Zscaler (ZS) Q4 2019 Earnings Report

In Q4, we are pleased to announce that we delivered strong revenue and operating profit growth in the fourth quarter with positive free cash flow. For the quarter, our revenue grew 53% and billings grew 32% year-over-year against a very difficult comparison.

We are seeing a mega shift take place, where organizations are choosing multi-tenant cloud architecture to empower them to scale quickly as they move their applications and data to the cloud. Digital transformation and adoption of mobile and cloud fundamentally change network traffic patterns and break that traditional perimeter protection model, where organizations build a hub-and-spoke network and a mode of security appliances to secure the network.

In our large ZIA deals, we continue to see Office 365 deployments and securing local Internet breakouts as the primary driver. A Global 500 industrial company with headquarters in Europe purchased our business bundle and Cloud Sandbox for 120,000 users as they required a scalable solution that can keep pace with over 50% growth in Internet traffic for a year.

In addition to Office 365, SSL traffic inspection and cloud sandboxing were needed for better security for all locations across 60 plus countries and all users whether at the headquarters, or branch office or on the road. In another deal, a Fortune 100 consumer goods company that purchased business bundle several years ago upgraded to Transformation Bundle plus data loss prevention for all 100,000 employees.

After deploying Office 365 last year. The customer was overwhelmed with the growth of traffic for One Drive and SharePoint. With Zscaler, they will no longer have to backhaul Office 365 to four data centers. Instead, they are implementing SD-WAN for nearly 300 locations for local Internet breakouts to deliver better user experience.

Overall, the competitive environment remains favorable. And we have high win rates, coupled with a strong net dollar retention rate of 118%. In fact, our customer churn rate declined quarter-over-quarter and year-over-year. We ended fiscal 2019 with over 3,900 customers. Total [Phonetic] Global 2000 customers increased to over 400 as of July 31, up from over 300 a year ago. And we have over 100 of the Fortune 500 companies as our customers.

We are strengthening our channel partnerships with large system integrators and global service providers, who contribute over 50% of our revenue. We will continue to aggressively invest in our business to pursue our significant market opportunity.

We didn’t really see any comparative real competition from firewall guys or any -- other guys. So our competitive rate remains very, very strong. On the macro level, we haven't seen any significant things to really say that macro is playing a role in it. We do believe that as the large number of reps are being hired, they all need to go through a bit more sophisticated sales methodology, sales framework and the like.

as we compete out there, we almost win every deal, very low situations where we don't win. So very comfortable with our differentiated technology, very comfortable with our sales process [Indecipherable]. We just need to make sure we can keep on scaling it as we set our targets for bigger and bigger numbers.

I think if you asked any expert out there, what security inspection technology gives you better capability to inspect on law [Phonetic] threats, I think 99% of smart people agree it's a proxy technology. So I think while statements like that made by competition truly making zero sense. In fact, a lot of you work for large banks. All right. You clear about security, if you look at the top 10 large banks in the world and how many of them have next-gen firewall. Lots of them. How of them replaced a proxy technology for outbound traffic. I believe you will find it zero.

In fact, I know of a very large bank that has spent ten of millions of dollars on a next-gen firewall and deployed them all over. And this bank is still depending upon a proxy technology to inspect to clear traffic for threats. That's one piece. Two, if you look at any vendor, who is doing any meaningful thing even sitting in front of servers like Akamais of the world. They all have proxy-based technology because without proxy, you have little or no control. Lastly firewall, which is a pass-through device was a good thing before the SSL world when traffic was not encrypted. Today in most of the cases, 90 plus percent of the cases, it's SSL traffic, TLS traffic . Firewalls were never designed to inspect SSL, proxy technologies needed for SSL, if you really don't inspect the traffic, it is like your luggage passing through an airport inspection check post without inspecting. That's not a good thing. So I think. These statements are meaningless, they mislead customers, they give them false sense of security and do a disservice to the security industry.

Regarding displacement at a Fortune 50 retail customer, they alluded to. I personally know every Zscaler, Fortune 100 Zscaler customer and we did not lose any. So people, I think when they get desperate, they look for leading information. I've analyzed top 50 deals and we rarely see this firewall vendor in there. We do expect to see further misleading claims in the future from legacy firewall vendors, who are trying to tout their cloud security wins. When legacy secure web gateway vendors were trying to compete with Zscaler, we saw the same behavior. They try to upgrade the security appliances, they gave away the cloud, and they were falsely claim it as a cloud security win and displacement of Zscaler.