Financial Perspectives: CFO - ZSCALER INC

All right. Hello, everybody. Thank you for being here, and thank you for sticking with us. It's been a lot. Okay. I'd like to start by briefly recapping what you've heard today. We've talked about the structural steps we've taken to increase our TAM, strengthen our product portfolio as we enter the AI era, and enhance our go-to-market engine. These are each important pieces of the growth opportunity ahead of us, and I'm going to walk you through how all of this fits together from a financial point of view. I'm going to focus on three areas. First, our multiple growth engines that we believe position us to deliver continued compounding ARR growth. Second, the success we are having in driving broader adoption of our platform, which is supporting new logo growth and upsell opportunities. I'll provide some data that helps make that clear, and finally, our updated long-term financial framework. Let's start with a quick look back at our track record. We're entering our next phase with a proven track record of growth at scale. In fiscal 26, revenue grew by 25% year-over-year, while ARR also grew by 25%. Excluding Red Canary, revenue and ARR both grew 20%, and we delivered 14% net new ARR growth for the year. That momentum gives us a strong foundation to capitalize on the significant growth opportunities ahead. As we've scaled the top line, we've also continued to improve the profitability of the business. In fiscal 26, non-GAAP operating margin reached a record approximately 23 percent. Free cash flow margin was also 23 percent, and we reached a rule of 49 performance. Since fiscal 23, we have expanded operating margin by approximately 8 points, So alongside strong growth, we are driving operating leverage and building a business with a meaningful profitability profile. Okay, as you heard from Jay earlier this morning, we're operating in a large $220 billion addressable market, which you can see here mapped to our platform. We use this Investor Day as an opportunity to refresh our market forecast, and we are now leveraging industry forecasts from third-party market research firms as the inputs to our TAM. And in addition, you heard from Adam and Davil today, we continue to innovate and introduce new products, which has significantly expanded the markets we play in today. We strongly believe our platform is perfectly positioned to capture a growing share of this market. Others have presented a similar view of our platform this morning, but I want to drill down on how we organize the platform from a financial point of view. Fundamentally, our platform consists of four product categories with different levels of maturity and growth profiles. Zero Trust SASE Everywhere is the foundation. It accounts for approximately $3 billion of total ARR and has grown at a 20% CAGR over the past three years. Since this is the first time we're breaking out the platform in this way, I also wanted to double-click on two distinct offerings within this category. Zero Trust SASE for Users, which includes ZIA, ZPA, ZDX, and Zero Trust Browser, is our largest business. Zero Trust Branch and Cloud are much newer offerings on a relative basis and growing considerably faster at 75% ARR CAGR over the past three years. Combined, these have now reached $250 million of ARR, an encouraging milestone and one that reinforces our confidence in the long-term growth potential of the solution. The second product category is data security, which has grown at a more than 30% CAGR over the last three years. Under this new view of the platform, we have shifted Zero Trust Browser into Zero Trust SASE for users to better reflect how we go to market with this offering, and as a result have updated our data security ARR accordingly. The two newer product categories in our portfolio are security for AI and agentic SecOps. Within Security for AI, we ended the year with approximately $70 million in ARR, and incredibly strong momentum as evidenced by the growth we've been seeing. We are very pleased with our results to date, adding to our optimism about the future. Finally, looking at Agentix SecOps, we just launched our new integrated offering, so the historical performance here is less important than where we're headed. it. Across this portfolio, we see three growth engines that will continue to propel our growth going forward. Zero Trust SASE for branch and cloud, data security, and security for AI. Combined, these three growth engine systems will be the first to be launched in the future. These engines delivered 60% ARR growth year-over-year in fiscal 26. You can expect that we will continue to update you on the performance of these growth engines as a group quarterly and on an individual basis annually going forward. I want to spend a few minutes double-clicking on each part of our platform, starting first with our Zero Trust SASE Everywhere portfolio. We continue to see healthy growth from our Zero-Trust SASE for Users solution despite running into the law of large numbers. While today these solutions form the foundation of our portfolio, our business continues to shift more towards non-user products, and our goal is ultimately for our growth to not be tied to seats. We are making great strides in this regard. As we shared at earnings, 30% of our new and upsell ACV in fiscal 26 was from non-seat-based or metered products. Branch and cloud are key contributors to this, and both have been strong contributors to our growth with Zero Trust branch and cloud ARR growth exceeding 60% for each and every quarter over the last two years. Even more encouragingly, we still see significant white space opportunities for these solutions with just 10% penetration in the global 2000. Looking holistically at our Zero Trust SASE solution, our customers who are Zero TrustSASE everywhere enterprises or those who have purchased ZIA, ZPA, branch and cloud are also our most valuable customers. These customers delivered over 5x the ARR of customers who did not have branch or cloud and they have 121% NRR or six points higher than our overall NRR. Next, our data security portfolio has become an increasingly important contributor as enterprises confront a new wave of data exfiltration risks. Data security ARR accelerated to 34% in fiscal 26, with bookings increasing more than 40% year-over-year. As you heard from Davil, our data security solution is the most comprehensive in the market with products that span both data in motion and data at rest. We have seen over 40% ARR growth from customers who deploy multiple data security products, and today, less than 20% of Zscaler customers have multiple products, representing a meaningful upsell opportunity as we look ahead. Finally, our new security for AI offering is becoming an increasingly meaningful contributor to our performance. In the fourth quarter of fiscal 26, security for API bookings increased more than 50% sequentially on top of a strong Q3 and our pipeline increased more than 75% sequentially. This is exciting progress and we are still in early days with over 65% of our security for AI, ACV, and Q4 coming from products that have only been in market less than two quarters. This gives us significant confidence that these products will become increasingly meaningful contributors as adoption grows. And as more products within the portfolio enter general availability later in fiscal 27, including our zero trust exchange for agents, we expect even further momentum. As we've expanded our product portfolio, we've naturally created more ways for customers to land with Zscaler beyond foundational zero trust SASE for user offerings. We are seeing tremendous interest in our newer products, and they are becoming a meaningful part of our new logo ARR. In fact, roughly one-third of our new logo ARRR today is being driven by these offerings. This is up 3x versus 2023, demonstrating that Zscaler's platform value proposition is increasingly resonating with customers. Once customers are on our platform, we see consistently strong retention and healthy expansion. Net revenue retention has remained consistent around 115%, while gross revenue retention remains in the mid-90s. This reflects both the mission-critical nature of our solutions and expansion opportunities we are unlocking with our customers. The power of this expansion story is evident in our largest customers. As customers expand their investment with C-Scaler, we see growth accelerate. In fact, our $10 million ARR Plus customers have grown ARR nine points faster than our $1 million to $10 billion ARR customers over the last three years. And among those, our top 10 customers are growing even faster still. That is powerful validation of the platform strategy and the results that we are providing to our customers. As you heard from Ross earlier today, one of the tools helping us accelerate platform adoption and drive customer expansion is ZFlex. By giving customers the flexibility to consume capabilities across the platform, ZFex lowers friction in the buying process and encourages broader adoption from day one. And these results have been compelling, with 30% ARR uplift in fiscal 26 from customers with ZFlex. And as I mentioned on our Q4 earnings call, ZFlax bookings exceeded $1.7 billion in fiscal 26, which equates to nearly $500 million in ARR. This is how we will be sharing ZFLEX progress going forward. We've included both ZFLAX TCV and ARR in this slide, so you have the history. Importantly, even with the excess of expanding within our customer base, we still see significant opportunity ahead. Today our approximate $3.8 billion of ARR represents only a fraction of the $19 billion plus of addressable spend within our existing customers. That leaves over $15 billion of white space opportunity sitting inside our installed base. This includes our Zero Trust for SASE user solution, where we see approximately $6 billion of expansion opportunity. As you heard from Adam, this includes the meaningful expansion opportunity in our installed base from ZPA, with 30% of ZIA users today who have not yet adopted ZPA. But more broadly, we also see significant expansion opportunities with our newer solutions. The fact that over 40% of our installed base has not yet purchased any of our solutions beyond Zero Trust SASE for User underscores the magnitude of this runway. Bringing all this together, I wanted to walk through a customer journey that reflects what we are increasingly seeing across our customer base. customer base. In this example, our relationship with this Fortune 500 technology company began with a relatively modest deployment focused on Zero Trust SASE for users and data security. Over time, this customer expanded into additional use cases, including branch, cloud, and SecOps. We ultimately saw this customer commit to a ZFlex deal in fiscal 25, enabling them to adopt the full platform and accelerate deployment across the organization. Then, in fiscal 26, following the launch of our security for AI portfolio, they expanded their deployment with us to include these new solutions, and as a result, further expanded their investment with Zscaler. Over six years, this customer grew their ARR roughly 30x, with ARR increasing at a CAGR of approximately 74% to $20 million plus ARR by the end of fiscal 26. While, of course, every customer journey is different, this demonstrates the growth drivers we see as customers move from an initial deployment to a broader platform adoption. As we look ahead, it is the power of our customer growth flywheel and the meaningful runway for new logo growth that Ross shared that reinforces our confidence in the opportunities ahead. We are reaffirming our fiscal 27 guidance, which you can see here on the slide. Beyond fiscal 27, where do we see the business going? You've heard us speak about our aspiration to reach $10 billion in ARR. As we execute on this trajectory, we see a clear path to grow ARR organically to over $8 billion in ar by fiscal 31, more than doubling our current ARR within the next five years. How will we get there? We expect continued strong growth from our three growth engines, security for AI, data security, and zero trust branch and cloud. At the same time, our zero trust architecture is more important than ever, and we expect our foundational zero trust SASE for users offering to remain strong, delivering sustained double-digit growth. and as you heard today we see significant opportunity driven by the adoption of agentic ai this is still a new and emerging area and so we're not asking you to underwrite this upside today but we believe it has the potential to be a meaningful accelerant across every part of our business let me talk you through this scenario while this is not in guidance it is intended to show the potential of the business assuming a more rapid adoption of agentic AI. Our Zero Trust architecture uniquely protects against the threats created by agentic AI, which we believe will accelerate demand for our Zero Trust SASE Everywhere solution across users, branches, and workloads. With the increasing prevalence of AI, data security and security for AI become even more critical as enterprises look to safely deploy agentic AI at scale. And with AI-driven threats operating at machine speed, we believe our agentic SecOps offering is poised to disrupt the SecOps market, opening a meaningful adjacent growth opportunity. We believe these tailwinds could be significant over the next two years and could contribute nearly $2 billion of upside to our ARR. This would put us on a path to reaching $10 billion in ARR by fiscal 31, with each part of our business growing at a faster rate than in our base case. Let's now turn to our financial framework. This assumes over $8 billion in ERR by Fiscal 31. I'll start with gross margins. As you can see, our gross margins have consistently been around 80%, and we expect this to continue. We have been driving productivity in our go-to-market organization, and we expect this to continue as well, with sales and marketing as a percentage of revenue trending down. For R&D, we expect modest leverage from our more mature products while continuing to invest in new innovations. And in G&A, we see this ticking down modestly from AI adoption and automation. All of this leads to continued operating margin expansion by fiscal 31. Regarding free cash flow, we expect margins to be above operating margin. However, there are some timing considerations given the current memory price backdrop. Specifically, we are expecting CapEx as a percentage of revenue to remain elevated until fiscal 28, then normalize back towards high single digits as manufacturing capacity comes online and memory and component prices decline, which aligns with the forecast from Gartner and IDC. Finally, I want to touch a little bit on stock-based compensation, as this is a key factor in driving GAAP profitability. Over the long term, we are focused on bringing this in line with our peer group average. This excludes any future M&A, which has historically contributed one to two points. With this in mind, we're always evaluating the best use of capital to maximize shareholder value, and our capital allocation framework is clear. Our first priority is reinvesting in the business to drive continued innovation, resiliency, and product expansion to drive sustained long-term growth. Second, we deploy capital into M&A, focusing primarily on technology and talent tuck-ins to strengthen the platform. And third, we are committed to maintaining a strong balance sheet to preserve financial and operational flexibility. I'd like to leave you with a few points. First, we are operating in a very large and expanding market, and our innovation continues to broaden the opportunity in front of us. Second, we have a demonstrated ability to translate that opportunity into profitable growth at scale. And third, with multiple growth vectors, significant white space in our target market, and the tailwinds from agentic AI across the platform, we are positioned to drive durable and compounding ARR growth for years to come with both new and existing customers. Taken together, we have a strong foundation, clear visibility into the path ahead, and confidence in our ability to create long-term shareholder value. Thank you. Thank you.