. After securing Internet and SaaS access with Zscaler, it was natural for them to expand to our broader platform. ZPA for Zero Trust access to private applications, aimed for user-to-application segmentation to eliminate lateral type propagation, and ZDX to quickly identify and resolve end-to-end performance issues. With this purchase, the customer's ARR more than doubled to nearly $10 million. Next, I am happy to share that customers continue to adopt advanced features of our data protection pillar, making it one of our fastest-growing pillars. For example, in a new logo win, an American healthcare provider purchased multiple pillars of our platform, including ZIA transformation, data protection advanced, and ZDX for 124,000 users in a multi-year eight-figure TCV deal. Our data protection pillar was critical to this win due to its comprehensive capabilities, which include securing all types of data whether structured or unstructured. Data in motion or data addressed and data across all channels, including web, email, endpoint, SaaS, cloud workloads and more. Next, let me discuss our emerging products, including ZDX, Zero Trust for Branch and cloud, and AI analytics. I'm delighted to share that emerging products contributed approximately 22% of new and upsell business in fiscal '24, up from 18% in fiscal '23. We expect this contribution to grow to mid-20s in fiscal '25. Our Zero Trust for branch and cloud solution, including Zero Trust for workflows, Zero Trust SD-WAN, and Zero Trust segmentation is driving more and more meaningful wins. Let me share two examples, in an upsell win, a Fortune 500 financial services customer purchased Zero Trust for workloads to protect their on-prem applications. Zero Trust for workloads contributed approximately one-third of the seven-figure upsell ACV deal, which doubled the annual spend of this existing $1 million dollar ARR customer. In another upsell win, a Top 10 pharmaceutical company purchased our Zero Trust SD-WAN solution to protect over 30 manufacturing sites, eliminating the need for firewalls and making each site like a Starbucks (NASDAQ:SBUX). Zero Trust SD-WAN was nearly 50% off the seven-figure ACV deal. Our expanding portfolio of emerging products further strengthened by our acquisition of Avalor and Airgap is opening doors for sales to new customers. With the addition of Airgap, Zscaler is expanding to provide Zero Trust Security inside branches, factories, and campuses, where customers traditionally relied on East-West firewalls and network access control on NAP. By combining Airgap with our Zero Trust SD-WAN, we can not only replace firewalls at the edge, but also eliminate firewalls inside these sites. We are also seeing strong traction for the unified vulnerability management solution we acquired through Avalor. By combining our customers' enterprise security and business system data with our proprietary law data from half a trillion daily transactions, Avalor delivers real-time actionable insights and operational efficiencies for customers to improve their overall security posture. We expect new logo conversations that start with Airgap or Avalor or other emerging products to expand into broader platform opportunities. We will continue to invest in our platform expansion. Moving to the federal vertical, I am excited to share we landed a new cabinet-level agency, increasing our count of cabinet-level agencies to 13. In a seven-figure ACV deal, this customer purchased Zscaler for users for 5,000 users. With over 100,000 employees, this customer presents a significant 20x upsell opportunity. Having landed 13 of the 15 cabinet-level agencies, including the DoD, we see large upsell opportunities in the federal vertical with the increasing adoption of Zero Trust. Building upon our success in the U.S., we are accelerating our public sector go-to-market investments in other nations that are modeling the Zero Trust security initiatives similarly to the U.S. This is a large opportunity for us, but like many government initiatives, this will take time. Now let me share some updates on our sales organization. First, we had lower-than-expected attrition and we had a strong hiring quarter. In fiscal '25, we plan to continue hiring reps at a strong pace and expect attrition to further improve. Second, I'm pleased to report that sales productivity was better-than-expected during the quarter, driven by acceleration in new and upsell business. In fiscal '25, we expect sales productivity to continue to improve with the second-half stronger than the first. Third, we increased investment in the Global System Integrators or GSI channel by hiring leaders experienced in building GSI programs for large enterprises. These hires are driving significant progress in developing mutual go-to-market plans with GSIs that integrate the Zscaler platform with their customers' digital transformation projects. Most large GSIs are already Zscaler customers and that enables them to showcase to their customers the value Zscaler Zero Trust platform delivers. This quarter, we added another large GSI End-User customer, making eight of the top-10 GSIs by revenue Zscaler customers. This GSI purchased Zscaler for users for over 300,000 users, in our largest-ever TCV deal in the services vertical. This GSI is consolidating multiple point products, including secure web gateways, load balancers, VPNs, firewalls, and MPLS network, which is expected to deliver 200% ROI to this customer. I am pleased with the progress we're making in transforming our go-to-market engine to an account-centric sales motion, which is contributing to growth of our large customers. We added nearly double the number of global 2000 logos in fiscal '24 as compared to fiscal '23. We ended fiscal '24 with approximately 35% of global 2000 companies and more than 40% of Fortune 500 companies as our customers. Our customer base spending $1 million plus annually grew by 26% year-over-year to $567 million and we ended the quarter with over 60 customers spending $5 million plus annually. We expect this large customer momentum to continue in fiscal '25. Finally, I want to address the topic of cloud resilience that has come to the forefront due to the recent cloud outages of Microsoft (NASDAQ:MSFT) and CrowdStrike. When customers rely on a mission-critical cybersecurity service, there's no room for service interruptions. From inception, Zscaler has built a cloud security platform that has been seamlessly scaling with high-reliability and resilience. Operating such a service is no trivial task and requires years of experience. Unproven vendors, including new entrants and legacy firewall companies, do not have this experience. By operating the world's largest security cloud with superior resilience for over a decade, we have earned the trust of the largest enterprises. This is a clear differentiator for us and is driving the growth of our business. As an innovator and a market leader, in January 2023, we became the first cloud security company to introduce a business continuity service that enables customers to continue their operations even during catastrophic events. In conclusion, we are uniquely positioned to benefit from the confluence of two large secular growth drivers, Zero Trust security and AI. We enter fiscal '25 with a stronger go-to-market machine, increased pace of R&D innovation, strong adoption of our emerging products, and high levels of customer satisfaction with an NPS score of over 70. With our customer obsession, expanding platform, and a large addressable market, I expect another strong year, which will move us closer to our goal of $5 billion in ARR. Now, I'd like to turn over the call to Remo for our financial results. Remo Canessa: Thank you, Jay. Our Q4 results exceeded our guidance on growth and profitability, even with ongoing customer scrutiny of large deals. Revenue was $593 million, up 30% year-over-year and up 7% sequentially. From a geographic perspective, Americas represented 55% of revenue, EMEA was 30%, and APJ was 15%. For the full-year, revenue was $2.17 billion, up 34% year-over-year. Our total calculated billings in Q4 grew 27% year-over-year and 45% sequentially to $911 million. Our calculated current billings grew 27% year-over-year. Like last year, some customers paid us upfront on multiyear deals and the percentage of total calculated billings coming from such upfront payments was relatively unchanged year-over-year. Our remaining performance obligations or RPO grew 26% from a year ago to $4.418 billion. The current RPO was approximately 48% of the total RPO. We ended Q4 with 567 customers with over $1 million in ARR and 3,100 customers with over $100,000 in ARR. This continued strong growth of large customers speaks to the strategic role we play in our customer's digital transformation journeys. Our 12-month trailing dollar-based net retention rate was 115%. While good for our business, our increased success in selling bigger bundles, selling multiple pillars from the start, and faster upsells within a year can reduce our dollar-based net retention rate in the future. There could be variability in this metric on a quarterly basis due to the factors I just mentioned. Turning to the rest of our Q4 financial performance, the total gross margin of 81.1% compared to 81.4% in the prior quarter and 80.7% in the year-ago quarter. On a year-over-year basis, gross margin benefited by approximately 60 basis points from a change in our accounting attributed to the longer useful life of our cloud infrastructure. Moving on, our total operating expenses increased 8% sequentially and 26% year-over-year to $353 million. We continue to generate significant leverage in our financial model with an operating margin of approximately 22%, an increase of about 260 basis points year-over-year. Our free cash flow margin was 23%, including data center CapEx of approximately 8% of revenue. We ended the quarter with over $2.4 billion in cash, cash equivalents, and short-term investments. Before getting to the details of Q1 and full-year fiscal 2025 guidance, I wanted to share additional context about our framework for billing guidance. We expect full-year fiscal '25 calculated billings of $3.110 billion to $3.135 billion or year-over-year growth of approximately 19% to 20%. We expect first-half billings to be in the range of 39% to 39.5% of full-year billings guide with Q1 to be approximately 16.2% of full-year billings guide. The midpoint of our guidance implies year-over-year billings growth of approximately 13% in the first-half, accelerating to 23% growth in the second-half. In no particular order, I'd like to share three key factors that are driving this acceleration. One, as Jay mentioned, we expect sales productivity to continue to improve with the second-half stronger than the first. We expect this to contribute to strong new upsell and renewal activity in the year; two, our strong and growing pipeline supports second-half acceleration; and three, from a timing perspective, our contracted non-cancelable billings from prior year's active contracts are scheduled to grow 7% in the first-half and 23% in the second-half. This naturally implies a stronger second-half in billings growth, giving a strong visibility into total billings growth in the second-half. Moving on to taxes, please note that we expect to continue to be a modest cash taxpayer in fiscal 2025 with an estimated cash tax of approximately $45 million to $50 million. For non-GAAP P&L reporting, I'd like to call your attention to a change we are making to our non-GAAP tax calculations. Starting fiscal 2025 and going forward, we're establishing a non-GAAP tax rate of 23%, which is reflected in our non-GAAP earnings per share guidance for fiscal 2025. Please refer to our earnings release and financial supplemental for fiscal '23 and fiscal '24 comparisons reflecting this new non-GAAP tax rate. Turning to the rest of guidance, as a reminder, these numbers are all non-GAAP. For the first quarter, we expect revenue in the range of $604 million to $606 million, reflecting a year-over-year growth of approximately 22%, gross margins of 80%. I would also like to remind investors that a number of our emerging products, including newer products like ZDX, Zero Trust Branch and cloud and AI analytics will initially have lower gross margins than our core products. We are 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 $114 million to $116 million, net other income of $18 million, income taxes of $31 million. Earnings per share in the range of $0.62 to $0.63, assuming 164 million fully diluted shares. For the full-year fiscal 2025, revenue in the range of $2.6 billion to $2.62 billion, reflecting a year-over-year growth of 20% to 21%. Operating profit in the range of $530 million to $540 million, income taxes of approximately $140 million, and earnings per share in the range of $2.81 to $2.87, assuming approximately 164 million fully diluted shares. We expect our free cash flow margin to be approximately 23.5% to 24%, including higher CapEx this year. We expect our data center CapEx to be approximately 3 points higher as a percent of revenue compared to fiscal 2024, as we invest in upgrades to our cloud and AI infrastructure. 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, operator, you may now open the call for questions. Operator: Thank you. [Operator Instructions] Please standby for our first question thank you. And it comes from the line of Saket Kalia with Barclays (LON:BARC). Please proceed. Saket Kalia: Okay, great. Hey, guys. Thanks for taking my question here and a nice quarter on the billings and on next year's billings guide. Maybe if I give it to one question, Jay, maybe I'll make it for you. Can you [Technical Difficulty] drop a little bit there? I think we all know your views on firewall-based solutions, but maybe out of curiosity, how about some of the newer players in SASE that are maybe attacking this with a similar kind of pure-play cloud approach as Zscaler? Thanks. Jay Chaudhry: Saket, thank you. We have not seen any meaningful change on the competitive landscape. In fact, if I would say, as the market is looking for a broader platform that's integrated and it's looking for proven vendor because the resilience has become a very important thing our brand has gotten better. On the high-end of the market, we actually feel like we're very good. We mentioned about the number of new logos. Last year, we added essentially doubled in '24 over '25. We've seen whether the firewall vendors or some other vendors, either they lack the proxy architecture or they lack a multi-tenant architecture. Architecture is critical for win and that's a big advantage for us. Even if you build the architecture the time and experience it takes to build a highly reliable, highly resilient cloud is massive. And then these large enterprises have to trust you. It took us a long time to earn the trust of these customers. So we feel we are in a good position. We keep on innovating the gap between our offering and what I call so would be competitors is growing bigger and bigger. So I feel very bullish and comfortable for the platform and the gap we are creating with other competitors. Brad Zelnick: Great. Thanks so much. And I'll echo my congrats on a real strong finish to the year. Jay, I appreciate your comments about the Microsoft and CrowdStrike related outage in July and why Zscaler is designed in a way that's highly available and frankly relied upon by customers as an in-line solution. But I'm wondering if that event in any way from what you can tell has changed the way customers are thinking about their cyber strategies and Zscaler's place within that? Thank you. Jay Chaudhry: Yes. Brad, It's a good question after the CrowdStrike out, customers are more focused on resilience, which is our strength. In fact, I personally got lots and lots of calls right after the incident. They wanted to know about what we're doing about it, that we ended up personally inviting actually wide invitation briefing to 1,000 or so our largest customers. I was surprised to see that within a matter of a week or so, about 700 customers registered for the briefings, we ended up doing multiple of them. The main question was, this is mission-critical service and how are we protected? The good thing is Zscaler deliver business continuity plan or DR service in Jan 2023, the first vendor to deliver it, the only vendor that has a true BCP. So the importance of mission criticality has gone up significantly since the outage that was caused by CrowdStrike. In fact, about 40% of Zscalers large customers have already deployed BCP for ZIA. So while our customers want resilience, they also do want consolidation, but they do not want consolidation such that it makes them dependent on a single vendor, especially single vendor for applications and security. This sentiment has become even stronger after the Midnight Blizzard of Microsoft issues. So I think we are well-positioned. We did a good job in building mission verticality. And I think it's important and our customers are working totally with us. Brad Zelnick: Very helpful, Jay. Thank you. Operator: Thank you. One moment for our next question, please. And it comes from the line of Roger Boyd with UBS. Please proceed. Roger Boyd: Great. Thank you for taking my questions. Remo, I wanted to ask you about the billings guide and if you could just speak to the general level of conservatism there. You've been pretty clear even before this quarter about the expected headwind coming out of the go-to-market transition, but it does sound like sales productivity was better than expected in both 3Q and 4Q this year. So just beyond that, anything else giving you more pause or tempering your expectations around the broader macro environment, sales cycles, or anything else? Thanks. Remo Canessa: Yes, great question. So I mean, billings guide really reflects, again, we broke out the first-half versus second-half. And you know, as we talked about in the sales organization, we had higher attrition than we expected in Q3 and that attrition has stabilized in Q4. Hiring those account reps, this could to take time for those account reps to basically get to full productivity. We expect them to get to strong productivity in the second-half, our pipeline supports our guidance. And as we called out also, when you take a look at billings, billings is made up of new and upsell renewals and contracted billings. And one of the things we called out on the script is contracted billings are scheduled billings up from prior year contracts. So those are what we're seeing, we're seeing that because of the business is getting more second-half weighted, we're seeing that this -- our guide reflects that. And as we called out, in the first-half, contracted billings is expected to increase on a year-over-year basis 7% and in the second-half 23%. What I can say also is that from my perspective, being here at Zscaler for almost eight years, there's a change in our sales organization. You know, the change is basically it's a more mature, very strong leadership and also an organization that I feel is going to be able to sell deeper into accounts and really sell to the value of Zscaler. So the puts and takes are from my perspective is that strong demand for Zero Trust, we're going to continue to expand in the G2K, which represents around 35% in the Fortune 500 customers. But the key thing with Zscaler also is that we're innovating. So you look at our emerging products, they represented 22% of our total new and upsell in fiscal '24, we expect that to go up to 25%. So that's going to be our continued focus. It's not only selling our existing core products, but also innovating. As I mentioned, strong momentum in the go-to-market team. We just had our SKO and the feedback from everybody who went there was just very, very positive. I just really feel good about where we're at. I mean, having said that, the backdrop, it's still a challenging spending environment. But I feel that Zscaler with our platform with what we're building our go-to-market, I just think we're just very, very well-positioned. Jay? anything. Jay Chaudhry: No, it's good. I think the last comment I mentioned is, in today's environment, CIOs do want ROI cost savings, cost takeout. We're in a unique position to remove a number of point products that help justify closing our deals. Roger Boyd: Great. Operator: Thank you. One moment for our next question, please. And it comes from the line of Joseph Gallo with Jefferies. Please proceed. Joseph Gallo: Hey guys, thanks for the question. Jay, I want to follow up on that last question. I mean, you've obviously started the branch out very successfully beyond ZIA and ZPA evidenced by AI and data protection success. However, post the CrowdStrike incident, we've heard customers don't want to put all their eggs in one basket. Does this hinder your ability to sell incremental products? And then Remo, maybe you can just elaborate on how you're thinking about NRR in your fiscal '25 billings guide? Thanks. Jay Chaudhry: So it's a very good question. So now CrowdStrike wasn't really an issue of putting all of your eggs in one basket. CrowdStrike was one of the point products. Each product must work well. So on one side, customers do want consolidation. If you got two dozen products, they want to bring it down to a handful of key platform providers, but they do not want to go to the extreme of going with a single vendor that wants to sell all security products or a single vendor that wants to sell you all the applications and security products. In fact, most of the CIOs, I want to, they have been standardizing in-line access to three providers, one for EDR, one for identity, and one for Zero Trust actions. I think that's a good combination because you end up getting a couple of extra layers, but you still have separation. So in this environment, our customers aren't really pushing back on us because we tell them don't buy everything through Zscaler. You've got an EDR provider, you've got an identity provider and we'll do the rest of Zero Trust on activity. And that's how we carefully choose the markets we get into. So we feel comfortable and good about the expansion and selection of areas, where we want to compete in. Remo Canessa: From an NRR perspective, Joseph, 115% I believe is outstanding. We're not guiding to NRR. The only time we really look at it is, as we mentioned before on these calls, really the key for me is just driving top-line business, whether it comes from existing customers or new customers, but 115% at our scale, I think is outstanding. Joseph Gallo: Thank you. Operator: Thank you. One moment for our next question, please. And it comes from the line of Ittai Kidron with Oppenheimer. Please proceed. Ittai Kidron: Thanks guys. Great solid finish for the year. Remo, I'm sorry, I'm going to have to try and beat the dead horse here again on the billings. Just want to make sure I understand this right. I mean, in '24, you didn't have any unusual seasonality in the first-half, second-half on year-over-year patterns. They were quite similar in billings. So what is it that's driving the 7% and 23% differences in the first and the second-half? Are things being pushed out? Do you just expect deals to push out, hence you expect to close more or renew more in the second-half? Is that a macro comment? Was there something that happened two, three years ago, lumpsum that somehow comes back into play here? Anything that you can do to dig in just a little bit more on that would be greatly appreciated? Remo Canessa: Yes. So it's really -- if you take a look at the call-out is scheduled billings. And scheduled billings growth in the first-half was 7% and scheduled billings growth on a year-over-year basis, we see a 23% for this year. So then the question is step-back and what creates that? So we signed three-year contracts. In the three-year contracts, they're scheduled billings. So we have those scheduled billings. Those billings are coming through. Now, if you take a look and go back into fiscal '23 first-half and fiscal '24 first-half, there were macro challenges. So it's a challenging environment from Zscaler's perspective. So therefore, with that challenging environment, in the first-half of fiscal '23 and fiscal '24, now those scheduled billings are coming through and those scheduled billings are lower. That's what's creating that growth rate of 7% year-over-year in the first-half. Now having said that, what I made to the comment I made before was that the business is getting more second-half. We're becoming a larger company, becoming more second-half. So our guidance reflects that and that scheduled billings of 23%, those are contracted billings, they're scheduled and we expect to get those billings. Ittai Kidron: Thank you. Operator: Thank you. One moment for our next question and it comes from the line of Brian Essex with JPMorgan (NYSE:JPM). Please proceed. Great. Brian Essex: Great, Thank you, and good afternoon. Thank you for taking the question. Jay, I think -- I think you may have touched on this in your prepared remarks, but I want to circle back into the -- to the macro, specifically the competitive environment with regard to pricing. And there are certainly in the Zero Trust space, we're seeing a lot of initiatives to consolidate on certain platforms. Some of that is flexible pricing, different duration, giving away products for free. How is that impacting the pricing environment that you're dealing with? I understand that there's a lot of times an architectural change that's attractive with your platform, but just wanted to touch maybe if you could peel back a layer on the pricing dynamics just to understand what you see in your environment? Thank you. Jay Chaudhry: So as I said during my prepared remarks, yes, the macro remains challenging and there's deal scrutiny. But also at the same time, cyber, it's very important. In many areas, good enough is good enough. In cyber and large enterprises, good enough is not good enough. So customers do want a good -- a very good cyber solution. That's number one. And number two, in the cyber area, a real Zero Trust architecture that's cloud native does play an important role that matters. Now, once you do that, your pipeline actually build, you are engaged with customers and the next part comes in, can you close the deal? Now closing the deal in today's environment does require that you are able to actually show the customer that you can take a bunch of products out and you can save money for the customers. And we are able to release. We are able to replace a number of new -- number of products, like the firewalls, VPNs, NAV products, and the like. When we are able to show that we are able to eliminate those products, the customer likes it, that helped us both. No, we have our new and upsell business has accelerated actually. So we are seeing strength in area. So personally, I'm not worried about the competition. I'm able to handle pricing situations by showing the number of products you can move. Think of other vendors. Do you think a firewall vendor who wants to remove a bunch of point products? The biggest installed base in terms of products today is firewalls. They want to protect those firewalls. We take on those firewalls, we take on those VPNs. So we just have to -- this area we keep on getting better at is making sure we engage at the sea level, number one. Number two, make sure we create a good business value assessment and we have owned that process quite a bit. Brian Essex: Got it. Thank you. Operator: Thank you. One moment for our next question, please. And it's from the line of Matt Hedberg with RBC Capital Markets. Please proceed. Matt Hedberg: Great. Thanks guys for the questions. Maybe one on the quarter. Could you talk a little bit about, obviously, it was a Q4, but -- and we assume it's back-end loaded. But the linearity of the quarter, anything abnormal with deals that pushed or pulled? And I guess maybe if you could comment a little bit more specifically on trends in August thus far that would be -- or I guess now we're in the September, but through August, that would be helpful? Remo Canessa: The trends in August, I'll let Jay speak about that. Q4, we talked about that the quarters have become more back-end loaded. Nothing -- it was similar to the prior few quarters, Q4. So nothing unusual with Q4 from a linearity perspective. And regarding trends in August, we can't give specific trends on dollar amounts or anything like that or business, but maybe Jay can give a few comments. Jay Chaudhry: I think nothing unusual to talk about in August. Our business is making progress as usual. So I think you'll probably hear more about us as we get better. Matt Hedberg: Maybe if I could just squeeze one more in. You know, it seems like in the spirit of consolidation, it feels like you guys are in a good spot to consolidate a lot of customer spend. Can you talk about large deal visibility, understanding it is -- it is hard to predict the timing of those things, but could you talk about sort of the growth in your large deal pipeline and kind of the focus on increasingly playing that consolidation role? Jay Chaudhry: Yes, there is no slowing down on consolidation of point products. We have been seeing our deals in general getting bigger. They're seeing upsell going more and more. So if customers spend X, they're spending more with us. I shared several deals, several large deals, where customers started at X and it's gone up to Y or Z and whatnot. So the main thing for customers are looking for consolidation is, number one, can you give me better cyber and data protection? Number two, can I operationally run and manage these things better? Number three, can you do cost savings? That message is loud and clear and we're handling all of that. And for one area I'll highlight for consolidation, which is playing a bigger role for us is data protection. When customers started with Zscaler, ZIA, they started with cyber protection was the primary focus to make sure they don't get compromised. Now with ransomware attacks where data is often ex-filtrated, data protection has become a bigger and more important item than it used to be. Since we are sitting in line for the traffic that goes via the Internet, we are the natural provider, natural partner to do data protection. And we're seeing a growth in data protection that has become one of the fastest growing area for us. I think a few quarters ago, we mentioned that it has exceeded, it has surpassed $4 billion or for us. And also we expanded this platform quite a bit. We used to do in-line DLP as the primary thing. Now we also got DLP or email as a big thing, SaaS, SSPM, SASE kind of stuff and now DSPM are becoming more areas. So I think we've got a great expanding platform with cost-savings, I think they're extremely well-positioned. Remo Canessa: So from my perspective, also Matt, I mean, just some numbers we called out on the script, 567 customers with greater than $1 million ARR, 3,100 customers of greater than $100,000 and I believe 60 -- over 60 customers with $5 million in ARR, half a trillion transactions per day. So to put in perspective, I mean, order of magnitude, that's more than anybody has seen. At the time of our public offering, we're doing 30 billion transactions per day. So we've gone from 30 billion transactions to 500 billion transactions. The data that we receive, the information that we receive that we're able to basically help our customers for a security perspective. So I just don't think there's anybody else out there who can do it. So it's my view that we are in a great position to capture this market. I also believe that with the go-to-market changes that we've made over the last nine months, we're going to sell deeper in the accounts and also we've been one of the things we called out GSIs. That's going to be an area that we're going to focus in on as we go forward. I think the opportunity is really big. I believe the platform is well-positioned to really protect customers and governments throughout the world. And I think, you know, we feel good about where we're at right now. Matt Hedberg: Thanks. Super helpful. Operator: Thank you. One moment for our next question. That comes from the line of Shrenik Kothari with Baird. Please proceed. Shrenik Kothari: Hey, guys, thanks for taking my question. So, Jay, in light of what you said, right, you guys are expanding the platform beyond just securing users and now delivering Zero Trust for applications, workloads and IoT, and you gave example of a new logo win with Top 10, strong customer demand for the broad approach. Just can you elaborate on the nature and composition of these contracts, the non-cancelable billings, the compensation of this pipeline in terms of users and seats versus workloads and applications that you called out? And does that help with the overall kind of land and expand motion moving more towards the workloads and application base and a follow-up for Remo as well? Jay Chaudhry: Yes. Let me start with the platform expansion. As I said during my prepared remarks, most of the vendors are trying to really mature a product for protecting users. They've done that extremely well, 47 million some users protected. So it is natural for us to expand it to our workloads, IoT, OT devices and the like. In terms of growth, to give you some data points, we talk about emerging products from the newer areas and then we've got the mature flagship products on emerging products, which is where the workload protection, IoT, OT type of stuff falls in, it was about 22% in fiscal '24. It had gone up from 18% in fiscal '23 and we expect it to go to mid-20s in fiscal '25. So that's growing faster. That's why it's able to carve out market share out of that. Now the exciting thing about that area is there's literally no real competition to do these things in Zero Trust fashion. Yes, some of the workloads and all this done through firewalls, communication, IoT, OT, what do you do, firewalls and VPNs. We all know that firewalls and VPNs have to go away. And we are well-positioned. It's just that -- it's a little bit different sale. It's the same audience, but a little bit different. IoT, OT, a lot of stuff is linked to manufacturing and plants and the like. So you need to reach out of this audience, but CSOs and CIOs do play a common role with the acquisition of Airgap, which does actually device segmentation for IoT, OT extremely well without needing any firewalls, without needing any network access control devices, it is one of area that's being really showing tons of interest in our customer base. In fact, our number of engagements with device segmentation for IoT, OT based on Airgap has gone up significantly. So that's why I feel like the gap between us and people trying to come from behind is growing and the barrier to entries is not trivial in this space. Remo, you want to talk about the... Remo Canessa: Yes. From a contracted billing perspective, just -- again, the key point is that we signed three-year contracts upfront. And so getting that certainty with that contract is good. And then the billing happens afterwards on an annual basis afterwards. That's the scheduled contract billing. So what we're seeing is our contract lengths are increasing, which is positive. And also we're seeing our deal size increasing, which is positive too. But we're also seeing customers buying more of our product and across our platform with [Technical Difficulty] And again, getting a three-year contract with a scheduled billing gives you certainty related to the billings, but also getting that three-year contract gives you time to basically sell that customer more. And as I mentioned before, which is really key is that the sales organization, go-to-market organization, we're going to be selling deeper into the accounts. That's going to be our focus. We're going to look for new customers, but we're also going to look to sell deeper into our accounts. So longer contracts, it's a good thing. Shrenik Kothari: Got it. Thanks a lot Jay and Remo. Appreciate it. Operator: Thank you. One moment for our next question. That comes from the line of Patrick Colville with Scotiabank. Please proceed. Patrick Colville: Hey, Jay, thank you so much for taking my question here. I guess I want to ask about emerging products. I mean, it was 22% of new and upsell in fiscal '24. I mean, very impressive to see those emerging products ramp. I mean, we're going to get this in the 10-K, but what was ZPA and then ZIA as a proportion of new and upsell into fiscal '24? And I guess -- pardon me, the second part of the question is, how do you expect ZPA and ZIA to trend in fiscal '25? I mean, what's the sustainability and remaining TAM for those two product lines? Jay Chaudhry: So very good question. So let's start with ZIA and ZPA. You know at the time of IPO, there was only one product ZIA. ZPA was kind of a rounding error, so to speak. But today, if you look at the mix between ZIA and ZPA, ZPA has gone from literally nothing to about 40% -- over 40% of the new business that we are doing between the two of the products. So that's very remarkable. In fact, if it goes too high-up, I'll be kind of wondering, is ZIA is not going fast enough. So I expect it to grow somewhat more, but not quite. At the end of the day, it could get to 50-50. I expect every Zscaler customer for every user to have ZIA, ZPA, and ZDX, those three products make it a complete package and we call it Zscaler for Users. Zscaler for Users has become our single largest queue basically because that's what our sales team leads with, which really says that our goal is for every customer to buy those three products. That's kind of one key area. Now what is the second part of your question? Sorry, I forgot. Patrick Colville: I guess it's -- the question we get from investors is how -- what is the sustainability of those business lines? And I guess what you just articulated is that there's a lot to go in ZPA, but maybe talk about ZIA. Is there a lot to go there or is that a more mature segment? Jay Chaudhry: So let's also -- let's start with the second part. That is how much market penetration done and how much market penetration we have left to take. As ZIA was the starting product, obviously, almost all customers start with ZIA though we are seeing some customers starting with ZPA, so the number is relatively small. But take G2K, we reached nearly 35% of G2K, which means there are about 300 companies -- sorry, yes, 300 companies that have spent -- sorry, 35% of them are Zscaler customers. Now about probably an area of 60% of our large ZIA customers also at ZPA. So that's good penetration. But in terms of the opportunity for us, only about -- of the 35% G2K, about 300 of them spend over $1 million with us. That means that of the existing customer, the 400 more that could easily go to $1 million for us. But many of the customers in that same group have gone to $5 million. So what I'm saying, there's an opportunity for us to upsell, go from 35% G2K to a higher number and among those 35%, who sell more ZIA and ZPA. So there's no lack of market for us. Other point I'll make is on the high-end of the market, we do extremely, extremely well. Those customers are sophisticated, they need the functionality, breadth, depth, and reliability and resilience we offer. So we are counting on this thing. Our account-focused program that our new CRO is driving is actually focused on going deeper and wider into our existing accounts and getting new large logo accounts as well. So I hope that gives you the color you're looking for. Patrick Colville: Wonderful. Thank you so much. Operator: Thank you. Our next question comes from the line of Adam Borg with Stifel. Please proceed. Adam Borg: Awesome. And thanks for taking the question. For Jay, Remo, I know you talked about this a bit in the script, but I was hoping you could talk a little bit more about headcount growth in fiscal '25 and where you're really investing most across sales and marketing and R&D? Thanks so much. Jay Chaudhry: Yes. We do expect to increase headcount in fiscal '25. Our fiscal '25 headcount increase will be across all the areas, R&D, sales and marketing, G&A and cloud. I would say the pace of hiring in fiscal '25 will be less than what it was in fiscal '24. In fiscal '24, we added about 1,400 employees. We went from 5,900 employees to 7,300. So I would think about more of a moderate pace in hiring in fiscal '25 versus '24. Hamza Fodderwala: Good evening. Thanks for fitting me in. Either for Jay or Remo, curious since Mike and the new sales leadership have been on in the last few quarters. What are some of the early indications that you're seeing early proof points that gives you confidence heading into fiscal '25? Jay Chaudhry: So good question. Remember when we set out to make some of these changes, the key thing was for us was we wanted to move from early-stage companies that focus on opportunity-centric stuff to account-centric stuff. That was one of the key terms. We have put a program in place. We trained the sales force and we are actually making good progress in pursuing this process. How do you see the results? You start seeing more upsell in the account base plus and then you start seeing new logo as well. So we are seeing good upsell large deals in large accounts, that's what we expected. In fact, if you think about it, our overall number of $1 million ARR customers has gone up to 567 million. Our customers with $5 million or more ARR has gone 260 million. Now all of that is not attributable to the new team because the new team started working for the past couple of quarters, but we're seeing key results for that. The second thing we're seeing as a result is with the GSI involvement, we have a special focus on GSIs, who actually are embedding our offering into their offerings. So it becomes part of their offerings as well. We're seeing good early indications of that. Number three, the quality of sales leaders and reps we are hiring, a number of them come from the background with a focus on account to focus selling and working large accounts to larger deals. We are seeing the quality of those people. So from my point of view, the transition is going better than I expected. I'm very pleased with it and I'm very bullish about it. Hamza Fodderwala: Thank you. Remo Canessa: From my perspective. Yes, from my perspective, I'll give you my two sentences and make it really quick. At the end of the day, we've got a great company with a great platform, where significant need of your product on a worldwide basis, that's required, quite frankly. It comes down to one thing and that is people. And I believe what I'm seeing with the leadership that we have, but it's in our go-to-market team across the board. It is -- it is great to see. And really, I think sets us up well going forward. And as Jay mentioned, you know, strong leaders will hire strong people. And I believe the leaderships we have on board is very, very strong. Jay Chaudhry: Yes. I think the comment I'll make is a barrier to entry to do what Zscaler has done is very hard and cyber is becoming more and more important and we are excited for the opportunity ahead of us. With that, I want to thank you for your interest in Zscaler. We look forward to seeing you at one of these investor conferences. Thanks again. Remo Canessa: Thank you. Operator: Thank you all for participating in today's conference. You may now disconnect.

Zscaler, Inc. (ZS) Q4 2024 Earnings Call Transcript

Ashwin Kesireddy - Vice President, Investor Relations and Strategic Finance Jay Chaudhry - Chairman and Chief Executive Officer Remo Canessa - Chief Financial Officer Good day, everyone, and thank you for standing by. Welcome to Zscaler Fourth Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Now, I will pass the call over to the Vice President, Investor Relations and Strategic Finance, Ashwin Kesireddy. Please go ahead. Ashwin Kesireddy Good afternoon, everyone, and welcome to the Zscaler Fourth Quarter Fiscal Year 2024 Earnings Conference Call. On the call with me today are Jay Chaudhry, Chairman and CEO; and Remo Canessa, CFO. Please note, 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 and market opportunity. These statements and other comments are not guarantees of future performance, but rather are subject to risks 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 also want to inform you that we'll be attending the following conferences: Citi Global TMT Conference in New York City on September 5th, Goldman Sachs Communacopia and Technology Conference in San Francisco on September 11, Wolfe Research TMT Conference in San Francisco on September 11. Thank you, Ashwin. We delivered a strong Q4 with all metrics exceeding the high-end of our guidance. Revenue grew 30% year-over-year. Billings grew 27% and profitability reached new records with operating margins of approximately 22% and free cash flow margin of 23%. We also achieved a new milestone of $1 billion in quarterly bookings in Q4, driven by an acceleration in new and upsell business in the quarter. For the full-year, revenue grew 34% and free cash flow grew 75%, resulting in free cash flow margin of 27%, a new record for the company. With another year of strong top and bottom-line performance, we exceeded the Rule of 60 for the fourth consecutive year. Despite the recent changes in our go-to-market organization, we delivered these outstanding results, driven by strong customer demand for our Zero Trust Exchange platform. I'm very pleased with the progress we're making in go-to-market execution, the pace of innovation and customer adoption of our expanded platform. I'm also pleased to share we crossed $2.5 billion in ARR in Q4, and we expect to achieve a new milestone of $3 billion or more in ARR in fiscal '25. Before getting into further details of the quarter, let me share a few observations on the demand environment. First, customer adoption Zero Trust Platforms is stronger than ever, with Q4 setting a record for new and upsell business. Our platform secures 47 million users across nearly 8,700 customers. While other vendors are still struggling to deliver cloud security for users, we expanded our platform beyond users to deliver Zero Trust security for applications, workloads and, IoT/OT devices. Customers are consolidating their disjointed legacy security products by adopting our comprehensive platform. Second, the increasing use of AI is creating new avenues of growth for us. For example, the rising adoption of Gen AI is exposing new gaps in organizations' security posture. To help our customers address these risks, earlier this year, we launched Gen AI Security, which enables customers to realize the productivity benefits of Gen AI without compromising data security. Using our Gen AI security, customers can gain visibility, apply access control and enforce data protection policies to prevent their sensitive data from leaking. Third, I'm thrilled to share that we have achieved a major milestone with our cloud platform, surpassing over $0.5 trillion transactions daily, that is T as in trillion. This further demonstrates our widening market leadership position. These transactions generate a vast quantity of proprietary loans that feed our massive data lake. These are not firewall logs that often can't inspect SSL traffic for cyber threat detection. These are complete logs that have structured and unstructured data, including the full URL. We leverage this proprietary data to train AI models that power innovations throughout our platform. Our AI analytics solution, including unified vulnerability management, Risk360, Business Insights are seeing strong traction. AI analytics contributed nearly 3 points to new and upsell business growth in Q4 and 2 points for the entire fiscal '24, even though some of these products were only available for a part of the year. I am pleased with the contribution of AI analytics in fiscal '24 and with continued expansion of this solution, I expect its contribution to continue to grow. With an addressable market of $96 billion, we believe we are in the very early stages of opportunity with Zero Trust and AI. The cyber threat environment continues to worsen as the limitations of firewall and VPN-based architecture are exploited by threat actors to launch an increasing volume of sophisticated attacks. Over the last year, we saw an 18% increase in ransomware attacks blocked by the Zscaler cloud. Our season threat research team is tracking 391 of the most sophisticated ransomware families, including many that were uncovered by Zscaler in the past year. Driven by the increased number of cyber breaches, more customers are adopting our Zero Trust platform. For example, in a new logo win, a Top 10 Fortune 500 industry machinery company purchased Zscaler for users for 100,000 users in a multi-year seven-figure ACV deal. The customer previously purchased a firewall-based SASE solution to consolidate firewall, secure web gateways, and MPLS network spend. Subsequently, they realized the so-called SASE solution allows lateral tech movement and does not deliver Zero Trust Security. They chose Zscaler to replace their firewall-based SASE. Our purpose-built proxy-based cloud platform makes our customers' branches and data centers invisible to such actors, hence they can't be discovered and they can't be attacked. In addition to landing new logo platform purchases, we are also upselling our platform. Our land and expand motion creates a flywheel of continuous engagement and upsell. To give you an example, in a seven-figure upsell deal, a Fortune 200 financial services customer bought ZPA and ZDX after their successful ZIA deployment for 68,000 users. After securing Internet and SaaS access with Zscaler, it was natural for them to expand to our broader platform. ZPA for Zero Trust access to private applications, aimed for user-to-application segmentation to eliminate lateral type propagation, and ZDX to quickly identify and resolve end-to-end performance issues. With this purchase, the customer's ARR more than doubled to nearly $10 million. Next, I am happy to share that customers continue to adopt advanced features of our data protection pillar, making it one of our fastest-growing pillars. For example, in a new logo win, an American healthcare provider purchased multiple pillars of our platform, including ZIA transformation, data protection advanced, and ZDX for 124,000 users in a multi-year eight-figure TCV deal. Our data protection pillar was critical to this win due to its comprehensive capabilities, which include securing all types of data whether structured or unstructured. Data in motion or data addressed and data across all channels, including web, email, endpoint, SaaS, cloud workloads and more. Next, let me discuss our emerging products, including ZDX, Zero Trust for Branch and cloud, and AI analytics. I'm delighted to share that emerging products contributed approximately 22% of new and upsell business in fiscal '24, up from 18% in fiscal '23. We expect this contribution to grow to mid-20s in fiscal '25. Our Zero Trust for branch and cloud solution, including Zero Trust for workflows, Zero Trust SD-WAN, and Zero Trust segmentation is driving more and more meaningful wins. Let me share two examples, in an upsell win, a Fortune 500 financial services customer purchased Zero Trust for workloads to protect their on-prem applications. Zero Trust for workloads contributed approximately one-third of the seven-figure upsell ACV deal, which doubled the annual spend of this existing $1 million dollar ARR customer. In another upsell win, a Top 10 pharmaceutical company purchased our Zero Trust SD-WAN solution to protect over 30 manufacturing sites, eliminating the need for firewalls and making each site like a Starbucks. Zero Trust SD-WAN was nearly 50% off the seven-figure ACV deal. Our expanding portfolio of emerging products further strengthened by our acquisition of Avalor and Airgap is opening doors for sales to new customers. With the addition of Airgap, Zscaler is expanding to provide Zero Trust Security inside branches, factories, and campuses, where customers traditionally relied on East-West firewalls and network access control on NAP. By combining Airgap with our Zero Trust SD-WAN, we can not only replace firewalls at the edge, but also eliminate firewalls inside these sites. We are also seeing strong traction for the unified vulnerability management solution we acquired through Avalor. By combining our customers' enterprise security and business system data with our proprietary law data from half a trillion daily transactions, Avalor delivers real-time actionable insights and operational efficiencies for customers to improve their overall security posture. We expect new logo conversations that start with Airgap or Avalor or other emerging products to expand into broader platform opportunities. We will continue to invest in our platform expansion. Moving to the federal vertical, I am excited to share we landed a new cabinet-level agency, increasing our count of cabinet-level agencies to 13. In a seven-figure ACV deal, this customer purchased Zscaler for users for 5,000 users. With over 100,000 employees, this customer presents a significant 20x upsell opportunity. Having landed 13 of the 15 cabinet-level agencies, including the DoD, we see large upsell opportunities in the federal vertical with the increasing adoption of Zero Trust. Building upon our success in the U.S., we are accelerating our public sector go-to-market investments in other nations that are modeling the Zero Trust security initiatives similarly to the U.S. This is a large opportunity for us, but like many government initiatives, this will take time. Now let me share some updates on our sales organization. First, we had lower-than-expected attrition and we had a strong hiring quarter. In fiscal '25, we plan to continue hiring reps at a strong pace and expect attrition to further improve. Second, I'm pleased to report that sales productivity was better-than-expected during the quarter, driven by acceleration in new and upsell business. In fiscal '25, we expect sales productivity to continue to improve with the second-half stronger than the first. Third, we increased investment in the Global System Integrators or GSI channel by hiring leaders experienced in building GSI programs for large enterprises. These hires are driving significant progress in developing mutual go-to-market plans with GSIs that integrate the Zscaler platform with their customers' digital transformation projects. Most large GSIs are already Zscaler customers and that enables them to showcase to their customers the value Zscaler Zero Trust platform delivers. This quarter, we added another large GSI End-User customer, making eight of the top-10 GSIs by revenue Zscaler customers. This GSI purchased Zscaler for users for over 300,000 users, in our largest-ever TCV deal in the services vertical. This GSI is consolidating multiple point products, including secure web gateways, load balancers, VPNs, firewalls, and MPLS network, which is expected to deliver 200% ROI to this customer. I am pleased with the progress we're making in transforming our go-to-market engine to an account-centric sales motion, which is contributing to growth of our large customers. We added nearly double the number of global 2000 logos in fiscal '24 as compared to fiscal '23. We ended fiscal '24 with approximately 35% of global 2000 companies and more than 40% of Fortune 500 companies as our customers. Our customer base spending $1 million plus annually grew by 26% year-over-year to $567 million and we ended the quarter with over 60 customers spending $5 million plus annually. We expect this large customer momentum to continue in fiscal '25. Finally, I want to address the topic of cloud resilience that has come to the forefront due to the recent cloud outages of Microsoft and CrowdStrike. When customers rely on a mission-critical cybersecurity service, there's no room for service interruptions. From inception, Zscaler has built a cloud security platform that has been seamlessly scaling with high-reliability and resilience. Operating such a service is no trivial task and requires years of experience. Unproven vendors, including new entrants and legacy firewall companies, do not have this experience. By operating the world's largest security cloud with superior resilience for over a decade, we have earned the trust of the largest enterprises. This is a clear differentiator for us and is driving the growth of our business. As an innovator and a market leader, in January 2023, we became the first cloud security company to introduce a business continuity service that enables customers to continue their operations even during catastrophic events. In conclusion, we are uniquely positioned to benefit from the confluence of two large secular growth drivers, Zero Trust security and AI. We enter fiscal '25 with a stronger go-to-market machine, increased pace of R&D innovation, strong adoption of our emerging products, and high levels of customer satisfaction with an NPS score of over 70. With our customer obsession, expanding platform, and a large addressable market, I expect another strong year, which will move us closer to our goal of $5 billion in ARR. Now, I'd like to turn over the call to Remo for our financial results. Remo Canessa Thank you, Jay. Our Q4 results exceeded our guidance on growth and profitability, even with ongoing customer scrutiny of large deals. Revenue was $593 million, up 30% year-over-year and up 7% sequentially. From a geographic perspective, Americas represented 55% of revenue, EMEA was 30%, and APJ was 15%. For the full-year, revenue was $2.17 billion, up 34% year-over-year. Our total calculated billings in Q4 grew 27% year-over-year and 45% sequentially to $911 million. Our calculated current billings grew 27% year-over-year. Like last year, some customers paid us upfront on multiyear deals and the percentage of total calculated billings coming from such upfront payments was relatively unchanged year-over-year. Our remaining performance obligations or RPO grew 26% from a year ago to $4.418 billion. The current RPO was approximately 48% of the total RPO. We ended Q4 with 567 customers with over $1 million in ARR and 3,100 customers with over $100,000 in ARR. This continued strong growth of large customers speaks to the strategic role we play in our customer's digital transformation journeys. Our 12-month trailing dollar-based net retention rate was 115%. While good for our business, our increased success in selling bigger bundles, selling multiple pillars from the start, and faster upsells within a year can reduce our dollar-based net retention rate in the future. There could be variability in this metric on a quarterly basis due to the factors I just mentioned. Turning to the rest of our Q4 financial performance, the total gross margin of 81.1% compared to 81.4% in the prior quarter and 80.7% in the year-ago quarter. On a year-over-year basis, gross margin benefited by approximately 60 basis points from a change in our accounting attributed to the longer useful life of our cloud infrastructure. Moving on, our total operating expenses increased 8% sequentially and 26% year-over-year to $353 million. We continue to generate significant leverage in our financial model with an operating margin of approximately 22%, an increase of about 260 basis points year-over-year. Our free cash flow margin was 23%, including data center CapEx of approximately 8% of revenue. We ended the quarter with over $2.4 billion in cash, cash equivalents, and short-term investments. Before getting to the details of Q1 and full-year fiscal 2025 guidance, I wanted to share additional context about our framework for billing guidance. We expect full-year fiscal '25 calculated billings of $3.110 billion to $3.135 billion or year-over-year growth of approximately 19% to 20%. We expect first-half billings to be in the range of 39% to 39.5% of full-year billings guide with Q1 to be approximately 16.2% of full-year billings guide. The midpoint of our guidance implies year-over-year billings growth of approximately 13% in the first-half, accelerating to 23% growth in the second-half. In no particular order, I'd like to share three key factors that are driving this acceleration. One, as Jay mentioned, we expect sales productivity to continue to improve with the second-half stronger than the first. We expect this to contribute to strong new upsell and renewal activity in the year; two, our strong and growing pipeline supports second-half acceleration; and three, from a timing perspective, our contracted non-cancelable billings from prior year's active contracts are scheduled to grow 7% in the first-half and 23% in the second-half. This naturally implies a stronger second-half in billings growth, giving a strong visibility into total billings growth in the second-half. Moving on to taxes, please note that we expect to continue to be a modest cash taxpayer in fiscal 2025 with an estimated cash tax of approximately $45 million to $50 million. For non-GAAP P&L reporting, I'd like to call your attention to a change we are making to our non-GAAP tax calculations. Starting fiscal 2025 and going forward, we're establishing a non-GAAP tax rate of 23%, which is reflected in our non-GAAP earnings per share guidance for fiscal 2025. Please refer to our earnings release and financial supplemental for fiscal '23 and fiscal '24 comparisons reflecting this new non-GAAP tax rate. Turning to the rest of guidance, as a reminder, these numbers are all non-GAAP. For the first quarter, we expect revenue in the range of $604 million to $606 million, reflecting a year-over-year growth of approximately 22%, gross margins of 80%. I would also like to remind investors that a number of our emerging products, including newer products like ZDX, Zero Trust Branch and cloud and AI analytics will initially have lower gross margins than our core products. We are 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 $114 million to $116 million, net other income of $18 million, income taxes of $31 million. Earnings per share in the range of $0.62 to $0.63, assuming 164 million fully diluted shares. For the full-year fiscal 2025, revenue in the range of $2.6 billion to $2.62 billion, reflecting a year-over-year growth of 20% to 21%. Operating profit in the range of $530 million to $540 million, income taxes of approximately $140 million, and earnings per share in the range of $2.81 to $2.87, assuming approximately 164 million fully diluted shares. We expect our free cash flow margin to be approximately 23.5% to 24%, including higher CapEx this year. We expect our data center CapEx to be approximately 3 points higher as a percent of revenue compared to fiscal 2024, as we invest in upgrades to our cloud and AI infrastructure. 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, operator, you may now open the call for questions. Thank you. [Operator Instructions] Please standby for our first question thank you. And it comes from the line of Saket Kalia with Barclays. Please proceed. Saket Kalia Okay, great. Hey, guys. Thanks for taking my question here and a nice quarter on the billings and on next year's billings guide. Maybe if I give it to one question, Jay, maybe I'll make it for you. Can you [Technical Difficulty] drop a little bit there? I think we all know your views on firewall-based solutions, but maybe out of curiosity, how about some of the newer players in SASE that are maybe attacking this with a similar kind of pure-play cloud approach as Zscaler? Thanks. Jay Chaudhry Saket, thank you. We have not seen any meaningful change on the competitive landscape. In fact, if I would say, as the market is looking for a broader platform that's integrated and it's looking for proven vendor because the resilience has become a very important thing our brand has gotten better. On the high-end of the market, we actually feel like we're very good. We mentioned about the number of new logos. Last year, we added essentially doubled in '24 over '25. We've seen whether the firewall vendors or some other vendors, either they lack the proxy architecture or they lack a multi-tenant architecture. Architecture is critical for win and that's a big advantage for us. Even if you build the architecture the time and experience it takes to build a highly reliable, highly resilient cloud is massive. And then these large enterprises have to trust you. It took us a long time to earn the trust of these customers. So we feel we are in a good position. We keep on innovating the gap between our offering and what I call so would be competitors is growing bigger and bigger. So I feel very bullish and comfortable for the platform and the gap we are creating with other competitors. Thank you. One moment for our next question. And it comes from the line of Brad Zelnick with Deutsche Bank. Please proceed. Brad Zelnick Great. Thanks so much. And I'll echo my congrats on a real strong finish to the year. Jay, I appreciate your comments about the Microsoft and CrowdStrike related outage in July and why Zscaler is designed in a way that's highly available and frankly relied upon by customers as an in-line solution. But I'm wondering if that event in any way from what you can tell has changed the way customers are thinking about their cyber strategies and Zscaler's place within that? Thank you. Jay Chaudhry Yes. Brad, It's a good question after the CrowdStrike out, customers are more focused on resilience, which is our strength. In fact, I personally got lots and lots of calls right after the incident. They wanted to know about what we're doing about it, that we ended up personally inviting actually wide invitation briefing to 1,000 or so our largest customers. I was surprised to see that within a matter of a week or so, about 700 customers registered for the briefings, we ended up doing multiple of them. The main question was, this is mission-critical service and how are we protected? The good thing is Zscaler deliver business continuity plan or DR service in Jan 2023, the first vendor to deliver it, the only vendor that has a true BCP. So the importance of mission criticality has gone up significantly since the outage that was caused by CrowdStrike. In fact, about 40% of Zscalers large customers have already deployed BCP for ZIA. So while our customers want resilience, they also do want consolidation, but they do not want consolidation such that it makes them dependent on a single vendor, especially single vendor for applications and security. This sentiment has become even stronger after the Midnight Blizzard of Microsoft issues. So I think we are well-positioned. We did a good job in building mission verticality. And I think it's important and our customers are working totally with us. Thank you. One moment for our next question, please. And it comes from the line of Roger Boyd with UBS. Please proceed. Roger Boyd Great. Thank you for taking my questions. Remo, I wanted to ask you about the billings guide and if you could just speak to the general level of conservatism there. You've been pretty clear even before this quarter about the expected headwind coming out of the go-to-market transition, but it does sound like sales productivity was better than expected in both 3Q and 4Q this year. So just beyond that, anything else giving you more pause or tempering your expectations around the broader macro environment, sales cycles, or anything else? Thanks. Remo Canessa Yes, great question. So I mean, billings guide really reflects, again, we broke out the first-half versus second-half. And you know, as we talked about in the sales organization, we had higher attrition than we expected in Q3 and that attrition has stabilized in Q4. Hiring those account reps, this could to take time for those account reps to basically get to full productivity. We expect them to get to strong productivity in the second-half, our pipeline supports our guidance. And as we called out also, when you take a look at billings, billings is made up of new and upsell renewals and contracted billings. And one of the things we called out on the script is contracted billings are scheduled billings up from prior year contracts. So those are what we're seeing, we're seeing that because of the business is getting more second-half weighted, we're seeing that this -- our guide reflects that. And as we called out, in the first-half, contracted billings is expected to increase on a year-over-year basis 7% and in the second-half 23%. What I can say also is that from my perspective, being here at Zscaler for almost eight years, there's a change in our sales organization. You know, the change is basically it's a more mature, very strong leadership and also an organization that I feel is going to be able to sell deeper into accounts and really sell to the value of Zscaler. So the puts and takes are from my perspective is that strong demand for Zero Trust, we're going to continue to expand in the G2K, which represents around 35% in the Fortune 500 customers. But the key thing with Zscaler also is that we're innovating. So you look at our emerging products, they represented 22% of our total new and upsell in fiscal '24, we expect that to go up to 25%. So that's going to be our continued focus. It's not only selling our existing core products, but also innovating. As I mentioned, strong momentum in the go-to-market team. We just had our SKO and the feedback from everybody who went there was just very, very positive. I just really feel good about where we're at. I mean, having said that, the backdrop, it's still a challenging spending environment. But I feel that Zscaler with our platform with what we're building our go-to-market, I just think we're just very, very well-positioned. Jay? anything. Jay Chaudhry No, it's good. I think the last comment I mentioned is, in today's environment, CIOs do want ROI cost savings, cost takeout. We're in a unique position to remove a number of point products that help justify closing our deals. Thank you. One moment for our next question, please. And it comes from the line of Joseph Gallo with Jefferies. Please proceed. Joseph Gallo Hey guys, thanks for the question. Jay, I want to follow up on that last question. I mean, you've obviously started the branch out very successfully beyond ZIA and ZPA evidenced by AI and data protection success. However, post the CrowdStrike incident, we've heard customers don't want to put all their eggs in one basket. Does this hinder your ability to sell incremental products? And then Remo, maybe you can just elaborate on how you're thinking about NRR in your fiscal '25 billings guide? Thanks. Jay Chaudhry So it's a very good question. So now CrowdStrike wasn't really an issue of putting all of your eggs in one basket. CrowdStrike was one of the point products. Each product must work well. So on one side, customers do want consolidation. If you got two dozen products, they want to bring it down to a handful of key platform providers, but they do not want to go to the extreme of going with a single vendor that wants to sell all security products or a single vendor that wants to sell you all the applications and security products. In fact, most of the CIOs, I want to, they have been standardizing in-line access to three providers, one for EDR, one for identity, and one for Zero Trust actions. I think that's a good combination because you end up getting a couple of extra layers, but you still have separation. So in this environment, our customers aren't really pushing back on us because we tell them don't buy everything through Zscaler. You've got an EDR provider, you've got an identity provider and we'll do the rest of Zero Trust on activity. And that's how we carefully choose the markets we get into. So we feel comfortable and good about the expansion and selection of areas, where we want to compete in. Remo Canessa From an NRR perspective, Joseph, 115% I believe is outstanding. We're not guiding to NRR. The only time we really look at it is, as we mentioned before on these calls, really the key for me is just driving top-line business, whether it comes from existing customers or new customers, but 115% at our scale, I think is outstanding. Thank you. One moment for our next question, please. And it comes from the line of Ittai Kidron with Oppenheimer. Please proceed. Ittai Kidron Thanks guys. Great solid finish for the year. Remo, I'm sorry, I'm going to have to try and beat the dead horse here again on the billings. Just want to make sure I understand this right. I mean, in '24, you didn't have any unusual seasonality in the first-half, second-half on year-over-year patterns. They were quite similar in billings. So what is it that's driving the 7% and 23% differences in the first and the second-half? Are things being pushed out? Do you just expect deals to push out, hence you expect to close more or renew more in the second-half? Is that a macro comment? Was there something that happened two, three years ago, lumpsum that somehow comes back into play here? Anything that you can do to dig in just a little bit more on that would be greatly appreciated? Remo Canessa Yes. So it's really -- if you take a look at the call-out is scheduled billings. And scheduled billings growth in the first-half was 7% and scheduled billings growth on a year-over-year basis, we see a 23% for this year. So then the question is step-back and what creates that? So we signed three-year contracts. In the three-year contracts, they're scheduled billings. So we have those scheduled billings. Those billings are coming through. Now, if you take a look and go back into fiscal '23 first-half and fiscal '24 first-half, there were macro challenges. So it's a challenging environment from Zscaler's perspective. So therefore, with that challenging environment, in the first-half of fiscal '23 and fiscal '24, now those scheduled billings are coming through and those scheduled billings are lower. That's what's creating that growth rate of 7% year-over-year in the first-half. Now having said that, what I made to the comment I made before was that the business is getting more second-half. We're becoming a larger company, becoming more second-half. So our guidance reflects that and that scheduled billings of 23%, those are contracted billings, they're scheduled and we expect to get those billings. Thank you. One moment for our next question and it comes from the line of Brian Essex with JPMorgan. Please proceed. Great. Brian Essex Great, Thank you, and good afternoon. Thank you for taking the question. Jay, I think -- I think you may have touched on this in your prepared remarks, but I want to circle back into the -- to the macro, specifically the competitive environment with regard to pricing. And there are certainly in the Zero Trust space, we're seeing a lot of initiatives to consolidate on certain platforms. Some of that is flexible pricing, different duration, giving away products for free. How is that impacting the pricing environment that you're dealing with? I understand that there's a lot of times an architectural change that's attractive with your platform, but just wanted to touch maybe if you could peel back a layer on the pricing dynamics just to understand what you see in your environment? Thank you. Jay Chaudhry So as I said during my prepared remarks, yes, the macro remains challenging and there's deal scrutiny. But also at the same time, cyber, it's very important. In many areas, good enough is good enough. In cyber and large enterprises, good enough is not good enough. So customers do want a good -- a very good cyber solution. That's number one. And number two, in the cyber area, a real Zero Trust architecture that's cloud native does play an important role that matters. Now, once you do that, your pipeline actually build, you are engaged with customers and the next part comes in, can you close the deal? Now closing the deal in today's environment does require that you are able to actually show the customer that you can take a bunch of products out and you can save money for the customers. And we are able to release. We are able to replace a number of new -- number of products, like the firewalls, VPNs, NAV products, and the like. When we are able to show that we are able to eliminate those products, the customer likes it, that helped us both. No, we have our new and upsell business has accelerated actually. So we are seeing strength in area. So personally, I'm not worried about the competition. I'm able to handle pricing situations by showing the number of products you can move. Think of other vendors. Do you think a firewall vendor who wants to remove a bunch of point products? The biggest installed base in terms of products today is firewalls. They want to protect those firewalls. We take on those firewalls, we take on those VPNs. So we just have to -- this area we keep on getting better at is making sure we engage at the sea level, number one. Number two, make sure we create a good business value assessment and we have owned that process quite a bit. Thank you. One moment for our next question, please. And it's from the line of Matt Hedberg with RBC Capital Markets. Please proceed. Matt Hedberg Great. Thanks guys for the questions. Maybe one on the quarter. Could you talk a little bit about, obviously, it was a Q4, but -- and we assume it's back-end loaded. But the linearity of the quarter, anything abnormal with deals that pushed or pulled? And I guess maybe if you could comment a little bit more specifically on trends in August thus far that would be -- or I guess now we're in the September, but through August, that would be helpful? Remo Canessa The trends in August, I'll let Jay speak about that. Q4, we talked about that the quarters have become more back-end loaded. Nothing -- it was similar to the prior few quarters, Q4. So nothing unusual with Q4 from a linearity perspective. And regarding trends in August, we can't give specific trends on dollar amounts or anything like that or business, but maybe Jay can give a few comments. Jay Chaudhry I think nothing unusual to talk about in August. Our business is making progress as usual. So I think you'll probably hear more about us as we get better. Matt Hedberg Maybe if I could just squeeze one more in. You know, it seems like in the spirit of consolidation, it feels like you guys are in a good spot to consolidate a lot of customer spend. Can you talk about large deal visibility, understanding it is -- it is hard to predict the timing of those things, but could you talk about sort of the growth in your large deal pipeline and kind of the focus on increasingly playing that consolidation role? Jay Chaudhry Yes, there is no slowing down on consolidation of point products. We have been seeing our deals in general getting bigger. They're seeing upsell going more and more. So if customers spend X, they're spending more with us. I shared several deals, several large deals, where customers started at X and it's gone up to Y or Z and whatnot. So the main thing for customers are looking for consolidation is, number one, can you give me better cyber and data protection? Number two, can I operationally run and manage these things better? Number three, can you do cost savings? That message is loud and clear and we're handling all of that. And for one area I'll highlight for consolidation, which is playing a bigger role for us is data protection. When customers started with Zscaler, ZIA, they started with cyber protection was the primary focus to make sure they don't get compromised. Now with ransomware attacks where data is often ex-filtrated, data protection has become a bigger and more important item than it used to be. Since we are sitting in line for the traffic that goes via the Internet, we are the natural provider, natural partner to do data protection. And we're seeing a growth in data protection that has become one of the fastest growing area for us. I think a few quarters ago, we mentioned that it has exceeded, it has surpassed $4 billion or for us. And also we expanded this platform quite a bit. We used to do in-line DLP as the primary thing. Now we also got DLP or email as a big thing, SaaS, SSPM, SASE kind of stuff and now DSPM are becoming more areas. So I think we've got a great expanding platform with cost-savings, I think they're extremely well-positioned. Remo Canessa So from my perspective, also Matt, I mean, just some numbers we called out on the script, 567 customers with greater than $1 million ARR, 3,100 customers of greater than $100,000 and I believe 60 -- over 60 customers with $5 million in ARR, half a trillion transactions per day. So to put in perspective, I mean, order of magnitude, that's more than anybody has seen. At the time of our public offering, we're doing 30 billion transactions per day. So we've gone from 30 billion transactions to 500 billion transactions. The data that we receive, the information that we receive that we're able to basically help our customers for a security perspective. So I just don't think there's anybody else out there who can do it. So it's my view that we are in a great position to capture this market. I also believe that with the go-to-market changes that we've made over the last nine months, we're going to sell deeper in the accounts and also we've been one of the things we called out GSIs. That's going to be an area that we're going to focus in on as we go forward. I think the opportunity is really big. I believe the platform is well-positioned to really protect customers and governments throughout the world. And I think, you know, we feel good about where we're at right now. Thank you. One moment for our next question. That comes from the line of Shrenik Kothari with Baird. Please proceed. Shrenik Kothari Hey, guys, thanks for taking my question. So, Jay, in light of what you said, right, you guys are expanding the platform beyond just securing users and now delivering Zero Trust for applications, workloads and IoT, and you gave example of a new logo win with Top 10, strong customer demand for the broad approach. Just can you elaborate on the nature and composition of these contracts, the non-cancelable billings, the compensation of this pipeline in terms of users and seats versus workloads and applications that you called out? And does that help with the overall kind of land and expand motion moving more towards the workloads and application base and a follow-up for Remo as well? Jay Chaudhry Yes. Let me start with the platform expansion. As I said during my prepared remarks, most of the vendors are trying to really mature a product for protecting users. They've done that extremely well, 47 million some users protected. So it is natural for us to expand it to our workloads, IoT, OT devices and the like. In terms of growth, to give you some data points, we talk about emerging products from the newer areas and then we've got the mature flagship products on emerging products, which is where the workload protection, IoT, OT type of stuff falls in, it was about 22% in fiscal '24. It had gone up from 18% in fiscal '23 and we expect it to go to mid-20s in fiscal '25. So that's growing faster. That's why it's able to carve out market share out of that. Now the exciting thing about that area is there's literally no real competition to do these things in Zero Trust fashion. Yes, some of the workloads and all this done through firewalls, communication, IoT, OT, what do you do, firewalls and VPNs. We all know that firewalls and VPNs have to go away. And we are well-positioned. It's just that -- it's a little bit different sale. It's the same audience, but a little bit different. IoT, OT, a lot of stuff is linked to manufacturing and plants and the like. So you need to reach out of this audience, but CSOs and CIOs do play a common role with the acquisition of Airgap, which does actually device segmentation for IoT, OT extremely well without needing any firewalls, without needing any network access control devices, it is one of area that's being really showing tons of interest in our customer base. In fact, our number of engagements with device segmentation for IoT, OT based on Airgap has gone up significantly. So that's why I feel like the gap between us and people trying to come from behind is growing and the barrier to entries is not trivial in this space. Remo, you want to talk about the... Remo Canessa Yes. From a contracted billing perspective, just -- again, the key point is that we signed three-year contracts upfront. And so getting that certainty with that contract is good. And then the billing happens afterwards on an annual basis afterwards. That's the scheduled contract billing. So what we're seeing is our contract lengths are increasing, which is positive. And also we're seeing our deal size increasing, which is positive too. But we're also seeing customers buying more of our product and across our platform with [Technical Difficulty] And again, getting a three-year contract with a scheduled billing gives you certainty related to the billings, but also getting that three-year contract gives you time to basically sell that customer more. And as I mentioned before, which is really key is that the sales organization, go-to-market organization, we're going to be selling deeper into the accounts. That's going to be our focus. We're going to look for new customers, but we're also going to look to sell deeper into our accounts. So longer contracts, it's a good thing. Thank you. One moment for our next question. That comes from the line of Patrick Colville with Scotiabank. Please proceed. Patrick Colville Hey, Jay, thank you so much for taking my question here. I guess I want to ask about emerging products. I mean, it was 22% of new and upsell in fiscal '24. I mean, very impressive to see those emerging products ramp. I mean, we're going to get this in the 10-K, but what was ZPA and then ZIA as a proportion of new and upsell into fiscal '24? And I guess -- pardon me, the second part of the question is, how do you expect ZPA and ZIA to trend in fiscal '25? I mean, what's the sustainability and remaining TAM for those two product lines? Jay Chaudhry So very good question. So let's start with ZIA and ZPA. You know at the time of IPO, there was only one product ZIA. ZPA was kind of a rounding error, so to speak. But today, if you look at the mix between ZIA and ZPA, ZPA has gone from literally nothing to about 40% -- over 40% of the new business that we are doing between the two of the products. So that's very remarkable. In fact, if it goes too high-up, I'll be kind of wondering, is ZIA is not going fast enough. So I expect it to grow somewhat more, but not quite. At the end of the day, it could get to 50-50. I expect every Zscaler customer for every user to have ZIA, ZPA, and ZDX, those three products make it a complete package and we call it Zscaler for Users. Zscaler for Users has become our single largest queue basically because that's what our sales team leads with, which really says that our goal is for every customer to buy those three products. That's kind of one key area. Now what is the second part of your question? Sorry, I forgot. Patrick Colville I guess it's -- the question we get from investors is how -- what is the sustainability of those business lines? And I guess what you just articulated is that there's a lot to go in ZPA, but maybe talk about ZIA. Is there a lot to go there or is that a more mature segment? Jay Chaudhry So let's also -- let's start with the second part. That is how much market penetration done and how much market penetration we have left to take. As ZIA was the starting product, obviously, almost all customers start with ZIA though we are seeing some customers starting with ZPA, so the number is relatively small. But take G2K, we reached nearly 35% of G2K, which means there are about 300 companies -- sorry, yes, 300 companies that have spent -- sorry, 35% of them are Zscaler customers. Now about probably an area of 60% of our large ZIA customers also at ZPA. So that's good penetration. But in terms of the opportunity for us, only about -- of the 35% G2K, about 300 of them spend over $1 million with us. That means that of the existing customer, the 400 more that could easily go to $1 million for us. But many of the customers in that same group have gone to $5 million. So what I'm saying, there's an opportunity for us to upsell, go from 35% G2K to a higher number and among those 35%, who sell more ZIA and ZPA. So there's no lack of market for us. Other point I'll make is on the high-end of the market, we do extremely, extremely well. Those customers are sophisticated, they need the functionality, breadth, depth, and reliability and resilience we offer. So we are counting on this thing. Our account-focused program that our new CRO is driving is actually focused on going deeper and wider into our existing accounts and getting new large logo accounts as well. So I hope that gives you the color you're looking for. Thank you. Our next question comes from the line of Adam Borg with Stifel. Please proceed. Adam Borg Awesome. And thanks for taking the question. For Jay, Remo, I know you talked about this a bit in the script, but I was hoping you could talk a little bit more about headcount growth in fiscal '25 and where you're really investing most across sales and marketing and R&D? Thanks so much. Jay Chaudhry Yes. We do expect to increase headcount in fiscal '25. Our fiscal '25 headcount increase will be across all the areas, R&D, sales and marketing, G&A and cloud. I would say the pace of hiring in fiscal '25 will be less than what it was in fiscal '24. In fiscal '24, we added about 1,400 employees. We went from 5,900 employees to 7,300. So I would think about more of a moderate pace in hiring in fiscal '25 versus '24. Thank you. And our last question, one moment please. Next question comes from the line of Hamza Fodderwala with Morgan Stanley. Please proceed. Hamza Fodderwala Good evening. Thanks for fitting me in. Either for Jay or Remo, curious since Mike and the new sales leadership have been on in the last few quarters. What are some of the early indications that you're seeing early proof points that gives you confidence heading into fiscal '25? Jay Chaudhry So good question. Remember when we set out to make some of these changes, the key thing was for us was we wanted to move from early-stage companies that focus on opportunity-centric stuff to account-centric stuff. That was one of the key terms. We have put a program in place. We trained the sales force and we are actually making good progress in pursuing this process. How do you see the results? You start seeing more upsell in the account base plus and then you start seeing new logo as well. So we are seeing good upsell large deals in large accounts, that's what we expected. In fact, if you think about it, our overall number of $1 million ARR customers has gone up to 567 million. Our customers with $5 million or more ARR has gone 260 million. Now all of that is not attributable to the new team because the new team started working for the past couple of quarters, but we're seeing key results for that. The second thing we're seeing as a result is with the GSI involvement, we have a special focus on GSIs, who actually are embedding our offering into their offerings. So it becomes part of their offerings as well. We're seeing good early indications of that. Number three, the quality of sales leaders and reps we are hiring, a number of them come from the background with a focus on account to focus selling and working large accounts to larger deals. We are seeing the quality of those people. So from my point of view, the transition is going better than I expected. I'm very pleased with it and I'm very bullish about it. From my perspective. Yes, from my perspective, I'll give you my two sentences and make it really quick. At the end of the day, we've got a great company with a great platform, where significant need of your product on a worldwide basis, that's required, quite frankly. It comes down to one thing and that is people. And I believe what I'm seeing with the leadership that we have, but it's in our go-to-market team across the board. It is -- it is great to see. And really, I think sets us up well going forward. And as Jay mentioned, you know, strong leaders will hire strong people. And I believe the leaderships we have on board is very, very strong. Jay Chaudhry Yes. I think the comment I'll make is a barrier to entry to do what Zscaler has done is very hard and cyber is becoming more and more important and we are excited for the opportunity ahead of us. With that, I want to thank you for your interest in Zscaler. We look forward to seeing you at one of these investor conferences. Thanks again. Thank you all for participating in today's conference. You may now disconnect.

Earnings call: GitLab expects revenues between $187 million and $188 million in Q3 By Investing.com

GitLab Inc. (NASDAQ: NASDAQ:GTLB), a leading provider of DevSecOps platforms, has reported a substantial 31% year-over-year increase in its second-quarter revenue, reaching $183 million. The company's non-GAAP operating margin notably exceeded expectations, hitting 10%. This performance is attributed to new customer acquisitions, expansions by existing customers, and the increasing adoption of AI-powered features in their platform. Looking ahead, GitLab forecasts continued growth with Q3 revenue expected to be between $187 million and $188 million, and full-year revenue anticipated to be in the range of $742 million to $744 million. GitLab's second-quarter performance has demonstrated the company's ability to leverage its AI capabilities to not only attract new customers but also to expand its engagement with existing clients. The introduction of GitLab Duo and the company's recognition in Gartner's Magic Quadrant underscore the strategic importance of AI in GitLab's product offerings. With the "In Process" designation for FedRAMP Moderate, GitLab is also set to meet the complex security and compliance requirements of more customers. The company's focus on enterprise customers and their specific needs, including the development of offline models, has been met with positive responses, particularly from GitLab Ultimate customers. The gradual implementation of pricing changes for existing customers is anticipated to improve unit economics, while the company's integrated security solutions continue to play a significant role in driving customer adoption. As GitLab looks to the future, AI is poised to start contributing more significantly to their business model from FY 2026 onwards. With the current trend of high user penetration and bottoms-up adoption, GitLab is positioning itself for sustained growth in the coming quarters. The company remains optimistic about its performance in the fourth quarter and expects to maintain historical revenue growth trends. GitLab Inc. (NASDAQ: GTLB) has shown a strong performance in its second-quarter earnings with significant revenue growth and an optimistic outlook for the upcoming quarters. To further understand GitLab's financial health and growth trajectory, here are some insights from InvestingPro: InvestingPro Data highlights GitLab's impressive gross profit margin of 89.36% in the last twelve months as of Q2 2025, indicating the company's efficiency in managing its cost of goods sold relative to its revenue. This is particularly relevant to the article as it supports the notion that GitLab's AI-powered features may be contributing to improved profitability and larger deal sizes. Moreover, the company has a robust revenue growth rate of 32.42% in the last twelve months as of Q2 2025, which aligns with the reported 31% year-over-year increase in Q2 revenue. This consistency in revenue growth is an encouraging sign for potential investors and stakeholders, reinforcing the bullish outlook presented in the article. Despite not being profitable over the last twelve months, with a P/E ratio of -19.36, InvestingPro Tips reveal that analysts predict the company will be profitable this year. This forward-looking insight can provide readers with a sense of GitLab's future earnings potential, which is a critical aspect of the company's valuation and long-term strategy. Additionally, GitLab's cash position is strong, as it holds more cash than debt on its balance sheet. This financial stability is crucial for the company's ability to invest in future growth opportunities, such as the expansion of AI capabilities and securing the FedRAMP Moderate designation. For readers interested in more in-depth analysis and additional InvestingPro Tips related to GitLab's financials and market performance, there are currently 20 more tips available at https://www.investing.com/pro/GTLB. These tips could provide valuable insights into GitLab's stock valuation, market sentiment, and other financial metrics that may influence investment decisions. Operator: [Call Starts Abruptly] [Operator Instructions] Please note today's call is being recorded. I will be standing by should you need assistance. And now, it is my pleasure to turn the conference over to Kelsey Turcotte. Kelsey, over to you. Kelsey Turcotte: Good afternoon. We appreciate you joining us for GitLab's second quarter fiscal year 2025 financial results conference call. GitLab's Co-Founder and CEO, Sid Sijbrandij; and GitLab's Chief Financial Officer, Brian Robins, will provide commentary on the quarter and guidance for the fiscal year. Before we begin, I'll cover the safe harbor statement. I would like to direct you to the cautionary statement regarding forward-looking statements on Page 2 of our presentation and in our earnings release issued earlier today, which are both available under the Investor Relations section of our website. The presentation and earnings release include a discussion of certain risks, uncertainties, assumptions and other factors that could cause our results to differ from those expressed in any forward-looking statements within the meaning of the Private Securities Litigation Reform Act. As is customary, the content of today's call and presentation will be governed by this language. In addition, during today's call, we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures exclude certain unusual or nonrecurring items that management believes impact the comparability of the periods referenced. Please refer to our earnings release and presentation materials for additional information regarding these non-GAAP financial measures and the reconciliations to the most directly comparable GAAP measure. I will now turn the call over to GitLab's Co-Founder and Chief Executive Officer, Sid Sijbrandij. Sid Sijbrandij: Thank you for joining us today. I'm excited to share our second quarter results with you and talk about our market-leading DevSecOps platform and its AI capabilities. We continue to deliver strong results that reflect our team's focus on customers, helping them realize faster time to value and customer-specific business outcomes. Second quarter revenue increased 31% year-over-year to $183 million, driven by new logos like Delaware North and Guild Mortgage as well as expansion by existing customers. Our non-GAAP operating margin also meaningfully exceeded our expectations in the quarter, increasing over 1,300 basis points year-over-year to 10%. This underscores our continued commitment to responsible growth. Now more than ever, organizations need to deliver software faster to respond to intense competition and accelerate performance. This is what our DevSecOps platform is purpose-built to do. We bring together developers, security experts and operations teams to better collaborate, improve quality and prioritize security -- all while decreasing software delivery cycle times and with AI integrated throughout the software development lifecycle, GitLab customers can take those gains even further. Enterprises are focusing on real results and real use cases for AI. They are looking beyond just code generation. They are looking to integrate AI into all aspects of software development to deliver tangible results. This requires a strategic approach that aligns AI solutions with business goals, provides measurable benefits, and improves security. And, this where GitLab excels. Our customers are excited about the meaningful productivity and security benefits of GitLab Duo, which has demonstrated up to 90% reduction in time spent on toolchain operations, 50% faster lead time, and 50% faster vulnerability detection. They are also excited about our ability to help them drive real business outcomes. For example, we recently heard from the State of Washington Public Disclosure Commission about GitLab Duo. They mentioned that GitLab Duo is improving their developer productivity and effectiveness which is helping their teams focus more on the substance of their work. AI is also resulting in larger deal sizes. Barclays (LON:BARC) purchased GitLab Duo seats this quarter coupled with additional Ultimate licenses. They are rolling out GitLab Duo to thousands of developers so they can take advantage of AI-powered capabilities in the same platform where they're building and deploying their code. It's exciting to see large enterprises like Barclays adopt AI as a natural step for simplifying toolchains and improving their developer experience. F5, a multi-cloud application security and delivery company, is yet another customer who is adopting GitLab Duo after seeing value from Ultimate in driving improved developer experience and productivity. Developers who participated in F5's pilot of GitLab Duo shared that our AI capabilities are easy to use and helped them to be more productive in their work. Now, F5 is rolling out GitLab Duo to all of the Company's two thousand developers. The KeyBank team also wanted to improve developer productivity, so they adopted GitLab Duo. Combined with our DevSecOps platform, GitLab Duo is helping KeyBank developers resolve pipeline issues six times faster. GitLab Duo is KeyBank's first approved AI technology due to our focus on transparency and privacy first. It's the combination of both our end-to-end platform and AI that is driving results for our customers. According to Gartner, by 2027, the number of platform engineering teams using AI to augment every phase of the SDLC will have increased from 5% to 40%. This is why we are very pleased with the outcomes of two of Gartner's recent Magic Quadrants. First, GitLab was recently recognized as a Leader in the first-ever 2024 Gartner Magic Quadrant for AI Code Assistants. We believe this recognition highlights our commitment to delivering AI-powered capabilities that accelerate software delivery, enhance security, and drive innovation for our customers. And, for the second year in a row, GitLab was recognized as a Leader in Gartner's 2024 Magic Quadrant for DevOps Platforms. We were positioned highest in both our Ability (OTC:ABILF) to Execute and our Completeness of Vision. Our market leadership comes from our integrated security and compliance capabilities, deployment flexibility, and our unified data store. This provides end-to-end context across an organization's entire software development and deployment workflow. Customers realize significant return on investment from adoption of our DevSecOps platform. Our new Forrester study on the Total Economic Impact of GitLab Ultimate found that organizations can achieve a 482% return on investment over three years. That's a nearly 60 percentage point increase over the last time we conducted this study two years ago. These results are based on our continued focus on increasing developer productivity, improving developer experience, accelerating feature delivery, improving security, and toolchain consolidation. Toolchain consolidation and related benefits are mentioned frequently by our customers. In fact, in our annual survey of more than 5,000 DevSecOps professionals, 62% reported that their teams use more than five tools and 64% want to consolidate their toolchain to drive efficiencies. This presents a tremendous opportunity for us as a platform to allow customers to consolidate vendors and reduce total cost of ownership. One of GitLab's strengths is our ability to help customers replace legacy point solutions. For example, by consolidating on GitLab, Lockheed Martin (NYSE:LMT) managed to run CI pipeline builds 80 times faster, retired thousands of legacy CI servers, and reduced the time spent on system maintenance by 90%. That shift resulted in a significant increase in efficiency and productivity for Lockheed Martin. Another example is one of the world's leading innovators in materials science. They are using our Enterprise Agile Planning add-on in combination with GitLab Ultimate to centralize planning tools into a single platform and improve visibility across the business. Our customers also see security as a mission-critical need. Recent news cycles continue to increase awareness and urgency in the executive suites about the need to embed security at the earliest stages of software development. 4GitLab Ultimate helps solve this by shifting security left in the process, seamlessly instrumenting security checks and guardrails into the software development pipeline. This comprehensive approach not only earns the confidence of security leaders but also dramatically enhances the developer experience. By eliminating context switching and post-deployment firefighting, developers maintain their crucial state of flow. This results in faster, more secure code delivery. GitLab transforms security from a bottleneck into a strategic advantage in innovation and reliability. Security and compliance capabilities are at the heart of Ultimate and set us apart from the competition. Ultimate is a particularly good fit for customers who require the enterprise-grade capabilities of our platform to meet constant demands to move faster and produce more software. In the second quarter 7 of our 10 largest deals were Ultimate purchases and 7 of our top 10 first order customers landed with Ultimate. At the end of Q2, Ultimate is now 47% of total ARR. For example, the National Oceanic and Atmospheric Administration upgraded from Premium to Ultimate this quarter for its enhanced security and compliance. They also purchased GitLab Duo to improve their developer productivity. Security is an important factor when customers adopt GitLab Dedicated, our single-tenant SaaS offering that is completely managed by GitLab. This offering is unique in the market and is especially valuable to companies with highly complex security and compliance requirements, and in regulated industries such as the public sector and financial services. Snowflake (NYSE:SNOW) recently migrated to GitLab Dedicated for source code management, CI, and security for their corporate environment. With GitLab Dedicated, Snowflake has the security of a single-tenant environment plus all the benefits of an end-to-end DevSecOps platform. We are also excited to share that we have achieved the "In Process" designation for FedRAMP Moderate. GitLab Dedicated for Government helps public sector agencies and customers in highly regulated industries meet stringent security and compliance requirements from the U.S. government. We expect this designation to build upon the significant momentum we already have in the Public Sector. In summary, Q2 was a good quarter and I'm proud of what we accomplished. I also want to thank the GitLab team for everything you have contributed to our ongoing success. Looking at the second half of fiscal 2025, I'm really energized by our ability to continue to drive customer success and the opportunity we have with AI to accelerate business outcomes. With that, I'll turn it over to Brian. Brian Robins: Thank you, Sid, and thank you again for everyone joining us today. This quarter's results validate the value that our customers get from our integrated platform. In today's cautious macroeconomic environment, technology needs to deliver quick time to value while solving complex, impactful problems. That is what our AI-powered DevSecOps platform does. A great example is Intuitive Machines, which became the first U.S. venture in 50 years to land a spacecraft on the moon. Integral to the success of the project was GitLab. Our end-to-end platform enabled dozens of developers to write code, gain visibility, and collaborate on shared projects. The result was a 10X increase in release cadence, 99% reduction in downtime, and 20X decrease in pipeline execution time. Quoting one of the software leads on the project, we absolutely could not have built a spacecraft in five years without GitLab. It helped us make history. Turning to Q2 FY25, results exceeded our expectations as we delivered another quarter of greater than 30% top-line growth and significant year over year operating margin expansion. Second quarter revenue reached $182.6 million, an increase of 31% from Q2 of the prior year. We ended the quarter with a dollar-based net retention rate, or DBNRR, of 126%. Q2 DBNRR was driven by a combination of seat expansion, at approximately 40%; increased customer yield at approximately 50%; and tier upgrades, at approximately 10%. In addition, all of our historical cohorts continue to steadily expand. We now have 9,314 customers with ARR of at least $5,000, an increase of approximately 19% year over year, and contributed over 95% of total ARR in Q2. In particular, we monitor performance of our larger customer cohort of $100,000 plus in ARR, which reached 1,076 this quarter, an increase of 33% year over year. In fact, more than 65% of new dollars invested by this cohort was in Ultimate this quarter. A great example of customer success with these large customers is bol, one of the biggest online retailers in the Netherlands. As bol's revenue grew, they needed to keep up with the strict and constantly changing compliance regulations. With GitLab, bol can set up policies that automate compliance configurations and checks, saving thousands of developer hours per month. This quarter total RPO grew 51% year-over-year to $747.9 million, while cRPO grew 42% year-over-year to $475.0 million. Non-GAAP gross margins were 91% for the quarter. SaaS now represents 28% of total revenue, in part a reflection of the considerable traction we are getting with GitLab Dedicated. Year over year SaaS revenue grew 46%. Given the continued high growth in SaaS, I am very happy with the team's attention to operating efficiencies which continues to result in best-in-class non-GAAP gross margins. Once again, we saw significant year over year improvement in operating leverage. Q2 non-GAAP operating income was $18.2 million, compared to a loss of $4.3 million in the second quarter of last year. This quarter, we dropped all of our revenue outperformance to the bottom line which, in combination with the team's continued focus on smart resource allocation, translated to a non-GAAP operating margin of 10% compared to negative 3.1% in Q2 of last year. This once again demonstrates our commitment to responsible growth. Cash from operating activities was $11.7 million in the second quarter compared to $27.1 million in the prior year period. Adjusted free cash flow was $10.8 million in the second quarter of FY 25 compared to $26.8 million in the prior year period. Q2 FY25 cash flow from operations and adjusted free cash flow reflect the timing of payments for our Q1 global employee gathering made in Q2. Now, turning to guidance. For the third quarter of FY25, we expect total revenue of $187 million to $188 million, representing a growth rate of 25% to 26% year-over-year. We expect a non-GAAP operating income of $19 million to $20 million, and we expect a non-GAAP net income per share of $0.15 to $0.16, assuming 168 million weighted average diluted shares outstanding. For the full year FY25, we expect total revenue of $742 million to $744 million, representing a growth rate of approximately 28% year-over-year. We expect a non-GAAP operating income of $55 million to $58 million. And, we expect a non-GAAP net income per share of $0.45 to $0.47, assuming 168 million weighted average diluted shares outstanding. Separately, I would like to provide an update on JiHu, our China joint venture. In Q2 FY25 non-GAAP expenses related to JiHu were $3.3 million compared to $4.8 million in Q2 last year. Our goal remains to deconsolidate JiHu. However, we cannot predict the likelihood or timing of when this may potentially occur. Thus, for FY25 modeling purposes, we forecast approximately $14 million of expenses related to JiHu, compared with $18 million last year. Thank you all for joining this afternoon. We delivered a strong Q2 and I am really pleased with how we are positioned as we head into the back half of FY25. We appreciate your support and look forward to speaking with many of you during the quarter. With that, I will turn it over to Kelsey who will moderate the Q&A. A - Kelsey Turcotte: Great. Thank you very much. I appreciate everyone joining. We are going to start by taking one question and one follow-up question. And our first participant is Joel Fishbein at Truist. Joel, go ahead. Joel Fishbein: Congrats on a strong quarter. Did love to get an update from you on how you're thinking about the go-to-market going forward? Obviously, you had a changeover in leadership there. And despite that, you had a very solid quarter. Just curious what you're looking for in a new leader. And just a quick question for you, Brian, on a follow-up. Sid Sijbrandij: Thanks for that, Joel. Yes, Chris was doing great job, would love to continue to have him here, but he found another opportunity. We've launched search, and we've been really impressed with the quality and the quantity of candidates. And in the interim, we're really pleased with how smoothly the team has transitioned to Ashley's leadership. In her role as Chief Marketing and Strategy Officer, she was already very in touch with both our customers and the sales leadership, but that enabled a smooth transition, which supported our raising guidance this quarter. Joel Fishbein: Great. And Brian, just a quick one for you. I mean, you outperformed very significantly on the operating margin line. I believe you're still going to prioritize growth over margins, but any color you could give us there would be really helpful. Brian Robins: Thanks, Joel. I appreciate that. Yes, we -- nothing's changed on that pre-IPO every quarter. Sid and I have said, growth is the number one thing, but we'll do that responsibly, and we continue to increased operating leverage in the model with even growing greater than 30% year-over-year. So happy with the performance this quarter and happy with the beat and raise for the year. Kelsey Turcotte: Next question goes to Ryan MacWilliams at Barclays. Ryan, go ahead. Ryan MacWilliams: Just in terms of what you're seeing in the macro right now, do you know us any differences between the second quarter and the first quarter? And how are you seeing developer hiring at this point? Brian Robins: Yes. Thanks for the question. There's really been no difference between the two quarters. It still remains a cautious spending environment out there. And so, we're enabling our teams to go out there and the pitches are more financially related. And we haven't seen really any changes in trends on developer hiring either, and so first order continues to remain really strong. And that's really the power of the platform in the payback period that Sid talked about with the Forrester report and the ROI that our customers are receiving. Kelsey Turcotte: Second question was around developer hiring? Brian Robins: Yes, developer hiring has been -- developer hiring has been the same. No changes. Ryan MacWilliams: Excellent. And then for Sid, there's been a lot of focus on the coding assistance around generative AI. But as you're seeing the velocity of software development pick up, are you seeing more interest from customers around non-coding tools, but as they utilize AI within their coding process, such as securing binaries or more security around their software development lifecycle. I would appreciate more color here. Sid Sijbrandij: Yes. And that's certainly how we see the market. The first market was AI code creation. We're really glad that the last Gartner AI Assistant Magic Quadrant rates us as the only non-hypercloud that's a leader in this space. The second phase is AI throughout the whole software lifecycle. And I think for that, we're in a great spot with dual enterprise. And in the Gartner Magic Quadrant for DevOps that was released this morning, we're a leader with -- and we have the highest score for both execution and for vision, and I think that having the best and broadest platform enables us to win in this category. And beyond that, you'll have more autonomous AI, AR going from reactive to proactive and I'm really excited about what we're doing here. If you attended our GitLab 17 event. We showed GitLab Duo workflow and autonomous agent that can take more initiative of its own. That's where the puck is going, and we're scaling towards it. Kelsey Turcotte: Jason Ader, next, from William Blair. Jason, go ahead. Jason Ader: All right. I guess there's a sense out there Sid that because of GitHub's faster growth rate recently that they're growing faster than you and taking share. I mean, I guess they are growing faster than you, but how do you think about the kind of share shift, if at all, in the market? Are you just both doing better than everybody else, and that's explanation? Or do you think you have GitHub could be taking some market share? Sid Sijbrandij: I think that customers are migrating to platforms, and that's benefiting both of us. And I think we're early. If you look at our revenue together, it's a small part of the $40 billion market. At the same time, there's -- the other thing is that they had a head start in AI co-creation. They purchased OpenAI and they had a head start. Today, we're the only non-hypercloud that's a leader according to Gartner. And that's because of two things, because you need a great model and you need a great context. We're vendor-agnostic Today, we use the best model on the market for cogeneration Anthropic Claude 3.5. And context-wise, we know more of what a user is working on and what has worked on -- what they've worked on in the past because we got the broadest platform, we have the most more contracts and better contacts leads to better AI answers. So together with that, we feel comfortable in competing. Jason Ader: Okay. Great. And then Brian, just a follow-up for you on net retention rate and DRR, it was 126, it's continuing to come down? Do you think we bottomed? Where do you see NRR maybe exiting the year? Brian Robins: Thanks for the question. We're happy with where we landed in the quarter. I don't see anything with the dollar-based net retention rate. That's a concern for me. All our historical cohorts continue to steadily expand. The composition of our net dollar retention rate includes seats, which is an output for us. Just as a quick reminder, last year, we signed the largest deal in company history, which has been a tailwind for us for seats over the year. And we don't view a change in the ratio as a reflection of any recent developer hiring trends. As Sid said, this is a big market, very low penetration. And we have lots of room in front of us for growth. Kelsey Turcotte: Next question goes to Kash Rangan from Goldman Sachs (NYSE:GS). Kash, go ahead. Kash Rangan: Great. Congrats on the beaten race quarter. I hope you enjoyed your summer. One for Sid, one for Brian. You talked about GitLab as being the unique company that it's not a hyperscaler, you have these AI capabilities, is that strength a key selling point in your end markets? I think we can all safely agree that Duo just got going seven to eight months ago. It's still too early in the AI race. So, how do you think that given that we're early and you're off to a good start that this hyperscaler neutral positioning actually does give you an advantage in the long run? And then one for you, Brian, I think you talked about a smaller percentage of the growth rate in ER coming from price increases. Can you help us understand what is ahead for the Company, especially as you go through the motions of renewals from the other pricing tiers and the subsequent price increases that could help your contribution to the growth that get even better. Sid Sijbrandij: Yes, Kash, thank you for that question. Being hyperscaler, independent, being vendor-agnostic, it's good, but it's not enough. The key reasons we win against Microsoft (NASDAQ:MSFT) GitHub are that we have, first of all, the most comprehensive platform. When the platform can do more, our customers can get a 10x faster cycle time. The second reason is we have the best security. We allow our customers to shift security left, always do security and prove that they've done it. And the third reason is that we really listen to our customers. We're the only vendor with a single-tenant SaaS solution, GitLab dedicated that's going really, really fast. And we're getting the acknowledgment that we're executing well. Today, leader in the MQ for DevOps. We're all the way to the top, all the way to the right, and that's enabling our customers to get the biggest return, or 182% ROI according to Forrester. And the interesting thing is that's 60% more than the previous study. So, the benefits of being on the broadest platform are increasing. Our customers are better and better off over time being on GitLab. Brian Robins: Thanks, Sid. I'll touch on the price increase real quickly, Kash. And so there's a couple of things to touch on there. One is we do break out quarterly and dollar-based net retention. What impact is related to seats, price, which has also increased customer yield as well as tier upgrades. And what I really care about when I look at that is the positive unit economics are growing really nicely in the business. I talked about this in the Q1 call, and I'm happy with how we're doing there. And then going forward, we expect the price increase to continue to layer in overtime as we cycle through the renewal portfolio. And so, we're partially there, but we'll see impact throughout this year and next year related to that. And so overall, I'm really pleased with the returns that we're seeing from the price increase and the consistently improving unit economics, which shows the value that the customers are getting from the platform and as part of the total economic study increasing as well. Kelsey Turcotte: Next question comes from Karl Keirstead of UBS. Karl Keirstead: Okay. Great. Maybe on the AI side, so those anecdotes about Barclays, F5 and KeyBanc are pretty powerful, maybe a two-parter for you. Are any of those customers or maybe some of your other early Duo wins, customers that were using GitHub CoPilot and now that Duo has closed a lot of those functionality gaps are moving off of Microsoft? And then I guess the second question said, I could be wrong on this, but my understanding was that to Duo at least initially, was quite rooted in Google (NASDAQ:GOOGL)'s LLMs. And I'm wondering if this change, assuming it is to Anthropic's Claude model had a marked improvement in the functionality of that co-gen tool. Sid Sijbrandij: Yes. Thanks for that, Karl. Yes, if you look at customers, evaluating Duo Pro and Duo Enterprise, I think there's nearly zero customers that don't know that Copilot exists. And for most of these customers, they've had pockets of use, and they do commonly a head-to-head comparison. So, we're winning against Copilot. Regarding the best model for the task, we're still using some of Google's models. But for cogeneration, the most kind of vivid application right now, the best model on the planet is Anthropic Claude 3.5, you look on the Internet, that's consensus. We found the same in our testing, and we can switch to that. We're not beholden to using any HyperCloud product, we haven't bought an AI company or an AI foundational modeling company and being able to use the latest and greatest is a great advantage because it gives our customers better code. Kelsey Turcotte: Next question goes to Rob Owens of Piper Sandler. Rob, go ahead. Rob Owens: Great. Brian, realizing there's a lot of puts and takes around the revenue growth number, just with changes to our SSP. I guess I'll have two questions kind of masked in one. Number one, did that come in relative to your expectations? And is there no change to the year if we think about the headwind that you called out on last quarter, and I guess, secondarily, looking at a lot of the leading indicators, RPO up quarter-over-quarter, CRP up quarter-over-quarter. I think one of the best growth results you've seen in the last year, can you speak to large deal activity right now upsell versus new customer commitments and just what you guys are seeing on that front? Brian Robins: Yes, absolutely. Thanks for the question, Rob. When you look at sort of the SSP and for everybody, that's just accounting on how it gets allocated. It doesn't impact the overall deal itself. We actually took a little bit of a hit this quarter related to SSP that we talked about on the last call. And so that was assumed in the numbers. We're doing well across the business. First order is doing well. Expansion was well. We had the best quarter in churn and contraction in the last eight quarters. And so on prior calls, I said that I thought that second quarter, we would have run through most of the contracts and churning contraction was better than in eight quarters. The other thing that we saw is we actually saw a real strength in the enterprise greater than $100,000 customers growing over 30% year-over-year. And we saw a lot of expansions in lands in that area as well. And I think it just goes to some of the things that Sid said previously around time to value, positive business outcomes, ROI, consolidating a tool chain onto a single platform has just created a lot of benefit, and we're seeing the positives of that sort of show up in the model. Kelsey Turcotte: Next question comes from Michael Turrin at Wells Fargo (NYSE:WFC). Michael, go ahead. Michael Turrin: Great. Thanks, Kelsey. I appreciate taking the question to your team. I guess just -- I'll ask both parts upfront, but to some of the prior question, the leading indicators here all look pretty good, and it's not something we're seeing a lot of across software, CRPO billings, bookings up more than 40%. So just hoping you can unpack that strength a bit more if there's anything more onetime in nature for us to be mindful of in those metrics? And then Brian, maybe walk us through the assumptions you're embedding in forecast for the rest of the year on the back of that Q2 strength across macro, seats, sales execution or anything else worth mentioning for us. Brian Robins: Appreciate the two questions. On the forecast and how we're running the business and the transition of actually taking over the interim CRO role, there's really been no changes whatsoever and actually has been really plugged into the entire sales force and visiting customers and worked really closely to Chris. So, we're happy about the minimal disruption there with Chris' departure. All the metrics that you talked about, CRPO have grown 42% year-over-year, short-term calculated billings around 40% year-over-year, Ultimate ARR now 47% of total ARR and was greater than 50% of bookings within the quarter and that really coming from the enterprise base that we have. And so, our deals are getting larger, Ultimate adoption is increasing, Ultimate is good for us and our customers, and I think you see that in the metrics itself. And then we also saw Dedicated. Dedicated grew roughly 150% year-over-year, SaaS was great. And so, we're just seeing strength sort of across the board from our customers who are adopting the platform. Kelsey Turcotte: We'll turn the questions over to Pinjalim Bora of JPMorgan (NYSE:JPM). Pinjalim Bora: Congrats on the quarter. I wanted to ask you, Sid, obviously, it seems like we are seeing some of the AI adoption. But any way to further quantify it in terms of maybe the portion of the customer base or users that are touching the product today and what portion of the codes that is being written by the AI as being committed. Any further kind of quantitative metrics? Sid Sijbrandij: Yes. Thanks for that. It's still early for us. You heard from Barclays, F5 Nova, but if you look at the quotes going on, not all of them have AI in it. And if they have AI, they typically don't have AI for all the users of our customer yet. So, customers are early in this adoption cycle. We cater to the enterprise. They are relatively slower to adopt this and more considerate, it's really important that we listen well to these customers. For example, we are accelerating our work on off-line models because our customers are requesting that. We see a giant opportunity for AI throughout the lifecycle. So, our GitLab Ultimate customers predominantly think that Duo Enterprise is a really, really good value proposition, and that's a big focus of ours. Pinjalim Bora: Yes. Understood. One follow-up for Brian. Brian, what portion of the contracts from existing customers at this point are completely through kind of the first phase of your pricing change of existing customers, the 19 to 24. Is it fair to assume that it's largely complete by this point? And the second phase of the rollout, which I believe started in end of April, if I'm not wrong, did it have any impact in billings, RPO performance this quarter? Brian Robins: Yes. So, on the price increase impact overall, remember, we weren't allowing people to early renew. And so, it really comes up when their renewal comes up and they would go 19 to 24 than 24 to 29 and then new customers will go straight to 29. And so, I think it's really important that the price increase will continue to layer in overtime as we cycle through the renewal portfolio. And so, I expect next year to continue to see the benefit of that. And it really points to the unit economics improving based on what we're delivering to our customers. Kelsey Turcotte: So, from now until the end, we're going to go to just one question so we can get as many people on the phone as possible. And with that, I'll turn it over to Gregg Moskowitz at Mizuho. Gregg Moskowitz: Great. Congrats on a very good performance. I wanted to follow up on Ultimate because the percentage of ARR continues to expand nicely and Sid, you called out some very good success among your largest customers. Despite the much higher price point that exists for Ultimate as compared with premium, what I'm curious about is if you're finding that you're landing more frequently with Ultimate versus where -- what you were seeing 6 to 12 months ago? Sid Sijbrandij: Thanks for that. We're certainly changing our approach to leading with Ultimate when we approach a new customer because the more comprehensiveness is driving so much value because this integrated security is driving so much value. We've started to lead with Ultimate just talked about the return, like the 482% return that is for GitLab Ultimate. So maybe counterintuitively, our most expensive product is the one you get the biggest return on because the return is not coming so much from paying us less, but it's about deprecating all those existing point solutions. We talked about Lockheed Martin. Being able to deprecate our legacy CI vendor, it's the not just on software, not just on cycle time, not just on efficiency, even on hardware costs. So being able to consolidate is the big winner and Ultimate can replace the most point solutions, and that's why we're leading with it. Kelsey Turcotte: Our next question comes from Matt Hedberg at RBC. Matt, go ahead. Matt Hedberg: I'll offer my congrats as well. I guess for either of you, regarding Gen AI, it seems like you guys are increasingly fitting into that work stream for a customer when they're thinking through their own gen AI adoption. I'm just sort of curious like when you're having conversations with customers, how important is gen AI. I think we've all been sort of like it's the first and last question I think everybody asked. But how -- when you're talking to the customers, how important is that in their software development lifecycle right now? And I guess, is there -- how do they see GitLab fitting into that kind of that ecosystem that they're all developing. Sid Sijbrandij: Yes, it's really important to our customers. We had a bunch of caveats, why they're not all of them are rushing to implement it to 100% of their users. First of all, they want it secure. Second of all, they wanted to work for the people who are working on existing applications. A lot of the demos you see out there, they're for new applications. Most developers in enterprises are working on giant existing applications. So, making that work well is really important. We got a project internally called Da Vinci to make AI even work even better for those existing applications. That's super, super important. It has to meet all the security requirements that the customer has, and they want to see an actual return, and most of the time, that return comes now when it's just for the coding, but when it's throughout, so those are the considerations we run into. They want vendors who can deliver on that. We have a great vision going forward, but they're not jumping in to 100% of the people for just a coding solution today. Kelsey Turcotte: Next question goes to Zach Schneider at RW Baird. You there Zach? Operator: Zach, you can now unmute on your phone, if you'd go ahead unmute for us you have that capability. Kelsey Turcotte: Okay, so we'll go on to Mike from Needham. Mike, go ahead. Mike Cikos: Just wanted to circle up, and I appreciate you guys continuing to give us the composition of the DBNRR. If I could just focus on the seats contributing about 40% this quarter. Wanted to get a sense, first, how that compared versus your internal expectations? And then secondly, can you help us think about like is the sales force indexing more potentially toward pricing given the changes to the different packages you have out there in the market? Or any other color there as well to help us get a better sense of how the DBNRR flows from one quarter to the next? Brian Robins: Yes, absolutely. Thanks for the question. The dollar-based net retention with the seat fluctuation based on the largest deal that we had last year, we knew that was going to be different this quarter than previous quarters. It's also an output. And so, as we go in and solution sell, we're trying to figure out what the best solution is for the customer, and then we'll land there. The fact that we're landing larger and landing more on ultimate, that's going to -- that's good news and will have an impact on dollar-based net retention rate, but there's nothing that's all within the quarter that caused any concerns as it relates specifically to seats as that component of the dollar-based net retention rate. Kelsey Turcotte: Next question goes to Peter Weed at Bernstein. Peter, go ahead. Peter Weed: Thank you very much, and congrats on the continued momentum. I think if I'm doing my back of the envelope properly, it looks like you are anticipating a nice acceleration in quarter four implied in the numbers. How should we think about that acceleration relative to what appears to be a little bit of a deceleration in your guidance for quarter three? Brian Robins: Thanks, Peter. As always, appreciate the question. When I look back at sort of last year, and looked at when we reported Q2 and what we guided for Q3 and Q4, they're somewhat similar. And so, I didn't see any sort of sequential or year-over-year changes that jumped out to me to be surprising. Fourth quarter historically has always been the strongest quarter in the Company. Q2 and Q3 have relatively been the same and Q1 seasonally has been a little weak. We continue to guide to strong top line growth rates and improving non-GAAP operating margins. The thing I'd personally like about the business model is we have a lot of visibility heading in any given quarter, given the ratable nature of the business. And as we continue to scale, we're seeing efficiencies at scale in the business, which is great as well. And so, I'm pleased with the guidance we provided this afternoon for the third quarter and for the full year. Kelsey Turcotte: Next question goes to George McGreehan at Bank of America (NYSE:BAC). George McGreehan: George McGreehan on for Koji Ikeda. I wanted to say congrats on Duo Enterprise going GA, the list of features highlighted in the press release were very impressive. And I kind of wanted to dig in more specifically about how you're selling the product to the installed base. Can you talk a bit about the strategy there and in terms of any changes to sales incentives? Just you could kind of get a sense of how to think about potential adoption rates over the next several quarters. Sid Sijbrandij: Yes. Thanks for that. The main audience for Duo Enterprise is existing GitLab Ultimate customers. And it's -- Ultimate is typically our larger companies, and they are served by our sales force. So, it's a direct motion. Ultimate is also our fastest-growing SKU if you think about it, if you look at the cohort of $100,000 plus, 2/3 of the net new ARR went into Ultimate, so that's growing, and we want to build this Duo enterprise growth on top of that. And we're talking to the customer because there's lots of considerations, implementing it. That's, for example, why we're working on an off-line version. That's why we have tons of features to control who's using it, when they are using it. And we're selling it because of the improvement in productivity, not just for coding, not just for devs, but also for their security people and their operations people. Kelsey Turcotte: We have time for two more questions. I'll go to Nick Altmann at Scotiabank. Nick, go ahead. Nick Altmann: Just a quick one for me. Last quarter, you guys talked about Duo going to be sort of a bigger needle mover next year, you guys did rattle off a handful of marquee wins. And so, I guess, when you think about the second half pipeline, as you sort of get more customers on Duo have more referenceable logos. What are you sort of anticipating from the second half of the year in terms of Duo contribution versus, say, a quarter ago? Brian Robins: Thanks for the question. I'll answer directly and then I'll give some more context on sort of how I think about it. So, we really expect AI to start contributing to the model in FY 2026 and beyond. First, from just a practical perspective, there was sort of a big media hype cycle and people are just partially adopting it now. And so, I think right now, we're starting to see customers trying to figure out how to implement AI safely and compliantly within their organizations. And we're starting to see that with what we gave you from a reference perspective. And also just from a mechanics perspective, and I know you know this, but it makes sense to say it is from a new product perspective for it to have an impact at a company that $700 million plus in run rate revenue growing 30%, it's just going to take a little while to sort of build that. From the AI contribution in 2Q, I will say that we're 3x our plan number. So, we did a lot better than what we expected internally. And so, from a model perspective long term, I just view this as good news because this is going to be a long-term growth driver for the business. Kelsey Turcotte: Last call for our questions coming from Kingsley Crane (NYSE:CR) at Canaccord. Kingsley, go ahead. Kingsley Crane: It sounds like you've had some nice wall due deployments with a couple of banks and F5, should we continue to think about high user penetration, but a smaller total number of customers? Or are you seeing some green shoots in terms of some bottoms-up adoption with Duo? Sid Sijbrandij: We're seeing some bottoms-up adoption as well. I think if you look across our entire customer base, the more common scenario is that they buy Duo for part of their users. For various reasons, they don't -- they're not yet ready to put all the users in it. We think that will come over time. The returns are there, that that's a more common scenario. Of course, we also have these great customers that do it role to role immediately, and if we meet all the requirements, we can do that, and that has our preference. But the partial scenario is more common. Kelsey Turcotte: So, this concludes our second quarter call. Thank you very much for joining us, and we look forward to seeing many of you over the coming quarter. Have a great evening.