Zscaler, Inc. (ZS) 25th Annual Needham Growth Conference – (Transcript)

Zscaler, Inc. (NASDAQ:ZS) 25th Annual Needham Growth Conference Call January 12, 2023 3:00 PM ET

Company Participants

Jay Chaudhry – Chairman and Chief Executive Officer

Remo Canessa – Chief Financial Officer

Conference Call Participants

Alex Henderson – Needham

Alex Henderson

Welcome everybody to the Zscaler fireside chat that we’re going do here at the Needham Conference. It’s great to have Jay and Remo here to provide the great content. Let me start-off by saying, we have made Zscaler our single best idea in the security space for 2023. We strongly believe that they have the right mix of relatively seamless and easy to deploy upfront technology that in a tough environment, they can deliver that customer growth still, which is the Akram’s Razor I think in terms of where the pressure is on a lot of the security companies.

We also strongly believe that this is a time when investors are going to be looking for that quality company that can both deliver growth and strong profitability and cash flow and that certainly fits the description and the valuation compression we think is finally started to bottom out even with the downgrade over at Brand X this morning.

Leaving that point aside, welcome, guys.

Jay Chaudhry

Thank you.

Remo Canessa

Thank you.

Alex Henderson

One last thing, if you have questions, I’m more than happy to pass them along. There’s a box that you can type them into. I’ll keep my eye on that all through the fireside. And any – at any time, please feel free to throw questions in. With that, guys, so the obvious question here is, how macro sensitive is Zscaler against this environment? And I actually think that there’s some interesting data that that I was looking at.

Let me just roll this by and see if this is something that’s predictive. So, it seems pretty clear that the [contagion] [ph] in the economy started off in Europe and is gradually [defining] [ph] its way to the U.S. Most companies in the security space that have had issues saw it in Europe first and then saw it show up in the U.S. But when I look back over the last three years and last three, four quarters, there’s zero evidence that that happens in your business.

In fact, you guys accelerated from 40% to 45% growth to 46% growth sequentially accelerating in Europe as this pressure has developed. So, is that an indication, a proof point that, in fact, you guys grow well across increasingly pressured macro environments.

Jay Chaudhry

So Alex, first of all, thank you for the opportunity. Yes, Europe has felt some pressure and Ukraine war has also played a role in it. But overall, here is what our European story is. First of all, we are very well penetrated in Europe. I mean, take some of the largest companies in France. About 30 of the 40 largest companies are Zscaler customer. Central Europe, UK, it’s the same story. These large companies, they need to make sure that cyber is in good shape. It is true. There is more pressure in Europe. There’s more scrutiny in Europe than in the U.S. but there are two things that are helping us:

One, like U.S. companies, Europe also has to worry about cyber. Europe actually is more worried about cyber than U.S. is because they are sitting right next to Russia. Number two, they have lots of pressure to reduce cost. And our solution as a platform can actually reduce cost significantly. Now, everyone likes to say, we reduce cost platform, this and that, but think of Zscaler and contrast it with some of the other solutions. Endpoint or identity.

These guys, they are focused good products, but they don’t replace a bunch of foreign products out there. When we go in, the entire outbound DMZ goes away with ZIA. This is a bunch of products. When ZPA gets deployed, a bunch of products get removed. So, combination of great savings and good ROI combined with still interest in cyber is helping us in a better shape than many of our peers out there.

Alex Henderson

So, in fact, it does suggest that you’ve already demonstrated what people are fearing is going to happen in the U.S. economy as the economy has decelerated month to month to month. You’ve actually seen that deceleration in Europe and powered right through it. And they stopped with those facts, right? I mean, that’s empirical evidence. So, let’s talk a little bit about the reason that happened. So, one of the things we’re hearing very clearly from the VAR community is there are some categories that have [Technical Difficulty] significant nut upfront that you’ve got to digest in order to get to the savings.

So, I have to decommission something, I have to put some engineering skill into it, I’ve got to actually spend some money on some other hardware or whatever. I mean, that’s part of the problem I think with the vulnerability management space in particular as an example. They’re having trouble getting new customers. Talk about what happens, the mechanics of winning a new customer for Zscaler in this environment.

Jay Chaudhry

And deploying it, because you talked about deployment, right? If you go back to pre-COVID, that customers wanted to go through network changes and deploy Zscaler from branch offices and then the customer moved on to protect remote users who work from home. If there’s one thing COVID did that is good, it showed CIOs and CTOs that the network in network security you got in place in the data center and network connecting various branches is not needed. It’s not relevant.

During COVID, we start, we flipped our deployment model. Don’t even touch the network. Go and deploy this endpoint agent on a laptop. It simply comes through us ZIA, ZPA, happen seamlessly. So, we were able to see the deployment that took five or six months. Could be done in actually two, three, four weeks. So, our deployment model has fundamentally changed. It’s helping us do much faster deployment. And once they see it, eliminating some of the network and all the stuff becomes a lot easier. But once traffic starts flowing through us, look at the outbound [BMZ] [ph], what ZIA does.

All of those products can be decommissioned, and a lot of them can be decommissioned in – probably in a two, three, found months. Okay. ZPA, it starts with VPN replacement, then it starts looking at doing the rest of the start displacement. Our customers are asking us, say, just don’t, I don’t just trust you. Show me business value assessment. Show me quarter-by-quarter. What can be rolled out? What can be removed and whatnot? And that’s what we’re doing. So, the extra scrutiny is actually asking us to do that kind of stuff.

We have been doing business value assessment for now several years, but no IT environment is asking us to do more granular, do it more precise. A year ago, we would do business value assessment, ROI, year one, year two, year three. Today, we actually bought quarter one, quarter two, quarter three, and quarter four and so on. Our business value is strong, ROI is strong. And that’s really what’s helping us get our deals done.

Alex Henderson

So, in that context, can you talk about the – some of the other platforms, for instance, the ZDX product, you know, how’s the uptake of the nascent products to the existing customer base?

Jay Chaudhry

Yeah. ZDX has taken off faster than we expected. It has taken up even faster than ZPA. Now why is that? If you think about what companies need to do in today’s cloud and mobile world, ZIA gets them secure and fast access to Internet and SaaS. ZPA provide access to any internal applications in the data center and factories or public cloud, like Azure, AWS, without doing anything special or networking. That two together is what we have been now selling for quite a while.

The only thing missing in this equation was if there’s performance issue along the way, the user is sitting somewhere, teaching some applications, what do you figure out? There’s no meaningful product I’ll be introducing. We are sitting in between. So, ZDX was a natural thing for us to do. We’re using the same endpoint agent. We turn on telemetry, we start collecting those telemetry, and we can tell them what’s going on.

So, now we are packaged fee services, ZIA, ZPA, and ZDX into one bundle called Zscaler for users. That feed together is all you need for your users, and that’s what we are selling more and more. And ZDX is naturally benefiting from it.

Alex Henderson

So, when did exactly did you hit that transition in the selling process?

Jay Chaudhry

Yeah. You know, all of these things, we test we learn about 15 months ago, we start to sell more and more ZIA, ZPA, and ZDX, but they were separate SKUs. Once we see enough traction, we create a bundle. The bundle got [indiscernible] the larger market, what, a few quarters ago.

Alex Henderson

So, I do have a couple of questions that came in from the audience. And I thank you guys for that. I love when it’s not me asking the questions. Even they pay me that. Just repeat them. It’s great. Any case, the first one was, can you talk about the competition with each of the two prime competitors that they note here, Palo Alto and [NetSkope and] [ph] Cloudflare? And I love to start off with the, you know, Palo Alto, what’s going on relative to, you know have they improved what they’re doing? Do you see them more? Do you see them – how’s pricing playing out some of those metrics on Palo.

Jay Chaudhry

Yeah. So, if you think with a high-end market, these folks understand security. They understand what’s really zero trust, what’s a firewall. We, actually I would say, the firewall companies have become less there. They used to show up, tell a story, you know, everyone knows what their story is. And I would say the less competition from them on the high-end space.

In fact, I talked about a large bank that probably has spent well over a $100 million with this firewall company. And when they looked at securing their users, there was no back-off. Okay. They told us that the [indiscernible] vendor came to us and say, we got a grade zero trust solution. We can do better than Zscaler, and we’ll give you at half the price. Okay. The customer said, sorry. You build great firewalls. We love your firewalls. We’ll have you in the data center, but when it comes to user protection, it’s a different architecture, proxy was the requirement, scalable proven proxy, and then the real cloud native stuff.

So, I think there’s – there may be some noise more with investors than it is in customers. When you come to lower-end of the spectrum, and probably the enterprise, low-end enterprise 2,000 and 3,000 kind of numbers, we do see a number of vendors there. Final company show up, even Cisco and [indiscernible] shows up there as well. And that’s where we had limited presence. In the past two years, we increased our presence significantly. So, do I think these firewall guys could be real affecting computation for us? Not really, unless they change the architecture.

It’s like trying to say that, do you think a traditional car company by bolting on an electric engine becomes a real competition. Not really. No. Eventually, if they wake up and say, I need to invest and build in real electric engine and go with that, that could be – that’s something for us to worry about and see how do we keep on innovating and getting ahead, but good to our benefit.

Traditional companies keep on bolting things more and more because they think it’s an easier and faster way to get there. Building something from scratch takes a long time. So, no worry about the [firewall fund] [ph]. You talked about this cloud – what’s either cloud something? What is it cloud thing?

Alex Henderson

So Cloudflare has put out a lot of press suggesting that they are much faster than Zscaler. And, you know, to be fair, Cloudflare is focus as a cross WAN Internet accelerator, does give them some advantages in rapid communication across the WAN. When I hear that, my response to it is that, okay, but the comparison isn’t between Cloudflare and Zscaler, it’s comparison between Cloudflare and Zscaler and hairpinning over the traffic back to the data center and a difference of a couple of milliseconds one way or the other when you’re doing the 3 ops instead of 30 ops is [indiscernible]. So, it’s really a functionality problem. So, can you [solve that] [ph]?

Jay Chaudhry

Yeah. I think these guys make a lot of nonsense noise. Even last year, you know, once they told investors, we replaced Zscaler at a very large oil company. Really? And the name of the company, you kind of said, because I know them well. So, I called the CIO and said, well, what are they talking about? Do you have them? They said, we, in one of my business units, I am using CDN and DDoS. That’s it. Now that funky little thing became [indiscernible]. Okay. Some companies like to stretch. Some companies go too far beyond stretching. That’s one.

I had one other conversation with someone that said, wow, these guys have lots of experience. And selling large enterprise. I said, do the following. Right. And all this debate. Ask them. Tell me 10 large enterprise customers that are actually using Equinor ZIA, ZPA. Okay. I bet you’d struggle to find even one. Okay.

So, it’s easy to make a lot of noise. See, putting on all the stuff, they’re trying to bait us to [indiscernible] and get into – they want credibility, they want some coverage. They’re not going to get burned into that stuff, leave it alone. It’s sometimes I think they’re trying to do, they have a better [indiscernible], and lots and lots of little things in it, but everything is two-inches deep.

Alex Henderson

Right. So, from a future parity perspective, it’s nowhere near there. Even if there’s some a speed advantage, that’s the measuring the wrong thing, right?

Jay Chaudhry

So, okay. Not even quite there. Okay. When can they have the speed advantage? If the traffic, say, coming from Singapore to New York needs to come on a Wide Area Network. Yes. They can do acceleration. But our goal is not to backhaul traffic. The goal is that applications are getting set up everywhere. Why is Microsoft putting its data centers in every part of the world? So, no backhauling is needed.

So, the advantage of doing some funky tests to show that I can bring on my backbone to do something is not a real thing. My traffic, my customer traffic in Singapore goes to Singapore data center. Then it gets on Microsoft network to get to where Microsoft is. In Microsoft in Singapore, it’s one hop away for me.

So, all of these papers are trying to get attention. We’d rather focus on our customers, so do you think I even worry about Cloudflare thing? Not really. My worry is to make sure we keep on executing with our focus, our sales team fully enabled, and we don’t get complacent. We don’t let success go to our head. And with that, we are focused on customer obsession. That’s why our NPS is sitting way up it’s sitting. That’s why our score, promoter score is sitting at very good. Over a 125% net retention rate. We are proud of those numbers. And we keep on driving.

Alex Henderson

So, another question came in on the competitive front. The question is specifically, have you seen any changes in the win rates against NetSkope and Cloudflare? And I think you already answered the Cloudflare. So, let’s [Technical Difficulty] on the NetSkope piece.

Jay Chaudhry

Look, NetSkope is still a by and large a [capacity vendor] [ph]. If you ask them, how many Fortune 500 companies do you have as a customer? You know, they’ll give you a big number. And actually, that number will be technically right, probably, there are a couple of dozen CASB customers who fall in that bucket. If you said, how many of these companies are actually taking all the traffic like ZIA or ZPA? I bet you’ll struggle to find companies out there.

So, becoming a CASB is one thing, setting a line to inspect all the traffic without increasing latency and having a cloud that works, you ought to make sure it has availability is much, much harder task. What’s making things worse for private companies? There’s no – CIOs are looking for more and more consolidation and simplification.

Do you think they’ll consolidate with a private company they don’t even know what the financials are? Or if they check an audited financial statement, they’ll find that these folks are losing tens of millions of dollars every quarter?

So, I do believe that most private companies will be struggling in today’s market. Our position as a public company with focus on cloud security with the best architecture is putting us in a much better position.

Alex Henderson

So, the question though was, is there any change in win rates? And it sounds like the answer is no.

Jay Chaudhry

We aren’t even competing on our main segment of Enterprise [and a major] [ph]. On the low-end, we do see them like we see firewall companies and Cisco as a wall, once we engage, we almost [solved this thing] [ph].

Alex Henderson

Great. Another question coming up from the audience is, does your contribution margin construct of 60% still hold in a slower macro environment and with more products on the menu?

Remo Canessa

The answer is yes. The answer is yes. I mean, it’s – we typically do, you know, three-year contracts, but, yeah, the no change in contribution margin. Yeah. No change at all. Still 60% plus for years two and three.

Alex Henderson

So, while we’re on the subject of the business model, clearly, there’s been a shift in sentiment on the streets relative to what investors want to see. They want to see maybe a little less growth and a little more profitability. I think with almost any very high growth company, they can print substantial profitability improvement. All I have to do is, slow down the growth of their OpEx. I mean, you can mint money for quite a while if you choose to do that.

Harder to balance it. And so, can you talk a little bit about the balancing act that you’re doing between continuing to drive that long-term opportunity and the growth and the value of being the scale player with producing maybe some more margin and cash flow in this environment given the uncertainty around the economy?

Remo Canessa

Yeah. I mean, it’s a great question. You know, every company is different. You know, every, you know, the market that we’re addressing, it’s an early stage. We’re the leader in that market. We have the product, you know, that addresses the market. And so, I feel that we’re, you know, from a company perspective versus other companies, we’re more resilient, you know, related to the downturn. Not immune, but more resilient.

Then the question comes down to, you know, and again, we’ve been growth oriented and we still are growth oriented, but, you know, the thing about it is, is that because of the large market opportunity that we have, do you want to really start pushing operating profitability and free cash flow?

Free cash flow, we’ve been over 20% in the last two years. That’s outstanding. So, from my perspective, the biggest value we can give to our shareholders and to ourselves is to continue to focus on growth. Having said that, we hear, you know, our investors, some investors talking about increased profitability. So, we did increase our guidance on operating profitability. And as you mentioned, Alex, in a SaaS model with 80% gross margins, with the growth rate that we have, it doesn’t take much to get to your operating profitability targets, and our targets are 20%, 22%. That would be a disservice for everybody, you know, in this market.

We’re the market leader. We feel that we can exploit this market with our technology. So, again, we’ll be more mindful of operating profitability. We’ll balance it, but again grow. What we also talked about is that, you know, in the second half, we’re going to moderate hiring. So, the moderation in hiring, basically, is that we’re still prioritizing quota carrying reps, you know, revenue generating salespeople, as well as R&D.

From a company perspective, I can tell you for, you know, for our revenue generating reps, we have not changed it from our initial plans. So, again, why are we doing that? The reason is that it’s a huge market opportunity. And the model that we have gives us the ability to make these decisions.

In times like this, you know, major significant downturns. The risk is you don’t want to overreact. You know, in the model that we have, business that we have, the engagements we have with our customers, you know, gives us the ability to really, I feel, you know, get through this and become a much stronger company on the way out – as we come out of this.

Alex Henderson

Just [indiscernible] on that comment, do you think the Street is overreacting in terms of the amount of pressure that they’re anticipating? And in fact, your business has actually smoother than the streets thinking it?

Jay Chaudhry

I’ll respond. I think yes. Look at two years ago in the past year or two. All these investors were so bullish. I mean, it’s like, come on. You’re so bullish, you’re investing everything, raising valuations to the sky. And then suddenly noticing everything is [gloom and bloom] [ph]. Okay. Remo and I have always been prudent. In those crazy times too, we were investing very carefully. We were still delivering 20% net cash flow. Okay.

We don’t [like business] [ph]. In this environment, we are not going to over pivot. Okay. But we know that our model is good. And from what makes – what gives us more flexibility is our 80% plus gross margin. If you think about the, kind of business we are intaking, so much traffic, inspecting and enforcing policy. And still being able to do that kind of margin is a good starting point and that’s the barrier to entry for us.

People can’t just change gross margin. Our gross margin gives us more flexibility to invest in the rest of the money and whatever we need to do. And some of those things are there because we decided to really build our own TCP stack that gives us great throughput. We invested in building our own cloud web and running on somebody else’s cloud because it is fundamentally meaningful. It actually gives you far better margins.

Sometimes, I hear of these firewall companies say, well, our margins are very good running on a hyperscaler. Well, wait till you really have traffic on it. You’re just talking about it without much traffic. If a hyperscaler wants to have 70% to 80% gross margins, do you think can you get 70%, 80% gross margin for your services on proper [70%, 80%] [ph] gross margin? No. The math doesn’t work out. We’ve done it right then the other strategic thing we did years ago.

While we said we don’t put all these functions in India and some of the other lower cost countries. India, Poland became pretty important for us. Engineering, half of the engineering team is in India. If we had all the engineering team sitting in the Bay area, our cost of R&D won’t be 15% it’ll be probably 10 points higher. They give us flexibility to invest more and still return some good cash flow, have good cash flow investments. So, that’s why we really don’t kind of jump and say, let’s freeze everything. We think we are doing the right thing. We’re moderating stuff, but we are putting growth ahead of profitability, but we are making sure we have pretty good profitability.

Alex Henderson

So, Remo, when I look back in the rearview mirror, you exited the July time frame, your fiscal year-end with a very significant increase in your sales organization. I think it was in excess 50%. You can correct me if I’m wrong, but I’m pretty sure it was. And you continued to hire in the first quarter. So, when you say here, you’re moderating, hiring even as you’re continuing to prioritize reps, it sounds like there is significantly more than enough capacity to deliver the more modest growth targets, which slow down into the 30s pretty quickly, you know, in the headlights. So, is there any change, you know, in the productivity of those salespeople? How do we think about the impact of larger deal sizes and longer closure rates against sales productivity or are we just being very conservative in the forecasting guide?

Remo Canessa

Yeah. I mean, a lot of questions there. So, we didn’t comment what our, you know, quota carrying rep growth was in the fiscal 2022. So, 50%, like, I’m not going to comment on. Regarding, you know, building up the, you know, the sales organization, you know, I now like to look at, you know, this year. I’m also thinking about next year. You know, I’m thinking about want to make sure that we’ve got the capacity, you know, for our internal plans for fiscal 2024. So, I’ve got that in mind.

Regarding deal sizes, they are getting bigger. Deal, you know, closing deals taking longer. We talked about, you know, things that you look at, your close rates are increasing, which is the sign of the macro economy. And also, linearity. It’s more back-end loaded sign of the macro economy. The expectation related to productivity is it will be flattish to down in sales productivity in fiscal 2023. That’s primarily a function of the growth in the sales organization. Also, you know, the broader macro, you know, environment.

Having said all that, we are, you know, the entire world, basically, you know, economy is going through a really, you know, a tough patch, you know, I’ve gone through, you know, 2 or 3 back in 2001 and 2008. This feels different. You know, this feels that it’s going to be tougher. The advantage that, you know, Zscaler has is that, you know, if the world’s changed that basically how companies conduct business has change, where applications are in the cloud and users are in mobile.

Zscaler revolutionize basically how you do security and networking. You do it through the cloud. And if you think about it, is that the way companies are doing their business has fundamentally changed, but the architecture is still primarily predominantly the architecture, which was developed back in the 1990s, which doesn’t work because basically you’re bringing things onto your network. You’re exposing your network. We’re zero trust.

So, we fundamentally changed it. So, from my perspective, you know, because of that, because of the need, like I said, we’re not immune, but we’re more resilient. We just got to get through this period. And I feel, as I mentioned, in times like this with companies like Zscaler who are continuing to develop and really grow their business, including increasing headcount.

We have an opportunity. This is the time when companies really can take a big leap forward. Jay has mentioned it before. It comes down to one thing as far as I’m concerned at this point. It’s execution. It’s the people we have in the company. It is the culture that we create, you know in the company, but we’re all going after the same thing. And that’s the key thing. It’s execution getting the right people, and that’s what we’re doing.

Alex Henderson

So, in the crucible of macroeconomic pressure, the companies are forced to address the inefficiencies and vulnerabilities in a more efficient way and Zscaler wins in that environment.

Remo Canessa

Yeah. Of course, that’s from my perspective because a lot of companies, what are they doing? They’re laying people off, right? They’re freezing hiring. What does that do, you know, to the morale in your company? What does that do related to investments that you can make? I can tell you that from a Zscaler perspective, the two areas that, you know, we’re going to invest in, and not moderate is R&D and basically revenue [generating heads] [ph]. So, that puts us in a very unique position to really come out of this pretty strong.

Alex Henderson

So, you’ve done a lot more bundling in this environment. You’re seeing bigger deal sizes. How does that translate into price sensitivity. And I mean, certainly, we’re hearing price sensitivity across most companies. And to what extent do you feel like you can pull the line against that?

Jay Chaudhry

So, I’ll answer. There is definitely price sensitivity, but is far more focused on cost savings and auto. If I can show here is the next four quarter, six quarter plan that shows that I can save you money and I can improve my [indiscernible] simply by my infrastructure. It goes through. So, we are able to do bigger deals. At pretty good per user pricing when we show that things can be taken out. The good thing is that CIOs are actually focused on simplifying and cost reduction.

In fact, they actually open up and share with us some of the old legacy technology they have that can be taken out. So, we end up doing some pretty good business case studies of business value assessments. That help us do well. So, we have actually benefited from some of this stuff because we have the way to address this.

Alex Henderson

So, is that an answer that you’re able to hold the line on providing price abatements to customers to get the deals or how do we think about – your willingness to hold the line?

Jay Chaudhry

While there is negotiations, there is no undue pressure on pricing. There’s far more pressure on show me the [sales] [ph].

Alex Henderson

Right. So, a question from the audience, you know, do you have six month quota cycle to steer large deals into 2Q and 4Q or is it an annual quota pushing more large deals towards the fourth quarter fiscal?

Jay Chaudhry

Our quotas are annual. We don’t do six-month quotas, but there are incentives. No one wants to wait till the fourth quarter to do the deal. There are things in place. These are measurements in place. So, yeah. I’ve seen some companies try to [divide up] [ph], but I think when it comes to large enterprise business, it’s hard to try to really sunk in into two quarters at a time.

Alex Henderson

Another question from the field, how are you thinking about M&A opportunities over the next few years? Obviously a lot of private companies [indiscernible] as you noted earlier might make some interesting acquisition opportunities. But I also think you have a tendency to want to stick to your architecture. So, how do those sit together?

Jay Chaudhry

Yeah. So, we are getting so many inbound calls on the M&A front. Okay. I mean, there’s a day and nights difference between six months ago versus today. As you’ve seen over the past three, four years, we have selectively done five to six small tuck-in acquisitions that can fit into our platform that can be integrated. I think most of the time you keep on seeing us doing some of those because having an integrated platform is important.

Otherwise, we’ll become like, some of these are a big company that go on a buying spree. They seven companies at seven consoles and everything is separate. My customers don’t like them. Now, having said that, we are open to look at some of the sizable acquisition if that makes sense, but it has to be compelling. And we don’t really buy for revenues. Unless there’s a technology that’s meant for the new world, we stay away from all technology. So, are we going to see some tuck-in acquisitions? Yes. If I don’t do it, I’ll be missing out on something because, I’ll tell you, I look at a falling way.

If I need to add this functionality, for example, we added Browser isolation. I probably cut probably 4 months to 15 months trying to introduce [that all] [ph] feature set in the market. So, it’s good for us. Big smokescreen, the Honeypot technology. We saved over 10 months, 12 months. So, you’re going to see some of those to really increase our platform, but by getting them early stage, they’re not that expensive, and they can be easily integrated.

Alex Henderson

Quickly, is there any high priority categories in, kind of very quick answer here that you’re watching or focused on? Because I do want to ask Remo about [SPC] [ph]?

Jay Chaudhry

I’m not sure. I’m ready to talk about specific categories on this call.

Alex Henderson

Yeah. Makes sense. I didn’t think you would answer the question to be honest with you. Remo, stock-based compensations obviously come to the forefront, people are sharpening their pencils and knives, you know, what’s your thoughts there?

Remo Canessa

It’ll come down as a percent, you know, of revenue as we go forward. You know, typically, when you’re starting out as a company, you know, public company, your stock based comp as a percent of revenue is going to be high. As you mature, you know, that stock base comp goes down. Cash comp becomes more important. And also, basically, you know, the lower level ranks of the company don’t get stock. So, as we mature as a company, you know, you’ll see that with Zscaler.

Alex Henderson

There hasn’t been a lot of churn at Zscaler historically, but I would assume churn is even improving in wage rates becoming less of a pressure point as the competition for talent seems to be lessening.

Remo Canessa

Yeah. I mean, when you’re, you know, there’s a lot of reasons that, you know, someone want to come to Zscaler. Certainly compensation, you know, and again, people getting stock. And right now, you know, the, you know, the stock is down. So, if you believe in the company, you know, if you’ve got the right type of attitude and thought, you know, you could do well. That’s one reason. Another reason is culture. The culture we have at Zscaler is unique. I’ve never seen anything like it in my career, which was great.

You know, the other thing is that if you are an employee, you want to be associated with a winner. That winner basically carries with you in your career. And if you’re with the company and you’re able to basically, you know, move up the ranks in that company then – and you’re with a company that’s really, you know, a real marquee company. It’s really going to help you down the road from a basically, you know, professional basis. So, there’s [indiscernible] you know, the market, you know, a year ago, we couldn’t get people in. Now, there’s just a lot – there’s a very high demand where people want to come to Zscaler.

Alex Henderson

Well, we’ve kind of run out of time, let me stop with that great comment. Just to remind people, we strongly believe in the outlook here and really strongly believe that this is a company that’s going to power through it. It’s been our position from day one when this was a $25 stock that this is a company that you want to own for the long-term, and I – we reiterate that point, making it our single best idea for 2023 punctuates that. Remo, thank you so much. Jay, it’s awesome to see you. I have been – you’re one of my favorite people to spend time with. So, I really appreciate you coming on with us. And I know you’re lurking out there, Bill. Thank you so much.

Remo Canessa

Thank you.

Jay Chaudhry

Alex, thank you. Goodbye.

Remo Canessa

Bye.

Question-and-Answer Session

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