Zscaler, Inc. Aktie

I'm Fatima Boolani, I jointly head up our software research team here. Thank you for joining us in the afternoon session of day 2 of Citi's TMT Conference. I'm very excited to host a fireside chat with the CEO and Founder of Zscaler, Jay Chaudhry. Thank you so much for being here.

Thanks, Fatima.

Jay, I want to start the session and the discussion off by you just setting the stage. You just closed out fiscal '26, which was a pretty transformational and transformative year for you. But before that, I have to say Zscaler is 19 years old this month. It might have been your first baby, but congratulations on that. But a pretty transformational year for you in terms of a lot of activity, a pretty large acquisition. So just to have you set the stage for us and the table for us on the year-end review, the key milestones coming off closing out this year.

So first of all, our platform expanded significantly. Zero Trust everywhere is a big differentiator because you don't want just for users, branches, devices, workloads and our agents. Our portfolio for data security is as comprehensive as anything gets. And then security for AI, actually, a year ago, we had one product that was GenAI security. Now we've got 6 very good products fully integrated. That has exceeded my expectation, the pace at which happened. And we expected it.

We set up a security for AI start-up within Zscaler. It has actually delivered solutions very rapidly. And then the launch of Agentic SecOps that happened today. Great platform on the product side. I think we have a better portfolio platform than anyone else there.

On the sales side, we got some great momentum. We started the journey of transformation about 2, 2.5 years ago when Mike Rich came on board. In that time, we changed the sales team's process quite a bit to be enterprise account focused. And that thing is delivering results. To give you tentative data, you may think that overall ARR growth percentages here. But the real number to look at the growth where we have made changes in net new ARR.

In '25 -- I mean, '24, we basically had very little net new ARR growth. '25, we took it to 7%, fiscal '26 first half was 10%, Q4 was 17%. It's tracking very well. So good momentum on the sales side, good on the customer side. Customer success is very good. Our NPS, Net Promoter Score has been sitting in the 80 to 85 range, very, very proud of it. That's reflected in the amount of upsells we are doing. So very pleased and looking forward to further doing better job in '27.

So product portfolio has expanded materially. The go-to-market motion is now getting to a cruise control or a cruising altitude, if you will. So as we look into fiscal '27, maybe we can spend a little bit of time talking about the security for AI opportunity. That seems to be an area where you're very excited.

When you spend time with customers, what are their most salient and palpable pain points that you're solving today? A lot of vendors are clamoring for the CISO attention, clamoring for the budgetary attention. How are you putting a stake in the ground and wedging yourself in the room and saying, these are the focal points for your architecture today. And I don't have to remind anybody that this has been, again, a pretty consequential year of cybersecurity headlines development, right, post Mythos, post the Hugging Face incident. So how have those conversations shaped the dialogue that you are having with CISOs today that's different from the conversations you were having 6 months ago?

So first of all, it's not just the CISOs. Now CIOs worry about it. The Board worries about it. In fact, after Mythos, most large enterprises had a cyber task force whose job was to do some of these things and then report to the Board on a frequent basis. So here is what's setting us apart in some of these areas.

Think of what the customers are worried about from cyber frontier models. One, even if you don't plan to embrace AI, frontier models still cause a risk because anything that's exposed to the Internet could be a firewall, VPN, application A, application B, they can be discovered. And if they are discovered, frontier models are likely to find some vulnerability that creates a problem.

In the Zscaler world, we're unique that with Zero Trust, we can hide those applications behind. So we are very busy working with customers hiding their applications, customer after customer. There have been cases a customer had 500 exposed domains, subdomains, applications. And once we go in and we are able to bring that number down to probably 200 in a matter of a few weeks, then it takes more time to go further down. That's number one.

Number two, they are worried about embracing AI agents. They're powerful. They're excited. Every CEO is putting pressure on them, do it and then they say, wait a second. Then they read about Hugging Face. And they even next week Anthropic saying, "Hey, my agent went rogue". Then Meta comes, "yes, mine went rogue too". And then last week, what OpenAI, one of my agents hacked a German site 3 months ago, okay? All this is happening.

So enterprises are worried about it. So for that, they are looking for essentially a solution that can make sure right agent can talk to right agents. There's nobody better suited to solve that problem than Zscaler because we pioneered Zero Trust where a user could only connect with certain application, not on -- not to the network. Firewall vendors connect to the network. We advanced it to Zero Trust for branches, for devices, for cloud workloads. So doing agent was a natural thing for us to do. So those are the two things.

I'll give you one example yesterday. I was in D.C. met a few customers. Two of them are large federal agencies that you would expect in D.C. That's a natural part of it. And both conversations tell me Mythos, they're both using Zscaler, ZIA, ZPA stuff. And now they're looking for help. So now the conversation happens. I talk to the CIO, how we can do this stuff. They are large agency, thousands of one.

And the CIO said, I have 900,000 Internet access points, okay? How long will it take for you to give me an assessment and the risk factor of it? I told that it will be faster than how long it takes you to go through your paperwork for procurement. He said, how about 4 to 6 weeks? I said done. I said, let's get started. We'll figure out. And then our real opportunity comes actually to block all those things. So one of the opportunity motion we have is to show them what the risk is as a complementary service, then the opportunity comes to us. So it's sizable, and we are focused on leveraging it.

Jay, I'm going to take a little bit of a detour and talk a little bit about the historical context a few things, so if you can humor me. You've had the privilege and the benefit of actually witnessing and participating in disruption in prior computing cycles, right? So you saw the rise of the cloud secure web gateway coming. Cloud was ascendant and we were moving away from the client-server model. I think you're famous -- and you've been famously talking about that the castle architecture shouldn't exist. You stack the DVD players, so I think we're familiar with that.

So you lived through that computing shift. So cyber attacks and the rise in volume and velocity and variety and sophistication of cyber attacks was an issue at that point in time, Target, COVID era, pandemic era, there was an impetus for security modernization. And now we're here with the AI native era, right? So cyber attacks have always been a problem. They've always gotten worse. But in your opinion, what is different, more pernicious, more consequential in this period of time that doesn't compare to these past periods?

So the number of attacks and the nature of the impact of attacks has gone up what I may call incrementally. What Mythos models have shown, it's a step function change. It's a big change. Let me give you some data points. The number of vulnerabilities that pre-frontier model companies who do vulnerability management are able to discover, if it is x, frontier models are discovering 10x. That -- so it's such a big.

For example, before Mythos, we would go and tell customers, you should hide your attack surface with Zscaler. It's a good thing. And they'll say, yes, it's a good thing, but it's not -- I have a lot of other things to do. It's this kind of priority, but not the highest priority. Now if something can be discovered, there's a pretty good chance that the frontier model will find vulnerabilities that can be exploited.

So the risk has gone up significantly. These assets have to be done. So that's what makes these people nervous. So the biggest change -- one of the big attacks that happened, what, 10, 15 years ago was Target.com. That was big. It shook things up, but nothing like this. This is -- you're seeing things every day. I mean we were part of the Project Glasswing from day 1, early March. When we tested our own software, we found quite a few vulnerabilities.

I changed priorities in my team and say, your #1 priority is fixing it and the feature delivery can slip a bit, that's okay. So I think that is very important. The good thing is a cloud-native company like Zscaler can fix those things on its own. If you're selling lots of firewalls, then we have to reach the customer to figure out, upgrade all the kind of stuff. But this is the biggest step function change in cyber world.

So just bringing it back to your opportunities -- your prosecutable opportunities and your capturable opportunities. I think one of the things that's been confounding for investors is that the environment has never been more dangerous. I mean you just obviously gave us some very examples of why the market factors and the exogenous variables are absolutely in your favor.

So the confounding element, I think, for a lot of investors has been, well, where is the budgetary explosion, so to speak, right? You would have assumed that the cadence of budgetary growth would have accelerated immediately, right? And you just mentioned to me that the federal agency has a 4- to 6-week time period, right? You also mentioned that in your CISO conversations over the last 6 months, post Mythos, there was a task force, right?

So it's almost like instead of seeing a budgetary explosion that you've been able to capture, there's maybe been a little bit of a pause from an organizational standpoint as to there is such a tremendous amount of change. You want to be deliberate and thoughtful around it. Would you disagree with that characterization, number one? And then number two, how can we -- how can you express comfort and confidence that actually the budgetary explosion, so to speak, is on the come because budgets are only going to need to rise to the occasion of the cybersecurity and cyber attack environment that we're in?

Yes, good comprehensive question. So first of all, I would say the urgency to handle security issues has gone up big time. That's there. Now I will contrast the urgency during COVID versus today. This question has been asked to me. COVID was a catalyst. The difference between the two was the following. When you were sent home on Friday, whatever March 14, 2020, on Monday, you couldn't work unless you had a solution. So we were inundated with calls. We are literally working day and night to turn on Zscaler to get things moving. So it happened very rapidly.

On Mythos side, the risk factor is viewed as far, far bigger. But now they are trying to understand the risk, what, how, where, prioritization. Those things have played a role. So you did not see kind of a silver bullet saying, suddenly, the budgets are jumping up. But the urgency is going up. Now urgency is in a couple of areas. One is these models, what can I do about protecting it? And then the other pressures CEOs are putting on CIOs and CISOs embrace AI safely in a much faster fashion. Now they are trying to figure out what do we do.

Now embracing AI is happening, but bigger rollouts are still slowed down because of cyber. Now when I go and talk about AI security or security of AI to customers, which is every conversation, they are looking for, can you give me a comprehensive solution rather than 5 point products? So that's favoring us. We built about -- we built 4 products internally. We acquired 2 products through acquisitions. So it's helping us there.

The other thing that's helping us is they're seeing there are 1,000 probably security for AI companies out there. The message from CIOs is, I don't want one more point product. I want integration that's helping us in that space. But also, I am also seeing that even though we have done hundreds of deals in the past 12 months for AI security, the deal size has been smaller.

They're kind of say, I want to understand -- and before I do multimillion dollar deals. So size deal are smaller, urgency is there. It's also driving need for Zero Trust because either you hide your applications behind or if you think somebody got in, you need Zero Trust to reduce the blast radius. So branch is infected. It doesn't go beyond the branch. So it's helping data security as well.

By the way, the deals we closed in Q4 for AI security, 70% of the deals also had data security as a part of that. A number of our Zero Trust deals did get accelerated because of the sense of urgency here. So we've seen an impact. I think we expect to see more impact in fiscal '27.

This is a good segue into the next question I wanted to ask you is just around you've framed the business by virtue of pillars, let's just say loose pillars, right? Zero Trust everywhere, AI security and data security.

I'm curious what is now -- has the tip of the spear for you changed? Because clearly, in the way you've described it, there is a lot of coincident value in having a Zero Trust architecture and portfolio of products from you on the Zero Trust side with a layer of data security, and we'll certainly get into more of the data security implications and what that means for your business.

But generally speaking, you framed the business in those 3 particular pillars. I'm curious as it stands today, as you think about fiscal '27, as those budgets open and the urgency is realized and you're monetizing it, where is it -- where should investors expect to see the outcome, the positive outcomes of that budgetary allocation? In what domain would you expect that to show up most?

Yes. So great question. So first of all, those 3 pillars you mentioned, we just added a fourth pillar for Agentic SecOps with the launch. It's a new area. It will take some time, but it's also a big opportunity for us. Where is that traction coming from, right? So I have been surprised by the speed at which the security for AI products have taken off. I told you a year ago, we had basically one product not a whole lot of stuff.

As many products...

As many products. And also, we disclosed after Q3 was our last 12 months bookings for security for AI has exceeded $100 million. And in Q4, we all saw that sequentially, our bookings went up 50%. So we're seeing good, very good traction. I expect some serious traction in this area. Though we haven't quite factored a meaningful upside of security AI in our guidance. We just want to be prudent. We just -- unless we prove we get comfortable, we don't really want to raise expectations.

Take Agentic SecOps, too. We are working with a number of customers in early stage. We haven't factored a whole lot of that in because we haven't really proven ourselves. So the big growth areas, AI security starting from a small base, but it's growing rapidly. AI is impacting data security that is helping. And Zero Trust everywhere is the foundational piece if you really need to be secure. There's nothing more fundamental than Zero Trust everywhere.

We're seeing our branch deals going up. Zero Trust everywhere, number of customers has moved up from 300 a year ago to 950 this year. That's pretty remarkable. We're doing some very large deals on branch. I'm excited with this area, very much so because I've always believed that the network, call it disruption, MPLS, we did that very nicely. People used to say, you're crazy, if you say MPLS is going to go away, it can never go away. right?

Now Zero Trust branch is disrupting SD-WAN. Even though Gartner talks about SASE and SD-WAN, we kind of on a different TAM. We are in SASE without SD-WAN, Zero Trust branch and all that kind of stuff. We're doing some very big deals in this space. We're also doing deals where Zero Trust branches bought without having to buy traditional ZIA ZPA because they want to do segmentation.

So one thing new this year for us for growth is we have now multiple landing solutions. And even though we had some before, we never focused on it. Now we're realizing that you go to a customer, if you go with one solution and the timing may not be right for it. But if you have 4 offerings, they're more likely that you're going to say, I need this.

So for example, AI security, a lot of deals we're doing are new logo deals. Data security, a number of those products are new logo products. Zero Trust branch, when I do plant segmentation or all, I don't need this solution. So I have multiple solutions that are helping us expand our platform. I mean, we shared about 785 customers now with $1 million-plus ARR, $5 million ARR number has been going up as well.

We did a record number of million dollar deals last quarter. We created a record pipeline last quarter. Our productivity in Q4 was the highest in the past some 4 years and productivity of '26 has been very good as well. So that sounds bullish about '27.

There is kind of a running theme that you're alluding to around this resurgence in Zero Trust principles, the foundational underpinning to build your agentic workflows and agentic applications. So as part and parcel to that, historically, predominantly Zscaler's business model was sort of a user-based model, right? We've always been acting as a switchboard between the user and the end application, right? I know increasingly, you've been moving towards becoming the communication switchboard for agents, right?

And branches and workloads, yes.

So as kind of the end user units, let's just call it that, move away from humans to machines, to agents, how are you levered financially to those positive trends? Because I think we've all heard the stats here that an agent-to-human ratio in the next 3 to 5 years could be 50x, 90x, 100x, right? Sky, maybe the limit on that. So how is the business model benefiting from that today? And where do you expect that to be? And should that actually show up in Zero Trust momentum? Or will that show up in the Agentic SecOps pillar that you just launched? How would this -- what is the culmination of this growth of end user units?

So it'll show up in both, but the starting point will be Zero Trust Exchange. Then the logs from there flow into Agentic. Agentic SecOps become the secondary part of it. Look, the more agentic communication happens, there'll be more need for policy enforcement who talks to who. That's where our exchange or communication hub comes in.

And some people have made a case that, oh, this exchange, this policy should run on the endpoint or here and here. It can't run on one entity because agents will be on the endpoint, they will be sitting on my mobile phone. They will be coming from Snowflake, ServiceNow and hyperscalers. So you need almost like a phone switchboard in the middle that can connect any party to any party. So that's part number one.

And with that, we will scale. If you look at it, the reason we believe we have the right to win in Agentic communication more than anybody else is because we have the core competency. We built the exchange for users, to applications, then took it to branches through devices, to cloud workloads, to Agentic Exchange. Now literally to build what we have to build, somebody who doesn't have this background has to set up infrastructure around the globe. Then they need the policy engines, logging reporting. literally about 70% of what we needed for Agentic Exchange, we already had it. 30% is what we have been building.

What is that 30%? What's different? Well, MCP gateways, A2A gateways are starting communication point. You talk -- you communicate our prompts, ability for your proxy to extract prompt, analyze it, understand the intent, understanding potential things had to be done. So guardrails needed to be built. Intent had to be understood. Identity, we have always taken identity from whoever provided it.

Agentic identity is a little bit more cumbersome, a little hard. A user identity is kind of static, you got it. Agent can change on the fly. Is identity for a given session, how dynamic is it? What all can they do? If they're launching 5 subagents, do my permissions go to my agent and what all do they go? So there are a little bit of authorization pieces. Those are the pieces we built.

We launched our exchange, in June at Zenith Live, and it's in limited availability, working with a bunch of customers to get all the things out. But that's the biggest opportunity with biggest barrier to entry. Then logs flow into SecOps. SecOps is there to see if you didn't catch something when it's happening, it's after the fact, it's needed.

Then with our logs, we don't have to spend time to move it to a data lake and get the results back. Today, it can take days or weeks to find something and take an action on it. With Zscaler, where we can find things in minutes because we have the first-party data, take an action to our exchange to block up and do a policy enforcement. That's really what makes it exciting for us.

Jay, you brought up identity, so I have to ask you this question. I think there is a debate I certainly have with a lot of folks around, well, what's the right way to think about the identity architecture that you wrap around an agent? Clearly, it's very different from a human user like you characterized. But ultimately, do you believe this is a privilege-oriented problem? Or is it a governance-oriented problem? And technically and even conceptually, how do you solve for that agent's level of permissions, right?

So identity can fall in 3 buckets for your simple understanding. Base is who are you? That comes from traditionally for users, Okta, Microsoft, Ping or the Vault. Then the next level is what all can you access. Within SAP, you can access this. That's called authorization and governance that comes from SailPoint of the world.

The third piece is what special privileges can you have? That comes from privileged access management kind of company. This is BeyondTrust and CyberArk of the world. These are there.

Now start with identity. You need to start with identity of the agent. In my view, as we work with all the hyperscalers and Snowflakes and Salesforce of the world, when they create agent, they create identity. So they're going to go to an independent company and say, use my identity for this agent, gets very hard. That's why our decision is take identity from the party that creates agent. Now we can add authorization policies on it, figure out intent and the like. That's the right way to do.

A lot of companies who are trying to say, I'm the identity company, they're taking machine identity, many times certificate-based stuff, which is good for servers. It's not good for agents. So I personally don't think that's the right approach. We will augment identity authorizations on top of identity we get from the agent providers.

And is that identity intellectual property going to be your secret sauce? Or is that something that you'd be willing to partner with traditional IDP and identity.

Identity is going to come from identity providers. We add value to figure out whether the policy should be enforced or not, checking the intent, checking authorization risk associated with that. That's the value we add in our exchange. Exchange is not a simple thing anymore. It's more sophisticated. And that's our IP.

Jay, when we talked about, again, the multiple landing spots and landing zones for the customers, you've got the go-to-market motion, but something new that you've also introduced over the span of this last year is Z-Flex. So just as a procurement model and the procurement vehicle to drive more awareness of the full portfolio. Can you give us the top three learnings that you've gained from launching Z-Flex? And any metrics that you're proud of in basically having this be a very important sales conversation tool. And what should we expect from Z-Flex as we think about fiscal '27?

As the name implies, Z-Flex, it's a flexible mechanism for our customers to acquire our products. So Z-Flex is not a new product, new packaging. Z-Flex says I want to reduce friction for customers to be able to do larger deals with us, align with us and it becomes a win-win.

So what are we offering with that? Number one, customer used to look at, you got 6 things, I'm interested from data security. I want to test A, then B, and then C, will decide what I want, what I don't want. And so we give flexibility to all modules. You don't have to keep on testing the stuff. You can keep on moving faster. That's number one.

Number two, create a rate card so the customer can buy additional product without going through procurement cycles. Anytime you go through a procurement cycle, it just drags things on. Number three, with the flexibility, they also want many times, though not always, some ramp. I got 6 things. I would have bought 3 otherwise. Now I can't roll out 6 at the same time, give me 3 months, 6 months, 9 months ramp time. So ramp becomes part of it.

And with that, they're also willing to do longer deals. So more and more 4-year, 5-year deals. So it's a win-win thing. So we are seeing deal size going up. Customers who have done Z-Flex with us in the past year, it's in less than a year. Their upsell has been 30% higher than customers who haven't done with us. I think it's great for customers, great for us.

Now we need to take it to the next level. We started less than 4 quarters ago. Just first quarters are testing the water to see what limited number of things, then we opened up more and more. And this year, we want to take it to a broader level because it's a good thing for customers.

I did want to spend a little bit of airtime talking about the big launch that you had today of the Agentic SOC and Agentic SecOps. This is something that you have telegraphed on the back of the Red Canary acquisition and what your anticipation was after a full year of integration. So can you just walk us through the culmination of -- you did the Red Canary deal last year. How has that now been fully folded in and integrated and melded into Zscaler proper?

Red Canary was done to make sure we can accelerate the delivery of our Agentic SecOps solution. since they had expertise in SecOps management as a managed service, they have playbooks, they have built some very good agents. We took those SecOps agent, embedded them into our solution. That's what brought together. That's what the launch is about.

And so it was never about us fully saying, I want to be an MDR vendor. We want MDR management as an auction managed service. But SecOps is a great solution. Our enterprise customers want it. So it's a product they can buy and they can also buy a managed service if they choose to do so. So from a revenue point of view, actually, Red Canary has been a headwind for us rather than a tailwind because MDR stand-alone companies traditionally have had elevated churn rates, and we saw the same thing here too.

And there are also customers on lower end. You can't -- the smaller customers mean you can't really touch them that often that generally ends up having higher churn rate. The success of SecOps for me is how much revenue do we grow to our traditional enterprise customer base. There are big deals to be done in this area. We expect that. And we'll plan to bring the Red Canary customers over from the current solution to the new solution because we aren't going to keep two solutions. And we haven't fully tested how much uptake that's going to happen.

So we factored some of that as a headwind from Red Canary. That's why we're not expecting much from the Red Canary side of it, but we are expecting this to really build momentum for our overall SecOps solution to our traditional customers.

Just from a competitive standpoint, Jay, there has been a huge battle to win the hearts and minds and the budgets of the SOC because we are in this generational modernization period. So what would you articulate is kind of your de facto advantage in the Agentic SecOps, security analytics, stack modernization opportunity? And why do you have that must-have angle relative to some of your peers who may have had a little bit more of a head start in this domain?

Some folks had a little bit of head start in the domain, but all the head start was in pre-Agentic era. True Agentic technology actually happened in the past 18 months, not even 2 years ago. A lot of stuff before that was design, mimicking human beings, doing a little more automation, doing even faster.

We had the advantage of doing it in the past 12 to 18 months in a new way designed for agents, not for human beings. That's number one because agents will do more so what. That's number one from a technology point of view. Number two, from a technology point of view is closed-loop system. You send it to some system, they take a week or x days to discover it.

And all those remediation has to be done somewhere in an in-line system, either on the endpoint or in-line system like Zscaler. We being able to offer both, not having to move the data to another lake are able to do some of this stuff in minutes. That's advantage, especially more so in today's world when you find an exploit and it gets exploited pretty quickly.

And third, big thing is data. We really have some of the best data. People make a case for whose logs are better logs. Well, in line is fundamentally important. Imagine you need to figure out how do I keep my country safe and you know logs about who is moving in and out of your country. The best place you know who is coming in and out. And the EDR is important because EDR sees what's on the endpoint, endpoint become a point of exploitation. We have both. We correlate both. So with that telemetry, we think there are right to wins with this thing. Lots of customers are asking us, you create all this telemetry. Why don't you give me more value out it rather than I having to pass it to someone else.

Jay, my last question for you is in September 2027, when we're going to have you back at the conference, what will have been the two things that will have happened that would have surprised you to the upside? So instead of doing 17.4% ARR growth in fiscal '27, you're going to do 25% ARR growth. My number is not...

Only 25%? Cool.

The two things that would really surprise you to the upside in a look back from a year from now?

So number one, security for AI growth, okay? I'm very bullish. But again, my bullishness and giving you the guidance need to be kept in the right place, okay? But I'm seeing it. Number two, Zero Trust everywhere would be the other thing. But in that piece, I'm excited and curious to see how the Agentic exchange takes off. Now some of this stuff will take -- Agentic will take some time because there's so many unknown pieces that are being built every day. But I would like to be sitting here next and say, I've proven enough to see Agentic stuff taking off because that opportunity is boundless the barrier to entry to do what we are doing in this space is very hard.

Thank you, Jay. I always walk away much smarter after our conversation. So I appreciate your time. Thank you so much, everyone.

Thank you.

Good morning. Thanks so much for joining us at the Zscaler session. Delighted to have Adam Geller, Head of Product; and Kevin Rubin, CFO, on stage with us. Really grateful to you guys for taking the time.

Thank you.

So Adam, I remember the original days of the Zscaler IPO. And one of the most foundational things that Jay and the team drove home was this idea of a true proxy architecture and how taking shortcuts to accomplish what looks like a proxy architecture from the outside in is not the same thing as delivering a true proxy architecture.

So my question for you is, we're now in a world where there is a decent intellectual argument to be made that agents should communicate on a proxy architecture. As a leadership team and as Chief Product Officer, how do you take a vision that was built for SASE and Zero Trust and extend it to an agentic proxy architecture?

So I think the -- so -- and I wasn't there during the IPO, but I was at companies that were competing with Zscaler without proxy architectures. So certainly know the space well. I think that the argument on all of it when we think from a product perspective is what's right fit for purpose of what problem you're trying to solve. So you have to come back to some sort of first principle there.

And the reason why a proxy architecture is powerful in cybersecurity specifically is because when you get in the path of something, you have the chance to actually see and inspect because the whole point of doing cybersecurity is you're looking for either threats coming in or you're trying to understand where data is moving and should it be moving or not. So just connecting things serves a purpose.

That allows you to get from point A to point B. But the whole reason why you have that concept of a proxy is it's an inspection point and it's a chance to at least see and observe, you can observe, take notes and take no action or you have the chance to enforce policy. And so that architecture time and time again comes back up as a staple of cybersecurity products and technology because it works and it's extremely powerful.

Now, it's -- like any security piece, it's friction in a process. So you have to be careful how much friction you introduce into a process. And with agents, right, agents are not operating in silos. They're operating by connecting to other data sources. They're connecting by working with other agents. So you have a whole interconnection to consider and that is ripe for can you -- where you apply security into that?

What do you do at the edge? What do you do in that connectivity path? And so that's why we think that proxy architecture is very powerful. The challenge will be, and the key is in, how do you apply it and how do you -- what's the same and then what's different when that traffic is agent traffic versus any other kind of traffic.

Let's stay on this thread. So I think we're all familiar with classic web proxy, where if I go out to the internet, the Goldman Sachs policy Zscaler enforcer will be in the middle, and it will orchestrate or proxy the connection. With agents, the question we get on agents is both, look, they are ephemeral, they spin up and down much more quickly.

And fundamentally, there are things about how an agent runs a session that make it difficult to properly, to your point on earlier, enforce and observe, it becomes different. Maybe just give us the layman's version of how do you take the tooling that was originally built for web proxy and extend it to agentic proxy?

Sure. I'll give you -- I'll give you one very vivid example that I will try to drive that point home. In most communications or most sessions of the human driving it, like I was describing before, you want to understand should I allow something or not? And you basically have milliseconds to do that because anything longer than that when the user gets -- think something is wrong and they go away and they file an IT ticket or they just find a path around it.

So you don't get a long time to decide, is this a good website or is this a bad website or should I allow this transaction or not? And so a lot of, as an example, in in-line DLP, you look for a very quick pattern match. You have that sensitive content, my policy says sensitive content isn't allowed out, so it's not allowed, right? And you make that real decision.

In AI, and this can be both human working with, let's say, a generative AI chat interface or an agent, the iteration, the back-and-forth conversation is actually how that works. So the intent of a one-line request that mentions cookie, you could say that's -- talk about your cookie recipe, right? If it's a back and forth over 6 different turns, it might be about a session cookie that's holding an authentication token for a particular transaction and that might be much more sensitive information that's being sent out.

So you actually have to look at a -- using AI terms, a context window, right, or understand multi-turns of a conversation. So the way you inspect is different and what you're looking for also starts to change depending on what you're trying to protect. In more classic world, it's -- you're looking for vulnerabilities or is this malware or is this an exploit coming down?

Or is my data leaking? In the AI world, you might be looking at is someone trying to the -- is someone trying to poison my model, is someone trying to get it to do something it wasn't supposed to do. There's no vulnerability there. Like, there's no signature for I exploited a vulnerability. That's the way how a lot of cyber works. And when you're proxying AI communications, you need different kinds of inspection engines for that traffic.

Maybe the other way to talk about this is through a little bit of a customer journey, and Kevin, we'll bring you into the conversation. Talk to us a little bit about when you meet with your large customers in the last 5, 6 months, how is the conversation between you -- between Zscaler and the customer changing that addresses some of these new AI risks more comprehensively? And maybe the answer is Zero Trust architecture. But give us a flavor for what those conversations look like on the ground.

Sorry, she said Kevin. I thought it was coming to you.

No, no, either way.

No, no, it's okay. Look, I think the conversations have obviously accelerated and have gotten much more intense post Mythos. And companies deal with the reality that they have vulnerabilities and exposures, many of which they didn't even know they had before, right? So their exposure, their threats are far greater today than it was 6 months ago. And the questions are, how do I deal with that, right? What do I do?

And I think the reality is that patching alone is not going to solve the problem. You've got old equipment that in order -- may not even be in service any longer, you can't patch. You may have old operating systems that you'd have to upgrade before you patch. I mean, the complicated environment of being able to address this with simple traditional methods is becoming harder and harder and the exposure and the time to a breach is becoming less and less.

And so the conversations are, what do I do? And our answer is very, very simple. You need to hide your applications, so completely reduce your attack surface and eliminate the ability of any potential breach to be able to move laterally. And so a lot of the conversations are around how do we address the risk today and how do we help you going forward, be able to secure your environment given how everything is changing so quickly.

Your point on patching doesn't solve the problem. I would love to use it as an opportunity to ask you about frontier models, and Adam, this one is probably for you. What do you think the role is of a frontier model in security? Where do you think the swim lanes ultimately converge versus stay separate?

Great question, TBD, just like it's been in -- and it will evolve, just like it's been evolving with cloud for many years, right? The evolution of what should you expect your hyperscaler to do for you. And then when I was in cyber in that time, in the early 2010s, right, there was that initial belief was, well, this will all be just baked into the hyperscaler now. So I don't need third-party products anymore.

And the investor conversations were all about, so when does this degrade the cyber business, because I was working in another cybersecurity company, and it ultimately didn't play out that way, right? There is embedded functionality in the hyperscalers. And then the third-party elite and very focused cybersecurity companies have found a way to continue to drive value for their customers, right, because that is their core and only focus. And so I think we're going to go through a similar pace with that or evolution with that on the frontier AI models, right?

Every -- as an example, every AI model has the concept of guardrails, right? They also have the concept of running without guardrails. And there are baselines. And then there are what other guardrails, what third-party products like Zscaler makes one AI Guard, that is a guardrail solution for making sure that your model does not go awry, right, either shares too much information or gets compromised in some fashion.

And so I think you'll see baseline level of security capabilities will be built into all the foundational model solutions, and then you'll see those natural kinds of extensions. At least maybe 10, 12 months ago, you also saw this angle of, will the frontier model companies just build cybersecurity products outright? And that's -- it's always a risk. I mean, it hasn't quite played out as scary as it was set up 10 months ago.

When I say scary, meaning just there's no need for cyber anymore because you can just code -- everyone can code it themselves on a weekend. That hasn't proven to be true yet. We haven't seen that from any of our customers. Do we see people using it? Absolutely. But there's a learning curve there, and there's an investment curve just like using any powerful technology, and there's a cost-benefit of do I want to have an entire cybersecurity product practice in my business?

Or is my business something totally different than that, and I'm going to leverage an enterprise product? So we -- so I think that from the model companies, there will be the embedded pieces that they do. They may find certain unique areas where they say, we just think we can be really good at this, and we're going to introduce a competitive cyber product.

Every one of the model companies, though, are competing with -- are partnering with the big cybersecurity players, too. So again, just like in the hyperscaler space, it feels like there's going to be room for most. I think the biggest angle or biggest opportunity that I see is in software development, right? And it's not a particular place that Zscaler plays.

But if you are writing -- if you're more and more using agent frameworks to write your software, the frontier models, I believe, would argue that the ultimate way in which you get out of this, continue this, how do I patch vulnerabilities show up model is if you just -- some level completely give it to AI and say, AI is going to basically do your entire -- almost your entire software development lifecycle because it's the only way you can keep up with the development and then the management and the continuous patching, testing, redeployment of your code.

I think that is a very high bar for most organizations to get comfortable with, certainly large enterprises that we sell to, allowing that level of autonomous changing happening in their mission-critical infrastructure. The human discomfort with that has been a challenge with automation and cybersecurity for many years.

Like I can trust -- can I trust that decision to be made if it's going to take down the trading desk? Or am I willing to say, no, I'm not going to trust that. It can let me know if something is bad and I'll deal with it in off hours. So I think that's probably the area where I would expect to see more and more -- and where I think the frontier models are very well suited given what they do.

What about for -- and this actually comes back to the R&D part of the conversation as well. What about in terms of your own applications of AI within your organization? Any thoughts on how you can apply something like an open-source model or even a frontier model to your own rich data sets in-house to have an evolution in data plus model to get to something greater?

Yes. I mean, in terms of just AI internally, I mean, I think we're going along the same journey that many companies are. We have a very strong initiative internally to continue to use and deploy AI to improve basically fundamental productivity. We think about it as employees plus AI, not humans or AI.

We do think that they're -- the pairing of those 2 are kind of where the powerful combination comes into mix. Some of the early areas where we've had more success, like many companies, customer support, ticket deflection that has been a very significant kind of continuous evolving area of success in the go-to-market space, we've been continuing to expand use of AI.

And then in back office, we continue to expand. So I think there's a lot of opportunity going forward. I think we're just scratching the surface as to what's available. In terms of how we use AI and data, maybe, Adam, do you want to talk about the launch this week?

Yes. I'm just going to finish one quick point internally, and then I'll talk more externally with customer data. But I think that the -- Kevin is right, all of the different functions are looking at, well, how do I leverage AI to change how I operate, right? And on the engineering side, it's definitely changed how we're developing software. It has not only changed how it deploys because that gets back to the humans and the customer side of it. Sorry about this, need a quick drink. Tail end of a cold and talking for 45 minutes straight.

I got it. Yeah.

It's not great...

Give me a wink and we'll make Kevin answer.

Make Kevin answer more questions. Maybe I'll pivot quickly. So we do have our Agentic SOC launch today. And that is all about taking the 750 billion signals a day that Zscaler sees and running it against an agent framework for helping customers detect, investigate and respond to security incidents. And that's something that we're really excited about.

That is not a human readable problem, and it was ripe for agentic transformations, which is true for everyone who's operating in the security operations world right now. The difference for us is that you could maybe joke and say it's a late mover advantage because we know the space is not new. We didn't start with, let's just build a giant data lake to collect it and then do a little bit of normalization and then create alerts for humans to look at, which is what the traditional SOC models have been built around.

They're all evolving. We started with how do we build a model that is -- how do we build an approach that is set for agent-first interaction. And some of that we got through our Red Canary acquisition, and we've been bringing into this, and others are new agents that we've been building, but our starting point with our Agentic SOC is effectively a family of dozens of agents that are doing that detection, investigation and response process. So we're excited about that.

One of the more common pushbacks we hear on competition in agentic SOC is, well, there are all of these other companies that have really strong footholds in endpoint and SIEM and it's a much more natural progression for them to own the agentic SOC than it is for Zscaler with the network background. Maybe push back against that a little bit and talk about why your architecture is the right one versus a CrowdStrike or a Palo Alto.

Sure. It's -- having been in the SIEM and SOC space for a long time before Zscaler too, endpoint data is certainly very valuable. That argument immediately gets -- the pushback to that argument immediately goes to, look at all the agentic SOC companies that are in the start-up world right now, none of them have an endpoint presence because they're tiny companies, yet they're all claiming they can do agentic SOC.

So you do need access to certain data points. And it is true that owning a vantage point is powerful. I think the guess what or the surprise is, well, Zscaler actually owns 2 vantage points. So we certainly own the network vantage point, but we also have 60 million endpoints. So our endpoint presence is probably bigger than Palo Alto Networks endpoint, not bigger than CrowdStrike, but it's bigger than Palo's.

And it's not an endpoint for just connectivity, right? It is an endpoint that does DLP, that does policy inspection, that does user performance, that does software inventory. So we have all that data set, and we were never bringing it together other than for those micro use cases like, okay, I have an endpoint, I'll use it for endpoint DLP. Now all of those signals at the endpoint and in the network are coming together.

So the kinds of incidents that we're seeing our Agentic SOC be able to detect and investigate certainly leverage endpoint data. They certainly leverage EDR data from partners like CrowdStrike and every other -- and Microsoft Defender and SentinelOne and others, but it's just one of many pieces. And what we think is that, especially in a world where the threats are increasingly going to be less, here's a piece of malware that someone is trying to download.

Here's a behavioral pattern instead of what happened on this endpoint, what machines did they access? Where did they try to go on the internet? Well, Zscaler sees all of that telemetry. So we are -- we have equal, if not more right to bring that picture together for a customer than someone who's just looking at one of those pieces. So -- and that's what will play out, and we'll see how that plays. But we've run a threat hunting service for a number of years on a small scale that's been doing just that for customers.

And what we find is that while the red alert sometimes may come from an endpoint trigger, the first thing people look at when we say, oh, what do I do to investigate this person or an agent is, where did they go? What were they doing? And they immediately then go look at the Zscaler logs, right? So that's when it comes in. And so we have all that together, and we believe that our agents can actually connect that and then we have our human expertise on top of it.

That all makes sense. So Kevin, there were a number of product cycles just in the last 20 minutes that we've hit on. I want to map it a little bit into how the sausage was made as it pertains to FY '27 guidance. You've also acknowledged that there have been moving pieces to the sales organization. So maybe let's take a step back.

How did you think about normalizing, perhaps that's the right word, for some of the changes that you're making in the sales team relative to some of the excitement that Adam and your customers are talking about, about the various product cycles within Zscaler that are more than just core networking or core SASE.

And I think we're in a really exciting, interesting time, right? We've got momentum building from an AI perspective. We've got -- I mean, Adam kind of alluded to it, but I want to make the point a little bit more fine. We now have opportunities with these new products to land customers in ways we didn't before, right? So if you look at where Zscaler was just a few years ago, we were largely going in and starting with prospects in terms of user transformation. Today, we have an opportunity.

We can still obviously do user transformation, but we have an opportunity to go in and have a conversation around a manufacturing facility, a branch. We have an opportunity to go in and talk about AI. We have an opportunity to talk about when you think about exposures as we were talking about with AI going in and saying, let us help you solve your inability to patch fast enough and hide your applications so that they cannot be publicly identified. We have an opportunity to go in and talk about the Agentic SOC.

So the ability for us to go in and have very different conversations with customers and prospects is very different as we think about today versus just a few years ago. Having said that, a lot of these are very new, right? When we talk about the Zero Trust Exchange for agents as an example, right, that's an early access. It's not actually generally available. A lot of our AI capabilities have been released in just the last 6 months. And so a lot of this is new building a momentum.

We're very excited with the traction that we're getting, but it's also new, and we have to balance that. The piece of the business that has been very consistent and predictable has been our upsell, right? We've been able to consistently deliver NRR of 115% for the last 4 quarters by way of example. And we have confidence in our ability to continue upselling. One of the points we didn't address yet, and I'll just touch on it briefly, is Z-Flex, right?

We introduced Z-Flex about a year ago. It's our flexible pricing and packaging offer for customers that are looking to make longer-term larger commitments. And in those customer contracts, we've seen an uplift of 30% against, kind of, the before and after ARR picture in that environment. And so there are a lot of, I think, real positive signals as we go into the year. We did obviously raise guidance in the last quarter.

We also know that we have an opportunity to do better in new logos. And so we've got specific initiatives as we think about fiscal '27 go-to-market around new logos. We have about 25% of the enterprise customers that we target today, about 4,600, against the population of a target audience of about 20,000 customers. And so that's really where we see opportunity as well.

Give us an example on how you can change the new logo success.

So 2 things I can point out. First of all, we are investing more in sales reps that are solely focused on enterprise land, right? So going after pure prospecting territories as opposed to a blend of those. Along with that, every year, you kind of make changes in how you think about monetizing and addressing the sellers to incentivize them to do that.

Another example we mentioned was an agreement with Carahsoft, who is going to take a stronger role down market for us where we don't devote a lot of resources, but there's a lot of opportunities. So we're really looking at ways in which we can continue to enhance it. And then back to the ability to land with multiple products, making sure we have clear enablement and sales plays that assist reps as they're having those conversations and making that front and center.

As an analyst, we sometimes try to predict the inflections in sales and marketing product cycles, which, as you can imagine, a little bit of fool's errand from the outside in. If you had to help us out here, talk to us about when you think we might start to see a more meaningful change in productivity? Ramped reps or -- however you think of it from a cohort standpoint?

So Q4, as I mentioned on the call, was the highest quarterly productivity within the sales organization that we've seen. So very proud of the continued improvements in sales productivity in the business. And fiscal '26 on an annual basis was the highest productivity since 2022, so about 4 years. So we are seeing significant productivity improvement that we do carry into the fiscal year.

So very pleased with where we are and the improvements we've made. We do have 2 leader transitions that we are going through at the moment. One was a vertical leader where we promoted an internal candidate who's now responsible for that piece of the business. The other was a geo leader where we have -- we've identified a candidate, that candidate has accepted, we just need to go through the onboarding process.

It's outside the U.S., so it takes a little bit longer to land. So I think we are seeing all of the right signals in terms of kind of going forward. It's just that as we think about the products, how they land and how they build momentum, the pacing of that is different, right?

So the Agentic SOC, as an example, we think that that's probably a bigger '28 event as we kind of roll that out into market today and start to build momentum. Zero Trust Exchange for agents, again, is probably a back half of the year phenomenon. And so as these things stack upon themselves, we'll start to really continue to kind of build on the momentum we saw last year.

We'd be remiss not to spend a couple of minutes on ZIA and ZPA. There are 2 schools of thought. There's the bear school that, look, the best part of this product cycle is behind you. You've already gotten really good penetration in enterprise. There's a bunch of new competitions.

Then there is, I think, what is the more balanced view, which you have subscribed to, which is we might actually have a renaissance on SASE with things like sovereign SASE and network traffic going up. Maybe just flesh out some of the pieces of the bull case for the core Zero Trust business, ZIA, ZPA into 2027.

Well, I'll start to give Adam some more time to address his voice. I think it goes back to a couple of things that we've talked about. So first of all, within our target market, we only have 25% penetration in those customers, which means we have 75% of customers who have yet to adopt and deploy Zscaler. So that, to me, is a large opportunity for us that we see as an opportunity.

Within our existing customers, we generally will -- if we're going in for user transformation, we'll generally consume the user population, but that doesn't mean that it's a one-for-one with ZPA. So I still think there is significant opportunity within the existing customer base around ZPA, ZDX and then some of the other components.

And we touched on it a little bit earlier, but as it relates to AI and how do you get your hands around potential threats in, I think Adam used the terminology line speed, but moving at agent speed, it is going to renew interest in Zero Trust and how do you build a security environment that can operate at speeds that humans can't. And I think that, that will turn the conversation back to the Zero Trust architecture that we've adopted and deployed.

Maybe one thing I'll just add to that and tie back to your earlier question about how Zscaler is using AI internally, right? So even -- and this is going to be true at every company, I believe, or many companies. We have people this past year who built applications who are not developers. Someone on my team who built an entire operating system for how product management works, and it's an incredible application. It ties together Jira, Slack, Salesforce, and it was built by 3 people.

That application is becoming critical for my team to run. It needs to be protected. It is behind ZPA. That's a new application in our company that we didn't buy, but it absolutely needs to be protected. It needs to -- it has an AI interface to it. I need to make sure that when a salesperson chats with it, they get what's publicly available. They don't get the whole road map. But by the way, the model knows the entire road map that's there, right?

So all of those protections that we've been using, they actually need to now protect that application. So back to that case of will there be a renaissance? Well, if you tie in and say, what is AI going to make easier, the generation of software and code, it's not just to run -- it has to run somewhere and it needs to be protected. So I think certainly, even if you could say user counts might not go up or go up dramatically, the application proliferation is going to be huge, and those all need to be protected.

Fantastic. Kevin, were you about to...

I was just going to say, and if Jay was sitting here with us, kind of calling on his point of view, he would say that the opportunity to secure agent-to-agent communication is, in his mind, significantly larger than the opportunity to secure users. And so that's an important piece.

That's the perfect place to end it. Please join me in thanking Adam and Kevin for their time. Thank you, guys.

Thank you so much.

Good day, and thank you for standing by. Welcome to the Zscaler Fourth Quarter 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Kim Watkins, SVP, Investor Relations and Strategic Finance.

Good afternoon, and thank you for joining us today. Welcome to Zscaler's Fourth Quarter Fiscal 2026 Earnings Conference Call. On the call with me today are Jay Chaudhry, Chairman and CEO; and Kevin Rubin, CFO.

Please note that we posted our earnings release, shareholder letter 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 a reconciliation of GAAP to the non-GAAP financial measures in our earnings release.

Before we get started, 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, annual recurring revenue, net new annual recurring revenue, operating margin, gross margin, operating profit, net other income, earnings per share and free cash flow margin, our customer response to our products, our expectations regarding AI and its impact on our business and customers and our market share and market opportunity and our objectives and outlook.

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 this quarter: Citi 2026 Global TMT Conference on September 9; Goldman Sachs Communacopia and Technology Conference on September 9; Wolfe Research TMT Conference 2026 on September 9; and JPMorgan 2026 Software Forum on October 1.

And with that, I'll turn the call over to Jay.

Thank you, Kim. Good afternoon, everyone. We delivered a strong finish to the fiscal year with 25% ARR growth and a non-GAAP operating margin of 24%. We are seeing significant positive trends in net new ARR with growth, excluding Red Canary, accelerating to 17% in Q4. These results reflect increasing market adoption of our Zero Trust platform. AI is quickly becoming the largest tailwind we have ever seen driving demand for our Zero Trust everywhere, data security and security for AI solutions.

Our customers are relying on us to both combat the threats created by Agentic AI and and safely deploy AI agents and models at scale. Since our last earnings call, new AI models have become more powerful, more autonomous and more dangerous from a cybersecurity perspective. The ability of these new frontier AI and open weight models to uncover previously unknown vulnerabilities at a rapid pace has become even more apparent. Organizations simply do not have enough time or resources to fix the unprecedented number of software vulnerabilities that are being discovered.

The time between vulnerability is being discovered and exploited is also shrinking. You cannot win a patching race against AI. This is leaving organizations exposed and likely leads to more breaches. Over the past few months, our team has conducted hundreds of frontier AI risk assessments for global enterprises to help them assess their cyber resilience posture to minimize potential breaches that takeaways have been incredibly revealing. Over 90% of organizations had AI applications, models and other servers exposed to the Internet and more than 1/3 had known exploitable vulnerabilities.

At the same time, the threat landscape has been compounded by the ability of new AI models to power ungoverned autonomous agents. We are now seeing the impact of fully autonomous AI attacks. They have already been multiple high-profile incidents from 3 leading frontier model companies where agents went rogue and took unauthorized actions. This includes the recent Hugging Face incident where a swarm of agents went to extreme lengths to break out of a sandbox training environment, get onto the copay network and move laterally to conduct a sophisticated attack.

This is driving urgency at the highest levels and Zscaler is uniquely equipped to meet the moment. CEOs and boards are looking to us as their trusted partner to address 3 essential business challenges. First, how do we secure our environment when we can't patch security vulnerabilities fast enough? Our Zero Trust Exchange makes applications, AI models and data invisible. And attacker, human or agent, cannot reach what it cannot reach.

Second, how do we minimize the impact of a potential breach? Our Zero Trust Exchange connects users, workloads, branches and agents directly to the applications they need without placing them on the network. This eliminates lateral threat movement containing the impact of a breach.

Third, how do we take advantage of all the benefits of AI without introducing significant new risks? Zscaler has a full portfolio of data security and security for AI solutions that prevents data exfiltration, provides guardrails to prevent abuse or misuse of AI applications and enables secure agentic communication.

Because of these advantages, customers trust us to secure their business-critical environments. We are also differentiated by our scale, operating the world's largest distributed in-line security cloud, processing more than 750 billion transactions per day. This scale provides unmatched high-fidelity telemetry that continuously improves our AI-powered security capabilities.

In the AI era, Zero Trust is now an imperative, and we're not alone in this belief. Anthropic published a white paper in late May, encouraging adoption of a Zero Trust architecture for AI agents, emphasizing the importance of treating every agent like an untrusted entity and making sure it only has access to authorized data and applications.

This is why customers are expanding their investments with us to secure their agentic infrastructure and why we are confident our platform is uniquely equipped to address the risks companies face in this new world.

In addition to protecting companies from the threats created by Agentic AI, we are also enabling organizations to safely deploy AI agents and models. Our AI solutions are key to providing enterprise visibility, governing what data and applications agents can access and what actions they are permitted to perform.

We are often asked why our solutions are needed alongside identity for AI security. While identity solutions answer who is requesting access, our in-line exchange determines what that user or agent should be allowed to do and enforces that policy in real time. Put simply, identity is only the starting point for securing AI. Greater visibility and control is needed for organizations to trust agents accessing sensitive data, interacting with applications and taking action on behalf of users.

Earlier this year, we introduced the industry's most comprehensive security for AI solutions designed for exactly that reason. We are seeing strong proactive inbound interest from both new and existing customers, and we have seen no budget constraints. Security for AI bookings increased more than 50% sequentially in Q4 on top of a strong Q3. Our security for AI solution provides new logo opportunities by offering organizations an integrated way to secure AI use at scale.

At our Zenith Live Conference in June, we unveiled the latest additions to our security for AI lineup, including our Zero Trust Exchange for agents and Endpoint AI Security, both of which we expect to scale in the second half of fiscal 2027. Both products are in early access, and we're seeing tremendous interest from customers. These new solutions will provide organizations the ability to enforce AI policy, both at our exchange and the endpoint, enabling policy enforcement at the optimal location. We continue to innovate in this area at a rapid pace.

Next week, we are announcing the next major innovation on our platform with our new Agentic SecOps solution. Just as AI is increasing the threat surface, it is also stressing a human-driven traditional SOC approach, where remediation can take days or weeks. In contrast, our AI-first approach brings together our proprietary telemetry and Red Canary's decades-plus of experience in managed detection and response or MDR.

Our Agentic SecOps solution enables security teams to prioritize real threats and leverage specialized AI agents to detect, investigate and respond to threats at machine speed. We're driving closed-loop remediation in real time by integrating our Agentic SecOps with our Zero Trust Exchange, enabling customers to move with speed as the time between detection and exploitation has decreased from months to minutes. We will be launching our new Agentic SecOps solution with a webcast on September 9, which will be streamed on our website.

Our approach for securing users and nonusers and ensuring safe adoption of AI is resonating. This is increasingly evident in my conversations with customers and partners and is illustrated with a few customer examples. First, we had a notable 7-figure upsell Z-Flex win with a Fortune 500 transportation customer who deployed our security for AI portfolio to secure their full AI life cycle.

Our security for AI solution provides an integrated approach to secure AI use at scale. This includes discovery and management of all AI assets, including shadow AI and enforcement of safe access to approved apps. It also includes real-time prompt and response inspection to stop data leaks and threats like prompt injections and continuous red teaming assessments. This customer selected our security for AI solution over 2 major platform competitors and with this win, the customer's ARR grew to nearly $10 million.

In another 7 figures, Z-Flex upsell, a Fortune 500 semiconductor manufacturer expanded its adoption of the Zscaler platform to secure a company-wide rollout of Claude Cowork. After assessing several vendors, this client determined Zscaler security for AI was the only solution capable of securing the customer's AI adoption, including its endpoints, secure agent to agent communication and model usage in private and public environments. This is a great example of how our customers are expanding the use of Zero Trust Exchange to safely deploy AI agents and models as well as combat the threats created by Agentic AI. While we're in the early innings of security for AI, these deals give us tremendous confidence in our ability to expand this offering significantly over time.

Next, our leadership in data security is a powerful tailwind for our Security for AI business. As enterprises embrace GenAI and Agent AI, they're confronting a new wave of data exfiltration risks, including data abuse and over privileged access to data. Our in-line architecture, coupled with our Endpoint DLP and now Endpoint AI Security enhances our ability to enforce data loss prevention in the cloud as well as on the end point.

Securing data and AI go hand-in-hand as evidenced by the fact that 70% of our security for AI deals this quarter included our data security solution. In Q4, we also closed a 7-figure Z-Flex upsell win with a large global asset management firm. The customer selected Zscaler's data security posture management solution over a privately-held DSPM vendor. This customer chose Zscaler to address gaps related to sensor data discovery across its multi-cloud environment and data governance.

With this upsell, the annual spend of this customer increased by nearly 40%, reaching an ARR of $5 million plus. We're also seeing continued traction across our Zero Trust SASE solutions, including customers expanding their Zero Trust SASE deployments. For example, this quarter, we signed a 7-figure Z-Flex upsell with a Global 2000 financial services customer, who upgraded to Zscaler Private Access with AI-powered app segmentation for 120,000 users, increasing their ARR by nearly 50%.

We are also driving new logos. We closed a 7-figure new logo Z-Flex win with a Fortune 500 life sciences company that is deploying our Zero Trust SASE and security for AI platform across 75,000 users and displacing a legacy firewall-based SASE platform. This customer, led by a newly appointed CISO who is a 3x repeat Zscaler customer, chose us for our ability to deliver unified visibility and control across both enterprise security and GenAI. This is a great example of a new logo purchasing the entire Zscaler platform.

Customers are also increasingly starting the Zero Trust journey by securing nonuser environments. For example, we closed a 7-figure new logo win with a Global 2000 health care equipment manufacturer to deploy our Zero Trust Branch solution across the critical production sites to secure its OT environment, displacing an existing long-term legacy vendor. This is an example of a sizable opportunity Zscaler has within factories and warehouses to secure IoT/OT and provide Zero Trust device segmentation.

Zero Trust Branch simplifies customers' branch deployments by eliminating traditional branch firewalls, SD-WAN and MPLS networks, reducing operational complexity. It also minimizes the impact from an infected machine in a branch or a manufacturing plant by limiting lateral movement across the environment and therefore, containing the breach.

In another known user deal win, we closed a 7-figure upsell with a Fortune 500 aerospace customer. This customer was going through a divestiture and expanded its Zero Trust Cloud deployment between its on-prem and public cloud environments to securely migrate workloads. With this deal, the ARR of this customer grew by more than 30% to over $5 million. We're seeing tremendous momentum with Zero Trust Cloud. This quarter, we extended the solution by offering a managed service through Google Cloud, which can be configured in under 10 minutes, reducing the deployment time and operational costs significantly. This expands on our existing offering for AWS and enables multi-cloud flexibility.

The strength we are seeing in Zero Trust Branch and in Zero Trust Cloud is translating to meaningful momentum with Zero Trust Everywhere enterprises, those that have purchased Zero Trust Users, Zero Trust Branch and Zero Trust Cloud. We exited Q4 with more than 950 Zero Trust Everywhere enterprises versus over 700 in Q3 and over 350 at the end of fiscal 2025.

To summarize, AI represents one of the most significant opportunities in Zscaler's history. Our platform was built for this moment. Zscaler has always secured interactions between every user and applications, and now Zscaler secures interaction between every user, every agent and every AI model. We have a large and growing market. Adoption of our platform is expanding, and we are continuing to innovate across Zero Trust SASE, Agentic SecOps, data security and security for AI. We are well positioned to extend our leadership as the cybersecurity platform for the AI era, drive durable growth and create long-term shareholder value.

Now I will hand it over to Kevin to walk through the financials.

Thanks, Jay. We delivered strong Q4 results with revenue and ARR both growing 25% year-over-year, net new ARR growing 24% and non-GAAP operating margin reaching a record 24.3%. For full year fiscal '26, revenue also grew 25% and when combined with 23% free cash flow margin, our performance exceeded the Rule of 40, landing at approximately 49%.

Our growth engine continues to broaden beyond users with increasing contribution from non-seat-based solutions, continued Z-Flex momentum, record large deal activity and improved sales productivity.

ARR momentum remains strong in Q4. Excluding the contribution from our acquisition of Red Canary, net new ARR was $232 million, up 17% year-over-year, and total ARR was up 20%. Importantly, this marks a continued acceleration in net new ARR growth from 7% in fiscal '25 to 10% in the first half of fiscal '26 and to 17% in Q4. Red Canary exited Q4 with $141 million of ARR.

Total net new ARR was $246 million, up 24%, bringing total ARR to $3.8 billion, up 25% year-over-year. Performance was broad-based with strength across the Americas, EMEA and APJ.

We also continued to deepen enterprise adoption. In Q4, we closed with a record number of $1 million plus new ACV deals and the number of $10 million-plus ARR customers nearly doubled year-over-year. We ended the quarter with 785 customers generating over $1 million in ARR and 4,182 customers generating more than $100,000 in ARR, growing 18% and 20% year-over-year, respectively.

As our platform expands beyond users to protect branches, workloads, AI applications and AI agents, our monetization model is also expanding. In Q4 and for the full year, our non-seat-based metered usage solutions delivered approximately 30% of new and upsell ACV. ARR tied to these offerings grew more than 100% year-over-year.

Turning to revenue. Q4 revenue was $898 million, up 25% year-over-year and 6% sequentially, exceeding the high end of our guidance. Growth was broad-based across the geographies. The Americas accounted for 57% of revenue and grew approximately 30% year-over-year. EMEA accounted for 27% of revenue and grew approximately 17%, and APJ accounted for 16% of revenue and grew 23%. For full fiscal '26, revenue of $3.4 billion grew 25% year-over-year.

Excluding Red Canary, revenue of $3.2 billion grew 20% year-over-year. Red Canary contributed $144 million of revenue in fiscal '26. The Americas accounted for 57% of revenue and grew approximately 31%. EMEA accounted for 28% of revenue and grew approximately 16%, and APJ accounted for 15% of revenue and grew approximately 23%. Remaining performance obligation, or RPO, of approximately $7.4 billion grew approximately 27% with approximately 45% classified as current RPO.

Turning to go-to-market. We are pleased with the continued strong sales execution. In Q4, we delivered double-digit sales productivity growth and achieved our highest quarterly productivity ever and the highest annual productivity since 2022. This reflects continued improvement in our account-centric sales motion and our ability to drive broader platform adoption with customers.

Entering fiscal '27, our priorities are focused on deepening relationships with existing customers, accelerating platform adoption, improving new logo execution, expanding coverage in key segments and increasing partner-led contribution. These priorities are especially important as the rapid proliferation of frontier AI models increases customer engagement at senior levels of the organization as Jay discussed earlier.

To support new logo growth, we are expanding coverage through both direct and partner-led motions. For example, we recently expanded our partnership with Carahsoft to further penetrate the commercial and SMB segments in the U.S. through 100% channel-led motion. We are also adding dedicated new logo sales executives focused specifically on pursuing new enterprise customer opportunities.

Z-Flex remains an important part of our go-to-market strategy. It provides customers with multiyear commitments, the flexibility to activate or swap modules without starting a new procurement cycle while also providing premium deployment assistance and support. We saw strong momentum again this quarter with Z-Flex, driving meaningful upsell, shorter sales cycles and greater forward visibility. In Q4, Z-Flex generated over $770 million in TCV, up more than 60% quarter-over-quarter.

For fiscal '26, Z-Flex customers saw an ARR uplift averaging nearly 30%. For fiscal '26, Z-Flex generated more than $1.7 billion in TCV, underscoring customers' long-term commitment to Zscaler. Two recent examples illustrate the value of this model. In a 5-year 8-figure Z-Flex deal, a Global 2000 services customer increased its ARR by nearly 90%, crossing $5 million this quarter and driven by expansion with existing products and adoption of new products, including our security for AI and Zero Trust Cloud solutions.

In another example, an existing 7-figure ARR Global 2000 retail and wholesale customer increased its annual spend with us by 140% in a 3-year 8-figure Z-Flex deal. This customer expanded adoption across 9 existing modules and adopted 6 new modules, including our security for AI solution.

Turning to operating performance. We delivered strong profitability while continuing to invest in the business. Non-GAAP gross margin was 80.2% compared to 79.3% a year ago. The year-ago period included a onetime deployment of a large private cloud in a government customer's data center, which included a hardware component that carried a lower gross margin profile. We also delivered significant operating leverage in the quarter. Non-GAAP operating income was $218 million, up $60 million or 37% compared to $159 million last year. Non-GAAP operating margin was 24.3%, up 220 basis points year-over-year.

For the full year, non-GAAP gross margin was 80.3%, up 20 basis points year-over-year. Non-GAAP operating margin was 22.9%, up 120 basis points year-over-year. This performance reflects the strength of our business model, disciplined execution and our ability to deliver durable growth with expanding profitability while continuing to invest in the significant market opportunity ahead.

Turning to the balance sheet. We ended the quarter with approximately $3.5 billion in cash, cash equivalents and short-term investments and $1.7 billion of debt. In Q4, we generated $279 million in operating cash flow, and CapEx was $200 million or 22% of revenue. This brought our full year CapEx to $277 million or 8% of revenue and coupled with capitalized internal use software of $73 million resulted in free cash flow of $779 million for the full fiscal '26 or a free cash flow margin of 23%, down from 27% last year. The year-over-year declines reflect the timing of cash collections and CapEx expenditures.

Looking ahead, I want to provide an update on our expectations for capital expenditures to support our growth. As I shared last quarter, we are seeing higher prices and tighter availability for memory, storage and processors. These components support our data center infrastructure and our Zero Trust Branch appliances. In Q4, we opportunistically accelerated certain purchases where data center equipment was available. As a result, fiscal '26 CapEx was 8% of revenue, consistent with the expectations we provided last quarter for CapEx of high single digits as a percentage of revenue. We expect CapEx to remain elevated during fiscal '27 due to higher component pricing, especially memory. We'll continue to monitor our costs and share regular updates about the impact.

To provide additional capacity to support our AI and growth initiatives, we are strategically reallocating resources through a workforce restructuring. This action is expected to affect approximately 3% of employees and result in restructuring charges of approximately $30 million to $33 million.

Turning to guidance. Let me provide our outlook for Q1 and full year fiscal '27. As a reminder, these numbers are all on a non-GAAP basis. For the first quarter, we expect revenue of $935 million to $939 million, approximately 19% year-over-year growth; gross margin of approximately 80%; operating profit of $215 million to $217 million, up approximately 25% to 26% year-over-year, representing a 23% operating margin; net other income of approximately $33 million; and earnings per share of approximately $1.15 to $1.16 per share, assuming a 21% tax rate and 170 million fully diluted shares.

For the full year fiscal '27, we expect ARR of $4.396 billion to $4.426 billion or year-over-year growth of approximately 16.6% to 17.4%. For net new ARR seasonality, we expect approximately 37% of net new ARR in the first half of fiscal '27 with 15% in Q1 fiscal '27. Revenue of $3.908 billion to $3.938 billion, reflecting year-over-year growth of 16.6% to 17.5%. Gross margin of approximately 80%, operating profit of $924 million to $932 million, up approximately 21% year-over-year and equating to an operating margin of approximately 23.7%. Net other income, approximately $140 million to $142 million. Earnings per share of $4.86 to $4.90, assuming a 21% tax rate and approximately 173 million fully diluted shares and free cash flow margin of approximately 23% to 23.5%, reflecting CapEx, not including internal use software in the low teens as a percentage of revenue. We expect free cash flow margin to be seasonally stronger in Q1 and Q4, reflecting timing of CapEx and cash collections.

Looking ahead, we are excited by the opportunities we see to continue scaling our rapidly expanding AI Security portfolio, accelerating Zero Trust Everywhere adoption and growing our data security revenue.

In summary, we are pleased with the results we delivered in fiscal '26. We achieved 25% year-over-year ARR growth, record operating income and operating margin. We also saw continued momentum with Z-Flex and closed an all-time record number of $1 million-plus ARR deals. I'm excited about the substantial opportunity ahead in fiscal '27. We are confident in our ability to continue to drive profitable growth across multiple vectors, including product innovation, go-to-market and customer expansion and creating value for our shareholders.

To learn more about our strategy and plans for the future, please join us at our upcoming Investor Day on October 6 in New York City.

I want to thank our employees, customers and partners for their continued support. With that, operator, you may now open the call for questions. Thank you.

[Operator Instructions] Our first question comes from Saket Kalia with Barclays.

Okay. Great. A nice close to the year. I'll keep it to one, but maybe address it to both of you, Jay and Kevin. It's great to see the higher growth rate for next year in ARR. Maybe the question is, how are we thinking about the impact of some of the sales churn here that we talked about last quarter in terms of productivity? And do we feel like the sales churn here has stabilized as we go into '27?

Let me start. Over the past few quarters, we have gone through transformation of our sales organization where we expanded from opportunity-led sales to account-focused sales. The strong results of Q4 kind of show that the transformation, the changes we've driven are working well. If you look at the sales productivity, actually, the sales productivity in Q4 was the highest. I think we are very well positioned with a strong sales team with good channel partnership and a very strong product portfolio as we enter fiscal '27. Kevin?

Yes. Thanks, Jay and Saket. Maybe just to reemphasize the point. So Q4 marked the highest productivity quarter that we've ever seen and fiscal '26 was the highest annual sales productivity in 4 years. So I think we're really positioned and set up well going into fiscal '27. Just as a reminder, we did have 2 sales leaders depart last quarter. One was a geo leader and the other was a vertical leader. We backfilled and internally promoted the vertical leader. Since then, a new leader has accepted the offer for the geo position. Just keep in mind that certain geos may take longer to onboard than others.

And finally, as we think about the shape of the transition, we expect that the leadership transition will play out in the first half of this fiscal, and that is reflected in our guidance. And I am excited about how this leadership team is coming together as we think about augmenting our existing team into this year.

Our next question comes from Fatima Boolani with Citi.

I was hoping to have you unpack some of the discrete drivers of that organic net new acceleration in the quarter. Provided that this is your fourth fiscal quarter, it's an abundant period of renewals and expansionary behavior from customers. So I'd love to kind of how you stack rank between some of those inputs and how did you feel and think about your new logo activity in the quarter? Just wanted to get a sense of the most sensitive drivers of upside and strength there relative to what we were looking for.

I'll start, and Kevin can add on. Q4 was a very strong quarter from almost all measurements. You saw all the metrics. We did very well. Our product portfolio has become pretty broad. Zero Trust Everywhere has been driving a lot of our sales. AI security peers are growing out there. And one of the things AI security needs Zero Trust architecture, Zero Trust solutions. Our solution like Zero Trust Branch did extremely well. Data security drove a big part of our business. And even the young offerings of security for AI has grown very nicely. So all products actually did very well. Kevin?

Yes. Thanks. So maybe just a couple of other points to emphasize. We did have broad-based strength in the quarter. So I think that's number one to reflect. NRR, although it's not a metric that we provide each and every quarter, it was consistent each quarter this year at 115%. So we've seen very consistent performance in terms of our upsell motion that I think is important to appreciate. Maybe one other comment I'll make is, as Jay mentioned, the early success with our security in AI. Obviously, it had a strong performance in the quarter. But another optimistic point of view is that we also saw a 75% increase in pipeline in security for AI as we think about what that sets up for '27.

If I may add 2 more points, from a new logo point of view, our Fortune 500 penetration moved up from 45% to 50%. That's pretty remarkable. And also worth noting is the $1 million-plus deals. We had a record quarter for new million ACV teams.

And Fatima, my reference to the increase in the pipeline relative to AI was quarter-over-quarter sequential, not year-over-year.

Our next question comes from Roger Boyd with UBS.

Awesome. Jay, I wanted to touch on the competitive environment you're seeing with some of these AI security wins. And I want to maybe pick on the 7-figure upsell you called out with an airline company where you won over 2 other platform competitors. Can you just talk about what you're seeing in these bake-offs? Presumably, companies are taking these decisions pretty seriously and trying to make strategic bets on which layer of security they see as best positioned to secure AI. But I'd be curious to see what you're seeing and what's causing you to win these large deals.

Yes. AI security is in demand, and there are probably lots and lots of AI security companies, probably tons of start-ups as well. So one of the things we see out there is our customers tell us that they don't want 1 more or 3 more AI security products. They're looking for an integrated solution, not only for AI security, but also that works with the rest of security as well. So this transportation customers that we highlighted, they are a Zscaler customer for Zero Trust Everywhere.

And it's natural for them to say, if I need to expand into AI security, then tomorrow, I need to be ready for my agentic communication, where Zero Trust Exchange to be able to ensure policy for agents. We were the natural choice for that to happen. And yes, every company is offering AI security, but they all come from different sides of it. Our differentiation is we have an [ interior ] solution for asset management to communication to actually relationship figuring out the access graph as well as agentic communication actually. That's really what's setting us apart.

Our next question comes from Richard Poland with Wells Fargo.

I just wanted to get a sense for unpacking some of the verticals in the quarter. I guess when we think about federal, I know last year, federal was a little bit softer than we would have hoped for. But just as we think about this quarter and heading into fiscal year-end for federal, anything to keep in mind there?

Yes. I'll take that quickly. Look, the federal business contributed high single digits to new ACV in '26. That was very similar to '25. Expectations for fiscal '27 are similar. There's nothing in particular that I would point out. Obviously, earlier in the year with [indiscernible], it was a difficult environment, but we've seen it perform fairly consistently with the last several years.

Our next question comes from Joseph Gallo with Jefferies.

Nice job on a quarter. I was just hoping if you could break out the Symmetry contribution to net new ARR in 4Q. And then just as a part of that really strong strength in non-seats in fiscal '26, what are the expectations as we go into fiscal '27? Because you're obviously offering more and more there. So is it fair to expect a larger mix of the new business comes from that non-seat?

So Symmetry is a very innovative technology that essentially connects the dot between different entries accessing different data sources as we have seen proliferation of AI agents. This innovative technology becomes extremely important. This was essentially acquired as a technology company with little -- very little revenue for it. But it's becoming an important part of Zero Trust Exchange, not only for agents, but Zero Trust for cloud workloads and Zero Trust for devices because understanding relationships of entities to what they access is foundational piece. That's where it's fitting in.

Regarding non-seat at a broader level, the comment I'll make is while early on, our products like ZIA for users, ZPA for users were largely user-centric. A lot of our offerings subsequently have not been user-centric. For example, Zero Trust for cloud workloads, it's all about workloads. It's essentially consumption based. Zero Trust Branch, which is largely about branch devices, IoT/OT devices communicating is all about non-seats. Data security, some of the modules are [ seat-based, ] others are data volume-based. And almost all of our AI security products or security for AI products are consumption-based linked to queries, essentially transferred to token consumption fundamentally. Kevin?

Yes. So with respect to Symmetry, again, to Jay's point, it really was a technology and talent acquisition and provided the access graph technology for us. The results are immaterial to our results, and nothing else to call out there.

Our next question comes from John DiFucci with Guggenheim Securities.

I have -- I apologize. I have a 3-part question, but I promise, it's all related. You said you're adding new enterprise reps to go after enterprise accounts while also restructuring, and that's going to affect 3% of your employees. Can you give more color around this? One, what kind of employees will be affected? And what will be the net employee count effect? And then also, where are these new reps needed, is it specialized sales or will it be broadly across your geos and product? And finally, what's driving this, is it an inflection point in demand that Jay talks about AI or is it just as you said -- you also said here, you're seeing very good sales productivity, so now it's just the time to be hiring more to keep on growing?

Yes. Let me start. So first of all, the reduction you pointed out, it's essentially rebalancing a reallocation of some of our resources with better leverage and also better investments in the AI area we are looking at. That's fairly straightforward. And if you look at adding our sales resources, when a company is growing at a pretty good pace, it's natural to add resources. We have essentially almost always done it. Now the question is where do we add the most of the resources.

We do have specialty teams and we have account execs. Our specialty teams have been making a pretty meaningful contribution. I'm extremely proud of it. Our CRO, Mike Rich and his team evolved the idea of take-up teams that we have started about 3 years ago. It has become a very good specialty team, and we are adding resources to specialty teams. But also in geos too, a number of accounts execs are being added. One of the areas for addition of account execs is probably the enterprise. If you look at the top end of the enterprise, we're pretty well covered. As you come down in the enterprise market, our coverage has been thinner. We are making that coverage. We are also investing on some of the channel resources because channel is helping us expand in the mid-market and like. Kevin?

Yes, John, the only thing I would add is the restructuring is about 3%. So it's modest, about $30 million to $33 million in restructuring charges. Maybe just to also double down on what Jay mentioned, Mike is adding people to the organization, both to address opportunities we have with new logos as well as upsell. We have about 4,600 of 20,000 targeted companies. So there's a big opportunity just with new logos alone. And so Mike does see an opportunity to do that through dedicated new logo hunters along with reps that hold both existing customers and prospecting territories. So there's opportunity for us to continue to expand across both of those dimensions.

So just to be clear, guys, and thank you for that detail. It's more about, hey, listen, our sales force is getting really good and productivity has gone up. So in order to continue to grow, and you're bigger, too, the law of large numbers, you just need to hire more salespeople. But it's more of that than it is when Jay talked about AI changing demand for security out there. Is that -- am I reading you right?

I don't think it's either or to be honest. I mean we certainly are seeing strong tailwinds with respect to AI broadly, whether it's specific to security for AI or just broad-based interest in Zero Trust and our existing kind of core Zero Trust Exchange. So I wouldn't limit the discussion to simply just generally continuing to hire to grow. I think there is a unique momentum at the moment with respect to kind of this AI tailwind.

Our next question comes from Brian Essex with JPMorgan.

I guess I want to take the other side of the coin relative to what Fatima asked. And I want to ask about the health of the Red Canary business. I know when you entered the year, there was some question of what the renewal experience would be on that platform, and you've now had a year worth of renewal experience. I think it's performed relatively well. But you also commented I think at the beginning of the year that some of those customers aren't your typical Zscaler customers.

So now that you've kind of like had a year of experience, what is your expectation for the growth of that business? And I totally understand the rationale behind the IP acquisition and the value that's going to provide to the products being released very shortly. But I just want to kind of get a baseline of what is your view of the health of that customer base, the renewals and growth of that base business going forward, so we can kind of gauge what -- how to interpret the outlook for fiscal '27.

I will start with a broader comment. The acquisition of Red Canary was, number one, to make sure we have agentic technology that could become part of our SecOps platform. Number two, we didn't have any SecOps expertise. Red Canary had 10 years of experience about understanding how our SecOp runs, and that was important for us. In that area, we've done a pretty good job of integrating their technology with our technology, and that's becoming an important part of our SecOps solution. Regarding financials, Kevin?

So look, fiscal '26 was really focused on integrating the Red Canary technology into our Agentic SOC solution that's launching next week. When we closed the acquisition a year ago, we did not know what portion of their business was going to be durable. So we took a conservative approach in how we picked up ARR. Quite frankly, we're pleased with the ability to maintain the book of business while going through the integration. As I mentioned last quarter, as we think about fiscal '27, we are integrating their technology. It is a combined integrated offering that launches next week. And so as it relates to Red Canary, we're not expecting any net new ARR contribution. All of that will show up in the integrated solution going forward.

Very helpful. Do you think the churn is pretty much in the rearview mirror at this point in terms of any churn on that platform that may have happened?

I mean, look, we've talked, I think, at nauseam about the different churn rates that MDR businesses experience discretely different from ours. And that was -- that played out that way. We did see elevated churn in Red Canary's business in '26. Despite that, we were able to continue to maintain its book of business, as I mentioned. I would expect that as it relates to accounts that are up for renewal that we'll continue to see the higher, more traditional churn rates of an MDR business, not our rates, but that has all been contemplated in the guide.

Our next question comes from Meta Marshall with Morgan Stanley.

Great. I wanted to ask a question about the Z-Flex traction that you're seeing. And just as you continue to expand the platform with AI security and Agentic SOC, do you envision kind of mandating Flex plans more with some of these new products? And just how is it impacting sales cycles relative to the traditional sales approach?

I'll start. So Z-Flex is not about mandating. Z-Flex is about providing flexibility. As our platform is getting bigger, many times, our customers will look at evaluating product A or B or C or D, and they're not sure which one do they want, and this will take longer time. By giving them the flexibility there, you can start with a certain number of products, you can swap other products without going through, again, typical procurement level. This is one of the biggest things they needed. And sometimes, they wanted the ability to ramp because if they bought 6 products rather than 3 of them, they want some ability to ramp that became part of the Flex deal. And they also want a longer duration.

The customer engagement with us are not transactional. They're generally long term. Once they deploy us, they invest. They want to stay with us for the longer time. And they also want the ability to buy additional product from a rate card. All those things are very good for business, for customers and good for us as well. But it's true as our platform becomes bigger, all the products will be available as a part of our Z-Flex offering.

Yes. And one of the other advantages, it was in my prepared remarks, is it does -- it eliminates the need to go through new procurement cycles every time a customer wants to adopt and implement new modules or features on the platform. So you go through that discussion once. They have to complete flexibility the choose what's appropriate for them to use with their business at different points in time. And these are longer-term commitments, so we can offer that level of flexibility. So we've been very pleased with the momentum with Z-Flex. And as I mentioned, we ended fiscal '26 with more than $1.7 billion in Z-Flex bookings. So it's been very, very well received.

Our next question comes from Shrenik Kothari with Baird.

Our next question comes from Ittai Kidron with Oppenheimer & Company.

A solid finish for the year, guys. Kevin, I want to dig into your outlook for fiscal '27, specifically on the ARR front. I would love if you can give us a little bit more insight into the puts and takes that you've taken into account into that ARR guide. I mean clearly, you've had very good momentum here with net new ARR. If my math is right, that declines to 4% at the midpoint for your guide for fiscal '27. So would love to kind of get a little bit more kind of color as to what's included with respect to the go-to-market, the new products and any other components that you think it's important to call out. Appreciate it.

Yes. Thanks, Ittai. Maybe at the highest level, what I would say is we're very optimistic with the momentum that we do carry into '27, especially after a 17% net new ARR growth in Q4, excluding Red Canary. I am considering the time it will take for the sales transition that we've talked about, both in terms of the geo and the verticals as well as the pace of the uptake of the integrated SecOps solution.

In addition to that, look, as I mentioned, we have had consistent NRR. I mentioned each of the quarters of fiscal '26, it was $115 million. So I do expect that to continue. We also have an opportunity to accelerate new logo growth, which we've talked about. We're adding dedicated new logo sales executives, specifically focused on enterprise customers. We also have, from a product point of view, a larger opportunity to land new logos with a variety of products, very different than was the case years ago. And so I'm pretty optimistic in terms of the different dimensions that we think about for '27 and opportunities for us to continue to grow.

And AI security is adding further tailwinds.

Is the AI security contemplated materially into your outlook because a lot of that portfolio still needs to come?

Yes. We haven't specifically called out the contributions from security for AI in the guidance. But as I mentioned, AI is very quickly becoming a strong and durable tailwind for the business. And it is driving demand, not just for security for AI solutions, but Zero Trust Everywhere and data security. And we expect that these drivers will persist in '27.

Our next question comes from Gregg Moskowitz with Mizuho.

Jay, as you mentioned, you're hosting a launch event for Agentic SecOps next Wednesday. Quite frankly, a lot of time has passed since you acquired Red Canary and now that the day is upon us or almost upon us, it would be helpful to hear just a bit more from you as to what might be unique about your Agentic SecOps and what it will unlock for your customers.

Yes. Very good question. So our customers have been talking to us for the last few years. They're telling us that we have the best data, best telemetry across the network because sitting in line from endpoint to sitting on the endpoint and cloud as we're sitting on cloud workloads as well. This is resulting in over 750 billion transaction logs per day. That's a starting point of really good SecOps. So our customers are saying, we have to send this data to another vendor. You've got the data right there, why can't you give us more meaningful information that's needed for SecOps, which is natural. We should be doing that. That was number one driver.

Number two was, we observed over the years that there was a first generation of SecOps solution. Then second generation came where they're still human-centric but automation-driven. They're essentially human-driven. We saw the opportunity to really build a SecOps solution truly agent native, where agents are driving, detecting and able to investigate this thing at machine speed versus a traditional solution. I think it's an opportunity to disrupt traditional SecOps solution, even the one that they call themselves next-gen SecOps.

And the last factor was closed-loop remediation. These days, the time between a vulnerability being discovered and exploitation and shrinking typically take days or weeks for a typical SecOps solution to get all that telemetry, do all the detection and planning and really take an action. With Zscaler, since we have most of the data, we could do it within minutes. Those were the big drivers for us. We have a large number of customers who are waiting for our solution to really be deployed. So we are pretty excited about it. I think we'll have a meaningful opportunity for us. In the first half of the year, it's going to take some time to take off, but it should start contributing in the second half and then fiscal '28.

Thank you. I would now like to turn the call back over to Jay Chaudhry for any closing remarks.

Thank you all for joining us today. We hope to see you at one of our investor conferences. Thank you again.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Watkins, SVP, Investor Relations and Strategic Finance. Hello, everyone. Welcome to those of you joining us here in Las Vegas at Zenith Live and to those of you who are joining us online. We really appreciate you making the time to be with us here today. Before we begin, I'd like to remind everyone that today's presentation contains forward-looking statements within the meaning of the safe harbor provisions at the federal securities laws, including statements regarding our future financial performance, business strategy and market opportunities.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected, and we take no obligation to update them. For a more complete discussion of the factors that could affect our results, please refer to the risk factors described in our most recent filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q.

Okay. With that out of the way, we have a great lineup for you today. So in a minute, Jay is going to kick us off and take us through the Zscaler platform. and also go through some of the new solutions that we announced here today, including those that are securing AI. I know that is an interest for many of you. So we'll be sure to hit on those. Then Dave will come up and host a panel with 3 of our customers that we're really fortunate to have with us here today.

They're going to take us through some of their security challenges their journey with Zscaler and also take time to answer your questions. So start to think about what you might want to ask. And last, we'll finish up with plenty of time for an executive Q&A. So you can make sure to get all your questions answered. Okay. We're ready to get going. With that, it's my great pleasure to introduce our Founder and CEO, Jay Chaudhry, Jay?

Thank you. All right. Good afternoon. Good afternoon. Great. So as Kim said, I'll give you a high-level view of our platforms, on the offerings, what sets us apart from others. -- as those of you who attended the morning keynote, they may be a little bit duplicate as we are broadcasting session.

I want to make sure that remote attendees also have a big picture view of it. So overall, if you think about the opportunity that gets me excited is the massive market opportunity. It has been growing over time, and I'll walk you through how we have over $120 billion serviceable addressable market for us. And the need for cyber, the need for the solution we offer and talking about the architecture, what sets us apart and then a big picture view of the overall platform and close with some of the financial strengths.

Let's jump into the TAM. I think when we had Investor Day, we'll do bottom up, do some more analysis of it. This is kind of built upon the market size than we had shared with you before. On 0 trust every year, which is not just the users, which is the cloud and branches, you look at all those things together. It's about $65 billion SAM, pretty sizable.

We lead this area significantly, especially in the user side of it. The cloud is a great opportunity to disrupt the traditional virtual firewalls in the cloud and branch is an exciting opportunity to eliminate traditional wide network, traditional way of doing security inside the plants and factories. Data security is an ever-growing market as more and more data gets created and more and more on data sets out there.

And with AI, the data loss becomes a bigger challenge. We see this as an ever-growing opportunity for us. Agentic Ops, essentially is largely around SecOps and a couple of other areas like IT operations. But this market is sizable in the early stages market, but we have a chance to disrupt it. And securing AI is a brand-new market segment. And we got some serious momentum. We set up AI security as a start-up with a Zscaler to really build these products. And I couldn't be happier with the pace which we are building and developing these products and the traction or the interest we're drawing from our customers.

Let's look at -- the need -- you read all this stuff out there every day. So I don't need to walk you through all the stuff. But every day, every week, there's an issue that's happening. Somebody tried to embrace AI copilot loses data, open Clark, or credentials out there or some agent delivered some e-mails or they deleted some production database.

And a lot of these things aren't even has they are actually lack of policy, lack of controls, lack of guards. So you combine the cyber part of it with some of the guardrails net we built and wanted to make sure AI can be used reliably and effectively. It's a huge, huge need. As I talked to so many CIOs and so many CSOs. The #1 message comes from them is -- we have identified a few pilot programs.

We are ready to roll out. We have built some agents. I'm uncomfortable because the governance and controls aren't there. This is an interesting challenge everyone is facing and distribute from the exchange solutions will come in because think of the falling way. Where were some of these guards and controls and oil-based access, literally as a part of the application. You as a user, went to the application, application control what you could do and then application talk the data.

And now you can bypass the whole application, you go directly to the data. Where is governance, where is control? Where is all this stuff? And interesting challenge. This is where us being in the middle of it to really do policy governance that type of stuff will become extremely important.

A number of you may have seen this white paper that Anthropic published about a week ago, a Zero Trust or AI agents. As a read, I was wondering, did my Mark and team write it. It literally felt like what we advocate what we believe in the story was very simple for agents to work successfully. You can't let them roam and on the network. I had done network security. I have a firewall here and I have a firewall it doesn't really work. You really need to treat every agent is untrusted entity.

And through some policy controls, you need to make sure they only talk to right areas. And so that's important. You've also been reading about methods. I mean, so much has been talked about Metros is unbelievable. We have been part of the Glass wing program from day 1, early March time frame. We have been using it. It's pretty effective. It can find a lot of vulnerabilities.

The interesting challenges are being -- how do you fix them okay? Enterprises already have a large number of unmitigated unremediated vulnerabilities. Metros or for that matter, OpenAI is GPD 5.5 or purpose 4.7 or 4.0. They're all pretty sophisticated. They're going to give you 5x more -- what do you do about it? The answer is not that you're going to double, triple down on just patching. You will never get out of doing patching itself.

So the answer is if opportunities get discovered, they're not passed. It's natural that there will be more breaches than we see today. Then the next level question that CIOs would ask is, how do I -- what else can I do to minimize breaches? I know patching goes only so far? And number two, if we got breached, how do we minimize the impact of those breaches.

And that's where we actually fit extremely, extremely well. Number one thing our customers are doing to prevent breaches is hiding their applications, eliminating their attack surface. In the firewall wall, you're out there, you firewall. You can check VP and all the stuff out there, you scan and you see all of these things out there.

The way Zscaler was built. Your proxy or which you're hidden behind us. Nobody knows where you are. Number one 'thing we can do. And our customers are busy working with us doing that. And that's also leading to some of the upsell opportunities for ZPA and some of the deception technologies because they want every user to be able to do Zero trust when they access any application.

The second part ends up being stopping natural moment. Otherwise, a single infector machine in one branch can infect everything else out there, not a good idea. What if that could be contained in the branch itself -- we do that extremely well. So those are the 2 best defenses that our customers want.

And we are working with the leading model companies. As I mentioned, we are part of Anthropic Project GlassGreen. We're also part of OpenAI, they break. And it's good to work with them because they actually are helping to actually bring the applications to the market, we become an important partner to make sure those applications can be securely used.

So the whole notion that these model companies are going to eliminate our SaaS surplus will happen or cyber goods disappear. If you dig into Methos a little bit, so Methos finding more vulnerability, that means there's more need for providers like CSC. So the notion that these guys will go and do that stuff is really unfounded. The other part is a provider like Zscaler, we have a global infrastructure around the globe.

There's 160 on exchanges out there, there's a public, and there are quite a few private exchanges major customers, okay? An agent is not going to go and create all of the infrastructure for your connection, network traffic routing -- all that stuff is a fairly complex and sophisticated area. That's why we feel like our need for us will grow because the more agents you have, the more policy enforcement, more in-line inspection you'll need, which is important because then we can help our customers and it creates a revenue opportunity for us.

So the platform is meant for. This seems like Zscaler moment. I mean we built this platform for stuff like this. When we started the company, we built, we evangelize this stuff. When COVID came then the market realized said, "Oh, we need something like Secure. That was a big moment. We think this moment is almost like COVID because, in fact, it's even bigger from a cyber point of view as everything is online, everything is digital. So that's a platform we built.

Just to refresh your memory on what we've built, what we're doing. On the left side is what you see. This is a typical corporate network. Everything connects to everything. Every office connects to every office, every IoT device OP device is connected because otherwise, you can't communicate and when you do VPN sitting at home, you're all part of the same network.

Your network extends to every household are -- and this is primarily the biggest reason of the problems -- and all these firewalls sitting out there, they become fairly porous. They try to do segmentation with it. And when they find oh, this source IP to this destruction IP? Well, these 3 users need this. They need this.

Then you know what the rule becomes any to any. It essentially becomes an open thing. That's why we need to move away from the world of firewalls to the Zero Trust world, where literally everything is literally in Island. They simply connect to Internet. We are the exchange with the switchboard, making sure the right party can talk to right party only, that's fundamentally what we're doing.

So when people talk about this vendor, that's SC vendor, all the SC vendors doing spinning up virtual firewalls in the cloud fundamentally. There's no Zero Trust in it, okay? If people think that they don't need Zero Trust and the firewalls are fine. And part of the reason why firewall companies will not do real Zero Trust is because it cannibalizes all the firewalls.

When we go in, tons of virals are taken out. It's not in the best interest. It's just like telcos were fighting, not eliminating MPLS. They'll go out and tell the customers say, "Don't do this because there is no quality of service. None of that is there. Guess what secular forces are very thoughtful. Similarly, I believe that the Zero Trust is a secular trend.

That's the only approach that's needed. That's what we pioneered and that's where we have for meaningful lead and others can't even try to do it because it's not in the best interest. Okay. So here -- so the other thing, I often get asked the question and say, "Oh, say this, SaaS this, I see this. When others talk about SaaS, they talk about secure access to users.

Now area we pioneered when we started with Zero Trust, any user can have access to any application or anywhere without being on the network. We are understanding that we moved on to do Zero Trust branch. Every branch is in Island, very important area, then doing 0 to inside the branch for every device. So an infected IoT device in the plant or in a factory can, in fact, other devices is very important, otherwise to Imagine if a plant goes down, it's an important area.

And Zerocloud is about cloud workloads, fascinating story amount to workloads in the cloud will keep on going. And AI will further accelerate the development of these workloads out to. How is this cyber done? -- east-west firewalls, no of we'll do a virtual firewalls. This source IP address can talk to this Destin IP address. Not very exciting, not very manageable and this when we come in and say goodbye to all these virtual firewalls, and we can do true Zero Trust in the cloud. Very exciting area and growing very well for us.

The most exciting announcement for us this week Zero just for AI agents. This is fantastic. Now as I said during my keynote, the rally about probably 70% of the pieces we need to 0 trust for agents who are already there. Think of it, agents or like people, the digital workers -- we already have technology to do that.

Agents are like code. We've done it for workloads. We've got all the pieces, the policy engine, the logging reporting and all, it's all there. I'll come back to cover that a little bit more. So all this Zero Trust everywhere is done to really achieve 4 key areas. Security of AI, how do we secure all the AI application infrastructure, data security, cyber protection and Agentic SecOps.

Let me dig a little bit deeper into each of these. Security of AI. This is what every customer is 1 looking for to start with. Every customer wants to know what AI assets do I have? Where are they? Do you have the end point? I mean using externally, for example, public AI applications, all the my private AI models, prime bedrock, whatever the case may be, all what's on the endpoint. We brought together all of this as one dashboard being able to give you a full view of all assets for AI, no matter where they are, okay? -- and along with the risks they post. It's important. Every company talks for having AI Asset Management. So an EDR vendor when they talk about it, they're going to tell what's on the endpoint, because that's what the it -- there are no idea of what communication is happening there.

They can tell you the public AI. They can't tell you the traffic. We're sitting in line for cloud or Internet we're sitting on the endpoint. We're able to give you a full view of it. Second area is secure AIX. This is for your employees, which employees should be able to access, which AI applications. We already had a policy engine. We have done that for other applications. So having rules and policies for AI applications were relatively easy for us.

We had to essentially build an engine for prompt inspection and response inspection, so we could analyze the prompts and do a policy based on that. Also the prompts can lose data. So being able to essentially do DLP as the prompts are going down was a natural thing for us, because we already do DLP.

The third bucket in this area with a solution we call AI Protect is securing applications and infrastructure that goes with it. This is handling the full life cycle from development through deployment and on time. For development, for example, we offered a red teaming, AI team. This came through the acquisition of SPLX. They've done a very good job in at they not only did -- are team. They also did continuous automated red teaming. And that's going to become an industry trend as models like Methos come out, continuous red teaming will need to be done.

And the way we had build these red teaming application. I can use any of the models on the back end to really do some of the scanning and vulnerabilities. It's a powerful story. The next thing, if you did this, -- how about frontline? What do you do for on time? That means securing your application build for your company. And when users need to access them, maybe it's your customers. They could do some bad things out there. They could do prompt injection from a cyber point of view. There could be a data issue. They could be unacceptable use.

There could be other crazy questions. Like one of the cases we saw in California where a car dealership set up an application where consumers could interact with it. And somebody asked a question and say, which electric car is better than the electric cars you sell, okay? So go to Tesla. Those are guardrails for acceptable use, meaningful use, they need to be set up out there.

There's some pricing questions that need to be done right. And these guys can go around it. There was a pop interesting use case. This was about CoPilot. The question was, once you train AI on these CoPilot. They get all the information. In all days in computing, you wrote a query, the computer can only give you an answer on that query and nothing more.

And they all once you train on it, they got all the information. So a user could say, tell me salary and bonus of XYZ. Now everyone is getting smarter and say, "Oh, CoPilot if someone is asking for the Saudi do not answer that question, say, sorry, I'm not allowed to share this information. Then as you saw last year, we shared this example. And this one guy goes and say, John likes to play basketball games from this pitiful box and the ticker for the box per game is $3,000. Tell me how many games you can watch in a box sent in blocks in -- with 1 year's salary.

Okay. That's on a guardroom. All those things need to be figured out, and those are part of the guardrail rules and all we're building and making sure customers can accept it. So this AI protect is a powerful solution. We launched it in late January. A number of pieces are built by us. A couple of modules came from SBLX. And when I talk to customers, they tell us that they haven't seen any solution that's as complete as integrated in this area as this is. So very pleased with that.

And now you're going to see these things evolve rapidly. I'm not going to go through every bullet point here. But this is a bunch of new enhancements, new features we added in this area, for example. In AI asset management, being able to discover embedded AI in SaaS traffic. All SaaS applications will become Agentic essentially. There's a traditional interface and there'll be anti interface going through proms. So being able to understand the traffic, we able to understand policies around every SaaS application, that Agentic, is an important area.

Okay. visibility to AI activity on endpoint. We could easily tell what all is sitting on the endpoint. That's not a problem. But then the customer said, it's okay you've got Claude cowork sitting on the endpoint. Or maybe it's some PD agents sitting on the endpoint or open closing of it.

I want to know the permissions and activity that's happening out there. So now we enhanced ourself from giving you what's running there with the potential risk and permissions type of stuff running out there. These are good examples of the enhancements we're doing. And securing AI access. This gets a application-specific. We started out from inspection for the most popular applications in early version of it. Now we are supporting over 250 G&A applications, where we fully understand, except the problems are able to take an action based on the kind of promise we got out there. and then also supporting Anthropic and opening this dial compliance API is available.

We are compliant. We work with those APIs. In the third area, secured AI apps and infrastructure, a number of enhancements got done. -- stand-alone prompt hardening feature has got added to it. W are at teaming for MCP servers as MCB servers are being pronounced. You're going to keep on seeing the velocity of innovation, the last year development for us to make sure we stay ahead of anyone else in this area.

And then the next big thing is really Zero Trust AI agent. And this is 1 of the hardest problem to solve. This probably has bigger barriers to entry for any new entrants than any other area out there. Without going detail into it, it's essentially a version of essentially the Zero Trust exchange we built. -- but new things we needed was AI brokers, brokers for MCP, protocols, broker A2A had to be done. And then understanding the test has assigned, understand the intent, the risk being extract prompts, analyze it to intent and risk gets from their ability to do those things become important.

And then essentially a lower policy. It is the only real way to be able to handle it. Our view is that as agents get deployed, I mean, there'll be so much stays. It's not even the agent level. It's an invocation level that needs to be figured out. That means scale, that means granularity needs to be handled. We already do about 750 billion in transactions day. We think in this new world that we'll have to add a couple of zeros to it in terms of how much volume needs to be handled.

We feel pretty good about it, having the architecture, having the scale, have the experience to be able to handle in line is not a trivial thing. Anything you do in line, it better work, because otherwise, people can do the jaw. Anything you're reporting if it doesn't work, you don't get the right answer, people don't even know most of the time.

So that's why being able to have great response time, great scale, is fundamentally important to us, and this is where we are very, very well positioned far better than anybody else out there. And then the next problem, this is a fascinating problem. This is An example of a solution. Our customers want clamoring for on day, okay? We like to do that. We like to think what will be needed in a year or 18 months. I want to work on it today. I want to cook it, I want to refine. I want to get better than anybody else. So what is this? This is Access Graph. Now Access Graph is not just needed for AI. It's needed for other entities, too.

Smite Systems, a company we recently acquired solved this problem. It's a very hard problem. Many other things, if you ask me, asset management at all, is that a rocket science to do? Not really. You give a couple of quarters and 3 quarters, you're going to build it, solving the problem of taking all this metadata from all the application to understand in your enterprise, in your corporate network, which identity, which entity is reaching, which data source, which MCB server, which application, is a nightmare, because they just get on the network here.

You literally have information sitting in each application about what access happen. So Smite pulled all that matter data. Hold it out, this is billions and billions of data points. And now that the magic of AI to figure out these entities are accessing this, the data source, the data lineage, they call the graph because this is important. Now why is it important? Number 1 reason the customers but looking at symmetry and the large customers are looking at symmetry systems is to understand the lineage and from there, they need to understand data governance.

Even the issue of SOC compliance, how do you do SAW compliance? You have to prove that you've got all these controls in place. And those controls are actually through applications. when applications get moved aside, you go directly to data. How do you prove SAW compliance? They'll be impossible.

This kind of solution can help you prove what's talking to, what's going on. That's how Symmetry was positioned to sell it. When we -- as we saw this technology, then we said, well, this is great. But in the Agentic world, the data will go 10x, 100x. It will be impossible to do something without something like this. So first, we understand that graph. And then we use this information to apply policies for 0 for exchange to be able to see -- with this group of agents and have this group of applications or this group of data sources, that's what's exciting about it.

It just also shows the DNA of the scale is to be innovative, to do things far ahead of others and set the peso do. So this is our overall platform story. Then I won't go in detail out there, but the list of innovations in SAS is long. Every year, we do probably about 200-plus features, Hinda, ZIA, ZPA space out there. Browser extension, enterprise browser availability.

It's a specific use case, we needed some of the extension area. We did a tuck-in acquisition of SquareX, it did very well. B2B exchange is an exciting area. Supply chain is a big risk. The only competition we have in that space is 30-year-old side-to-site VPN connection. That's a problem, right? -- power segmentation of application. This group of users can do this group of applications.

We further made it simpler. We have been doing for some time. And Z agent framework. We created an overall framework. So where our agents can be for each product, each area, they're working from the same framework. I think we're going to cover some of that tomorrow and Adam session or agent for ZDX, for example, which can do all the stuff that people are trying to do, it's all automated. So you're going to see all products of Zscaler having the agent interface to be able to engage with our products across the board. Agentic SecOps new exciting area for us. We have been building the technology internally.

We got Red Canary technology. And as a result of that, we are going to really announce we had 2 product areas threat management, this is traditional security operations and exposure management brings together all the exposure area, your attack surface, your asset risk management and so on and so forth. And this is built on some pretty solid technologies and where we can take data from all kind of sources, including Zscaler sources -- and we've got a bunch of techniques and behavior-based analysis and all the mapping are done, context graph we create here to identify real threats. And this is just an exciting area.

This is also being launched this week, and you're going to see it grow every month as we move through the fast pace. Wrapping up the last couple of points. A number of questions have been asked for pricing user base versus nonuser-based pricing -- we started out very early on with seat-based pricing. But as we evolved, things have grown, for example, Zero Trust branch. It's based on a number of devices in the traffic as flows devices Zero Trust cloud workloads, a number of workloads and the traffic from those things. Data security at modules, only some of them are linked to a number of people. Others are based on the amount of data we are scanning, the data we are classifying -- and as you'll see, Agentic exchange, all of these will be based on agents, amount of traffic, which essentially leads to the token consumption essentially a consumption-based model.

So we're seeing our new business ACV coming from nonseat, nicely growing over time. About a quarter ago, we disclosed about 25% of the new ACV came from non-seat and last quarter in Q3, that number moved up to 30%. So we don't think we have any meaningful exposure based on seats because our model is expanding. Our platform is growing pretty rapidly.

And lastly, our scale, you know the numbers were to summarize, just to let you know, we crossed $3.5 billion in ARR. And we got plenty, on 20,000 enterprises we target about 4,500 are customers. That means remaining a prospect for us to pursue. This good opportunity for new logo. And also in the big areas AI protect that we just launched in January, right? We crossed $100 million over the last 12 months.

There are a couple of modules that were there like GenAI security is part of it, but a lot of stuff new. Most of the stuff is picking up -- picking up very nicely. Data security is growing very well, is going to keep on growing very well. We have $0.5 billion crossed in ARR and over 30% year-over-year growth. And Zero Trust every year is what sets us apart from others. Will set us apart for a long, long time. We started sharing with you the number of customers in Zero Trust everywhere.

About a quarter ago, that was 550, and now we crossed over 500 enterprises who do Zero Trust everywhere. That means they've got Zero Trust users, Zero branch and zero-trust cloud, okay? With that, we're going to start the next session. And this is our customer panel that the Dhawal Sharma is going to moderate.

Great. Thank you. Great second. All right. We will take about 20 minutes a discussion between us, the speakers that are here with me, our customers, and we'll then open it up for you to ask questions as well. Since we have 3 various teamed customers who have joined us here. Why don't we start with you, Wan and go around and get an introduction about you, your roles and how long you've been using Zscaler and what problems we are solving for you.

Wonderful. Thank you. Good morning, everyone. Thank you for having me. So Wayne Fudersky with Edward Jones, have been there 25 years. Deputy so responsible for enabling the firm securely responsible for all the enterprise security architecture products and solutions. Then working with Zscaler now since 2010. So really grown up with Zscaler. We use a lot of their key core products, EIA, ZPA, ZDX, CASB, browser and even touching now into the AI products. .

Jason Coler, been with Eaton for 10 years. I am deputy Ciso there. I've been a Zscaler customer since 2019, 2020, where we utilize them to help secure our workforce in COVID was a great investment that we made there to be able to secure a workforce in a very short time frame. I am responsible for incident response, threat intelligence and security engineering. So really the services that help keep Eaton safe.

Thank you. I'm StafaKeve. I'm the Chief Security Officer over at UKG. I've been there about 4 years now. Zscaler has been 1 of the strategic partners that have always leveraged and I've used it not only this company, but the prior company, where I spent about 8 years at brings. So when a customer is scale for over a decade now. So I think 2015, is when we started using Zscaler. So it's been in good time.

I'll start with Vopra. So you heard some of the innovations we have been talking about. And -- you guys have been a great sounding board for us. We build all the products in deep partnership with you guys. So going around again, what are some of the most interesting innovations that you see that announced today and which shift favor?

Absolutely. And I think it's been -- I'm always -- it's been always interesting to see the innovation that Zscaler is looking at either through acquisition or just organic growth building internally. So the SPLX, I think, is a very important piece because I was also a customer at SPLX pie to acquisition. So seeing that blend in and why we actually win that route and making sure that we're able to test our products because Zscaler been consumer -- a customer that provides AI software and software to customers being able to test those and validator is really key for us in terms of how we really look at it. I'm super interested about the AI piece because I think it changes the game, combining data, the AI graph and the access. And I think that visibility is a gap in the market that I think it's huge. Jason? .

I think the AI piece is the big area with the way companies are pushing AI to use it to make it work in your environment, the expansion of how they have visibility into what not only your employees are doing with AI, like your third parties are doing with AI and even what you're developing. I think that's a potential game changer there to get visibility across all those environments. .

Yes. All beating a dead horse here, but AI is everything for us for now, right? And I think the AI observability -- what we're talking about managing risk, right? We talk about shadow IT, right? It's really shadow AI. I can't secure -- I can't put a control I cannot govern. I cannot enforce policy if I don't know what's going on. So super important to me. The I will just say the maturity is so fast, right? Like we talked about 18 months ago and some of the things that we were doing compared to with the solutions that are being offered today by Zscaler and -- as I said earlier, we stepped into this and are running through the implementations as we speak on some of these prompt things and things that are going on. It's a game changer. We have to have visibility to manage risk.

Talking about specific scenarios. Man, I'll start with you. As you said, you've been a long-term customer at these killer. I remember working with you 14 years ago. talking about the benefits of local breakout. This is nothing to do with Zero Trust Ranch, but MPLS backhaul from your thousands of retail stores you adopted ZIA with the primary benefit of not doing local backhaul of traffic and doing local breakout. So that architecture has been evolving now to the point where there are appliances that give you 0 trust within the branch as well. So how have you seen that evolution in 15 years? And how has Zscaler technology evolved for your expectation in that time? .

Yes. It's amazing. 2010 already in 2026. I feel like we've kind of grown up with Zscaler. You think about when we start with Zscaler in 2010, what problem are we solving backhaul traffic, right? How did we do that? We didn't want to spend more money, do all that. We have 16,000-plus branch offices across North America. So -- it's a lot of traffic being passed around. So we really sat down with Zscaler. And it started off as really you think about it, it's a point solution where Zscaler is not anywhere near it is today, right, the size and scale.

And I feel like we've really taken that same journey in growth with Zscaler. And you talk about original Internet, the URL, the protection inspection to really what turned into cloud, right? And then when you jump into the cloud area and we talk about when we remember working early on with CASB, DLP, what's going on and how we've matured into that next generation of what I call technology into the cloud from a simple Internet world that we lived in.

And I've seen that growth as we've gone with Zscaler. And what I think it's always important is what was a single solution is what I would call a strategic partner today for us at Edward Jones with Zscaler. And I think fundamentally, what you see is they're either 1 step ahead of us or we're pushing them to develop the next technology. And I think what you can see is to be a strategic partner, we needed to create that ecosystem with them and moved along quickly with them.

I think the #1 thing I talk about all the time is, does our vendor understand what business I'm in. I'm on a financial service business. It's about availability. I got a trust, right? I need to understand I got to answer to regulators. All of those technologies and solutions as we partner with them and they deliver the solutions to us, Edward Jones.

It was -- it's really transformational as you look at it. And it talks about reducing complexity. And I think that's 1 of the biggest things we get from Zscalers, really getting in the middle, providing that 0 trust and being able to get in the middle and be able to do what we need to do, govern, pull policies in place, enable the business, securely. And I think when you look at where we've come and now we're into what I think is the next generation, not last generation, maybe for me, we'll see.

But what we really talk about is just last one is -- so you've seen how we've gone from Internet to SaaS world to now AI, and we're talking about what are the security controls are going in. We -- again, it was just natural for us. We could have looked at a third party and we did. We always do. Can you meet the requirements. Are we already implemented in that space? Can I reduce complexity? Do I really want to bring in another third party into the conversation with me? Do I really want to support another operational system? .

The answer is no, I don't. But I do need to make sure that they meet our requirements. And if they meet the requirements and exceed and help us create a better performance financially, economically, and to meet the regulators -- it's been a great solution and a great partnership with Zscaler. So for 15 years, I believe we've built that journey and what today is truly a strategic partnership. .

Fascinating. I love working with you over the years. Just moving to you, as you said, you started your journey with us on -- during COVID securing your users. But as we started building our Zero Trust branch solution, right, 1 question that everyone asks us when they start their journey, how is it different from my SD-WAN, right? And with you, we started working on this concept of Zero Trust factories. You have multiple factories deployed with Zero Trust appliances now or segmentation inside and with Zero Trust everywhere. Now -- we are also replicating the same framework in Zero Trust bank branches, Zero Trust hospitals now, how did you internally build the justification for our ZeroTrust branch or factories compared to SD-WAN, which is easier to deploy sometimes are things that networking people understand well. So how did you build that internal mind share? .

I will tell you this, it was really based on making sure that the sites were secure. I mean as a manufacturing company, we can't have downtime similar to what Wayne was talking about, but even more our production and our plants need to keep running on the SD-WAN and to provide us with the security that we needed all the way down to the device.

So we are really looking at as we deploy this and put it -- I think we're probably about 100 factories in to really make sure not only are we securing it at the network level, but at the device level and making sure that everybody has the right access in the environment. And I think we're on this 2-year journey now with Zscaler. They have been a really great strategic partner throughout this entire process.

We've been learning together, and we've been able to really make great headway when it comes to securing our plants to where we feel very, very much comfortable with. If something does happen, we're able to isolate it and secure it moving forward.

All right? I have discussed similar ideas with you as you said you had a returning customer. Your previous company had the same side of assets, which we discussed about securing with this Zero Trust branch architecture. But Shifting gears into your current company, you actually have been using a couple of our acquisitions, as you mentioned, both SPLX, you are a customer, symmetry systems, you were a customer with them as well.

And you have provided your input feedback as we were doing validation and diligence on these companies on why you like these companies. And one thing I remember you send an e-mail to Jay and I saying, you guys are on the right path with some of the acquisitions that you're making and connecting the dots. I would love for you to tell us how you articulated that story that you shared with us.

Absolutely. No, thank you. SP-9 And when I think -- when I see some of the things that were happening, and I think as a customer of 1 SPLX, and I'll give you an example of -- we're building software. We're testing the AI agents. We want to give it to 80,000 customers of UKG. And what we wanted to be able to do is have a fully automated testing capability that test some of our AI agents.

And this is not just and testing. This is we want to do different types of tests. So we want to do sentiment test. We want to do validation test. We want to do the security test. That's a key component, right, is in terms of how do you support for that. But the second thing is what are we actually protecting and we're protecting data, and we want to make sure that we understand identity -- and this is where Symmetry came into play in terms of as when we bought symmetry in Us, how do we make sure we connect this together, right, having access to the data, who has access to the data. what are they doing and what actions are they taking? So combining those things give me that visibility.

The third thing was if you tie that to what Zscaler does, in where it sits, the visibility and combining those 3 now you just have the full visibility of an end-to-end product stack. And that's why I said, you guys are on the right track by connecting these things together. Because not only you have an agent that sees traffic going from the endpoint to the Internet, you also have the visibility at the browser level.

You have the DLP that talks about policies that changes, "Hey, who's -- who can do this and who could not do this." But then what can -- what data can they touch? Can it just my payroll information? Do they have the right to touch that information. So if you combine all those things together, you just create a whole different game. Now I'm super excited about the developer side because I think that's a whole different game. If somebody is writing code in Claude code or you're using GPT or whatever Codex, that policy, the single policy agent is just powerful.

Now I don't have to go look for another product. And I think that's the key. I want simplicity but a platform, less platform, 1 or 2 that I can build my security around it.

Got it. No, this is very insightful. A couple of questions. I know we have 5 or 6 minutes left before we pass it on to the audience. in, you are in financial services. Frontier Labs came up with models that are finding vulnerabilities at piping speed. They are looking at how new attack chains are created, creating like finding a lot of things that were exposed out there, but not saying how badly they are exposed and how they can be exploited. We believe Zero Trust is the right way to start those exposures from being visible. So how is your security approach change in light of these front-end models doing what they're doing in recent time? .

Yes, it's crazy how fast things are moving out. I couldn't agree more. So it starts with trying to hide the attack surface, number one, right? So let's not look at that. But the reality is we're all trying to patch. We're all trying to do vulnerability management at crazy amounts of it. I think what you're finding out really quick from all of these new models that are coming out of exposing these vulnerabilities is 2 things where you used to be able to just focus on critical and highs.

It's not only creating new it's taking what we would call medium and lows, and it's starting to patch these things together and move very, very fast. So I think the reality for us is we -- everybody in the words of patching is we're going to have to automate more, right? It's just inevitable, right? You're going to have to have machine learning versus machine learning AI versus AI. It can't be human versus AI anymore.

We're not going to be able to keep up, right? It's just not possible. And then when we look at in the financial services industry, I can't express enough that with all the different regulators that are coming in, they're challenging us. They're already asking these questions. I look, any one of these Nissocks, take your pick from out there in the world, we're being challenged constantly is how are you handling this? And of course, they know about all this.

So they're asking the tough questions, right? They've increased the number of questions in the compliance space around AI. How are you controlling and how is it exposed? But more specifically, the focus is changing from a regulated perspective. And without these type of models and things that we're getting and really trying to say, block the attack surface, understand what the visibility is we need to prioritize, right? We need to find out what that is. We need to be able to fix it, not all can be fixed, so then there's the mitigating control. So it's fast paced. We just we're going to have to do what we can do to protect and prioritize.

Mustafa, stuff from your side? When you think about the scale of remediation that's going to happen and even today with the existing things that are happening, you need to buy time. So -- and I call it, being able to have segmentations in using the Zero Trust model to really isolate most critical and then focus on the most important thing in giving you the time. And I think that's super key in every organization. Anyone can't fix all of the problems you're going to have, so you need to be able to prioritize -- but I think with Zscaler that gives you that capability to actually isolate your network, segment, the critical areas and segment areas that I just use is out there so that you can maintain and have a better understanding.

We've been talking about this in UK like how do we think about the camera system? How do we think about the office, the conference room devices that are in our network, like this is huge and -- if you need to patch all of that in a day, what are you going to do? So these are the components of taking stock to really reduce the attack surface.

All right. My last question, I'll start with you, Jason. Is on how you are thinking about the AI security spending? Is this coming from your existing budget or you're reallocating budget for securing AI as new use cases emerge. How are you building this justification and the security budgeting insight? .

Yes. I think it's a combination of the growth of AI in a company like ours, we have to put thing forward, you have to put budget and to secure it as well, but we're also getting the incremental spend in cyber as well because the company overall understands the importance of this and be able to deliver on a secure AI environment. .

In? I would agree. Right now, it's not cutting anything. It's an addition to the budget at this point in time. We know cybersecurity, AI is something new and that we're adding to the budget at this point. .

I think it's a combination of both, it's reallocation and then finding the right investment for additional security.

Now these are great insights. And actually, on lease color side, what we are seeing is while we work with the cyber practitioners like yourself, we're also engaging more and more with chief technology officers, organizations who are building apps and they are saying, for example, I want to embed rec teaming more in -- on the shape left where developers are building apps. And -- we are working with this new emerging role of GFI officer, which sometimes is in data world, sometime in AI-specific role where they are looking at the whole lens of how they are enabling AI and new budgets are treated. -- because as you create more budget for AI, you need to secure that AI as well?

For example, SBIX is inside our product from the enterprise. So yes, it's a mix of both. And sometimes you have to do that.

Great insights. Thanks for sharing your journey and your insights with us. We have about 16 minutes left. So I'll open it for the audience here to take questions. We'll start with you. I'll randomly pick. I'll go across the room.

Thank you. This was all really good -- I actually have like 3 questions. I'm going to ask the 1 on the last thing you just said. So I think all of -- well, actually, Jason and Mustafa said that AI security budget was going to be at least partially come from reallocation from other areas. I'm just curious, what are those other areas of the parts of traditional security that you can take from -- like what's most kind of like that risk? .

It's actually not coming from security. It's coming from the business. because they understand the value that security is going to provide to them to keep the AI that they're creating safe. So it's not -- we're not taking anything away from IT or security itself. It's just additional funding that's coming in from the business. .

Mustafa?

So just curious Yes. For us, I think it's the some reinvestment in terms of areas when we think about all of our security stock, what security stack do we have that's below in lack of controls or it's not actually giving us the control we want. So this is something we evaluate annually and say, if we have a better if we can increase or security controls on AI stack because it's the most imminent, so we need to move some of those. It could be -- we are doing pen testing, for example, in this case, can that be allocated for prevention control instead of just testing. So some of those things are the things that we're evaluating.

We have the question in the front here. I'll move here. I think on the front here.

Can I ask you to please state your name and company name before you ask your question. .

Sure. No problem. Keith Bachman from Bank of Montreal. Very insightful. As we listen to customers and global SIs, a frequent conversation or identification of problem statement is understanding where the agents are, who owes what are the risk exposures. And a lot of companies come to talk about a value proposition associated with solving that problem statement, not just Zscaler but a number of companies. And so I'm interested from your perspective, when you think about that problem statement, which was identified here tonight -- or today, excuse me, -- is it one company you think you'll work with? Or is there more than 1 organization that will serve as that orchestration layer for lack of a better word?

And more broadly, are there other -- this is a Zscaler events, so unfair question, but are there other vendors if there -- that you think might be able to contribute to helping with this problem? .

Is that you want to take that one? I can start. I have a lot of agents. So when you think about the environmental ecosystem in terms of agents, there's a agents that you're building for internal use or agents that you may be building for your customers. So there's 2 components of that. Where Zscaler provides context is where it's sitting because you have -- it's sitting on the endpoint, it has the visibility as the network traffic.

So that visibility is going to be there that gives you that context. Even if you're using additional models, so you're using different or agents that are not specifically enterprise use, you tend to have that visibility. So the expansion they're doing allow us to see more and more. Now they are places where you may add additional context of additional products, and I think Zscaler is thinking about that as its scale.

But from my visibility today and what I see, and I think the more some of these companies become platforms and give you more visibility you would use them to actually give you information you need.

Another one. I think that's exactly right, right? I think the visibility in the single platform is really beneficial to us. I couldn't tell you that there isn't going to be a best of breed from another product or solution. The key there is when that happened is the integration level, right? It's really how a Zscaler or how is the product ex playing together and how do I integrate those together. It creates more opportunity.

But the real question is, if you're willing to go outside of the ecosystem, how much value does it provide to us, right? And if it really is that much value, then it's about the integration for us.

All right. We have a question somewhere in the middle. We'll probably go there. .

Eric Heath with KeyBanc. Thanks for all of you being here. I'm sure we haven't really touched on it, but more the SecOps side of things. I'm sure you all have other vendors that are using various SecOps organization, your SIM, our EDR, et cetera. How do you think about Zscaler as a partner in the SecOps Arena side of things with Red Canary and some of their ambitions there? .

I don't think I would be the one to take that someone else can take this one.

I'll take it. using that. Yes. It's very interesting. And I think the industry need a different view on operations and SIM. That's a very challenging market right now. Most organizations, I think, are struggling with the data coming in and then the remediation or time to remediation.

So I think from a product perspective, when I saw it, I think it's really interesting and he could solve a lot of problems that organizations have, especially the remediation piece. What was interesting to me is the data aggregation and how much they're bringing all of that data because that's -- today, it's very costly for most organization, ingesting that amount of data. Zscaler is able to do it effectively. And I think it could be a great product for many organizations in Houston.

Steve Koenig, Macquarie. Thanks for doing this. I appreciate it. So with you all cited AI as being the newest thing that's challenging year. With like the agents that Anthropic is offering, okay, being deployable on the desktop or on the endpoint or being deployable in the cloud. And potentially in the future, the big LLM providers like pinning certificates to that stuff and decrypting the traffic, so the Zscaler wouldn't be able to see it potentially.

And maybe I'm simplifying this too much, but with all this stuff changing so rapidly, like how mature are the solutions being offered today for you all in terms of being able to empower your employees but protect the use of this Agentic technology in cloud and the desktop clot in the cloud. How do you think about doing that? And is it slowing down your rollout of like these these agents, say, co-work or cloud, et cetera. Are you worried about that? And where do you start to protect.

So it's a really good question, and I think it will go back to partnering with a company like Zscaler to work through that. You're sometimes always playing catch up and you only could do what you can, but you have to really work with your security partners and your strategic partners in the space to be able to do that. And you talked a lot about -- you might not be able to see all of the traffic or everything that's going on, but it's really being able to see some of it, understanding your environment, getting that somewhat of a visibility to be able to take corrective actions in your environment.

So it's going to continually evolve making a strategic partner like Zscaler, providing them feedback, you working together It is really going to help the product grow to be able to get what you need to get done. .

I think it's easier when you have a scale Anthropic and Zscaler and an open AI having that integration because there is the power of -- for us to be able to to deploy, right? So today, I don't have the visibility that I want by giving my employees GPT and Claude code in my infrastructure because I need additional security controls just lacking from this morning, looks like that's coming. So that's amazing. So those are the kind of things that I think we need to be able to perform some of those things. And I think that partnership will allow you to say, even if there's a certificate change in the middle, later on, that partnership allow us to actually close that gap.

I think I just want to add 1 point to it. Yes, 100%. Look, as these model providers are becoming more enterprise deployed. -- they know that security is top of mind for enterprises. So we have partnerships. We have API integrations and expansion of our footprint on the endpoint with products that we have launched and what we are doing in public cloud. we are bringing that coverage to make sure there are no gaps left anywhere. But it is evolving landscape, and we are very focused on that.

Next question I think in the front here .

Brad Zelnick with Deutsche Bank. Really appreciate you all making time and sharing your insights with us. As pricing models across cyber and IT in general, evolve to more closely align and cover token costs and align the value what you're paying with the value that you're realizing, how do you manage and kind of mitigate and have visibility to where your CFOs aren't kind of choking you out and -- and where does Zscaler fit within all that? .

Yes. Great question because we just went into the AI solution. And I mean those are the control right, the capacity, that's the economy side of it, and it's probes and number of tokens that we're working with. And then I think it was interesting. I read an article not too long ago that was talking about people and companies are driving AI and AIU, they were measuring who was doing the most, but they were just using AI. They weren't being productive with AI.

So you have to change your measure as a business to what is the AI value providing, not just, hey, I used AI a whole bunch. But really, what was the productivity out of that AI and somebody was trying to win a contest to say, I hit so many things. So when you think about like us, it's -- right now, we do want to see people using it, right? You want that experimentation, you want that, and you're going to see some increased costs.

But the question ultimately is going to come down to, you're going to have priorities it's not this unlimited bucket of money that we all have, right? So when I look at probes and applications, I'm going to start to have to start to look at prioritizing my applications and understanding what I want to scan, what I don't want to as we go through that mechanism.

So I think from a business perspective, like anything else, the scale and the cost is going to go up, but how do you measure the value of the cost that's going up? And what are you actually running. You think about cloud cost when everybody just threw up things in the cloud and didn't manage any of it and somebody got a big bill at the end of the month, right? So you really have to sit down and start looking at from a business perspective and say, what are you allocating -- what are you permitting and put some controls and access around this, so that you can see the difference in what the money is being spent on?

We have 3, 1 in the middle and now. Let's start there.

Okay, Jason. This is for Jason, Mustafa. Ashish Bhandari from Through line Capital. Both of you spoke about using your Zscaler deployments to have better visibility into developer usage. That's an interesting use case and not something I explicitly thought about before.

Maybe can you double-click into that? We've seen all the cogen tools go pretty nuts over the last 12 months. So I'd be curious how you're using Zscaler and other vendors to address that.

So there's the capability -- Zscaler because it sits on the endpoint, you start to look at the capabilities to talk about, which is IDs -- so the engines that the developers are using to write code. We have seen a lot of supply chain security happening lately.

And this is the visibility. How do you use that to actually get better traction and make sure you know what the developers have. The second important piece is the API integration they have into the AI agent that allows you to see what's happened and what the developers are doing from a policy standpoint. And I think with some of the enhancement that it's coming, you can even have predefined policies and say, someone can do this all clear the parameters that you can actually do.

So I think that's powerful, that's missing today. And if most organizations, you either have to build something or go find new provider that's doing that. So that's, I think, in my view, it's --

And just to add to that, like look, from our side, we have some very large customers who are big technology shops. We are big developer populations, right? So even with core products like ZIA, even if you don't think agents in AI security, we have been covering them for many years. So 100% a big focus area. I think there was a question you had in the middle.

Meta Marshall, Morgan Stanley. Maybe a couple of follow-up questions. Jason and Wayne, you guys kind of didn't talk as much about the Agentic SoC. And so just kind of wondering what solutions you are using to kind of manage a lot more data kind of coming in and a lot more signals that you guys are getting? And then on the second question, kind of on the final point around pricing, it sounded like kind of the response to Brad's question was, we'll get the AI costs under control, and that will kind of level set the rest of the cost. I guess, just is there a comfort right now with kind of token-based pricing within security that kind of mirrors that AI pricing.

I'll take the second.

I'll take the first one.

There I'll sit on the backside on the pricing. Are we comfortable? I think we're learning what Comfort looks like. I think you're right, it's pretty new to us. So where is that? I know there's going to be a ramp-up, Absolutely, right? We we're going to purchase so much, especially on the probe side and we're going to go out there and we're going to start to see the value of it.

And naturally, the organizations are going to continue to grow. So I think there's always going to be a capacity increase with that budgeting. I think he'd be hard-pressed today. It's easy for us to go out there and say, evaluate what we have today and say, this is how much we need. I think what will be interesting is when we get 6 months or a year down the road and we start to see where this tiering level goes, does it ever level off? Or does it grow at a certain pace.

Comfort, I don't know. I think there's a strong word. I think there's an expected cost -- but comfort is something I think we just have to get better at. I think like I always use the cloud, like we just like to throw everything out there, and we'll see what happens. And then everybody started to figure out how to manage it. I think that's what we're going to learn very quickly is how do you manage AI expenses and growth? I think comfort is probably a strong word.

Yes. I'm not going to talk to vendors and I can talk to strategy. Yes, as an organization, we are definitely looking at how we can use a Agentic SOC. So because as you've heard, you're not going to be able to keep up with human speed anymore. You need to use genetic AI to be able to help you. .

And that's a big focus area for us. You will hear that tomorrow's keynote, which is going into what we are doing in the Agentic SOC. We have always integrated SOC source and are 1 of the highest fidelity security data provider. But our data is unique, and we can build a lot of findings on top of it and by integrating third parties and some of our investments and have a lot in, you will hear what we are doing in that space.

We have 1 last question that we can take. We'll go in the back there, and then we'll wrap up.

Yes. Peter Levine, Evercore. We're at the Zscaler conference, but maybe if you take a step back, if you think about identity, network, endpoint, cloud security -- what's the first layer of defense that you're defending now against some of these AI attacks? I know you're investing a lot more in Zscaler and their AI products.

But if you think about identity, your endpoint, like where are you spending most of your capital today to the founding business.

Identity still to me is extremely high. I mean you start with identity in the roles and segmentation as you talk about that. And -- but it all bleed right back into Zero Trust where it happens, right? So whether I have identity, and I have ZPA, right, and I can apply an individual to an application on our system and really put that enforcement policy. But I feel like it always starts with me in the identity in the credential space because once I know that, then I can control and enforce policy through whatever mechanism I feel that is, whether they're coming through an Agentic either not a real person or if they're a real person or not, then I apply that. So I think identity has to be a strong focus and then everything else builds from there.

I would say identity first, data second, identity, you use it to make sure you know who's coming in and what they need access to. In the event of zero-day or they just work in and get access to the data. It's copying that data and validating that. So if you connect those together, and I think you have a good chain of security, which I think Zscalar is trying to get up.

All right. I think with this, we'll wrap up the panel. Thanks for your questions, and thanks for sharing your insight gentlemen. And next session, we'll need a few minutes to set up the stage. So give us a couple of minutes and we'll get back.

Yes, please. Okay. We're going to get ready with -- we have plenty of time for Q&A with all these folks. So please raise your hand. We have some mic runners -- maybe start up here with Brad. .

Thank you again. Can you guys hear me? .

Okay, Brad Zelnick, Deutsche Bank. Great to see you all. Another Zenith Live in the books. Great stuff. Mike, I wanted to direct my question to you. One of the surprises coming away from Q3 results was guidance that we heard, which was incrementally conservative -- and the context around a few key sales departures as a reason for that, which in the context of a company with 8,000 some-odd employees was just a little bit surprising. And not to dwell too much on that.

But looking forward, can you just talk about the resilience of the go-to-market organization, why the pipelines and the relationships or institutional relationships and the risk that we bear going forward? Or is there going -- because we've all as investors seeing these movies is there risk of fallout that you've got dozens and dozens of others that are on their way out the door? Or just any help you can share with that would be great.

Yes. Good question. So I think the unique thing about that was just -- it was just 2 at the same time. That was it. right? Normally, I mean there's always going to be turnover, especially in the world that we live in today with AI. There's always this new hot company that people want to go to, and they've got formal. A lot of the people here, and I always get so energized, I come to this event, -- and I hear the executives talk about how much they love their account teams.

That relationship is so important. We have so many talented people here that love it. They love what they're selling. They love our solution. They love the future at Zscaler. So I feel very confident that our strongest people are going to be successful and continue to thrive here.

They also want do they have a career path. And so as we grow we put a lot of time and effort into career passing these folks to make sure we keep the right people on board. But it's healthy to have some level of turnover. And in both instances, the people that left. One was a mutual thing. The other one was a little bit more -- maybe a little bit more of a surprise. But we've got great people on the bench to backfill. So it also raises the game of other people. and helps on that career pathing side. Do you know what I mean? So they see a future other people when 1 person goes, somebody else gets promoted, maybe you bring in some new folks -- but a lot of times, you have a strong bench, and you can promote people. And that means there's another set of promotions. I got under that for worthy people. So it's an opportunity as well. .

Yes. Okay. How about John, over here. sit outside the side? .

It's John Difucci from Guggenheim. I have a couple of questions. I'm going to come to Mike, too, because I actually never met you and I have always wanted to. So we hear a lot about a changing go-to-market strategy when you came on board. -- become a much more strategic partner with your customers, and it all kind of makes sense.

And I think your product people have really built up the platform so that it's gotten to be more of a platform rather than being used for a couple of products. And we do hear about a ton of large deals in the pipeline that continue to get pushed out. And I'm just curious like I'm probably not the only one, everybody checks here into the field talks to partners. I just wondered like what's going on with that? Is it -- are people sort of waiting to sign large deals, they are they fully committed to Zscaler as a platform? Like I heard your customers up here talking about Zscaler and solving the problem of AI, which I don't think any 1 vendor does that.

But I don't know, maybe you guys think you do by yourself. But how would you kind of talk to that topic. And I know there's a question in there somewhere, so I apologize. But there's these big deals. You're a more strategic partner to your customers, but they don't seem to be closing as much, I guess. .

Yes. Maybe do some deals happen faster than expected, too. So it's kind of a balance. But the deals that take longer to get done, it's usually because there's a lot of testing that they have to do. And there's a lot of people -- it's kind of a political landscape, a lot of people you have to get on board. -- from different groups, right? So that takes time. They want to go through the testing. They want to see what we can deliver.

Sometimes there's new requirements they want to see us deliver before they're ready to take that deal to the next level. And I think that's 1 of the strong suits of Zscalers how closely tied we are to customers, how we listen and actually, we deliver on those requirements faster than the competition. That's what I hear at least.

I'm probably biased, but that's what they tell me. But sometimes it takes longer, right, to build in all those requirements. And then they're going to say, okay, now I'm ready to go because I've done the testing. Large companies have -- they spend a lot of time doing testing. -- a lot of time doing testing. Hopefully, AI can help solve some of that problem, right? And they can speed that up. But we can plenty of deals that happen ahead of schedule as well. So I'm not super concerned on the time it's taking to get these deals done. That doesn't keep me up at night. .

Maybe I can give a perspective of a CIO because I was a professional CIO before getting on to Zscaler payroll. What I think Dhawal mentioned this earlier as well, See, the large enterprises are also struggling with these AI Sunami coming in. The -- who is the owner inside large enterprise to drive -- some people are pointing chief officers and some people make the data person, be there, some people keep the infrastructure.

So -- but what's happening is they're all realizing that the right to play and right to win to protecting AI is the network providers, right? And then among the network providers, so we are getting a lot of traction around how our network teams and the are bringing the application teams and the officers, and that's where some of these testing cycles will take longer. But we see the momentum. I see the recognition by some of the CIOs that Zero Trust providers have an advantage. And that's what Jay highlighted in the town hall today as well or in the keynote.

Keith up here in the front .

Keith Bachman, Bank of Montreal. Thank you very much. Jay, I wanted to direct this to you as you -- I don't know if you were listening to the last panel, but identity was no pun intended to identified as 1 of the key areas of spend as we look at the next period of months and probably years.

And if I think about some of your offerings -- it seems like you're encroaching on identity, right, in terms of your value proposition and Swami we were talking about this last night. But I'm trying to understand where does Zscaler's value proposition start and stop relative to the identity partners?

And are you frenemies are directly competing, and this is particularly related to areas such as governance of agents is what I'm referring to. Thank you.

This kind of builds upon the question that got asked and ask listen to the answer as well. To me, the question is not that is identity more important or network more more important. EDR does what it's supposed to do on the endpoint. It's like watching what's inside your house. It's useful, but it's contained to that. Identity is the starting point of access to something. Identity can be used to do old school access to put you on the network. Then identity is useless.

Because identity puts you own the network, you own the network, you're going, you can go all on them. Identity combined with Zero Trust together is the real solution that says only this entity can talk to that entry. So our view has always been. I don't see tight integration. And then we on the switchboard that makes the right connection on one-to-one. So encroaching on identity.

Let's talk what that mean. The basic identity starts to bid John identity is this. We get that from Okta today or Microsoft. But then there are a number of things on top of that, which device is John coming from? We know that because traffic comes from, which location is it coming from? What's the behavior is the traffic growing less than us. So we're adding value on top of identity by looking at a bunch of attributes.

We call it additional authentication services we build on top of what we get the basic identity that we do that today for users. Now this scope will become more important for agents because agents need to know a lot more than basic identity. The question is, should Zscaler provide the basic identity or what should it provide?

Our view is that every provider that's going to allow you to create agents, Microsoft, AWS, Google of the world. Identity just gets created. The basic identity who is -- what this agent is comes from that agent. I don't need to compete to get that identity. I take that, I become the switchman, but now I can add a number of authorization services on top of that, skills, tools, access, all the other stuff.

We do all of that. That's becoming extremely important along with that. So yes, we are not directly competing in the basics of identity, but we are competing to deliver solutions. Customers don't buy identity for the sake for identity, customers why identity or ask to access on application services. And now the question you're going to ask is Symmetry identity. Yes, no. It's the graph kind of say, who is tango. It gives us meaningful information -- so we may not do the basic identity to compete, but all the other value to make decisions about what to connect is very important for us, and that's really what our focus is.

Maybe I'll just add quickly. It's we will and will continue to use that as context. It's very important context as well as the authorization of what that identity is allowed to do. So that's part of the information we use in making our policy decisions being the 1 that grants that initially, that's a whole structure around who the business owner is of that.

It gets very distributed in organizations. It has to cross lots of different parts. I don't know that there's a spot where we have -- like where it's critical that we own that piece. We need to know it, and we need to keep up to date because the other part 2, when you look at this intersection is being an in-line solution or being on the endpoint where the action is happening, which were in both of those. There's also a whole question of that initial authentication or authorization that's granted to the application what happens if the behavior or pattern changes while that session is open. We're in the best spot to actually take a real-time dynamic action, say, based on new information, I know, I'm actually going to end that session or that conversation.

And that's a great spot to be able to enforce. And we do that in a couple of different areas and that whole discussion is coming up on agents as well, too, right, in the middle of sessions. Like what is it the risk changes or the posture changes already authorized the sessions there. Who knows what to do -- who's in the spot to take that action, we're actually in a very good spot to do that. .

So I may add 1 more comment to clarify I get asked by many CIOs. I said I thought identity provides policy of who access is what? How come Zscaler providing police okay? -- right? They get confused. My simple answer is, when I go to an international airport, they scan my driver's license or my passport. And Passport that computer makes a call to a database of passports. Is Jay's passport valid or not. That's identity. But I'm somebody to sit in line to allow me to go or not go. .

We are in line in space have thing. Identity once you get checked out identity is out of the way. Identity may have groups to say who can do what, but then it's out of the way. Being in line, we're able to add additional value, authorization, behavior and all is what we can do. That's why we play a very important role. That's why having the best identity for us is not that critical.

Let's go ahead, Catharine.

Catharine Trebnick, Rosenblatt. Can you unpack why you said ZIA and ZPA are growing? Is that due to the acceleration of ethos in the landscape. But just you picked that up in your opening remarks. .

So when you talk about ZPA. So there's Zero trust part for CIDP users, then this for workloads as well, and we'll take the same ZPA for agents as well because at the end of the day, -- the goal is who can access what application we are having. I think. So on the ZIA side, largely, that stuff comes from new logo acquisition because most of the time, when they buy a DI, they do it for all users because they must protect all users. ZPA, many times, they only bought partial users because it started out by replacing VPN. Now under metals.

They're basically saying every user must be untrusted. So we're seeing a lot of interest for people who have bought ZIA, but haven't bought ZPA so far or who have bought partial EPA want to go to full ZPA. Those areas are directly beneficial because that does 2 things with ZPA, you're hiding your private applications behind us. Also with ZPA, the lateral movement goes away.

So we see Methos as tailwinds for it.

Second row. A couple of questions right there.

Roger Boyd with UBS. Jay, can you compare the level of urgency you're hearing from CISOs today to what you saw during COVID? And I think you laid out very clearly why Zero Trust architecture makes sense for this environment. But I think the other question is how quickly can customers get there. And in COVID, we saw sales cycles meaningfully compressed. I'd just love to get your perspective on what you're hearing today.

It's a very good question. The urgency for Methos is actually higher in many ways. I didn't see the board level discussion happening. -- as much with COVID. -- they wanted people to come back to work. But almost every CIO I have talked to us so they said, we've got a task force, we are reporting the Board every week or every 2 weeks on the progress we make. It's that level of stuff happens. The difference is the following. With COVID, you went home on Friday, you needed to access your work on Monday morning from a home.

So the urgency was give me something to get started. With Methos tell us, they're struggling there figuring what do I need to do? The first thing they all wonder is, what is this Methos, what does it mean to me? And the way Anthropic has done it, it's kind of a mystery thing out there. You don't know, you wonder about it.

But as we had talked to the customers and explain to them, they're looking for practical steps and saying, what can I do and report to the Board that I had done AB and C and I'm making progress. So all of our discussions have essentially led to essentially deliverables where you ask that they want to work on fixing volabilities. But -- our current customers are actually working on hiring their applications behind us.

They're working on moving to Zero Trust everywhere. They are looking at the users not being on the network and branch projects are actually gaining more interest. But I think it will take some time. I expect the momentum for ZPA kind of stuff will happen faster in the customer base.

The new logo takes a little bit more time and testing. But I clearly see the interest in moving more towards Zero Trust with Methos than it was before Methos.

This is Shrenik Kotari from Baird. So Jay, you have talked about how agenting exchange could be the largest transaction-based profit-based monetization opportunity. And today, sort of double down, talk about the Agentic transactions or order of magnitude potential Zero. We heard from the customer, it seems like from an AI security and a Agentic prioritization, they are adding to the budgets, there's appetite.

In terms of just the core monetization meters, right, you announced AI broker. So I'd love to hear more about how that becomes a commercial manifestation. It seems Customers are anchoring towards agent identities orient first. You talked a lot about identities being sort of the centerpiece. So just curious how are you thinking about this monetization strategy.

Right? So you saw a genetic exchange and the traffic that's coming through exchange for agents, essentially based on traffic or call it, number of requests, which translates to tokens becomes the commercial mechanism for us to monetize for it.

And -- we just launched it. I think -- so we are seeing a lot of interest building our customers who work with us early stage, POCs and all that kind of stuff. I can tell you, I'm not seeing so much interest in any product than exchange for agents and being a critical product like this.

For example, on contrast to the area. Asset Management, do they care about it they do. They don't like it. The right time in the do. But they know that Agentic is a hard and important problem to solve. They're working with us very closely. The exact pricing and all, we are still figuring out the way we do pricing I work with a first dozen, 2 dozen customers, figure out the traffic flow pricing that needs to be done. So pricing will probably get firmed up in the next couple of months as we see traffic, how much needs to be done, but I see lots of interest. And I'm looking forward to see the growth, and we'll share with you as we make progress in this area. But it's an exciting, challenging problem -- the #1 reason I hear from CIOs is why we're not able to roll out these Agentic projects in production at mass scale is lack of governance and data security issues.

Let's go over here to the left side my left. .

Thank you. Gray Powell with BTIG. So thanks for hosting the event today and a good presentation. So I understand that there's a lot of urgency and discussions created by Mythos. And I'm just trying to figure out how that materializes into demand. And specifically, do you see it driving more interest in the existing, like the proven products such as ZPA? And I'm asking because just the marketing on a lot of the AI security products, I just have to -- it sounds the same. It's confusing to me. I think it's confusing to buyers. So I'm really interested if you could just talk about what you're seeing from the perspective of core product demand versus new AI security products and just how you see that playing out in discussions? .

I can start and Swamy, you can add to it since you're very heavily involved. .

When we -- I'll give you a detailed answer. When we do our meetings with customers about what can I do to protect against metals. We have very specific 6 recommendations, and they have become as a result of lots of discussions. -- one, higher attack surface. That's where ZPA plays a very important role because you're hiding attack surface of your private applications, okay?

Number two, if you get breached, how do you make sure the breach doesn't spread around? It needs Zero Trust at the user level, fast because use the weakest link. That drives demand for ZIA, ZPA bolt. And then we say, make each branch like an island that make sure that the infection doesn't spectrum branches. So it really builds demands are bold. -- users, branches and even workloads.

Number three, if you already got ZIA/ZPA deployed, which are foundation for your users, you need to make sure they're properly configured. We are doing validation of the configurations to make sure it's the best practice of forward configuration.

Number four, while I assets are now directly linked to metros. They're just showing up in every enterprise, and those AI assets are creating risk. So understanding what you have with the risk is #4. Number five, you should discover and fix will it prioritizes and fix vulnerabilities.

That's everyone is expected to do that. Six, you change from doing right teaming a couple of times a year to continuous automated that teaming that's driving demand for our red-teaming products. So this is the list of recommendations that go through and customers prioritize it, but they realize that Zero Trust becomes a foundation to do more and more of Agentic stuff. And that's obviously the demand being driven for AI as well as Zero Trust users and other things as well.

Yes. I would say that if you look at the discovery that we announced, right, that is something that CIS want right now. I always tell my team that you get to build the products that customers want yesterday. So that is the demand on that and the POCs are going very well.

And those conversations quickly switch into how can I now manage it. And many of you have seen this NVIDIA 5 layer AI stack. So if you look at the top layer, the application, so we can protect it with secure and then the next 2 layers models and LM they would want to make sure that you govern that as well. So what's happening is when users were using Internet, you would type www. something.

In the era of agents, the equivalent of WWW is MCP. So the AI broker that we launched was effectively how to really govern the activity that's happening. And within MCP, you could renew skills, tools and other problems that we can put in, all of them have to be governed. And that's why people are excited beginning with the discovery.

Maybe just 1 other comment to add on that. I think the -- when you think about protecting your organization, the core capabilities that Zscaler has and as Jay mentioned, and specifically the ZPA having that application, that attack surface of your applications, that's that's the most obvious thing that everyone should be doing and pets driving a tremendous amount of conversations.

But it's also when you have that discussion, it's clear and it's understood. Now people need to do it, and there's the -- getting the mindset to make changes, but it's not a hard discussion with people on that. And I think what I've seen with Methos is that recognition of I know I need to do more. Now if I haven't done this already now, it's time to do that. That second part about MCP servers and all the assets that are part of using AI for productivity it's not a chicken and egg, but you're not going to spend all your money on securing something that you haven't even figured out how to use yet, right?

So all of those pieces are popping up in organizations. And so I get why you say it sounds confusing because each of those terminologies, those pieces of things that are part of using AI for productivity. It's it's cloud co-work, it's MCP servers, it's A2A, and it's all these different pieces -- it's at the endpoint, it's what am I using a foundational model in the cloud.

Everyone is trying to figure out -- how do I use it? How do I get productivity. And I think in the earlier discussion, people talked about, am I seeing the actual outcomes versus just usage. But the fast follow on that is, so if I'm really going to use this at scale in production, how to do I heck I secure it? And so everyone is looking for those attach points. And I think what you saw from double this morning and in the discussions today, we do think we have these right 3 pillars for how to look at that.

But that is all new for folks, right, in terms of where they go in to spend. So it does sound like a lot of people, like it's that gold rush type mentality, where every big company on start-up is going to say, "Well, I'm going to help you with that specific piece of it, right? And that's why you see a lot of common storylines in there and everyone saying, I'm going to be the one who's going to do that and we believe we can, too.

Dave I'll grab him over here on my right, your left.

Steve Koenig, Macquarie. This 1 is for Mike and if Jay wants to follow up, maybe he'll want to as well. So just maybe extending the last question when it comes to these conversations that become about securing genetic AI in the enterprise, which is complicated and difficult for for the enterprises to, number one, figure out what they want to do with the Agentic AI and then they got to secure it. So Zscaler has has an ability to enter into those conversations and you have solutions that help with that.

But I'm wondering, how does that affect your sales motions in the sense that what used to maybe be an easy conversation about ZIA or ZPA or even Zero Trust everywhere, now becomes a conversation that is potentially much more complex because the whole is year protecting AI enters into that. And then maybe does that change the nature of your sales cycles that would have been much easier. So how do we deal with that? I guess that's the question.

Well, it's still early, right? And we're learning. There's new personas that we're going to have to build relationships with. So kind of the way we've got the sales org set up -- we have Doble's team that has some core folks that are very, very knowledgeable, go very deep with those personas today. And then we're training people by region, by area where kind of the major buying centers are to make sure we have enough people that are able to have those Level 3, whatever, Level 2, Level 3 conversations.

But yes, it's going -- we're learning as we go. But there's 1 thing that's very clear. Everybody wants to have that conversation with us and they all do feel like, especially if they are a customer today, they feel like they would prefer if we had the right solution for them because we're already there in line, and we see all their traffic. So we have this advantage, and we feel like we have the right to go win they feel the same thing.

So if I may add, many times, the notion of who is the buyer matters Zscaler has traditionally sold to 2 most important buyers. CIO is #1. CISOs #2. And why it's a CIO #1. 6 years ago, I used to think that CISO was number one. Because the transformation is driven by the CIO, CIO, CISO and Head of Infrastructure Network and these folks play a role. A lot of the discussion gotten stuff, go to CIO. Some companies do have Chief AI Officer or Chief Data Officer, then actually into gets made by the CIO. If we didn't have access to the CIO or CISO. We would be wondering about which solutions take all the security solution we have. They all lead up to the CISO. Now AI solution lead up to CISO and CIO both.

I think from access point of view, fairly well covered. The key for us is how do we streamline our teams to be more effective. There are some similar things to what we have been selling there some different things. Take what's similar? The notion of exchange for agents user branches is pretty similar. Yes, there's some nuance things underneath. But explaining that philosophy of we did it for users. Now we do for agents. Is fairly easy to explain and get the stage going via it count exact, then we can pull in SCs and subject matter experts as they are at.

But also, we have evolved some of these specialty teams, too. I mean Mike did specialty teams in his previous company, where they actually have different buying centers, at HR in 1 case, IT in second case, some in other case. So we have a specialty sales team, for example, for data security, which can get pretty complicated. Now data security is still sold to the CISO someone under the CISO.

But the technology functionality can be complicated. So we had experts who actually talk about that area. Similarly, we had a few others. We also evolve when a new product comes in under product management, we learn, we understand and we figure out how to go forward with it. But for AI overall, everyone wants AI. So rather than having a small specialty team of AI, we actually want everyone to sell AI, that they'll be backed up by some experts, domain experts, nonspecialty salespeople, but domain experts who could be pulled in for deeper discussions.

We are learning the process that the part of selling AI Protect, which is asset management, secure access and the guardrail and red teaming is fairly straightforward. We learned quite a bit in the past few months. The learning will probably happen about our exchange for agents in the next couple of months, but there's a high degree of interest.

Todd, right in the middle?

Todd Weller with Stephens. A question for Adam. Adam, you come from the SecOps world. It's a new space for Zscaler not as known crowded space. What's the strategy for breaking into that market? And what is it about the solution that you think is differentiated and will resonate with the customers?

Sure. I think you heard a touch of it from the folks on the panel before. But yes, it is new. So they're also learning how we're approaching this. I think the biggest piece from a SecOps standpoint, right, is that organizations are and do have centers of gravity of data.

And so if you're a Zscaler customer, we are a center of gravity of data with what we do with ZIA, ZPA, DLP, what we have from our client perspective. And -- our approach to this is how do we bring that together in a meaningful way for the purpose of security detection, investigation and response, right? Because that -- we have detections, we have signals. We have contacts -- and historically, we haven't brought that together in any fashion to help a customer through that investigation process.

We said you can stream it somewhere else to do it, but we haven't offered that place. Yet we also had capabilities like our threat hunting services, where we were uniquely positioned to use our data to find incidents that otherwise would not be found by streaming it off to some other SAM or SecOps product. You wouldn't see it on the end point. And we had people who like that service from us, but it was a small, I'll call it, like pilot service.

But at the core of that is they were writing detections that could be found across that Zscaler ecosystem of data. That's part of what we've been bringing together foundationally, the data fabric that we acquired several years ago is what creates those entity relationships between all the information we have third-party data like identity, contention like vulnerability and exposures and asset information -- and so we wound up having this foundation, we did the Red Canary acquisition, which brought in meaningful detection libraries and skills around how do I run detections against not specifically Zscaler data, but any third party that you want to bring in.

And this past year, we've been bringing all of that together. What we're bringing to market though is the software platform. Because Red Canary was an MDR. So if you wanted that service you got a service. If you wanted a software platform, you got to service because that was the only thing that they had to sell.

And had we not acquired Red Canary part of their road map path was how do I deliver this in a more cost-effective software platform way, but that wasn't what they had built, and that's not where their 10 years of experience came from.

Zscaler, you know that's what we build, right? And so we had this path that we were going down -- we had the Red canary acquisition in this year has been about bringing that together where that Agentic SOC core platform becomes that foundation where I should be able to go at a minimum to any Zscaler customer and say, -- we already have this data. I can make better use of this for you in detection, investigation and response whether you send me anything else or not, happy to take more, and I can take more.

But even if you don't, I will show you how I'm using Agentic framework to go through each of those steps and help you investigate incidents in a way you could not do before -- and then if you want to send that off to your SAM or whatever other product, you can do that, too. And know, by the way, if you want a service on top of that, we have expert skills for both threat hunting and full MDR that we can now offer on top of that.

So that's what you'll hear tomorrow in some of the keynote and then in a more formal launch. And I think that's a valid entry into this space. it also balances long answer, but I'll just wrap this up. It also balances, I think, the long-term question about what will happen in the Sakani world where there's this continuous, I can do the job that could give me all the data. I don't need any of the data. I'll just send agents to go get all the data when I need it. right?

And everyone I speak to in the SecOps world, you need a foundation of that data. Like we're not at the spot where this is just real time. Agents are just going to go grab data from their source at the moment they need it, you need that initial core foundation. And I think organizations will have several, right? We won't be the only player that's there, but I think we can also live and it's important, we can live with those other players that are in place, which I think is a requirement for entering into this market when there are already other big players and crowded in there. So I have to be able to show a customer that it's okay that you're working with CrowdStrike who's a partner of ours, we can be in here not just, oh, the only way this works is if you only use us. .

Okay. The right side here in the middle on Tazz and then we'll go to Eric.

This is Tazz from ROTH Capital. I had a question. I had a clarification on the Zero Trust for agents. Is there dependency on customers having ZIA and ZPA users before they can use Zero Trust for agents or can customers who are completely need Zscaler also use the transfer agents.

They can go on, you don't have to buy the user before you do agents. If you have users, it becomes easier because you understand this. But this is not a dependency. .

Got it. And the second part of -- second part of the question is, you gave us the bookings number for AI protect $100 million over the last, I guess, 1 year. And my question was, again, how much of that is coming from net new customers to Zscaler versus upselling. And when customers buy AI protect existing customers, what is the typical uplift that you see in the deal value?

It's a mix is the answer. The uplift is a harder 1 we have. I haven't looked at that personally. I don't know if anyone here knows the answer. .

Yes, we'll have to stay tuned for that one. We'll come back to you on that. .

Can you pass it to Eric, please? So you're right. Awesome .

Eric Heath from KeyBanc. Jay, I guess this 1 is for you. I mean, tracking all the breaches we see, I think a very, very common shortcoming point of exposure is the hardware that sits on the perimeter, right, the firewalls, the SD-WAN to VPN, et cetera. And you always talk about how this is a weak point. And maybe I'm over extrapolating and maybe I'm reaching, but it seems like Mythos can only accelerate that short coming from the hardware vendors. .

And we know there's several hardware vendors that are constantly patching and being exploited and et cetera, and Methos those only accelerates that. And then the ability for these hardware vendors to support these large fleets of hardware devices that need to be patched and fixed and whatever just we're always talking -- now the conversation is the compressing time line of between vulnerability and breaching and exploitation. And I know your answer is going to be yes to this, but do you think that this accelerates the transformation from hardware to the Zero Trust Exchange. And like I said, I think your answer going to be yes. But like in practicality, do you think this is going to be a real accelerant for customers to think .

So having had probably well over 100 conversations CI and CSOs in the past couple of months. light bull for better understanding Zero Trust is going up. For example, we talked about users being untrusted should never be on the corporate network. Some of our very progressive customers have already done it. many have known they're saying, "Oh, I should be doing that. So the understanding and learning for Zero Trust is going up, understanding and learning that 300 branch offices, the firewall face in the Internet is exposed to the entrant. And that is not a good thing, is going up.

So I do believe that Methos is becoming an excellent or adoption of Zero Trust. And it's going to start differentiating the firewall guys who always talk about we go Zero Trust say because they see the difference. Now they ask a question. No, -- do I have a lateral moment or not, what's going on. So this is happening. And also the point you said, patching. The bigger boxes you got everywhere, the more software functionality, you sit in a box that's scattered around.

The bigger that is because bigger the issues out here. The less you got sitting on the device is less likely you have issues out there and more likely take the branch office. We do have a branch, -- we're trying not to get there, but we are there because the customer needs.

We run them, we manage them, we operate and we upgrade, okay? -- essentially. So we are taking that risk away. And also in the traditional world, there are firewalls sitting inside the campus deep inside that only under customers' control. Those are the kind of things sitting out there. And I do believe that it is accelerating this stuff. And hopefully, we'll show you results in coming quarters.

Okay. We're going to go over to George. .

George wane with Oppenheimer. Kevin, bringing you into this since you haven't had a chance to talk yet maybe giving us some perspective on -- there's a lot of opportunities here, how you're prioritizing your investment with respect to your product and sales and marketing. .

Yes. No, I appreciate the opportunity to answer the question. Some of it has been answered as we've kind of gone through this conversation, right? So as we think about when we bring new innovations to market, the way we're thinking about AI is different than we've thought about some of the other products. So we have a dedicated team with Dave and Swamy who are acting in effect like a startup within the organization to really move with speed. But then they're working directly with Mike's organization to enable as many of the sellers and the people within his word to be able to sell it broadly.

Obviously, AI is just a very important element, both in terms of what we're providing our customers, but also internally. So that is a priority internally if we think about in that regard. And then the other products, we have specialty teams where we specifically identify resources that can help Mike's team go and sell. And actually, those live within Mike's team. So they're part of them. But that's how we think about the trade-off in different investments. And we, like every other business, go through an annual process of setting our operating plan, and we identify priorities. And AI will continue to be very top on those priority lists. .

If I may add, while our portfolio has grown, has become pretty large. We actually say no too many projects and many initiatives. EDR has been asked for many times. We said no. Identity has been asked many times. We have said no. So we're fairly disciplined. When we do projects that are very synergistic to Zscaler. They don't require as big of an investment as it would be if we were to do the old way. 5 years ago, I told you when we did sandboxing. Literally the amount of effort that was needed to do sandbox on Zscaler ZIA platform. 20, 25% of the total effort if as compared to if we're done or an independent company because rest stuff is already in place. They're taking traffic, they're opening files, all the stuff has been done. I talked this morning, Agentic Xchange, building on top of zero-tu exchange. -- only 70% of the pieces that are there. 30% is what we're adding. Take, for example, you heard about Zscaler cellular.

It's a very cool and exciting area of opportunity. What are we doing in amount of after needed -- it's a fair, very small team that's leveraging all the back end, but a new use case to take traffic, take telemetry from these IoT devices. So being doing the smart thing being around our core competency is what makes us more productive in delivering more products with great returns. .

I think we have time for one more. Let's make that Rich in the back. .

Rich Poland, Wells Fargo. I think we talked a lot about just the investments in a lot of things, AI on the product side that can really I think, drive a lot of expansion with the existing base. But when we think about 1 of the things that was said last quarter, the new logo side, it seems like that's more of an emphasis now targeting that 200 to 100 employee range. I guess both Jay and Mike, can you talk a little bit about just what's needed there? What's needed to enable that? What did you see that prompted you to want to focus there more? And just kind of any color around what you're doing there. .

Mike, and then you get out to the next level of detail. I think what we shared with you before is that we have focused on larger customers and we come down market from there. The question wasn't that we are now, for the first time, adding new logos, the new logo for more apps. As we are adding more and more people, the higher end of the market is fairly well covered. You have to add more account execs, they actually naturally going to the next level of the stuff. And the next layer, 2k to 10k accounts, they actually have fairly limited coverage. It's fairly limited installed base. So by default, they end up getting more new logos and very few current customers, it's naturally going to take us in that direction. As 1 thing we told you. The second thing we said is, we are looking at more focused incentives for new logos here. In the past, we have done some here looking at doing more because it's a good opportunity for us, Mike.

Well, I mean, first off, that's just a space where there's most new logos exist. So it's a lot of fertile hunting ground. But every enterprise company goes through this where you sell you add customers and then it's a lot easier to do upsells, especially when you have a platform like we have.

So everybody wants to work on existing customers because it's just easier to get deals done. It's just -- it's easier, right? And so I think historically, we've been too lenient on how we set up the territories, and that space between the 2,000 and 10,000 has just gotten ignored.

And then we kind of realized we brought some outside help to help us analyze the numbers. And we said, wow, this is a big opportunity. We've got to go back to this and actually focus the territories. Because when you do territory planning, if you set up the territory so that there's no way you can make your number unless you sell these new logos, you get that energy and everybody starts rowing the boat and not order to go get that.

And then the alignment with marketing and how you spend money based on existing customers, I mean our previous regime was really focused on upsells. Now we're just balancing that out.

One point of just clarification. You've heard us talk about the 20,000 plus or minus, largest companies in the world. this population is included in that 20,000. So it's not like we're all of a sudden going to a completely different ideal customer profile, right? We're really talking about the same population of companies that we have been for many times, just making sure we have appropriate coverage and focus. .

Great. Do you want to close this out Jay? .

Yes. So I hope you heard that we see a massive opportunity. The market is getting hotter and hotter I mean there's nothing harder than cyber in today's world, right? And having a platform that's expanding and growing at a faster pace and the go-to-market engine focus on a consent pretty well positioned, pretty excited to really serve our customers and keep on innovating. So thank you for joining us, and look forward to working with you in coming sessions. Thank you.

Jay, thank you so much for joining our conference. I really waited for this session because I read an interview with you that you believe that investors -- you don't do a good enough job to explain your company to investors. So I want to give you the opportunity to explain your company.

And the first thing I want to start with, normally, I don't ask about the quarter, but I do want to ask about the quarter because I thought there was a difference between the way you performed financially and the way the stock reacted. What is misunderstood by investors in your company's performance?

Okay. So first of all, as you saw, the Q3 performance was very good. We beat all metrics that the investors look for. I think for going forward guidance, there're 2 aspects to it. One was Q4 and second was fiscal '27. And the 2 factors for us to be more cautious about the guidance, one was we had a couple of changes where 2 leaders reporting to the CRO moved for 2 various reasons, one for personal reason, understood, and second was an opportunity at a pre-IPO AI company. And when leaders leave, we want to make sure the transition involved and they will have some impact that factor it. And second was the Red Canary customer base. We have built a new product combining Red Canary technology with our technology. And that new solution is getting showcased next week at our annual Zscaler conference.

And the uptake of those customers, we still need to understand. So keeping those 2 things in mind, we kind of set the expectation at what my CFO will call as a prudent level. But in terms of the external market factors, the market for cyber has never been hotter. Methos has further put fuel to the fire. They're probably the biggest tailwind since COVID for our company. And this platform has gotten bigger and bigger, loyal, happy customers. And we have essentially gone through the transition of sales that started about a little over 2 years ago, and we've gone through most of it. And we look forward to expecting in Q4 and '27.

So maybe let's start with if you can articulate your target markets, meaning what are the opportunities you're going after? No, I'm not talking about the quarter thing. It could be a 3-year, 5-year, but what are the opportunities you're going after? And why are you well positioned for these opportunities?

And it also relates to the question you asked, what investors don't understand, okay? So investors understand mature established market well. A firewall is a firewall. It doesn't need to be explained much. A router is a router. Maybe the feeds and speeds are better, okay? When you bring transformation, you bring totally new changes, it takes some time to explain itself. And then what happens is the established incumbents fight back because they get disrupted. They like to say we do that, too. It's like internal combustion engine car companies fighting against electric car and say, forget it, I'm better, okay? That's the fight that goes on. So take one example. Zero Trust is fundamental, with methos it's becoming more and more important because there will be more breaches. It's given because you can't be able to patch all the way. And Zero Trust will make sure that only certain parties talk to certain parties, the breaches don't spread, the blast radius will become smaller.

Many times, people think that just because a lot of me-toos are trying to say, oh, we do Zero Trust too. And this fancy new 4-letter word SASE, we do SASE too. First of all, SASE and Zero Trust aren't the same. SASE allows SD-WAN lateral movement and the like. And then the second part is Zero Trust started with users. We made user Zero Trust Phase 1. Then we made cloud workload Zero Trust. What's my competition for Zero Trust cloud? 30-year-old firewall technology, East, West, North or traffic. Then we made branches Zero Trust. Each branch is like an island. There's no lateral movement and then device in a branch. We call it Zero Trust Everywhere story. That Zero Trust Everywhere is just beginning to take off.

We shared with you at the earnings that now we have over 700 customers doing Zero Trust Everywhere, which means users, branches, cloud workloads and devices. That same number was 550 last quarter. So big opportunities to make Zero Trust Everywhere, market #1. And there's really not a real competition from firewall vendors out there. It's only probably on the lower end of the market because the high-end customers generally are more savvy, they get it.

The second big opportunity is data security. For data security, you need to sit in line as a proxy architecture and inspect the stuff. Firewall vendors don't do data security well, they're not a proxy architecture. We have over $0.5 billion ARR business. If it were an independent company, it will be the largest data security company perhaps and still growing over 30% year-over-year. We do that stuff very well, okay? That's -- so those are one set of areas. Then look at the newer areas. Securing -- before I go there, the most important Zero Trust next area is Zero Trust for AI agents. Search for Anthropic's white paper on Zero Trust for AI agents. It just came out 2 days ago. I looked at and said, they wrote what I would have written, literally. They understand it. Their stuff was agent-to-agent communication must happen through Zero Trust, not through the firewall. We actually have been building that solution. We plan to launch it next week at our user conference, and there'll be millions and millions of user -- agents, and they need to be secured. That's an opportunity.

Then securing AI infrastructure and applications and models. We have been building that solution. We did an acquisition. And in January, we launched our integrated solution. Our customers want integrated solution not 5 different vendors. And that solution is taking off quite well. We already exceeded $100 million in bookings for that solution, a big opportunity for us. And then agentic SecOps. While there are many players in agentic SecOps, AI actually is useful for building SecOps. There are probably 500 companies, start-ups in agentic SecOps, maybe more. And because they think they're going to build it easily, the advantage will be to vendors who actually have telemetry and metadata to do it.

We are in line. We probably have the most valuable data from communication. We are on endpoints. We have endpoint telemetry. All authentication goes through it. We have identity telemetry. So our customers are saying, you got the data. I don't need to pass data to someone to build the SIEM. I want really output that can be done directly with us. So that's an opportunity for us as well. So there's no lack of products, and we do products carefully. We don't go on a buying spree for I mean to say, A, B, C. They're well integrated. They're part of the story.

What makes you be successful in these areas, meaning the current position that you have with customers, what are the parts that can be levered into the new areas?

Yes. So first of all, Zero Trust Everywhere is expanding from what we have. It's very, very natural. When customers go from Zero Trust or users to Zero Trust Everywhere, the ARR either becomes 2x or 3x, okay? Similarly -- and we are natural. If you are a user of Zero Trust, natural to the next. Data security. We're sitting in line inspecting traffic. Most of the time, data leaks through the Internet. We are the natural player to be able to do that. If you think about for agentic stuff, it's natural to be do that. And if you think about the SecOps, SecOps is driven by the fact that we got all the telemetry and metadata. We can do that, but one more point. In minutes, I can figure out some of the new threats. I can do a close feedback system to the in-line system to block those threats in near real time that doesn't happen otherwise. So very synergistic platform expansion.

Yes. Is there a risk of slow take rate? Meaning what I'm referring to is the majority of the revenues today are ZIA and ZPA. You have new areas you're going after. Is there a risk of a kind of transition period?

So if you look at the ARR or emerging growth and new ACV has been growing rapidly. And we have been giving some stats, for example, great to see data security agree so well. We have seen in the past couple of years, we used to do emerging products and some of them already emerged. So we stopped doing emerging. The emerging went from about 8% or 9% to 30% in 2, 3 years. That's a remarkable expansion thing. So if the products are synergistic and the decision-makers are similar, it becomes meaningful.

If decision-makers are very different, it becomes a lot hard. That's how we are [ selecting ] our products. One more thing as products have expanded, we now have -- do have specialty overlay salespeople who can go deeper in certain areas, but they work with account execs.

Got it. You mentioned data security, and this has been a focus of yours for quite a few years. Double-click on this market, meaning what is attractive within -- data security is a big space. What is attractive? And what are you addressing within data security?

About 5, 6 years ago, we only used to do DLP, in-line DLP. And our large customers said, doing data security with 1 vendor is hard enough, if I buy 3 products from 3 vendors, it will be impossible. Zscaler, you should focus on building a complete platform for data security. And that's when we expanded to CASB SaaS security. Then we added endpoint DLP, added e-mail DLP, and we added cloud security, S3 buckets and all. Recently, we added -- last year, we added DSPM, discovery, classification of data. So it is the most comprehensive integrated platform. We think we have a big edge. We have very good uptake by our customers. So we're very pleased with the performance.

And again, what -- the same question I asked you before. What makes you better positioned for this market given that it is being addressed by other players as well?

Not really that much. Think of which SASE vendor does data security very well, not a whole lot. There is a class of vendors coming from the start-up side, they call themselves DSPM. DSPM, one more 4-letter acronym, it's called data security posture management. At a simplistic level, it does 2 things. One, it allows you to discover data. Where is my data, data center, AWS, Snowflake, wherever. And then it helps you classify the data. That's important. But it doesn't do data DLP, okay?

You do classification and discovery, then you combine it with a DLP and then it becomes a complete solution. We came from DLP side. We added DSPM, so we have a complete solution. And generally, there's a lot of wording about DSPM is important. It is important. And you hear about some of those vendors, but they will have to do DLP to be successful in data security, and we are ahead of anyone in this area.

Got it.

And then the customer engagement tracker working with us. DLP should only be done with somebody who is already sitting in the traffic path. Some new first vendor to come and say, put me in the traffic path is a big ask.

Got it. I want to go back to ZIA, ZPA just because it's a big portion of your business. How is the growth like? And what are the drivers? I mean, when I talk to Cisco or Fortinet -- yesterday, I hosted Ken Xie and Ken said, I'm 1/3 of the price. He said, that's my thing. I'm bundling it together with my firewall. I'm writing on top of the firewall, I'm 1/3 of the price. What kind of a disruption do you see from companies who are trying to bundle firewall with SASE or SSE?

So 2 things. First, if you want product functionality A and you get B, I'm not sure in cyber, if someone gives it to me free, I won't take it. So if it doesn't work -- so they are all firewall functionality. There's nothing zero trust about it. In many product areas, good enough is good enough. Perhaps the HR system, now, they are pretty important, but...

Not as important as cyber.

Yes. I'm okay with a good enough HR system, but I'm not okay with a good enough cybersecurity. CISOs, CEOs have to think that if I get compromised, what's the consequence. That's point Number One, okay? Point Number Two is that customers are understanding more and more the need for Zero Trust. I think the wind is not towards I can give you cheap firewalls. Now it is true that lately, in my view, firewall vendors have been helped from 2 things. One, the prices have gone up. Heck, if you raise the price 15%, if you beat the quarter by 15%, what's a big deal about it, right? It's external factor that brought you in. Two is, I think they're also getting some tailwind from the AI data centers being built. But we are clearly seeing Zero Trust momentum building up. Our growth should not be looked at ZIA, ZPA for users alone. That's a starting point. It's not a core versus noncore. Our product to stay Zero Trust users to branch to cloud, how well is the overall portfolio growing is really an important part of it. And overall, we're doing quite well.

And is there -- just because of the fact that there is more competition today on SASE, even inferior solutions, but Cisco is in the market and Fortinet is in the market and CheckPoint is in the market. These are new players. They were not in this market before. Does it translate into pricing pressure or shorter duration of contracts? Or do you see any impact of the new competition?

So on the high end of the market, which we actually do extremely well, we don't for 2 reasons. One, they understand architecture value. But many times, procurement likes to bring someone in even just to put pressure on the pricing. This is how many times the dialogue goes in. A firewall vendor goes in and say, you're spending $20 million with me, Mr. Customer. Just you need to expand, here's $5 million more. And for $2 million, I'll give you what Zscaler has for free. And they're probably paying us $5 million in that account. And we are able to go in and say, oh, you're spending $20 million on firewall, which is becoming like mainframes. The future is not firewalls. So what if I bring that number down from $20 million to $10 million in 15 months or 12 months and rather than $5 million, you give me $8 million.

When the customer sees the math, it becomes a no-brainer. I had been in many of these pricing pressure calls that come from time to time say, oh, Zscaler, my budget is down 15%. I'm asking every vendor to bring the price down by 15%. That call happens as CIO from time to time. And generally, less pressure on security, but many time they come, I can say, Mr. CIO or Ms. CIO, why do you only want to reduce 15%? Why don't I help you reduce actually $5 million or $10 million. They say, really, how? Here are the things we can take out. When that discussion happens, CIO is not worried about saving $500,000. He want to save $5 million to $10 million. And we're able to open new areas and new opportunities in that area. So overall, there's not a meaningful change in pricing pressure.

Got it. I understand. Can you talk about new customers versus upsell to existing customers? What are the dynamics of gaining new customers versus the other part?

So our customers are overall very happy customers, very loyal customers. So upsell is a lot easier. In fact, quite a few times, the call comes in, the customer or CIO or CISO move from company A to B, they call us and say, "Hey, I want to bring Zscaler in." So in fact, it's probably one of the most effective lead sources for us. We got hundreds of customers who has [ CISO ] gone from company A to B to C. And early on Monday, I got an e-mail from a CISO who just joined a Fortune 10 company. And he was in a Fortune 25 company, before another one. He bought us in Company 1, Company 2. And this Company 3, he wanted to connect and he said, "Hey, I don't even have to do much work. Zscaler is already deployed here, but I can probably expand it."

So expansion is obviously easier when you have a good customer base. New logos do take more effort. There have been discussion inside the company over the past few years, do we give more attractive comp plan for new versus old? And part of the discussion was, do I want people to do too much focus on new at the cost of upsell? If you are a company with a small portfolio of products, you must get new logos to grow. If your platform keeps on growing, you have 2 ways to grow, upsell and new. We have both of those opportunities for us. If you think about the total customers, about -- over 45% of Fortune 500. And if you go to the bigger enterprise level from 2,000 up, 2,000 is a threshold for enterprises and there are about 20,000 enterprises and about 4,500 are customers. That's about 23%. This is a sizable market to go after new.

So one of the things we're changing going forward this year is as we add new salespeople, when company is growing, you need to add salespeople. So we have more being added between 2,000 to 10,000 space, which is largely new logos because our penetration there is limited. So we're adding new reps or new logo focus. We are making sales comp plan more attractive for new logos. And we're also going to be more targeted with VARs because at that end of the market, you do need to work with VARs to have proper coverage.

I asked you about competition, and I forgot to ask you about Microsoft. So I want to go back to it and see, do you feel the pressure from Microsoft? I mean they have very disruptive pricing, but product quality is not the same. So how do you see Microsoft in the market?

So over the years, Microsoft has been a great partner. We were the one who helped Office 365, local breakout big time. That's when we got the highest level relationship with Microsoft. We're integrated with Endpoint, EDR, Identity, Microsoft Sentinel. And about 3.5 years ago, they launched a competitive product. I was kidding -- not kidding really telling Microsoft, you guys even stole my name. It became Internet Access or Private Access. At that time, as I talked to Satya, Scott Guthrie, and they basically said, look, you've got a 15-year lead over us. We need to offer the product. But working with our sales team, my sales team's quota is $100 million. Security in a given customer will be $5 million. They're not focused on security. If your product is good, the customer likes it, they'll be fine. So 3.5 years later, I don't even recall last time I had to say, man, we are competing with Microsoft. Now my data points are more on the higher end of the market because that's where we spend more time. But it is not a meaningful factor.

Got it. So working on the portfolio is one challenge, and you've done great. You have a very articulate product strategy. The second part of the battle is working on go-to-market. So talk about the efforts on go-to-market, the success stories, the challenges, kind of give us the whole picture of how you evolve your sales organization to address the new opportunities?

Yes. So about 2.5 years ago, we made the decision that we need to move from opportunity-centric sales thing to account-centric stuff. We brought Mike Rich, CRO. He has done a great job in making changes. We made big changes at that time. We wanted leadership and salespeople who knew how to deal with large accounts brought in from the ServiceNow model, which was successfully done. So over the past 2 years, we have actually successfully made all the changes. I mean, if you look at the numbers we delivered over the past 2 years, they're pretty impressive. Now they slowed the absolute growth in net new ARRs, slowed down in '24. It picked up in '25. In '26, as you saw the numbers, net new ARR growth has gone up, coming -- going from '24 in the some 0, 1% range to 7%. The first half of '26 was about 10%. The last quarter was 14%. We did pretty good. Now we want to do better.

I mean I'm an ambitious person. I mean, I have big aspirations, so really need to keep on moving in that direction. We did have a little setback with a couple of sales changes that we have factored in the guidance. But the market is good. Essentially as we pass through the transition of a couple of sales leaders and changes, everything is pretty well aligned. GSIs, we made a lot of good progress. They're working, doing some very good deals with us.

Got it. What are your challenges? I have -- I want to ask you other questions, but before that, I want to understand where do you put your focus? Meaning what are the things that you think you need to address for the next 2 to 3 years, 5 years?

In general, I have only 2 focus areas: build amazing products, sell and support to customers, okay? Now in that context, if you look at -- I think we got the building product and platform, we got it pretty well under control. We have done very targeted tuck-ins acquisition, which actually add some differentiation to our platform. The Symmetry acquisition was especially very, very good. On the go-to-market side, I think the #1 thing I wonder about fixing is the FUD being created by known Zero Trust companies to confuse the market. I know why they're doing it because they need to protect themselves. But in some ways, it's kind of doing disservice to enterprises who believe that this is real security when it's not. So that's one initiative.

We have a CMO who is very good. Now, we've got a number of initiatives in marketing to create brand and awareness. That's number one. Number two, I think related to market somehow has discounted the role we are playing in AI security. And if you really think about that, the biggest thing to be done in AI security among all these things is securing agent-to-agent communication. Nobody is better positioned for that. A number of other areas, can you give me visibility into AI products? Of course, everyone will do it. It will become like CASB kind of stuff. Can you do red teaming? Everyone will do red teaming about it. And we have it in our portfolio. We have to have it. But the hardest problem to solve is communication of agents. And that's what we built.

We'll be launching it next week. And I wonder about why has market discounted us for AI. I know the one thing that comes to mind is this methos thing, while we have been part of the Glasswing project from day 1, just that when the press release came out at short notice, our name was missing, and we had to go, hey -- I mean, well, they did it on their own time in a short window, we missed out. And then the following week or so, we're able to go to them, get approval to go out there. But we missed the window and some of the investors and market felt that. Only 2 companies that are listed there are actually AI ahead in the market. I think coming quarters will prove that we'll generate some real, real numbers in AI security to convince investors that we are the real game.

Got it. Most companies in the space are offering some kind of flex programs and you have your Z-Flex. Talk about the importance of it to the customer, to you? And then what's the take rate of Z-Flex?

Z-Flex has exceeded all of our expectations. It's probably 4 quarters or less than 4 quarters, about 3, 4 quarters.

Maybe we'll start what is it? For those that don't know, what is Z-Flex?

Yes. Thank you. What's the Flex program, as name implies Z-Flex, it gives you flexibility to buy certain products and being able to even swap certain products. Otherwise, the customer says, Zscaler, you got these 8 data security products. I'm not sure if I want A or B or C. I'm going to test and test and test. It could take many quarters. Now we are able to say, look, you can select X products, and we'll give you the ability to swap and swap is linked to similar price ranges, so to speak. So they can swap. That's number one. Number two, they said, I want 6 products, but I'm not ready to roll out all 6. It will take me time. So I want to be able to do these 4 and then do 2. So we gave you staggered, the ramp product. We had done ramps before. It just formalizes ramps as they are needed.

And number three, if I want to buy a new product, there's a rate card already available. So this thing removes the procurement cycles back and forth. All that stuff makes it easy. Now our program is fairly conservative. We basically are recognizing the revenue for the next 12 months or ARR for the next 12 months. So it's -- but it's worked very well. We just got past $1 billion in the Z-Flex booking, which is good. It's good for customers. It's good for us. And the deal size, length has gone up. Most of the Z-Flex deals are 5-year deals.

Is there a risk -- and I've seen it with CrowdStrike before. Is there a risk that Z-Flex makes it very easy for customers to try and test and systems, et cetera. And upon renewal, though, you'll see a slowdown, meaning companies are trying it, companies are testing it, but maybe renewal rate won't be as strong. Like what's the risk that what we're seeing today, some of the growth we're seeing today is really customers trying new products?

So first of all, Z-Flex is a headwind for ARR recognition.

Got it.

Okay. Because some of that is staggered, okay. Number two, our focus as a company has been to make sure the products we sold are deployed. I get a personal review on a monthly basis to look for deployed versus undeployed products. Many of the compensation of product leaders are linked to deployment. Our customer support team, the deployment team is linked to it. So I think companies should be careful, but we are already very focused on making sure products we sell get deployed.

Okay. We officially ran out of time, and I didn't leave enough time for questions. But thank you very much, Jay. It has been great, and I'm always happy to host you at our conference.

Thank you. I think if I leave the last word for you, methos will probably drive Zero Trust need faster than anything else that's driven out there. And we have the right products, and we intend to do the right execution.

Absolutely. Great. Thank you.

Thank you.

Great. Good afternoon, everybody, and thanks a lot for joining us. It's a pleasure of hosting CFO of Zscaler, Kevin Rubin. Really appreciate you joining us today. To begin, just level set, we'll take questions in the room as we come. So feel free to send it or e-mail. It's going to be a fireside chat format.

So just to jump in, right, I wanted to -- just for audience not as familiar with Zscaler story or maybe still sort of know you as the original [ SaaS module ] story. What the most important, I would say, conceptual takeaway from the last quarter was increasingly becoming a control plane, not just for the users and applications, but getting more agents and workloads. So just how should investors really think about Zscaler as a platform identity?

Sure. And thank you for having us. So Zscaler started as a Zero Trust platform for users that included Internet access and then shortly thereafter, private application access and have since expanded into Cloud, so being able to provide Zero Trust for workloads and devices sitting in Branch locations. And then more recently, we're going to be announcing Zero Trust for agents. So providing the same principles that we applied for users, devices, workloads, also providing it for agent-to-agent and machine-to-machine communication.

We have our user conference next week in Vegas, Zenith Live, and you'll hear a lot more about AI, agentic and our integrated SecOps product next week. So we'll be talking more about it. But essentially, if you think about Zero Trust, provide the least permissioning to solve a particular ask or use, don't give access to somebody to jump on a corporate network and potentially have lateral movement access to do bad things. And so we've applied those principles through our Zero Trust Exchange to really provide one-to-one communication paths between users, applications, between workload and workload, between devices and devices. And so it's just a very differentiated approach to network security.

Great. Very helpful. Just on the topic of AI, there's been sort of product debate around frontier models and AI native start-ups, especially post the Mythos announcement by Anthropic. Just can you elaborate like as AI traffic sort of expands as more and more agents are coming online and even the attackers are moving at machine speed, how does that really expand the need for what you offer, which is like an in-line enforcement layer? And how does that opportunity multiply in the agentic era as you go?

Yes. So as Mythos and other similar frontier models demonstrate an ability to identify vulnerabilities at a rate and pace that far exceeds what we've seen today, we believe the best security and the best response to that is to hide your applications and limit your lateral movement. So ultimately, your blast radius can go down to one infected device and one only, doesn't have an opportunity to permeate the rest of your network.

If you look at large organizations today, they already have a backlog of patches for existing known vulnerabilities that they are incapable of handling in any reasonable period of time. So they go through a process of prioritizing which patches I'm going to apply when and attempt to do that without disrupting their organizations and their business.

What Mythos and other models similarly are identifying is a volume of vulnerabilities that already exceed what they can handle today, you're just piling on top an order of magnitude more sets of vulnerabilities and ultimate patches that would need to get run, and it's just incredibly overwhelming.

And so our approach and our answer to that is if you adopt Zscaler Zero Trust approach, you end up hiding all of your public-facing applications, so they cannot be seen. If you cannot reach the application, you cannot breach it. And so hide it and then only apply -- only allow those sessions to be activated based on least permissioning. And so those are the conversations that we are having with our customers and prospects today in response to just an unprecedented level of identification of vulnerabilities.

That's very helpful, Kevin. And I know you did highlight the customer conversations with CISOs and CIOs, how that's really shifted post-Mythos. Just in terms of big picture, right, what are you seeing as the budget trends for broader cybersecurity, right, in light of Mythos? Are you seeing CIOs starting to kind of expand and unlock more budgets because of the extra risk or additional risk that AI is driving? And are you seeing, especially to your point around the exposure risk? And recently, there was findings of almost 10,000 high critical vulnerabilities. How is all of that kind of changing the budget landscape for you?

Look, it's incredibly challenging for a CIO who has largely lived within a fixed budget domain for a long period of time. And all of a sudden, there's 2 fundamental dynamics. You've got a need for their organizations to deploy AI and to do so quickly. I don't think I've met a CEO who has told an organization to slow down and go forward with AI slowly. It's -- let's get it deployed through the organization and take advantage of it as quick as possible. And so they're reacting to a desire by their business to deploy AI.

And at the same time, they have to then understand how do I protect this AI use in a way that protects my organization. And what we've seen is that companies have rushed to be able to deploy AI technologies within their organizations, and then they're coming back behind that to actually provide security for the ultimate use.

And so we are working with customers via our AI Protect suite of products to be able to provide protection for AI use. So we offer the ability to first identify and find all of the AI assets that are being used within the organization, not just the obvious ones that you're intentionally deploying, but applications that are leveraging AI in the background to be able to do more work within those applications. So we're able to identify the landscape of threat that you may have within your organization as it relates to AI.

The second step then is to be able to actually protect the communication path going back and forth between AI. What data do you want to share, what data do you not want to share. And so we have an AI Guardrails capability that will allow you to monitor and inspect that communication in real time to be able to ensure that sensitive data is not being exposed to models when it shouldn't be and responses back from those models are business appropriate for your particular use.

And then finally, we have an AI Red Teaming solution that allows you to continually monitor those models and understand how those models may change, evolve and drift over time. Fairly new products. We announced those as a collective suite of products at the end of January of this year, but they're actually doing quite well, and there's a lot of interest around just generally being able to protect AI.

Great. Really helpful. And you mentioned about the incremental sort of AI security demand sort of in reaction to -- react to deploying AI, as you said, sense of urgency to deploy across enterprises. We've also heard from some of the channel partners, some of the customers out there that people are closely looking at sort of longer duration architectural reevaluation as well, right? So does frontier AI ultimately also - and is it getting evident in your conversation, accelerate this migration away from -- and as you guys have talked about as a lot of the Zero Trust SASE vendors talked about from perimeter-based sort of firewall appliance-based approach.

I suspect that as we kind of play this forward and organizations recognize the exposure that exists with traditional hardware approaches, network security approaches to AI and what they will have to do to be able to patch and protect their environments, it's only going to increase the validation of moving to a solution like Zscaler. We already have an incredible ROI for customers that choose to adopt Zscaler in lieu of traditional network-based security.

And as the burden and overhead of continuing to manage that, you called it perimeter base, I just used the term network security. I think it's just going to make it that much more compelling. And we have had significant inbound conversations as this Mythos, and Mythos-like exposure has been identified because companies are realizing that there's got to be a better way for us to protect our environments without constantly having to chase our tails and continually patch and chase these vulnerabilities. So we do think that it is a significant tailwind and opportunity for our business.

Great. Very helpful. And just on a high level, the impacts on your revenue model, right? I mean, we all understand like the seat model, of course, will take a sort of a backseat as we go into this agentic era. And you have talked about how, as you said, right, the AI traffic, the workloads, the agents, all those interactions are likely to accelerate materially. Like just how should we and investors think about this model holistically evolving from this human seat-based towards more sort of nonseat machine agent-based?

Yes. So we've actually been exposing some additional color into the texture of our new ACV in a given quarter, specifically to give insights into how much of that ACV is coming through traditional seat-based pricing versus more metered pricing. And it increased in this last quarter to about 30%. So we are seeing a continued increase in non-seat-based priced products in the market.

The AI and agentic technologies that I mentioned earlier are not seat-based oriented products by the nature of those products. So they are much more aligned to consumption and how much traffic is actually being exchanged. For AI, it likely is tokens, right? That will be the unit of value that gets monetized. For some of our other products, it may be just traffic and consumption. For our Branch device by way of example, that starts to look at assets and assets communicating back to other applications and company resources.

So we have continued to see -- just continued distribution of our business away from seat-based pricing. And when it comes to agent-to-agent, we think that, that traffic will be significantly greater than what we've seen with user traffic, and we expect to monetize that through tokens and consumption as well.

Great. Thanks for laying that out for us. And just I wanted to get back to the setup into fiscal '27 because as you know, the market reaction intensely seem to focus on the guide or the early look, as you said. When you think about that prudent framing, can you just help us unpack like how you're thinking about the execution piece, right, which is kind of tied to the go-to-market transition versus like there are a lot of moving pieces, as you said, around SecOps, how they're looking at the budgets, the deployment velocity, and then, of course, the agentic and AI monetization, if you can help us unpack please.

Yes. So I thought it was important in this last call that we provide an early look as to what we were seeing and giving you a perspective on growth rates into fiscal '27. We wanted to make sure that you were aligned with us in terms of how we saw our business. Against that backdrop, I provided 2 fundamental factors that were affecting how I looked at this early look into '27.

One was we are replacing 2 senior sales leaders within Mike's organization. You may recall, Mike joined us a couple 2.5 years ago. This is his second full year running our go-to-market strategy, soup to nuts. One of his leaders got an opportunity with an AI pre-IPO startup and chose to pursue it after spending, I think, almost a decade with us, so a very long-term tenured senior leader. And so he has moved on. And another leader that was a direct report to Mike is also departing the organization. And so we will be welcoming 2 new leaders into the organization. One is an internal promotion into this new role. The other will likely be an outside hire. And given that these are 2 senior individuals, I just took a cautious approach to what that would imply for fiscal '27. These are not the only directs to Mike, but he doesn't have a large set of directs as well. So just in the interest of being prudent, we took a cautious approach.

The other dynamic affecting our perspective on '27 growth is the pace of uptake of the integrated SecOps offering that you'll hear more about next week at Zenith Live. But if -- but fundamentally, we will be coming to market with an integrated SecOps solution that will leverage our existing technology from a data fabric perspective as well as our very high fidelity rich data set. And that will be the migration from the old Red Canary product into our integrated solution.

And what I don't know and what I'm again taking just a cautious view is what does the pace of that uptake look like going into next year. So those are the 2 fundamental dynamics as I looked at fiscal '27 growth. Now aside from that, we have a significant number of opportunities that could build momentum, and we're very excited about. We've talked about AI and just the opportunity that exists, whether it's a catalyst to folks choosing to adopt Zero Trust or it's actual providing security for AI, which, again, is products that we just recently put into market. So they're young, but obviously high-growing products. So -- but that's the tension and balance that we had to strike as we thought about the early look we provided.

Yes. No, clearly, as you said, like the headline early look seems to obscure some of the healthier sort of underlying signs and signals you just talked about, and especially around the health of the upsell pipeline, the AI pipeline and the nonseat business. So just -- I know historically, you guys have often guided prudently. I remember the times around the Branch Connector launch around the cloud before they showed that sort of inflection point, right? So should investors think about central monetization of AI Protect, SecOps, agentic exchange, like you have all of those stacked together in a similar way where like you have the architecture, you have the demand already there and just it's a matter of like timing and scale of monetization. Just curious, how would you...

I mean, I think the answer is a little bit different depending on the suite of products. AI is very dynamic. It's changing frequently, as you know. We are very confident in how we're approaching AI, both in terms of securing it as well as partnering with the large frontier model companies. We are part of Glasswing and DayBreak. And so that does give us a good perspective into what is coming and how we should think about releases like that.

So we're very bullish about the AI opportunity, but it does take time to build products in market are fairly early. I think as we think about the SecOps product, to me, it's really a pace of uptake question, right? We know we have customers that are on the existing product. We know that there's an incredible amount of value and insight we can provide. So how that rolls out and what that uptake looks like to me is kind of the measure of success going forward.

And then not to mention Cloud and Branch. I mean those are 2 very well-performing products that kind of build out the suite of Zero Trust Everywhere, right, moving from users to those 2 particular products. And then soon, we'll have agents. So I think there's a lot of opportunity for us to see building momentum going into next year.

So interesting, you mentioned about the Project Glasswing partnership and the potential for commercialization and monetization. A couple of partners, some of your larger peers have talked about some of the frameworks around that. Can you just kind of at a very high level, sort of lay it out like how do you plan to utilize and leverage this partnership to kind of drive the commercialization? And what does that look like as a monetization model?

Yes. I mean it's a little premature for me to do that here. You'll hear a little bit more from us at Zenith Live next week. But we have had access to these models. We are part of these programs. We've been able to run them against our environments and use those as well as have meaningful conversations with customers as to how these models may affect them and where there's opportunities. So you'll hear more from us going forward.

Got it. And just to double-click a little bit on the agentic exchange, which is the reason I brought up is you and Jay have sounded and for the right reasons, as the biggest long-term sort of opportunity, right? And I'm pretty sure we're going to hear more about that and seems like. But just as a quick preview, right? I mean, if there is a kind of traffic-based monetization opportunity there, you talked about tokens, you talked about sort of transaction processing layer. It seems like the AI traffic has already kind of exploded and as you see like a lot of numbers and metrics, how should we think about like monetizing that, right? I know we are -- or you are kind of still figuring out and trying to sell in a more stable model, more durable model, but just kind of any sense of how to think about that monetization?

Yes. I mean just to level set, the agentic exchange is not actually in market yet. The principles of how we will apply it are very similar to what you've seen us do with other Zero Trust approaches. And again, you will hear more. But the concept is simple. We have over 50 million users today that we apply Zero Trust to through the Zero Trust Exchange. I would expect that number of agents and machine-to-machine connectivity is going to be orders of magnitude greater than that.

And so the ability to be able to broker those communications, inspect that traffic and provide protection is going to be very similar to what we've been able to do with the other forms of communication. And it just -- it represents an opportunity very likely greater than we've seen thus far with users branches and devices. So very excited about the potential, and I feel like we've got a scaled track record of providing the Zero Trust approach to other forms of communication.

Very helpful. I know we'll definitely wait until Zenith Live for understanding how that agentic traffic translates into kind of more monetizable metrics. But before that, like AI Protect, as you started off with, already is achieving scale, right? I mean it's already at $100 million bookings, still relatively early compared to all your other opportunities. Just wanted to understand, I mean, you gave us a good kind of sense of like what's resonating. But like across AI Protect, there are a bunch of different components and you have Guardrails, and you have ways to protect, like the prompts and which is starting to become more significant? Or are there multiple levers right now already showing growth just from perspective of like AI Protect?

Yes. So the Guardrail product has been in market longest. I think we're actually probably just coming up on a year that, that has been in market. The Asset Management and the Red Teaming are newer. Red Teaming was part of the SPLX acquisition that we competed -- completed a couple of quarters ago. And the AI Asset Management, we rolled out, I believe, in January as part of that announcement. So each of those components have had a different shelf life so far. But collectively, we're very excited about the proposition of all of them and think that they do form the basis for what companies need to be able to protect their AI use.

Just a quick follow-up. Is AI Protect eventually and even like early signs, are you seeing that becoming a stronger landing motion, because I know you are focusing on new logos. You have been talking about some of the adjustments you made in terms of prioritization of go-to-market. Is that going to be one of your big focus areas? And I believe you mentioned you're already seeing some traction there.

Yes. So the AI suite of products do not require the Zero Trust Exchange or ZIA, ZPA specifically. So it is an opportunity for us to land and have conversation with customers, and we are having traction in those conversations. Some of the other products are more tightly embedded with ZIA, ZPA. So it would be natural that, that would be the landing point for those products. But the AI products do give us an alternative kind of side door, if you will, into introducing Zscaler to prospects.

Got it. And you did announce an acquisition, Symmetry, very recently. It seems to be very much strategically aligned with your agentic exchange sort of framework. Of course, the way you described that enabling agents kind of imposing policy around it, and it seems it's an innovative way of orchestrating the context and identity. Can you just outline like how that's differentiated from a lot of these agentic identity, let's say, methods and sort of paradigms out there?

I'll answer as the finance guy. It's a fairly technical question. So Symmetry has built an access graph that allows us to understand and infer permissions that may have been inherited to an agent through its need to do work. And so it just provides us yet another differentiated way to be able to understand identity and understand permissioning so that as we are providing in-line policy enforcement, we can ensure that the agents are only accessing permissible assets and/or applications. So it's just -- it's another piece of the agentic exchange puzzle.

Got it. And I'm presuming we'll hear more like the monetization model and like that strategy at Zenith. Okay. Just in terms of Z-Flex, right, and this was one of the, I would say, marquee quarters for you guys. You closed $480 million worth of TCV this quarter, and that was like one of the big, I would say, inflection I've seen over the last year. So I know you've understood that it's about flexibility and broader platform adoption.

As other kind of larger players out there, right, I mean, I'm referring have been leveraging this strategy. Can you just talk a little bit about like what has now resonated this quarter, especially, which is driving the sort of big kind of uptake of very, very large deals? And anything particular that stands out in terms of underlying driver?

Yes. So Z-Flex is our approach to providing customers that are looking to make large commitments over a long period of time to us. The flexibility to not have to identify each piece of technology and specific counts of everything upfront today, right? So if somebody knows that they are a long-standing Zscaler customer or intend to use our technology over a long period of time, it allows them to have flexibility for the different capabilities that they can deploy over a period of time, if they want to be able to swap into other pieces of technology or flex into other pieces of technology, it provides the vehicle to do that. It gives them fixed pricing across all of our portfolio of products.

In most cases, some are -- in some cases, we only give them a menu of lesser product. But by and large, it gives them fixed pricing that they've already prenegotiated. So they don't have to go through another procurement cycle 1.5 years into a contract to procure more. It's already been baked into that contract and allows them to make those commitments with the understanding that they've got protection if they want to use different combinations of product or they want to be able to try something else that maybe they didn't anticipate at the time they made the commitment.

So it's a very flexible way for customers to consume Zscaler. And for us, it gives us certainty. It gives us that commitment. And so we're happy to provide that flexibility as well in that relationship. And we did cross $1 billion in booking this last quarter as a result of the strong Z-Flex bookings in the quarter.

I had a quick follow-up. I think in the interest of time, there's a question which came up. So you do and you mentioned about your M&A strategy as well. You have over, let's say, $3.5 billion cash in the platform, it's definitely mature and as you said, like across the board. How do you think about the capital allocation right here? I mean, I know you've been doing a bunch of like tuck-in M&As. Mostly, it's still organic execution. Are there categories where like a larger sort of move could make sense? I mean a lot of your peers have done very big, at least compared to their standards. Is there something that you have in mind or looking at it closely?

So we have really focused on teams and technology that we feel are highly complementary to the Zscaler platform that we have today. We have not sought to expand into adjacencies or by populations of customers. We've really been very focused on how do we bring complementary technologies to market faster. And that's how I would expect us to continue to operate at least in the near to midterm.

Great. That's all the time we had. Really appreciate you joining us, Kevin, and thanks a lot for being in the room. Thank you.

Thank you.

Thank you for standing by, and welcome to Zscaler's Third Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Kim Watkins, SVP of Investor Relations. Please, go ahead.

Good afternoon, and thank you for joining us today. Welcome to Zscaler's Third Quarter Fiscal 2026 Earnings Conference Call. On the call with me today are Jay Chaudhry, Chairman and CEO; and Kevin Rubin, CFO. Please note that we posted our earnings release, shareholder letter 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 a reconciliation of GAAP to the non-GAAP financial measures in our earnings release. Before we get started, 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, annual recurring revenue, net new annual recurring revenue, operating margin, gross margin, operating profit, net other income, earnings per share and free cash flow margin, our customer response to our products, our expectations regarding AI and its impact on our business and customers and our market share and market opportunity and our objectives and outlook. 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 this quarter: the Baird Global Consumer Technology and Services Conference on June 2, the Bank of America Global Technology Conference on June 3 and the FBN Virtual Technology Conference on June 15. And with that, I'll turn the call over to Jay.

Thanks, Kim, and thanks to everyone for joining us today. We delivered strong Q3 results. ARR grew 25% and non-GAAP operating margin hit an all-time high at 23%. AI is changing the nature of cybersecurity in real time, and Zscaler is the cybersecurity platform for the AI era. This is evident in our results and the reason we are so confident in our long-term potential. We offer the industry's only complete Zero Trust SASE solution, a singular Zero Trust platform across users, across cloud workloads and across branches. Our architecture is purpose-built to address the limitations of firewall-based SASE solutions and has several key differentiators. First, we hide applications and data behind our Zero Trust Exchange, making them invisible from the Internet and eliminating the attack surface and attacker can't breach what it can't reach. Hence, this architecture provides far superior cybersecurity protection for our customers.

Second, we eliminate lateral movement of attackers with our Zero Trust architecture. We only allow authorized users and workloads to access specific applications. This reduces the blast radius of a potential breach, providing better security to our customers. This stands in stark contrast to competitors with firewall-based SASE architecture that connect users to the corporate network. And once a malicious actor gains a foothold on the network, it can roam freely and systematically attempt to compromise critical applications or steal data. This is how most ransomware attacks happen. Finally, scale matters, and our cloud-native Zero Trust Exchange is the largest distributed in-line security platform in the world that spans across 160 public exchanges, processing more than 500 billion transactions per day. This gives us the best quality and quantity of telemetry data. Simply put, no other cybersecurity vendor has access to data sets with comparable fidelity and breadth. This high fidelity telemetry fuels our AI-powered security capabilities, continuously improving how we detect, prevent and stop threats. These differentiators are especially important at a time when organizations are aggressively deploying AI applications and models with growing interest in AI agents at scale. We expect it won't be long before millions of AI agents have access to organizations' mission-critical applications and sensitive data.

Today, users are the weakest link in cybersecurity. But soon, AI agents will be the weakest link because they operate at far greater speed and have far less oversight. Even a single compromised agent can move from discovery to data theft in minutes, inflicting catastrophic damage on enterprises. Making it even more challenging, new powerful frontier AI models like Mythos are finding security vulnerabilities in software at machine speed, significantly diminishing the effort, skill and time needed to breach enterprises. All enterprises already have thousands of known vulnerabilities that they haven't been able to patch. Frontier models are multiplying these unremediated vulnerabilities by as much as 10x and even more powerful models that are currently being developed will undoubtedly make it worse. Enterprises don't have the capacity to patch and update existing vulnerabilities, so backlogs are piling up faster than organizations can address them. To tackle this challenge, the market needs to take a different approach. We provide the 2 most important defenses against these vulnerabilities: one, hiding applications from attackers; and two, eliminating lateral movement at scale. This validates the architecture we pioneered.

Zscaler was built for this moment. We started with Zero Trust security for users, so users can safely access applications from anywhere. Then we expanded our exchange to provide Zero Trust security to branches, workloads and connected IoT/OT devices. Now we are expanding our exchange to secure AI agents. An important element of agentic security is to understand which agents, users and other identities are communicating with which models, applications and data sources. On May 21, we announced our intent to acquire Symmetry Systems, a company that solved this difficult problem. Symmetry provides an access graph that maps how identities, applications and other data sources connect across the enterprise. We are integrating its Access Graph technology with our Zero Trust Exchange. We are excited to share more about this at our Zenith Live user conference in Las Vegas next month. We are also partnering with Anthropic on Project Glasswing and with OpenAI as part of its Daybreak program, formerly known as Trusted Access for Cyber or TAC, which allows us to access frontier models to proactively harden our systems and deliver better security and resilience to our customers. Against this backdrop, investors have asked us -- where is the ideal place to guard against AI threats.

We are in the enviable position of having strong visibility and control across 3 critical vantage points for superior security, network, cloud and endpoint. This is indispensable in enforcing real-time policy decisions. It is a powerful advantage for our customers and an important differentiator for Zscaler. We are enhancing our go-to-market engine across multiple dimensions to help highlight this differentiated approach. For example, we continue to deepen our partnership with global system integrators or GSIs, who play a meaningful role in expanding the reach of the Zscaler platform. we are seeing strong growth in bookings through our GSI partners. We recently announced the launch of Project AI-Guardian, a strategic collaboration with key GSI partners, which will help our partners extend the Zero Trust architecture to AI assets, including AI agents. GSIs will be able to leverage Zscaler's AI Protect portfolio to build specialized AI discovery and risk mitigation services. We are also continuing to expand our cloud marketplace motion. For fiscal 2026 year-to-date, we transacted approximately $900 million in TCV through our cloud marketplaces, which more than doubled year-over-year. This is becoming a more important route to market as cloud marketplaces simplify procurement, align well with enterprise cloud commitments and increasingly support larger strategic engagements.

These investments are helping expand our reach and Zscaler's unique architecture and approach for safe adoption of AI is resonating. This is evident in my conversations with customers and partners and why I believe AI is a catalyst for our business. Let me illustrate our progress with a few customer examples. In a 7-figure upsell deal, a Fortune 500 financial technology company chose Zscaler to secure rapid enterprise adoption of AI with our AI Protect solution, which we introduced in January. AI Protect includes AI asset discovery, AI guardrails and continuous red teaming. Zscaler AI Protect provides this customer a single integrated way to discover and manage all AI assets, including shadow AI usage, enforcing safe access to approved apps and inspecting every prompt and response in real time to stop data leaks and attacks like prompt injection. This customer faced the complex challenge of securing both employee interactions with public AI apps and their own suite of custom-built AI solutions. With our AI Red Teaming and AI Guard capabilities, the customer moved from a manual reactive effort to an automated proactive approach to harden the growing number of AI applications.

For customers building their own AI models and applications, our AI red teaming solution performs continuous security assessment. Our unified user interface and deep integration of multiple products is a key differentiator. Our AI Protect solution is resonating with customers with bookings crossing $100 million over the past 12 months. We are seeing inbound requests from across our customer base, and our pipeline is robust and growing. In another customer example, we closed a 7-figure upsell with a federal agency that previously migrated from a legacy VPN architecture last year to Zscaler's Zero Trust platform. This agency is deploying Zscaler to modernize and unify its data security strategy, gaining broad coverage without the overhead of managing additional endpoint agents or the operational complexity of stitching together various data security products. With this expansion, the customer is now using 6 of Zscaler's 8 data security modules across data classification, e-mail DLP, endpoint DLP and in-line DLP, along with our GenAI security solution. The expansion underscores our broader momentum in data security, which crossed $500 million ARR, up over 30% year-over-year. As AI adoption accelerates and sensitive data increasingly resides across multiple locations, customers are reducing cost and complexity by consolidating onto our data security solution.

Turning to another customer example. During Q3, we signed the largest branch deal in Zscaler history, an 8-figure upsell with a leading health care system to deploy our unified Zero Trust Branch solution across 2,000 sites. Zero Trust Branch disrupts branch firewalls, software-defined wide area networks or SD-WAN and MPLS networks. With this win, we are displacing both a major firewall incumbent and a legacy VPN incumbent. With Zscaler, the customer is eliminating lateral threat movement in their health clinics at roughly half the cost of its prior legacy solution. We are seeing particular momentum with Zero Trust Branch, where ARR has approximately tripled year-over-year. The next customer I'll highlight is a 7-figure new logo win with a leading health care technology company for a platform-wide adoption. This deal illustrates why customers choose Zscaler over incumbent firewall vendors, the stickiness of our Zero Trust approach with CIOs and CISOs and our ability to convert a limited initial request into a comprehensive platform win. We received an inbound request for this particular customer after a senior technology leader joined from another customer, where he had a great experience deploying Zscaler.

He fully understood the difference between Zero Trust SASE and firewall-based SASE, while the initial discussion started around securing users, the company's top priority quickly became securing cloud workloads. The deal quickly grew into a comprehensive platform win, including Zero Trust Cloud, Zero Trust Branch and 4 data security modules. The last customer win I'll highlight is a large automotive manufacturer that adopted our Zero Trust Cloud solution in a 7-figure upsell deal. This is a long-time Zscaler customer whose ARR is up tenfold in the last 7 years. This quarter, the customer extended its existing Zscaler Zero Trust SASE footprint by expanding its deployment of Zero Trust Cloud, improving its security posture and securing its massive multi-cloud environment. The customer can now inspect encrypted traffic and enforce granular security policies across hundreds of previously ungoverned cloud workloads. The deal also highlights the benefits of our Zero Trust Cloud solution, which was configured in under 10 minutes during the customer's proof of concept. Zero Trust Cloud eliminates virtual firewalls in data centers and cloud environments, reducing cost and operational complexity. The strength we are seeing in Zero Trust Cloud and Zero Trust Branch is driving the growth of our Zero Trust Everywhere enterprises that purchase each of our Zero Trust Users, Zero Trust Branch and Zero Trust Cloud. We exited Q3 with more than 700 Zero Trust Everywhere enterprises versus over 550 in Q2.

Customers are recognizing that it is no longer enough to just secure their users, and our platform is the industry's only complete Zero Trust SASE solution across users, across cloud workloads and across branches. In summary, we are confident Zscaler is the cybersecurity platform for the AI era. We expect AI and Mythos-like frontier models to be one of the strongest tailwinds our business has ever seen. Our Zero Trust SASE solution enables us to hide applications and make them invisible to attackers while also eliminating lateral movement. These attributes, along with our scale, are true competitive differentiators for Zscaler. With frontier models uncovering vulnerabilities at unfathomable speeds and AI agents becoming the weakest link in cybersecurity. These differentiators have never been more important than they are today. Our approach is resonating and helping to drive significant wins that demonstrate our ability to attract new customers and further penetrate our installed base of more than 9,400 customers. Among those, we serve just 4,500 enterprises out of a potential 20,000 enterprises in our primary target market. We are confident that our innovative approach to staying ahead of threat actors will help to drive further share gains. With the significant long-term growth potential, we are well positioned to continue creating significant value for shareholders.

Now I'll hand it over to Kevin to walk through the financials.

Thanks, Jay. We delivered strong Q3 '26 results, growing revenue 25% while investing with discipline. Year-to-date, with 26% revenue growth and a 29% free cash flow margin, we achieved Rule of 55 performance. Our Q3 '26 net new ARR was $166 million, up 24%, bringing total ARR to $3.5 billion, up 25% year-over-year. Net new ARR benefited from strength in the public sector vertical, which includes state, local and federal government and health care, including an approximate 8-digit upsell at a federal agency. Net new ARR also benefited from strength of large deals in APJ, where the deal value from $1 million-plus deals increased more than 150% year-over-year. Excluding the contribution from our acquisition of Red Canary, net new ARR was $153 million, up 14% year-over-year, and total ARR was also up 21%. Red Canary exited Q3 with $127 million of ARR. We have steadily expanded our Zero Trust platform beyond users to protect branches, workloads, AI applications and now AI agents. We believe AI agents will drive a meaningful increase in machine-to-machine and agent-to-agent interactions over time. In Q3, our non-seat-based metered usage solutions delivered just over 30% of new ACV and the ARR tied to those offerings grew more than 100% year-over-year. Revenue of $850 million grew 25% year-over-year and 4% sequentially, exceeding the high end of our guidance.

We closed Q3 with 748 customers generating more than $1 million of ARR and 4,003 customers exceeding $100,000 of ARR, growing 18% and 19% year-over-year, respectively. We also set a record $1 million-plus new ACV deals for Q3. On a geographic basis, we saw strong growth from the Americas, which accounted for 56% of revenue, up approximately 31% year-over-year. EMEA accounted for 28% of revenue, up approximately 16% and APJ for 16%, up approximately 23%. Remaining performance obligation, or RPO, of approximately $6.5 billion grew approximately 30%, including approximately 46% classified as current RPO. Our go-to-market strategy is a key growth lever, enabling us to deepen customer relationships, accelerate platform adoption and expand multiyear engagements. Building on Jay's earlier comments on enhancements to our go-to-market engine, we are continuing to strengthen our position as a long-term strategic partner and driving deeper customer adoption over time through our account-centric sales motion. We saw strong momentum this quarter with Z-Flex. Z-Flex gives customers with multiyear commitments the flexibility to activate or swap modules without starting a new procurement cycle, along with premium deployment assistance and support.

This program is driving meaningful upsell, shorter sales cycles and greater forward visibility. In Q3, Z-Flex generated just over $480 million in TCV, up more than 60% quarter-over-quarter. We have delivered over $1 billion in Z-Flex TCV over the last 12 months and an average 4-year term, underscoring customers' long-term commitment to Zscaler. To share a couple of customer examples, in a 5-year 8-figure Z-Flex deal, a Fortune 500 finance and insurance customer that spends more than $5 million with us annually increased their ARR by nearly 50%, expanding module adoption across 4 existing modules and adopting 6 new modules, including our AI Protect solution. In another example, an existing 7-figure ARR Global 2000 semiconductor manufacturing customer increased their annual spend with us by 60% in a 3-year 8-figure Z-Flex deal. This customer expanded adoption across 6 existing modules and adopted 6 new modules, including our AI Protect and Zero Trust Branch solutions. Turning to operating performance. Non-GAAP gross margin was 80.7% compared to 80.3% a year ago. Non-GAAP operating income of $196 million grew $49 million or 34% as compared to $147 million last year. Non-GAAP operating margin of 23% increased 140 basis points year-over-year, demonstrating leverage on sales and marketing. Turning to the balance sheet. We ended the quarter with $3.5 billion in cash, cash equivalents and short-term investments and $1.7 billion of debt.

In Q3, we generated $198 million in operating cash flow, and CapEx was $42 million or 5% of revenue. This equates to a free cash flow margin of 16% this quarter, down from 18% last year, reflecting the timing of cash collections and a free cash flow margin of 29% year-to-date. Looking ahead, I'd like to spend a minute and provide an update on increasing memory storage and processor prices and availability. As a reminder, we purchased equipment for our data center and Zero Trust Branch appliances. To mitigate costs, we put through a price increase on our branch appliance earlier this calendar year, which we expect to flow through in the next several months. We are also being opportunistic in taking advantage of delivery of data center equipment where we can get it to lock in today's prices ahead of potential increases in the future. This is pulling forward some of the investments we expected to make in fiscal '27 into Q4. As a result, we expect higher CapEx in Q4, taking fiscal '26 CapEx to the high single digits as a percentage of revenue, up from our prior expectation of mid-single digits. Looking ahead to fiscal '27, based on higher prices we see in the market today, we expect CapEx as a percentage of revenue to increase up to 200 basis points compared to fiscal '26 levels.

We'll continue to monitor our costs and share regular updates about the impact. Turning to guidance. At the end of the third quarter, 2 sales leaders departed the company. We already appointed a replacement for one of these leaders, and we are in the late stages of hiring a leader for the other role. However, we are taking a prudent approach to our guidance during this transition. Let me provide our outlook for Q4 and full year fiscal '26. As a reminder, these numbers are all on a non-GAAP basis.

For the fourth quarter, we expect revenue of $875 million to $878 million, reflecting approximately 22% year-over-year growth; gross margin of approximately 80%; operating profit of $206 million to $208 million, up approximately 30% to 31% year-over-year; net other income of approximately $24.5 million and earnings per share of approximately $1.08 to $1.09 per share, assuming a 21% tax rate and 168 million fully diluted shares. For the full year fiscal 2026, we expect ARR of $3.740 billion to $3.749 billion or year-over-year growth of approximately 24%. This guidance implies net new ARR growth, excluding Red Canary, of approximately 9.5%. For Red Canary, we expect ARR of approximately $137 million in fiscal '26, up from our prior guidance of $130 million with net new ARR of approximately $10 million in Q4.

This includes all the business expected in each period, including fiscal '26 renewals, upsells and new logos. Revenue of $3.3295 billion to $3.3325 billion, reflecting year-over-year growth of 24.6% to 24.7%. We expect Red Canary revenue of approximately $137 million in fiscal '26, up from our prior guidance of $125 million. Operating profit of $755 million to $757 million, up approximately 30% year-over-year, up from our prior guidance of $742 million to $748 million. Earnings per share of $4.10 to $4.11, assuming a 21% tax rate and approximately 168 million fully diluted shares and free cash flow margin of approximately 22.8% to 23.3%, down from our prior expectations of 26.5% to 27%, reflecting CapEx in the high single digits as a percentage of revenue. Looking to fiscal 2027, I'd like to provide some early perspectives to better align expectations heading into our second year with ARR as our primary growth metric and following the acquisition of Red Canary. Sitting here today, our view is for total ARR and revenue growth for fiscal '27 of 16% to 17%. Looking ahead, we are excited by the opportunities we see to continue scaling our rapidly expanding AI security portfolio, accelerating Zero Trust Everywhere adoption and growing our data security revenue.

In summary, we are pleased with the results we delivered year-to-date in fiscal '26. We achieved 25% year-over-year ARR growth and record operating income. We also saw continued momentum with Z-Flex and closed a record number of $1 million-plus ARR deals for Q3. The opportunity ahead of us is substantial, and we are confident in our ability to continue driving profitable growth across multiple vectors, including product innovation, go-to-market and customer expansion and creating value for our shareholders. I want to thank our employees, customers and partners for their continued support.

With that, operator, you may now open the call for questions. Thank you.

[Operator Instructions] Our first question comes from the line of Brad Zelnick of Deutsche Bank.

A lot of strong proof points in these results. Maybe a compound question since you're limiting me to one for both Jay and Kevin. I'm just trying to better understand the sales leadership turnover that you highlighted. Jay, if you can comment at all whether these positions, the turnover was voluntary or involuntary, how senior they were and why this could have an impact when you have such a mature and resilient sales organization? And then maybe for Kevin, on the same topic, is the pipeline there and you're just assuming a lower close rate? What would your guidance have been if these leaders were still in place?

So regarding the sales leadership changes, these 2 leaders are part of our CRO, Mike Rich's team. And it is true that Mike has built a strong bench. He has built a strong sales engine. We just want to be prudent that as these changes are made, it could have impact in the short term. And that's what we are keeping in mind.

Kevin?

Yes. Thanks, Jay, and thanks, Brad. Yes, I don't have much more to offer other than we are taking a prudent approach. We do recognize when leaders of this nature change that it can have some disruptive nature to those organizations. So I'm just taking a prudent approach to how we think about those changes.

And the only other thing I'll add, Brad, is that there will be changes in leadership from time to time. And regarding these 2, we have already appointed an internal replacement for one of these. And the second one, we are making progress, and we expect to close that in the near future as well.

Our next question comes from the line of Saket Kalia of Barclays.

Kevin, maybe for you. Can we just speak to how big the 8-figure federal deal was here in Q3? I guess the question is, if we exclude that deal, how do we maybe feel about the underlying flow business, right, whether it's new or renewals, again, excluding that large deal, which was great to see. I'm just curious how you look at the business if we exclude it, if we could size that.

Yes. Thanks, Saket. I mean, look, at the highest levels, we delivered a strong Q3, and I think we're very pleased with the results of the business. As it relates to the 8-figure upsell that I called out, keep in mind that these contract wins, as you see them get reported, first of all, it is TCV. And second, that part of the -- along with the upsell was also a large part of that deal was renewals. So that's already preexisting in ARR as you think about that particular deal that you were querying.

And Saket, if I may add, you've seen in the past, if deals are unusually large, we point them out. So nothing unusual about this.

Our next question comes from the line of Joshua Tilton of Wolfe Research.

I appreciate the early look for the numbers next year. When you look at the growth and kind of what it implies for net new ARR, you guys are kind of calling flat on an organic basis from the guide for this year. Can you kind of help us maybe think about the moving pieces between where that's coming from, whether that's the traditional Zscaler business or Red Canary or just any color to help us think about the trajectory of organic net new ARR next year in that guide?

Yes, I'll go ahead and start, and Jay can append. This is how I thought about the different components as we were giving you guys an early look. And I just want to call out, we don't typically provide this type of guidance this early in the year going into the following, but we thought it was important to give you an understanding of what we're seeing. So first of all, we have a pretty strong track record of upsells, and I expect that, that is going to continue into '27. You may recall that we shared we had a net retention of 115% in Q1, and that has been fairly stable the last several quarters. The area that we haven't been performing as well as we'd like is new logo. It certainly is a large priority for us, but I did take a tempered view of new logos going into '27. And then lastly, as we think about Red Canary and its contributions, we will be rolling out the integrated SecOps solution that will be available, we would expect in '27.

What I don't know is the pace of uptake amongst the existing customers for that. So as a result, as we think about Red Canary, we are expecting Red Canary's net new ARR to grow at a slower rate than the overall business in '27 as you think about modeling. And also keep in mind that Red Canary will be included in our results going into next year as it will be fully baked into '26. So we will not be providing separate disclosure of Red Canary in '27.

If I may add, look, we already covered the fact that sales leadership position has been part of our thinking to make sure you understand that it may have some impact. But if you look at the overall market opportunity, Mythos. has shed some more light on it. Every CIO, every CISO I talk to is talking about protecting against Mythos. And interesting part is while Mythos is about finding new software vulnerabilities and fixing them. People already have -- enterprise already have tons of vulnerabilities. The #1 protection they're looking at doing is hiding their attack surface. #2, they're trying to do is Zero Trust access. And we fairly uniquely provide those things. So while we were prudent in our forecast, the need for Zscaler today, especially for [indiscernible] Mythos is probably far greater than it has ever been.

Our next question comes from the line of Gregg Moskowitz of Mizuho.

You did very well this quarter in the Americas and APJ, although growth in Europe slowed. What are you guys seeing in Europe? And then just wondering if you had any commentary on the competitive environment, both in the Americas and in Europe.

So if you think of the overall competitive environment, I don't think things are very different in Europe than the rest of the world. You have seen us from time to time, Geo A may do better in a given quarter and Geo B may do better. But I think we know some of the areas of execution we need to improve. We are focused on it. And I'm pretty sure that we'll turn it around and make EMEA again a high-growth area.

Our next question comes from the line of Gabriela Borges of Goldman Sachs.

Kevin, you mentioned something interesting there when you were talking about the outlook for next year, which is that new logo growth may be tempered. And so either for yourself or for Jay, maybe just give us a sense when you dig beneath what's going on with the sales relationships with the customer pipeline, why do you think new logo growth is tempered?

Yes. Thanks, Gabriela. Just to clarify, I was not trying to suggest that new logo growth is tempering. What I was intending to convey is that my expectations relative to the early look for next year took a tempered approach to how we thought about the contributions of new logos. New logos is a strategic focus of ours. And as we go into '27, it will continue to be so. But again, I'm providing an early look here far earlier than we would normally do. And so as I looked at what we had in front of us in terms of the different components of the business, that was one area where I think we can do better.

If I may add, there's a sizable new logo opportunity for us. We have 4,500 enterprises as our customers, and those enterprises are customers with over [ 2,000 ] user seats. And out of the [ 20,000 $4,500 ] customers, that's what 23%. That means a sizable market for us to go after.

Our next question comes from the line of Brian Essex of JPMorgan.

Jay, if I could maybe ask you to peel back the layers a little bit on the impact of Mythos and OpenAI models. What we're hearing from maybe some of the channel providers is that the C-suite executives at enterprises are maybe to use their words, freaking out over the emergence of these models and the realization of how robust they are. So when you comment about some of the tailwinds in your business on the back of the emergence of these foundation models.%.

How do you see that materializing in your pipeline? It sounds like the consultants are very busy right now. But given the typical sales cycles that you have and maybe the architectural decisions that are involved with adopting your Zero Trust platform, when might we expect to see some kind of impact to pipeline revenue, billings and so forth? And how is this materializing with your conversations and how your pipeline might be materializing?

It's a very important question, Brian. We've never seen so many inbound calls come in so quickly. I got so many calls that I decided to say we will reach out to them and figure out a programmatic way of engaging with them. I don't need to dig into the detail of the concern. We all know they're very concerned, and they're looking for help. So it is interesting that most of the customers and vendors are taking the approach that let me help you find more and more vulnerabilities and try to patch that. While patching is a reasonable approach, we do not think the primary focus needs to be patching because you will never be done patching. So our recommendations are very clean, hiding your applications that I talked about, Zero Trust access, those are fundamental things that need to be done, and that's what we are helping our customers with. Now we also know that this is an area where we need to help our customers and not do ambulance chasing, okay? So we're not rushing to create opportunities. We are actually engaging with our customers in a consultative fashion to help them get out of the tough situations so they can really keep the Board and CEOs apprised of what's going on.

Now obviously, there are areas these customers need to worry about. We aren't really factoring in any meaningful impact of the new opportunities for Q4. But I do believe it will have impact in fiscal '27. The short-term impact, if I were to give you a couple of specifics, number one, many customers have ZIA for all users, but Zscaler Private Access is only for a subset of users. Now they want Zero Trust access for everyone from every location, even from the headquarters. So it's increasing interest for ZPA upsell. We have very cool deception technology. It's a decoy technology. Customers want this technology because they know that with all this happening, there will be more breaches and they want to catch that red-handed using deception like a stuff. So that's why I said sometimes I feel like it's a [ 4.0-like ] moment. Zero Trust has never been more important before. Thank you.

Our next question comes from the line of Meta Marshall of Morgan Stanley.

Great. Maybe building on a couple of the questions. Just as we think about kind of signposts that you guys are looking at for improvements on the new logo side, will that come from some of the GSI channel outreach that you guys are -- expansion that you guys are doing? Will that come with some of the new leadership, flexible pricing? Just trying to get a sense of what you think is kind of the most incremental to improve the measures that you laid out to improve the new logos.

Yes. Meta, thank you. So we have very specific plans we are formulating and they'll be an important part of our fiscal '27 plan. Number one, we have a limited coverage on the lower end of the market. When I say lower end of the enterprise market, it's generally between 2,000 and 10,000 users. As you know, the high end, our coverage is pretty strong. So adding more salespeople in that part of the market where coverage is less, number one.

Number two, the channel, especially the VAR channel plays an important role in the low end of the market. So we are creating specific programs and incentives for new logo in that area. Number three, the GSIs have been good partners. GSIs are generally good partners for large enterprises. So we are teaming with them for this area. You heard about AI-Guardian program we launched with them. That's a natural extension of the work we are doing. Number four, we have a program for major accounts. We're going to make sure we do some more focus on those teams to get new logos in addition to working on upsell. I think we feel pretty good about the opportunities to engage and do this stuff and a little bit more incentive to new logo versus we haven't done a whole lot in the past. This will probably make a difference.

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Our next question comes from the line of Ittai Kidron of Oppenheimer & Company.

Kevin, I just want to make sure I get my bearings right around the ARR and the commentary there. Taking into account your revised guidance for the year and your preliminary view into next year, it looks like your 4Q net new ARR again is decelerating quite substantially, and it's probably also in the -- going back to mid-single-digit growth only into next year. So another deceleration. I just want to get my hands around outside of the sales leadership that you've talked about, are there any other elements to take into account here with respect to this. You guys have made a lot of work over the last couple of years kind of turning around the sales force. I understand that when 2 leaders leave, clearly, some disruption can happen. I'm just wondering if that is the only element impacting the net new ARR here? Or there are other things to take into account?

Yes. Thanks for the question. I mean, look, the 2 factors that I think are important, you certainly mentioned one in terms of the 2 leaders under Mike that we commented on. It's just the reality when you have leaders that do depart that you do -- you may see some disruption. And so I'm just taking a prudent approach to that potential disruption. The other thing that I commented on is just the pace of uptake with the integrated SecOps products. So as we think about how that rolls out and what that pace of uptake is, I'm also taking a prudent approach there. As it relates to Q4, so the guide implies 9.5% net new ARR growth on an organic basis, excluding Red Canary. And just keep in mind, that's still an acceleration over what we put up last year. So keeping everything in perspective.

Our next question comes from the line of Erik Suppiger of B. Riley Securities.

On that outlook for fiscal '27, I think you had commented last quarter that the ZIA, ZPA core products were growing in the mid-teens. What growth assumption are you assuming as you look out to '27 on those core products?

Yes. Thanks for the question. I mean it's a little bit early, and that's a fairly granular element. What I can say is that we've continued to see consistent performance this year within the ZIA, ZPA product lines, but we didn't provide that level of granularity into next year.

If I may add, quite often questions get asked about core products versus known core products as if they're 2 separate buckets altogether. I think as we have been saying, our customers are asking for Zero Trust everywhere. We started with Zero Trust for users, which is ZIA, ZPA [indiscernible]. That was part one. Now they're all moving towards Zero Trust for cloud workloads and then Zero Trust branches and IoT/OT devices. So our #1 push is to work with customers to do Zero Trust everywhere. That's a big differentiation for us and an opportunity to sell bigger deals, while others who claim to say we do what Zscaler does are barely trying to build Zero Trust users, which we matured over the last many, many years.

Our next question comes from the line of Adam Borg of Stifel.

Maybe just on Symmetry Systems, I would love to learn a little bit more about what that brings to you that you couldn't do previously around securing AI agents. And given their Access Graph technology, how are you thinking about the move into identity security more broadly? And maybe just as a quick follow-up, any color on Symmetry even SquareX in terms of contribution to revenue and ARR?

So first of all, Symmetry has built very innovative technology. So what's the problem statement? It's not really basic identity. We believe the identity of agents will really come from companies such like hyperscalers or large software companies who are actually providing platform to build agents, they are the natural place to build identity. So trying to be an identity company for agents for someone outside these big guys will be a hard thing.

We have always taken the approach of being a [indiscernible] where we will take identity from different parties. So then what Symmetry? Symmetry pioneered identity mapping to data sources. So think of this way. In a large enterprise, all these identities, maybe users, workloads, maybe other machines, they access data sources that may be sitting out there somewhere. How do you know who is accessing what, when, where? Information sits in each application logs. Symmetry pulls that information and creates a very cool visual access graph. This was a hard problem to solve.

So this was solved by a bunch of PhDs. Once you understand who talks to who, this thing can be used to enforce policy, but agentic exchange that we're building. So it's very complementary forward-looking technology. This is the kind of stuff most companies aren't thinking about. Zscaler has always taken pride in being innovative and coming with solutions that no one else has built. So our Zero Trust Exchange got extended to Zero Trust Exchange for agents, and this becomes a very useful piece to highly differentiate our exchange and provide value for data governance and policy enforcement on our customers.

Did I answer your question?

That's really helpful. And just, Kevin, maybe any color just on top line for Symmetry and SquareX.

Yes, of course, of course. So as Jay mentioned, just to level set, Symmetry is a technology and talent acquisition. The ARR is immaterial and is in the low single digits. I think you also asked about SquareX, that was also incredibly immaterial.

Our next question comes from the line of Fatima Boolani of Citi.

Kevin, just on some of the commentary with respect to the opportunities to step on the gas pedal vis-a-vis new logo acquisition and in the context of the sales leadership transitions. Can you give us a quantified and quantification of sales productivity this year and some of your expectations as you think about the complexion of the 16% to 17% guide, again, largely tied to some of your comments earlier around building out more of a capacity presence with the lower end of the enterprise. Would love a little bit more quantitative color on some of the sales productivity/sales attrition and sales hiring quantum that you're thinking about in terms of pipeline build and conversion and productivity assumptions.

Yes. Thank you for the question. Look, for Q3, this was our sixth straight quarter of sales productivity growth even on the back of some tough compares. So I think we've done -- I think we're very pleased with the level of productivity that we've seen -- continued improvement that we've seen. I would expect going forward into fiscal '27 that we'll continue to see success in driving productivity and capacity. I just caution that it's a bit early to provide quantification of how that rolls into an early look for '27.

Our next question comes from the line of Gray Powell of BTIG.

Maybe just one on the competitive front. So just from a technology perspective, how are you staying ahead of the firewall vendors who are increasingly trying to upsell Secure Service Edge into your installed base? And when you do have displacements of legacy vendors, is there like a common driver? Is it like a particular set of features? Or is it just the overall platform and just that your technology is better? Anything you could see on that front would be helpful.

This is pretty simple. If you care about real cyber protection, you know that you need Zero Trust architecture. Firewalls create trusted network. Trusted networks enable lateral movement. So our customers understand that. They started with Zero Trust for users. Now they want Zero Trust for branch where each branch becomes an island like a cafe. Firewalls don't do that. They want Zero Trust Device. Firewalls don't do that. They want Zero Trust of workloads. Workloads have been secured traditionally by 30-year-old firewall technology, East-West, North-South, firewall rules. We do it in Zero Trust fashion. So we are on a road to take our customers to Zero Trust everywhere. That is our biggest differentiator. It's not feature A or feature B. It's an architectural difference.

Our next question comes from the line of Andrew DeGasperi of BNP Paribas.

I wanted to ask about the comments on the CapEx guide. And really, what I wanted to touch on is, given you've put together price increase earlier this year, and now these costs have gone even higher, are you considering potentially doing the same maybe at the same time next year?

Yes. Thanks for the question. I'll start. Look, we are constantly looking at the balance between pricing, margin and market prices and feel pretty good at where we are. We did push through a price increase earlier this year and have not seen any implications of that. I think the world is recognizing that hardware costs have gone up. But we do periodically review pricing and where we have opportunity to increase, we do take advantage of that. I don't know that I would want to sit here today and say at this time next year, there will be another price change. It is something we look at more dynamically than that.

But this situation you're talking about is fairly unique. It's created by all these AI data centers that's causing such a shortage of so many parts. But as Kevin said, we'll look at from time to time, but this became a special factor that all of us recognize and adjusting accordingly for it.

I would now like to turn the conference back to Jay Chaudhry for closing remarks.

Sir?

Thank you for joining us on our earnings call. We look forward to seeing you at one of the upcoming investor conferences. Thank you again.

This concludes today's conference call. Thank you for participating. You may now disconnect.

Minute early, since I have to read these disclosures, and I think you would all rather hear from Zscaler. So for important research disclosures, please see Morgan Stanley research disclosures website at morganstanley.com/research disclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

I'm Meta Marshall. I cover cybersecurity here at Morgan Stanley. I'm delighted to have Zscaler here today. Jay Chaudhry, CEO, founder, multi-hyphenate, and then Kevin Rubin, CFO.

Maybe let's just kind of circle maybe to start with before we go high level on fiscal Q2 earnings. You reported 25% ARR growth, 21% organic. You raised full year ARR targets organically, but maybe organically, it was viewed as a step-down from fiscal Q1 results. Where did you see the strength in the business in fiscal Q2? And what left you kind of encouraged for the rest of the year on both businesses?

Yes, I'm happy to start. There was a couple -- a few things with respect to the first half that I think is notable. First, we mentioned we had a record number of Q2, $1 million deals for Q2 -- for Q2, which I think just underpins the transformation that we've made in our go-to-market. So that was -- I think that was a really good proof point. We also talked about Z-Flex, which is our flexible buying vehicle for our customers. We did $290 million in TCV bookings in the quarter with Z-Flex. And since we launched the program, we have about $650 million in TCV under the Z-Flex program, which, again, if you think about what it represents, it's longer-term larger deals that our customers are making with Zscaler.

So another area, I think, that just underpins some of the strength that we're seeing in the business. And then to your point, I mean, we did see strong growth in the first half of the year. My comment would be that we did raise the net new ARR expectation for the year. And it was reasonably consistent with the performance thus far. So I think we're feeling really good as we go into the back half and what we can do.

Got it. Jay, I know you addressed this on the call, but just given how topical it is, what do you think investors are missing right now about kind of this dialogue around whether AI can replace cyber versus kind of the discussions where it had been, which is that you need cyber in order to have AI?

So for us, AI is net positive opportunity. So to deploy AI security, you need to secure AI, because unlike many other technologies, AI can be a very dangerous tool. Hackers are embracing AI faster than enterprises are. So when I talk to lots and lots of CIOs, they're all doing some kind of projects out there. And they're all nervous by rolling them out, and they really look at 2 things. One, tell me what AI use is happening in my company. So understanding of getting visibility and risk associated with that. Then as they are building applications, they want to do testing, vulnerability assessment. So red teaming type of tools are needed. When they deploy them, then they want some guardrails to make sure those applications and models aren't abused.

So that's one product set, maybe call it solution we launched on January 27, we call it AI protect, integrated or comprehensive, so they can get moving with it. And the next thing they are all excited about is AI agents. Because they think that AI agents can give them the productivity that's needed. And that creates a whole new kind of challenges. Traditionally, a user has in the weakest link from a cyber point of view. It's very much expected that AI agents will be the weakest link. Imagine agents getting hacked or hijacked in your enterprise, they have access to all kind of application services. And users move slowly, agents move on the dime. Users are thousands and agents will be millions. So they want to make sure there's a policy engine that can really allow right agent to access right application or talk to right agent. And that's our core competency. So we are very excited about it. We are talking to lots of customers. We have a growing pipeline.

Got it. What we found in our checks kind of despite some of the negative commentary around AI, is that you're finally seeing kind of broader SASE adoption that's being spurred by AI. Just beyond kind of the visibility and the agent protect, just what are you seeing as the biggest catalyst today for organizations maybe moving from kind of one piece of SASE to kind of a broader SASE adoption?

So first of all, SASE is a catch all phrase, it's kind of open buffet. You pick whatever you want to pick. We like to talk more about Zero Trust security. Because that's what's trying to fix security. The security is broken because we have been doing it by trying to secure the network by building firewalls and VPNs around. When Zscaler came on the scene, and we said forget firewalls, forget network security. You don't need to trust the network, you don't need to trust the users. Everything is untrusted, Zero Trust.

You give this much trust, so you can access application A or B or C without being on the network. The first part of Zero Trust was users. Users being able to access certain applications. The next part became workloads. Workloads are somewhat like users. They talk to Internet, they talk to each other. Very natural for us to extend or exchange for workloads.

Now what's being done in the workload areas so far? Same thing that has done for 25 years. Virtual east-west firewall, virtual northward firewall. So this is the next phase we brought. And the third phase we brought is Zero Trust for branch offices. A typical compromise happens this way. A single infected machine in a branch office gets compromised. The malware moves laterally and this mesh network, brings everything down. In the world of Zscaler you don't have lateral movement, you don't have mesh network. Every device from the branch talks through our exchange. So that policy gossip to the users to workloads to branches. And the next phase is agents. We think it's a wonderful opportunity.

Okay. You addressed this on the call as well. Zscaler continues to lead to market share gains for SASE. Our checks continue to kind of point to strong positioning. Yet we get questions about the number of competitors in the market. Have you observed any changes in win rates or kind of the competitive landscape around SASE?

In the large enterprise space, which is our primary segment, that's about 20,000 employees. If anything, I would say the competition has become less. Why do you say that? Because these large enterprise customers are CIOs, CISOs, they all know us. They understand what we bring to the table. And they also listen to some of the competitive story, where underneath its virtual firewall sitting around. So they see the difference. And they're pretty savvy.

There's less -- when you go down market, there are more competitors out there. But I can tell you that any of these new competitors coming in, having talked to hundreds of large customers in the past few months. We haven't really seen any increase in competition there. The biggest focus from CIOs is, one, I want to remain safe, give me Zero Trust and help me secure my AI initiatives. Number two, can you do it with greater ROI and remove some of the cost out of it.

We are able to do both. A firewall company won't do that, even though they try to talk about platform because the biggest spend in security still is firewalls. They have to cannibalize it. We like to cannibalize it. They don't. So we are able to go out, take some of these products out, make the case very compelling. That's what's driving our growth.

Got it. We've had kind of additional discussions over kind of the past months about seat-based models, and SASE has traditionally been a seat-based model. You guys talked about 25% plus of new bookings being non-seat-based for Q2. Just how do you think about kind of that overall value proposition to customers and kind of what that method of charging for it should be?

Yes. Traditionally, most of our business has been seat-based for ZIA and ZPA, but also some of the business has been known seat based. When we do guest WiFi, there's no fixed number of seats. It's charged based on the traffic flow. When we charge third-party contractors, suppliers and customers, that's not a fixed number of seats that's linked to traffic. So we have had those things. And then you go to the next level, take some with Zero Trust workloads. Workloads it's based on number of workloads and the amount of traffic. Take data security. We have 8 modules. A couple of those modules are based on number of users, but many of these modules aren't linked to users. When I do data discovery around terabytes of data or I classify it, it's not linked to users.

So this piece of the ARR has been growing steadily, and it got to 25%, and I thought it was a good milestone. We expect it to keep on growing. The biggest new growth factor in this area will be 2 pieces. One is AI security products, which is about red teaming to guardrail, all this stuff. That's all based on tokens essentially and then AI security exchange, or agent security. They will be all token-based.

Okay. We've spent some time talking about AI security. We've spent some time talking about Zero Trust Everywhere. Kind of that third growth pillar has been the data security everywhere. Those 3 businesses have now kind of crossed the $1 billion in combined ARR, growing faster than the overall business. Just how do you see kind of maybe some of these growth pillars over the next couple of years developing?

So Zscaler, Zero through Branch has gone through an inflection point. We are seeing very rapid growth. It eliminates traditional networking, SD-WAN and the like. Five, 7 years ago, I used to say MPLS is going to disappear. People said you're crazy. Where is MPLS today? It's by and large gone. I think SD-WAN will follow the same fate too, it's a matter of time. About a year ago, when we were just getting ready to launch Branch, I used to wonder, what percent of Zscaler customer will embrace it? And what percent will say, I need to keep my SD-WAN, I love it.

Again, I've been surprised that almost every customer I have talked to, they're all ready to make Branch like an island and, no mesh network, no SD-WAN. Big opportunity. I think 3 to 5 years, people are going to say, what does this SD-WAN you think used to be? So that's big growth.

Zero Trust cloud workloads, the only way it's being secured, the only alternative to Zscaler is old-school virtual firewalls. They are hard enough and complex enough in a data center, dealing with IP addresses and all firewall is a network device based on IP. This source IP address can talk to this destination IP address. It's a nightmare in the cloud. Since with Zscaler, this VPC can talk to this VPC. It's wonderful. This solution is growing very well.

Data security. Data security, we started many years ago. We've done DLP. Then about 5, 6 years ago, some of the CIOs told me, we get tired of managing multiple DLP policies. Even one product is hard enough, dealing with policies for multiple is very hard. Zscaler, you should really offer full data security offering. So we went all the way, not just in-line DLP, e-mail DLP, endpoint DLP, SASE, SSPM and on the cloud data security. It's the most comprehensive solution. And we are in line, we are a proxy. So hence, we can inspect before the traffic goes out. If you aren't sitting in line as a proxy, you can do that. That's why you don't hear from firewall vendors that they could do amazing data security because they aren't able to properly inspect it.

So this is a big area. I mean sitting at close to $0.5 billion in ARR. If we -- if data security was an independent business for Zscaler, it would probably be the largest data security company. So it's good. The many growth engines for us that are working.

Right. Okay. Maybe turning to another one of those Red Canary. You talked about -- can you talk about the long-term strategy for this business as it kind of becomes not Red Canary separate, but kind of part of Zscaler altogether.

Maybe I can make broader comments on strategy. Kevin, you can give some color to it. As we said, we wanted to get into AI Agentic SecOps because AI can disrupt SecOps. Our customers are telling us they're paying too much money building these data lakes. And they said, we have probably the biggest set of logs, and they get put some where they pay for them. So that's how we started to move into the SecOps space. Once we have the back end, we needed the front end. We needed agentic technology SecOps agent that could really solve this problem and do it in a faster and better fashion. And Red Canary actually has that technology even though they're MDR company, they've been doing this for 10 years. They had playbooks and they took the playbooks. They had converted those playbooks into agents in production. And we are integrating the agentic technology with our back end.

So there's one AI SecOps product that we can go and disrupt the market. So it's -- that product is coming along well. Red Canary technology is integrating very well. So we think it's a good opportunity for us because, if there's one area, AI will disrupt more than others. It's a SecOps.

And then, Kevin, I mean, just in terms of it's outperformed maybe kind of the expectations you had coming into the year. So just what are you kind of seeing from the business now having owned it for a number of quarter?

Yes. So I would describe when we acquired the business, we mentioned that current year renewals were not picked up as part of our initial recognition of the original $83 million in ARR. And that was, by and large, because MDR businesses historically have higher churn rates than we have in our business. And you have a much larger company purchasing a smaller company. And keep in mind, about half of their business is in what we would describe as the commercial segment, which is companies that are generally smaller than Zscaler support or at least intend to support directly with our go-to-market resources.

So there was a lot of uncertainty from our perspective as to how much of this business would likely renew. Now that we're 6 months later, we have seen what those renewal rates have looked like. And my commentary on the earnings call was they have been elevated. So I'm glad that we took a more conservative approach to those expectations. The guidance that we have provided and updated in the last earnings call, reflects now what we've seen from a renewal perspective and what we expect at the end of the year. So yes, it was an increase driven in part by what we've seen from a renewal perspective. I don't know that I would characterize it as exceeding expectations. I think it's part of the mechanics that we came into the year with?

Okay. I mean, Jay, you've done a number of acquisitions kind of over the last 12 months. Most recently, kind of SquareX, you kind of announced for browser security. Just how do you think about kind of where the white spaces are in the platform and just how M&A will be a portion of that strategy?

We are quite disciplined about what we want to offer, what we don't want to offer. If we want to offer or be in a given market, we want to do the best. Otherwise, we won't play into the market. And we look for markets that are synergistic to us. When we went to Zero Trust Exchange area as we added ZIA, ZPA, Branch, for example, we bought this company called Airgap Networks. It rounded out our Zero Trust device story, very synergistic. Came along extremely well. Take Zero Trust for information access, secured browser. I'll share my position as compared to the market. We have been offering Zero Trust access using remote browser, which runs in the cloud and offering this functionality.

We have a pretty sizable business doing this browser business, remote browser. Now there are some use cases for unmanaged device using my own device, my own browser, people want to access information. And in many cases, it used to be third-party suppliers or customers. You could use Zscaler remote browser to work with that. There's one piece that customers are wanting. They want device posture check from security point of view. You can't do posture check unless you put something on the device. The stand-alone browser companies would say, download my full browser and you can do the check and you go direct. A couple of years ago, we actually looked at some of them, even looking at see if you could buy this company. We didn't feel right. Customers said, "I don't buy 1 more agent." And this wasn't the agent. This is the mega agent. I mean it's a massive thing.

That's one problem. The second problem was as we looked at the stuff, all these browsers are based on Chromium, which is built by Google. Chrome has become big. This is the 1 billion lines of code and so many vulnerabilities are being fixed every week. Reminds me of windows, vulnerabilities that will happen every week. And so how are we going to keep up with that? You can't. So we said we will not go into the space. What we acquired is this company has done very innovative approach using browser extensions. We are able to check the device posture. So you can actually achieve what third-party browsers are talking about without having to ask the third parties to download one more browser. I think it's an elegant approach and then we have Zero Trust on the back end.

Okay. Got it. Kevin, maybe turning back to you, Z-Flex, you mentioned kind of upfront has been a huge area of success. It's like -- can you just walk through how Z-Flex is changing customer buying behavior and kind of how it's changing your visibility on the business?

Yes. So Z-Flex maybe just by way of background, a lot of software companies have offered flexible purchase arrangements. And for us, that manifests itself in the opportunity for customers that are willing to make larger commitments over a longer period the flexibility to swap in and out of products. We offer the ability to ramp generally in the first 6 to 12 months of the contract period. And then more recently, it's actually given us some flexibility around billing arrangements as well.

So if we wanted to provide a customer with the ability to pay a little bit less today and pay a little bit more tomorrow, we can -- we have the flexibility to do that through Z-Flex. It also facilitates the prenegotiation of pricing across the suite of products that are available to the customer in Z-Flex.

So there's a lot of advantages if they want to be able to extend into our data security products. They don't need to go through another buying and procurement process. They already know what products are. They've got a negotiated price, and then they can go ahead and deploy. For us, as I mentioned, we did about $290 million in bookings of Z-Flex this last quarter. To provide a little context of the Z-Flex business for us, they're generally 7-digit deals, and they average today about 4 years.

So they are a bit longer. And when we do go into a Z-Flex arrangement, it is generally a larger ACV commitment than they were making outside of Z-Flex. So it does drive bigger deals, it drives longer-term deals. And then as I mentioned, it facilitates upsell, right? They know exactly what's available to them at what price. So we think it's an attractive opportunity for some of our most strategic customers. And over time, many of our customers.

And are you seeing kind of that module adoption, the quicker adoption of kind of the additional modules as they move into that?

It's still a little early. We've had this in market for about 3 quarters now, but it certainly continues attract more and more interest, which tells me that customers are finding a lot of value.

Got it. Kind of moving back on to the AI security front. You have GenAI Security, you have security posture management, AI guardrails, AI red teaming, agentic exchange. Just how do you think about those separate kind of pieces in an AI portfolio versus kind of overarching portfolio.

That's a great question. In fact, generally, investors are wondering what's where new market. So we have 2 main solutions for AI. One is what we call AI Protect. We launched it on January 27 after integrating a number of products we've built and a couple of products that came through the acquisition of SPLX. So AI Protect has about 4 areas of functionality. First is giving visibility. Any external, internal AI application, we can tell you what you have, what's the risk. Two is, secure access to those applications, who can access, what can be access policies by user, by group and the like. Third is securing application you have built, how do you secure them? You start with doing the red teaming for vulnerability assessments. You know what the risks are. Then our guardrail product, which inspects prompts to make sure people can do bad things like prompt and like, that's the third area. And the fourth area is governance and compliance.

All 4 are integrated as a single solution and you can buy some of it if you want. That's one bucket. The second is taking our exchange for agents. This is in-line policy enforcement for agents. That's a very powerful solution, highly differentiated because we're sitting in line. And that's how our customers look at it. AI Protect is already being bought significantly, exchanged in early stage working with some of the customers.

Got it. And then just how do you think about overall SASE adoption and where we are in that. I think we get questions sometimes about kind of where we are on the core business. And how do you differentiate that maybe of kind of this grab bag where SASE means a lot of things to a lot of people, so how do you differentiate kind of within those areas?

I think it's a good question because SASE whatever. So this is how you should think about it. First of all, you need to understand that Zero Trust is fundamental for security, more and more important in the world of AI. That means things A talks to B through a switchboard. That's where the world has to go. From Zscaler point of view, we have 45% of Fortune 500 companies doing that today and 40% of global 2000 companies. Our large enterprise base that we target is 20,000 companies, 4,400 of them are customers, which is less than 25%. This means we have a sizable new logo base to go after, and we are pursuing that.

Also, it means there's a lot of opportunity for upsell, okay? And we have seen a number of million dollar deals going up, number of $5 million customers going up. In fact, last quarter, we had the largest number of $1 million deals in Q2. That's excellent. We also -- we're looking at last quarter, we learned that from the initial buy -- in 4 years, our enterprise customers will have 3x of the ARR. That's pretty good. And this is over the years when our platform was much smaller. As the platform has gotten bigger, we expect that this thing should continue or get better. So both opportunities, meaning significant upsell and significant new logo.

Yes. Okay. Perfect. I want to step ahead to go to market for a second. Can you just kind of talk about the evolution of relationship with channel partners? And just how you see kind of relationships with GSIs evolving?

In relation to them?

For go-to-market.

Go-to-market, yes. So we've gone through transformation of go-to-market and we've gone through it successfully. We walked you through, we did get projections, we met our projections. We are seeing the trajectory moving in the right direction. If you look at Q2 our sales productivity was up in double digits. Our total number of large deals moving up. Our channel contributions getting much better. At a broad brush basis, when you look at lots of channel partners, you talk to them, you're going to get a mixed feedback because we don't deal with 5,000 of them. Global system integrators work well with us. We have worked very hard with them. Why do we need them?

Here's the difference. A typical VAR will sell the boxes and they may get some deployment services, may not. They largely do a lot of fulfillment. When we go in, we -- you're not replacing Zscaler with Zscaler, a firewall here, a firewall there. You are transforming, you're removing lots of stuff. To remove all these branch firewalls, routers, switches, load balance. You need somebody who can do services. GSIs do a good job there in that area. So GSIs are working well for us. Selected channel partners who do these services, they are working well for us. So it's good. Our trajectory is moving in the right direction. Now we're working on upping that work. Kevin, you want to add anything to that?

No, the only other proof point that I would just offer is we had very strong pipeline conversion in the second quarter as well. So just another indication that things are building momentum nicely.

And I know we just talked about this, Red Canary, but any -- how -- should we think of it really as getting to that -- the 25% penetration you guys just talked about. Getting that to be a higher number? Or is there anywhere down market where we should -- that you find attractive opportunities?

I mean, to Jay's point, I mean, our focus are the largest companies in the world. Our direct sales organization is targeted at enterprise customers, which we estimate to be a little more than 20,000 companies in the world. That's where we go after with direct resources. Anything below that would be served through our channel, and that would be indirect for us. So our focus really is the largest companies.

Got it. And Kevin, maybe a question for you. You guys are rule of 50 company, obviously, leading growth and profitability. How are you thinking about kind of that trajectory going forward or just opportunities for operating leverage. And I want to bring into that discussion. There's maybe been a little bit more scrutiny of stock-based compensation. Just how you guys are thinking about stock-based compensation versus cash compensation.

Yes. I mean as a tech company providing alignment to our employees and stock is important, and I think investors appreciate that alignment. We also know that it has been a little bit elevated and we are acutely focused on bringing stock-based comp down over time and achieving GAAP profitability over time. So that is certainly something that is in focus.

As I think forward in terms of areas of investment and opportunity, we expect to see continued improvement in sales efficiency as we continue to move forward. And as I've gotten through the transformation efforts that have been ongoing over with Mike joining us a couple of years ago and going through that process. So we think there's opportunities there. And not to pull on a topical thread, but AI over time, will also provide areas of leverage.

Okay. Another topical point, memory costs. You noted -- remember, you hadn't seen any impact yet, but you have a good amount of inventory, both of kind of branch appliances and data center equipment. But just how are you thinking about potential impacts to pricing and CapEx just as we work through this memory cycle?

Yes. So it's a real issue out here. If you are a real box company shipping lots of boxes, you will be feeling the pain. Since we aren't. So the impact is less because we have been maintaining good inventory during -- starting during the COVID time. But we do expect that it will have some impact and we will pass some of the cost to our customers. So we will adjust some of the pricing. And -- but I think from modeling point of view, we are still targeting to really stay at about 80% gross margin. That's a good number for us. It also allows us to really introduce products at a faster pace. Rather than trying to optimize gross margins, I would rather get in the market faster by 6 months and 9 months and take time to optimize it. But back to your pricing. It will have some impact, but not significant, and we'll manage it.

All right. Jay, maybe I want to end with, you've built an incredible company. Just how do you think about the next 3 to 5 years? And what is your vision for Zscaler over that time?

So if you look at 2 big areas, Zero Trust Everywhere is meant to do 2 things. One, make sure you don't get compromised. Number two, to make sure you don't lose data. Sometimes I jokingly tell CISOs. Your job is really 2 simple things. Nothing compromises you or breaches you and nothing leaks out. We have built the best Zero Trust Exchange, and we are in the first inning of the journey with a lot more opportunities ahead of us.

Now comes AI. AI is fundamentally changing everything at many, many levels out there. So we have some very key differentiators in AI security. The exchange is probably the biggest one for us to differentiate us. And also the amount of data, the logs, the proprietary data we are getting is probably better than anybody else. It is with SSL inspection, we can see everything. So it expands our opportunity in the SecOps area. But overall, I see our business growing in 3 pillars: Zero Trust Everywhere, data security everywhere and AI security at all angles. This will give us plenty of opportunity to get to $10 billion ARR and beyond.

All right. Perfect. Well, Jay and Kevin, thank you so much for being here today.

Thanks for having us.

Thank you. Great.

Good day, and thank you for standing by. Welcome to the Zscaler Second Quarter 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, [ Kim Watkins ], SVP of Investor Relations and Strategic Finance. Please go ahead.

Good afternoon, and thank you for joining us today. Welcome to Zscaler's Second Quarter Fiscal 2026 Earnings Conference Call. On the call with me today are Jay Chaudhry, Chairman and CEO; and Kevin Rubin, CFO. Please note that we hosted our earnings release, shareholder letter 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 a reconciliation of GAAP to the non-GAAP financial measures in our earnings release.

Before we get started, 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, annual recurring revenue, net new annual recurring revenue, gross margin, operating profit, net other income, earnings per share and free cash flow margin, our customer response to our products, our expectations regarding AI and its impact on our business and customers, and our market share and market opportunity, and our objectives and outlook. These statements and other comments are not guarantees of future performance, but rather are subject to risks and uncertainties, 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 these 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. Morgan Stanley Technology, Media and Telecom Conference on March 2. Loop Capital Markets Investor Conference on March 10. Stifel Technology Conference on March 10. Cantor Global Technology and Industrial Growth Conference on March 11, and Wells Fargo Software Symposium on April 8.

And with that, I'll turn the call over to Jay.

Thanks, Kim, and thanks to everyone for joining us today. We delivered strong Q2 results, and I couldn't be more proud of the team's execution. ARR grew 25%, reflecting continued strong demand for our platform. We are confident in our outlook for the second half of fiscal 2026. And as a result, we are increasing our guidance across the board.

I'd like to zoom out for a moment and talk about what's on everyone's mind, AI. AI is the single most transformative technology of our time and its mass adoption only just beginning. We believe Zscaler is the security platform for the AI era because we already protect users, data and applications across clouds and the Internet at scale. Just as we enable customers to securely accelerate digital transformation and cloud adoption, we believe we are uniquely positioned to secure the AI transformation driving continued demand for our platform.

Organizations are rapidly adopting AI to drive productivity and innovation. But doing so is creating new vulnerabilities, significantly expanding the attack surface, and increasing cyber threats in scale, sophistication and speed, recasting AI from a productivity engine into a dangerous security set. During my conversations with more than 100 CEOs and CIOs, including many at the World Economic Forum in Davos last month, the urgency of securing AI is one of the top concerns on their minds.

This is the opportunity for Zscaler's industry-leading Zero Trust Exchange, which enables our customers to securely scale AI for the Agentic era and beyond. Zscaler minimizes the attack surface and limits [indiscernible] with our unique Zero Trust architecture that enables direct one-to-one communication among users, applications and AI agents.

I started Zscaler with an initial focus on securing users with Zero Trust. Then we extended our platform to deliver Zero Trust for workloads, branches and devices, which has increased our TAM significantly, and extended our technology lead from other vendors who are still trying to build a SASE solution for user security. Now we are extending our global Zero Trust Exchange platform to secure AI applications, AI agent communication, and Agentic workflow at scale. As AI agents are unleashed within the enterprise, it won't be long before billions of AI agents interacting with each other will have access to mission-critical applications and sensitive data.

Just like users, in organizations AI agents are also becoming the weakest link in cybersecurity. Imagine a threat actor, highjacking even one-off and organizations AI agents, resulting in a serious breach. AI agents shift the threat landscape and operate autonomously at speeds far exceeding humans, exponentially increasing Agentic traffic, while compressing the time to prevent, detect and respond to threats. This is becoming even more acute as AI agents, or apps, exposed to the Internet can be scanned and targeted in seconds.

Securing this new reality requires in-line policy enforcement at massive scale. This is what Zscaler is built to deliver. Zscaler stands for the Zenith of scalability. Effective AI security requires a proven Global Zero Trust Exchange infrastructure. And we believe Zscaler is the only cybersecurity platform for the AI age that's able to secure at this unprecedented speed and scale, creating a durable advantage. We have 15-plus years of experience operating our own cloud across 160-plus data centers worldwide, offering real-time security services with [ 99.999% ] reliability.

This global infrastructure is critical to secure AI agent communication. Our software is present on millions of end-user devices, servers, as well as in the cloud and branch offices, and it enables us to get Agentic traffic to our Zero Trust Exchange giving us a unique advantage. With our AI platform capabilities, we processed nearly 1 trillion AI transactions in calendar 2025. We are also processing millions of MCP requests through our exchange on a monthly basis, up from literally nothing a couple of quarters ago.

As an example, a large Fortune 100 financial services customer is using our Zero Trust Exchange to enforce policy for the software development agents. In another example, a CECL of a Fortune 500 entertainment company, a Zscaler customer, shared with me that with little deployment effort, he was able to turn on Zscaler Exchange to enforce policy for AI traffic and is securing over 4 million prompts per week. Our Zero Trust Exchange is fundamentally different from competitive firewall-based security architecture that connects users or AI agents to a network, and then allows them to run free, dramatically increasing the risk of cyber breaches. We expect these advantages, including significant architectural differentiation and our large customer base to drive short-term and long-term demand for our platform.

Turning back to the quarter. Our results reflect robust demand across all 3 of our growth pillars. AI security, Zero Trust Everywhere, and Data Security Everywhere. I will start with AI security, which includes two product areas. AI Protect our recently introduced solution to secure the use of AI and Agentic operations. I will begin with AI Protect which secures the full spectrum of enterprise AI adoption and solves a range of cyber and data law challenges.

Zscaler [ threat lab ] research found that in calendar 2025, AI application use within our customer base expanded to over 3,400, a quadrupling in the last 12 months alone, with data transfers to AI apps exceeding 18,000 terabytes. Many of these apps have serious vulnerabilities. Zscaler AI Protect, gives customers a single integrated way to secure AI at scale by discovering and managing all AI assets, including shadow AI uses, enforcing safe access to approved apps and inspecting every prompt and response in real time to stop data leaks and attacks like prompt injection.

For customers building their AI models and applications, our AI [ red-teaming ] solution performs continuous security assessment. This quarter, we integrated our AI red teaming and our guardrail products to provide true closed-loop security. While our Zscaler AI Protect solution is new, we see demand rapidly accelerating, including landing new logos representing a massive future growth opportunity.

This quarter, several large enterprises adopted our solution. In an 8-figure new logo win, we landed a Fortune 500 semiconductor manufacturer. This [ comer ] expanded its use of our platform to include AI Protect and data security solutions to block access to unsanctioned applications, prevent public LLM data leakage and provide visibility into prompts. Zscaler's integrated AI Protect solutions spanning the entire AI life cycle was a key differentiator for this new logo win.

In another example, in a 7-figure upsell deal, a Global 2,000 construction company, which is securing users with Zscaler, added our AI Protect solution to prevent data leakage and enforce acceptable use controls, or access to Gen AI applications.

The second product area of our AI security is Agentic Operations, which includes our Agentic [ SecOps ] and Agentic IT Ops solutions. We are significantly advancing our Agentic SecOps capabilities by integrating Red Canary's agent framework with the deep security insights we generate from the Zscaler Zero Trust Exchange, which processes more than 500 billion transactions every day, more than 20x the number of daily Google searches. This fusion of capabilities simplifies customer operations automates threat hunting and provides more accurate actionable threat prioritization.

Some of our wins for our [ Agentic SecOp ] solution this quarter include our leading AI software and research organization, a Global 2,000 utilities energy company, and a Global 2,000 oil and gas company. In agentic IT operations, our innovations include Zscaler Digital Experience, or ZDX Copilot, which combines Agentic technology with a conversational interface to troubleshoot and resolve performance issues of applications and network and endpoint devices.

Booking for ZDX [ Advance plus ], which includes our ZDX Copilot product crossed [ $100 million ] over the last 12 months, growing more than 80% year-over-year. We are soon launching an AI agent for ZDX that will automate multiple troubleshooting tasks, resulting in faster diagnosis and resolution of performance issues. Overall, I'm very pleased to see growing demand and continued momentum for our AI security solutions.

Our next growth pillar is Zero Trust Everywhere, which includes revenue from customers who are more broadly adopting our Zero Trust architecture by purchasing all of the following. Zero Trust Users, Zero Trust [ Branch ] and Zero Trust Cloud. We pioneered the Zero Trust users market by disrupting the traditional proxy and VPN markets, and we are a clear market leader. With our Zero Trust branch, we are disrupting branch firewalls, software-defined networks on SD-WAN and MPLS networks. With Zero Trust Cloud, we are disrupting virtual firewalls in the cloud. We are seeing ARR from Zero Trust Branch and Zero Trust Cloud growing significantly as we dramatically reduced cost and complexity.

The number of Zero Trust Everywhere enterprises has grown at a rapid pace and now sits at over 550, up from over 130 a year ago. The pricing of Zero Trust Branch and Zero Trust Cloud are based upon the number of devices, the number of workloads and the amount of traffic which keeps growing. This expansion also creates a flywheel effect generating follow-on demand for our data security and AI security offerings.

Let me give an example of Zero Trust [ Brand ] win at a subsidiary of a Fortune 500 retailer, who significantly expanded its deployment of Zero Trust Branch to over 1,000 sites in a 7-figure upsell, making it one of our largest ever Zero Trust Branch deals. The use case is for this customer for frictionless M&A integration and rapidly bringing both newly acquired and greenfield sites online. This order also included our AI Protect solution to secure sensitive data from Gen AI apps.

In Q2, 45% of the total customers who bought our Zero Trust Branch solution for new logos, demonstrating that Zero Trust Branch is helping us grow on new logos. This is also a clear proof that for better cyber protection, customers want each branch to become like an Internet cafe, and [indiscernible] place SD-WAN, which is often sold by SASE vendors.

Another important part of a Zero Trust Everywhere solution is Zero Trust Cloud, which reduces cost and operational complexity by eliminating virtual firewalls in data center and cloud environments, and can be deployed in 10 minutes. We're seeing tremendous momentum for Zero Trust Cloud.

To share a customer example in one of our largest ever Zero Trust Cloud wins, a Global 2000 financial services customer signed a 7-figure deal increasing their ARR to more than [ 5 million ], up over 40%. Zero Trust Cloud is priced based on traffic, creating a natural path for ARR to grow as customer traffic grows. This deployment will eliminate a large number of virtual firewalls in their multiple cloud environments which significantly reduces the operational burden of managing firewalls in multiple clouds, and improves cyber posture by preventing lateral that movement. With significant wins, we are proving that for better cyber protection, customers want each cloud workload to become like an island, and communicate only through our Zero Trust Exchange and displace virtual firewalls. Our opportunity is to secure millions of workloads.

Our third growth pillar is Data Security Everywhere, which is 8 modules, including data discovery, data classification, posture management and data loss prevention. We are seeing significant traction driven by enterprises, consolidating the data security point products onto our integrated platform and simplifying deployments. The growing use of AI apps is making data protection essential, generating strong demand for our solution.

Let me share an example. In an 8-figure upsell win of Global 2000 financial services customer expanded its adoption of our platform by purchasing additional data security modules, strengthening protection for sensitive data across its organization. This customer selected us over well-known competitors to replace multiple legacy point products due to our unified policy for various data sources and channels. With this purchase, the ARR for this customer increased nearly 5x.

We believe Zscaler is incredibly well positioned to secure the AI era. As the number of agents expands, the unique Zero Trust architecture becomes even more crucial. Minimizing attack services and limiting lateral movement by enabling direct one-to-one communication.

In summary, our growth opportunity is straightforward. Traffic flowing through our Zero Trust Exchange for secured communication expands our revenue opportunity. In the Agentic era, the traffic from Zscalers more than 50 million users, servers, cloud workloads, branch locations and AI agents will grow exponentially, driven by billions of autonomous agents. We believe that Zero Trust communication will be the only way to apply the real-time protection customers need to adopt AI safely and securely.

We run the largest in-line globally distributed security called platform in the world, processing more than 500 billion transactions every day, more than 20x the number of daily Google searches. This proprietary anonymized data is [indiscernible] our AI engine, a powerful differentiator to stop ever-changing cleats at speed and scale. We provide the global infrastructure which enables our customers to secure communication and apply policies in real time at wire speed.

Today, we are trusted by more than 45% of Fortune 500 companies, and we expect to continue expanding our partnership over time. In addition, with just 4,400 of more than 20,000 largest enterprises in the world as Zscaler customers today, we have a significant opportunity ahead. This gives us a durable runway for long-term growth from both upsell and new logo opportunities. Protecting AI is not just a job or task for Zscaler. It is our mission. We believe Zscaler is the cybersecurity platform for the AI age.

Now I will hand it over to Kevin to walk through the financials.

Thanks, Jay. We delivered strong Q2, '26 results, exceeding our targets while investing with discipline. With 26% revenue growth and a 36% free cash flow margin, we achieved Rule of 62 performance in the first half of the year, placing us among the elite companies that consistently outperformed the Rule of 40.

Our Q2, '26 net new ARR was $156 million, up 19%, bringing total ARR to $3.4 billion, up 25% year-over-year. Net new ARR benefited from strength in large deals and volume of deals. In particular, the Americas closed twice the number of $1 million plus deals this year as compared to last year. Excluding the contribution from our acquisition of Red Canary, net new ARR was $139 million, up 7% year-over-year, and total ARR up 21%. These results compared to an exceptionally strong 24% net new ARR growth last year.

Red Canary exited Q2 with $114 million of ARR. For the first half of the year, net new ARR, excluding Red Canary, grew 10% year-over-year, accelerating from 1% last year. This quarter, our Zero Trust Internet Access, or ZIA, and Zero Trust Private Access, or ZPA, ARR remained healthy and grew in the mid-teens. We have steadily expanded our Zero Trust platform beyond users to protect branches, workloads, AI applications and now AI agents. We believe AI agents will drive a meaningful increase in machine-to-machine and agent to agent interactions over time.

In Q2, our non-seat-based metered usage solutions delivered just over 1/4 of new ACV, and the ARR tied to those offerings grew more than 100% year-over-year. Revenue of $816 million grew 26% year-over-year and 4% sequentially, exceeding the high end of our guidance. We closed Q2 with 728 customers generating over $1 million of ARR, and [ 3,886 ] customers exceeding $100,000 in ARR, both growing 18% year-over-year. We also set a record 1 million plus new ACV deals for Q2.

On a geographic basis, we saw strong growth from the Americas, which accounted for 57% of revenue, up approximately 31% year-over-year. EMEA accounted for 28% of revenue, up approximately 18%, and [ APJ ] for 15%, up approximately 23%. Remaining performance obligation, or RPO, of $6.1 billion grew approximately 31%, including approximately 47% classified as current RPO.

We are pleased with the strong execution in our account-centric sales motion, which is strengthening our position as a long-term strategic partner and driving deeper customer adoption over time. In Q2, we again delivered double-digit sales productivity growth, reflecting continued improvement in our go-to-market execution with meaningful headroom ahead. We also achieved record pipeline conversion for Q2, signaling stronger pipeline quality and improved visibility.

We continue to build strong momentum this quarter with our recently launched Z-Flex program. Z-Flex gives customers with multiyear commitments, the flexibility to activate or swap modules without starting a new procurement cycle, along with premium deployment assistance and support. This program is driving meaningful upsell, shorter sales cycles and greater forward visibility. In Q2, Z-Flex generated more than $290 million in TCV, up over 65% quarter-over-quarter. Since launching a year ago, we have delivered approximately $650 million in TCV, at an average 4-year term, underscoring customers' long-term commitment to Zscaler.

To share a couple of customer examples. In a 5-year 8-figure Z-Flex deal, a large U.S.-based finance and insurance customer nearly tripled its annual spend by expanding its module adoption across 11 existing modules, and adopting 5 new modules, including our AI security solution. In a new logo Z-Flex win, a Fortune 500 retail customer purchased 11 modules in a 5-year 8-figure deal. This customer adopted all of our Zero Trust solutions, including Zero Trust Users, Cloud and Branch, landing as a Zero Trust Everywhere customer.

Turning to M&A. I'd like to start with some color on our recent acquisitions. On February 5, we closed the acquisition of [ SquareX ], which extends Zero Trust capabilities into any browser, enabling organizations to leverage standard browsers like chrome and edge to secure access on unmanaged devices, without requiring a separate third-party enterprise browser or using outdated and costly virtual desktop infrastructure.

Next, Red Canary. On February 1, we executed the next phase of integrating the Red Canary teams with the respective Zscaler teams. Red Canary was primarily a technology and talent acquisition. As we shared when we closed this acquisition, churn or MDR businesses is higher than we experienced in our Zscaler business. Post acquisition, Red Canary's churn has been elevated. We'll be providing Red Canary ARR in Q3 and Q4.

Turning to operating performance. Non-GAAP gross margin was 80.2%, compared to 80.4% a year ago. Non-GAAP operating income of $181 million grew $41 million, or 29%, as compared to $140 million last year. Non-GAAP operating margin of 22.2% increased 50 basis points year-over-year, reflecting the sales productivity improvements I mentioned earlier, demonstrating leverage on sales and marketing.

Turning to the balance sheet. We ended the quarter with $3.5 billion in cash, cash equivalents and short-term investments and $1.7 billion of debt. In Q2, we generated $204 million in operating cash flow, up 14% year-over-year, and CapEx was $18 million or 2% of revenue. Finally, free cash flow margin was 20.7% this quarter, down from 22.1% last year, driven by the timing of cash collections.

Looking ahead I'd like to spend a minute addressing the recent increases in memory, storage and processor prices and availability. So far, we haven't seen a meaningful impact to our operations. However, it could become a factor in the future as we purchase equipment for our data centers and Zero Trust Branch appliances. We'll continue to monitor our costs and adjust customer pricing if needed.

Turning to guidance. Let me provide our outlook for Q3 and full year fiscal '26. As a reminder, these numbers are all on a non-GAAP basis. For the third quarter, we expect revenue of $834 million to $836 million, reflecting approximately 23% year-over-year growth. Gross margin of approximately 80%, operating profit of $187 million to $189 million, equating to an operating margin of 22.4% to 22.6%, net other income of approximately $25 million and earnings per share of $1 to $1.01, assuming a 21% tax rate and 167 million fully diluted shares.

For the full year fiscal 2026 ARR of $3.730 billion to $3.745 billion, or year-over-year growth of approximately 24%. This guidance implies net new ARR growth, excluding Red Canary of approximately 9.5%. For Red Canary, we expect ARR of approximately $130 million in fiscal '26, up from our prior guidance of $95 million, with net new ARR of approximately $6 million in Q3 and $10 million in Q4. This includes all the business expected in each period, including fiscal '26 renewals, upsells and new logos.

For the second half of fiscal '26, we expect approximately 40% of total net new ARR to be recognized in Q3. Revenue of $3.09 billion to $3.322 billion, reflecting year-over-year growth of 23.8% to 24.3%. We expect Red Canary revenue of approximately $125 million in fiscal '26, up from our prior guidance of $90 million. Operating profit of $742 million to $748 million, up approximately 28% to 29% year-over-year, up from our prior guidance of $732 million to $740 million. Earnings per share of $3.99 to $4.02, assuming a 21% tax rate and approximately 169 million fully diluted shares. And free cash flow margin of approximately 26.5% to 27%, reflecting CapEx in the mid-single digits as a percentage of revenue.

We are very pleased with the results we delivered in the first half of fiscal '26. We achieved 25% year-over-year ARR growth and record operating income. Excluding Red Canary, our net new ARR growth accelerated to 10% in the first half of the year, up from 1% in the same period last year. We also saw continued momentum with Z-Flex and closed a record number of $1 million plus ARR deals for Q2.

Looking ahead to the second half of the year, we believe we are well positioned to build on this momentum. We will do this by scaling our rapidly expanding AI security portfolio, expanding Zero Trust Everywhere adoption and growing our Data Security Everywhere revenue. Ultimately, we remain focused on driving durable, profitable growth with strong cash generation. I want to thank our employees, customers and partners for their continued support.

With that, operator, you may now open the call for questions. Thank you.

[Operator Instructions] Our first question will come from the line of Saket Kalia of Barclays.

Thank you, team, for the increased disclosure on Red Canary, very helpful. Jay, maybe for you. I'd love if you could talk about just the competitive backdrop a little bit. And anything you can touch on in terms of competitive win rates, and what you saw this quarter? I mean, clearly, this is a rising tide market, but there are other players as well. Maybe the question is where are you winning? And what impact, if any, are they having?

Thank you, Saket. We haven't seen much change in the competitive dynamics over the past few quarters. What we saw was a record pipeline conversion for Q2, which is wonderful. And we also had a record Q2 in terms of large deal wins and -- in Q2, and large deal wins, I mean, over $1 million.

I mean there's a fair amount of noise the market creates out there, SASE this. SASE that. SASE is a collection of all kinds of products. In many of these SASE numbers, legacy firewalls, VPNs get thrown out. But what we are seeing in the market is our customers care about, Zero Trust. And as we engage and explain Zero Trust, we almost always win. And by the way, SASE is not [indiscernible] Zero Trust, and Zero Trust is what eliminates lateral move. So very pleased with performance. Our brand has grown. Most of large enterprises like us, they know us. And I think the future is great for us.

Our next question will be coming from the line of Brad Zelnick of Deutsche Bank.

Congrats again on another great quarter, guys, and I also appreciate the additional disclosure. Kevin, it seems you're raising your full year ARR expectation by more than your overachievement in Q2, which might be from newer acquisitions? And are there any seasonal anomalies we should consider? Perhaps [indiscernible] out of Q2 or anything like that?

Thanks, Brad. I appreciate the comments and the question. First of all, just remember, our business seasonality tends to favor H2. So we are going into the second half of the year feeling confident. We do see a strong pipeline of deals going into the back half, which does give us confidence in the raise with the exception -- excluding Red Canary. So I would point to strengthen the overall business as well as just general seasonality that we see in the back half of the year.

Our next question will be coming from the line of Gregg Moskowitz of Mizuho.

Also welcome the additional disclosures. So thank you for that. Very interesting that your non-seat-based meter usage solutions are now over 25% of new ADV. That's higher than a lot of people had thought. And with the related ARR more than doubling year-over-year, this has the potential to put some upward pressure on the growth algorithm for Zscaler in the future.

But Jay, when you look deeper at these nonseed-based solutions, you gave some good color in your prepared remarks, but can you help us better understand what's really most resonating with customers today, as well as what you're most excited about going forward?

Yes. We started early on with Zscaler. For users with Zero Trust that is largely [indiscernible], but now we have Zero Trust for workloads [indiscernible] devices, and now we are extending it to AI agents as well. Even for [ users ], we did have a number of use cases that are nonseed-based. This is [indiscernible] where we are doing third-party contractors, guest WiFi or B2B data exchange with suppliers and customers.

And just on growth, on [indiscernible] has been very strong, and that's all nonuser [indiscernible] pricing. Our AI security solutions, which are starting small, but growing pretty rapidly at all nonuser-based, rather they are token-based. And yes. We are pleased to say that 1/4 of our new business came from metered usage, and we expect it to grow over time, especially with AI agents because we believe that there will be billions of AI agents. The only way to secure communication of agents is to go through Zero Trust Exchange that scales, that's highly reliable and globally distributed, and that's what we have.

And our next question will be coming from the line of Brian Essex of JPMorgan.

Another set of kudos to Kevin for the organic versus inorganic disclosure. Maybe a question for you, Jay. And we saw this quite a lot during like a decade ago when digital transformation was the buzzword, and a lot of different IT projects were classified as digital transformation products. Similarly, we're starting to hear a lot of projects where executives are throwing AI on top of their projects to get more budget. And from that perspective, are you beginning to see any attached to budgets outside of security? How are CIOs thinking about funding some of these projects and is Zscaler [indiscernible] in that?

So we are seeing CIOs trying to really move as fast as they can to implement AI security projects. And so the feeling is if I'm not doing something, I'll be left behind. That's a clear thing. I see I have talked to lots and lots of them, but they do all worry about cybersecurity. Especially when you see all these agents showing up every other week, [indiscernible] last night was for [indiscernible] and [indiscernible] and all these guys keep on coming. They are definitely creating security issues.

So our customers are asking us, what can you provide me visibility into AI assets are risk associated with that? And then start moving around, how do I control agents? How I do have a policy that can say certain agents can access or an application? Agents are somewhat like you, they're just more dangerous and they're growing at a rapid pace. So there is a high degree of interest in proper security, especially Zero Trust for agents that we provide the budget opens up, the budget either comes from the security side of it. All the CIOs are allocating some number of budget out to the AI project.

If you're spending $100 on an AI project, you spend $4, $5, $6 on security is viewed as very nominal thing. So we're not seeing budgets as an issue to do AI security projects. It does require that you need to engage at the C level. And we have very good C-level relationships, and with pretty good plan and credibility with Fortune 500 companies.

Our next question will be coming from the line of Meta Marshall of Morgan Stanley.

Maybe a question for me, kind of following up on Brian's question. Just what you're seeing in terms of sales cycles once kind of a deal is encompassing more AI? I guess just how does it change the dynamic of your kind of needing to take a more holistic view or needed to include more modules? Just what are you seeing there?

So sales cycle depends upon the scope of the project. The first thing our customers are trying to do is put their hands around what do they have in [ the AI ] environment. What public [indiscernible] being used and what private [indiscernible] are being used. So for that, we offer AI asset management, then they want to do vulnerability assessment. We've had [ teaming ] kind of stuff as they roll out the project, guardrails becomes important.

Last month, we launched a very integrated AI security [indiscernible] The sales cycle based on what modules they're doing is generally faster because they are not really trying to go after everything. They want to start somewhere, but they want an integrated solution. And by a number of customers that told me, we bought this solution from a start-up, but for 1 year till I figure out what integrated solution can I get from a trusted vendor like Zscaler who will be around for the long term? So deals sell cycles are faster. They are smaller deals to start with, and I think they'll grow over time, especially most of those deals are based on consumption or tokens. And as [indiscernible] users are [indiscernible].

And our next question will be coming from Fatima Boolani of Citi.

Kevin, this one is for you. I was hoping to take a step back to how you reconcile the comments around Red Canary seeing elevated churn, but also the close to 30% revision on your financial contribution expectation from Red Canary, both ARR and top line on revenue? So just wanted to kind of better understand, I know you sort of flagged that the Red Canary business. generally had much higher levels of churn relative to Zscaler proper. So I just kind of wanted to better understand the dichotomy between those statements. And if you can opine on that?

Yes, appreciate the question. So look, I mean, there is an element here that as we talked about when we did the acquisition. As we do secure the renewals, there is a positive impact to ARR and so you are seeing some of that come in. My commentary just around the elevated levels of renewals is just to give color around what we are seeing. As a reminder, Red Canary was a technology and talent acquisition, and it is a core feature of the Agentic stock that we are putting together and combining, and I mentioned that we moved into the next phase of our integration earlier this month, and now consolidating those teams, which we're really excited about.

So, I mean, the reconciliation is really just to give you a little sense for what we're seeing in the business and how you should think about the second half of the year.

And our next question will be coming from the line of Roger Boyd of UBS.

Jay, I wanted to touch on sales productivity. You've made a number of changes to the go-to-market strategy over the past year in order to really help guide customers towards more transformational projects. And I know you mentioned another improvement this quarter, but can you talk about kind of the future ramp you're expecting in terms of sales force productivity? Do you see further room to upside given the push towards more of these transformational deals that are bigger, but maybe more complex?

I'll give you a broader view and Kevin is going to get into more specific [indiscernible]. With the changes we've gone through, we are driving more transformation deals, better engaging with our customers. With that, you're seeing bigger deals, Z-Flex type of deals that are happening up and that's leading to improved productivity. In fact, rather we had a double-digit sales productivity growth. Very pleased with the way sales transformation as. Affluent. As we said last quarter, the transformation is done, now we keep executing [indiscernible]. Kevin?

Yes. Thanks, Jay. So just -- I want to just kind of double-click on that last point, right? So as we engage with our customers, it is -- the account-centric model is a much different level of engagement. We're seeing a lot of interest in Z-Flex and what that looks like from a strategic point of view. And so the nature of the conversation, the way in which we're engaging the larger deals that we're seeing all will lend itself to continued productivity opportunity going ahead.

So as I look forward, I would expect that we will continue to see improvement in productivity as a result. So we are seeing the benefits, and I expect that we'll continue to see an improvement over time.

And if I may add that record pipeline conversion as a good indication of that what we want to do is working record million-dollar deals in Q2, another indication of the [ results begin ].

And our next question will be coming from Ittai Kidron of Oppenheimer & Company.

Kevin, I wanted to dig into your comments on the core [ ZIA ACPA ] growth. I think you mentioned mid-teens in ARR. Can you give us a little bit more color what was that growth rate for the last 2, 3 quarters perhaps? And how do we think about expectations for your core ZIA/ZPA business for the next 2, 3 quarters?

Yes. Thanks, Ittai. I appreciate the question. We have seen a pretty consistent performance in [indiscernible] We did get some feedback that it would be helpful for you guys to get a little bit more color in that regard, which is why I added that into the script. Keep in mind that [ ZIA, ZPA ] as it relates to Zero Trust Everywhere, is the foundation and to a large degree, the base and the opportunity. If you look at the number of customers that we have today, roughly 4,400 out of more than 20,000 potential companies that we think can be customers, you look at it in terms of Fortune 500, where we still have over half of those to prospect against. There is a massive opportunity left with [indiscernible] as as we think about it.

And even within the companies that we do have on [ ZIA, ZPA ], we have an opportunity to upsell those Zero Trust Everywhere and then adjacently through the other pillars, data security and AI. So from our point of view, it just reiterates the stability in the underlying business and really gives a sense for what's driving kind of the core of the business. But again, we've got these other 3 growth pillars that have been doing exceptionally well. And hopefully, that additional color is helpful for you.

One interesting to add what [indiscernible] that customers on average are tripling their initial purchase in 4 years. That's pretty [indiscernible].

And our next question will be coming from Gray Powell of BTIG.

Great. Can you hear me, okay? I cut out there for a second.

Yes. Yes, we can. Excellent.

Okay. So I want to follow up on some of the earlier questions. I think you've hit on this somewhat. But -- so you are seeing a lot of momentum in Zero Trust Z-Flex deals. If I'm doing the math correctly, I'm calculating that Z-Flex was over 30% of RPO bookings. I'm not sure if that's how you look at it. But I guess the question is, how does the ARR ramp on a Z-Flex deal compared to customers under historical contracts? And then just any directional commentary you can give on how big a typical Z-Flex customer is at maturity versus traditional, or like what they spend? And what's sort of like -- giving you the most upside from a product perspective?

Yes. Thanks for the question. Let me maybe just orient [ it ]. I mean the way that we look at Z-Flex is it is another opportunity for us to offer a package to a customer that we think is mutually compelling because the flexibility, so they have less concern about being locked into a particular product, or product decision in the future. It gives them an opportunity to focus more on the long-term partnership versus more transactional selling in nature. And then it does give an opportunity for them to try in a much easier, less friction way, new modules that expand into those modules.

So from a -- from an offering perspective, it is a much better and more strategic way to engage. We do think over time that more and more of our customers will will adopt Z-Flex. Is not something that we mandate or push, but where we feel that it really is well positioned. The field is enabled to be able to offer Z-Flex going forward.

Your question around differences in ramps, et cetera. Fundamentally, two deals if its a Z-Flex or if its a non Z-Flex, so long as they're similar structure. There's no difference in how that shows up in ARR. [ Z-Flex ], by their nature because they're longer term, they've got more products. They may have a ramp that is built in so that the customer can deploy along their deployment plan, which could take anywhere from 6 months to a year. But I wouldn't think about Z-Flex as creating a different dynamic with respect to ARR other than it's just another level of indication that we are very strategic in that environment.

The average Z-Flex deal is typically an 8-figure TCV commitment. And for those deals that we've done thus far, it's been about a 4-year period. As we've talked about, they tend to be 3- to 5-year deals. And right now, the average is about 4. So hopefully, that's helpful color.

And our next question will be coming from the line of Jonathan Ruykhaver of Cantor Fitzgerald.

So I think, Jay, this is for you. Just curious, when you look at [ SquareX ] from my understanding you're betting browser security via an extension rather than having a dedicated secure browser. Can you just talk about that? It seems like the flexibility could be a plus, but is there any trade up between control and functionality between extension and full [indiscernible]?

And then just just curious also on your view of how critical is the browser layer to winning broader Zero Trust deals over the next couple of years?

Thank you. Very good question. So we have been offering Zero Trust isolation solution using any standard browser for managed and unmanaged devices. [indiscernible] manage no problem. [ Unmanned ] devices means they were using the standard browsers. Some customers wanted something like a device [indiscernible] on unmanaged device. And for that, One option was you buy a full loan enterprise process from a third party.

We looked at some of those acquisitions a couple of years ago. We didn't like it. Full [indiscernible] browser with its own [indiscernible] and customers don't like one more agent, or in this case, this is one more mega agent on the endpoint. So what we found was with [indiscernible] acquisition, we could add the security functionality [indiscernible] using browser extensions from unmanaged device, it's a wonderful use case, or generally for third-party type of stuff for us. So it's a clean, better solution rather than trying to have full-blown third-party browser. And it really takes cares of the gap that we have in this environment.

So we think it expands our TAM. We have lots of customers who are using browser isolation. This actually will help us expand [indiscernible] some of the third parties who will come from unmanaged devices. So very pleased with the acquisition and a fit and early market reaction [indiscernible]

Our next question will be coming from the line of Eric Heath of KeyBanc.

Maybe I wanted to come back as an extension to Greg's earlier question, I'm thinking about AI agent. So AI agents are -- will drive a lot of network traffic. So Jay, Kevin, just how should we think about how you can monetize that increased traffic? And Kevin, how we should think about impacting the model over a longer time period?

Yes. Thank you. We think these agents that are going at a pretty rapid pace will generate a fair amount of traffic. The traffic needs, they're going to access application [indiscernible] one agent is going to talk to a second agent. In order to do that, we believe the best security is that they should be going through a Zero Trust Exchange so that a given agent can only talk to given agent or applications. Otherwise, you mentioned one impacted or hijacked agent will infect the whole enterprise. That's the biggest value we bring to the table. The more agents, the more Agentic [indiscernible], the more value we deliver and the better revenue opportunity for us. So we look at it as probably the biggest upside for growth of these kind of business.

And our next question will be coming from the line of Matt Hedberg of RBC.

Strong results you're raising, Kevin, you said by more [indiscernible], but I just had a clarification on ARR. I just want to make sure that I'm not missing anything. It looks like you raised ARR midpoint by $30 million. But it looks like in the disclosure -- and maybe this is where I'm mistaken, but it looks like you took your Red Canary expectations up from $95 million to $135 million. So to me, that looks like a $35 million raise. So am I interpreting that right? Because just I'm just not totally certain about what kind of the organic raise here is for the year?

Yes. No, I appreciate the clarification. If you look at this on an organic basis, we are raising the organic net new from 6.7% as our initial raise in the beginning of the year to 9.5% growth for '26. So yes, there is some element of Red Canary that is in the -- is mechanically inherent in the raise. But the underlying growth and strength in the organic business, giving us confidence to raised 9.5% net new growth this year is what you're seeing fundamentally in the raised guidance. And keep in mind, just in the first half of this year, net new without Red Canary grew 10% against the back half of last year, grew 1%. So we are seeing very healthy acceleration in net new ARR growth, both first half and signaling for the back half.

Our next question will be coming from the line of Keith Bachman of BMO.

Okay. I broke up a little bit there, but I want to go ahead and ask the question about Zero Trust Everywhere. And Jay, the question for you is how significant this be? You're at 550 customers now, you were at 130 a year ago. Two dimensions of the question are, A, what's the average ARR uplift that you experienced when a customer goes to Zero Trust Everywhere? Is there some kind of lift that you could help guide us on? And then how deep do you think this could get with your installed base? What's the potential reach here?

Yes. So first of all, we are very pleased with the number of customers becoming Zero Trust Everywhere customers. The number 550 is very good, and these are enterprise customers, they're large customers on. In terms of left on ARR, I think we even shared last quarter that we are seeing 2 to 3x, essentially move in the ARR when customers are buying -- moving to Zero Trust Everywhere, which is very good.

In terms of potential out there, I can tell you, a year ago, when was talking to -- I was talking to customers about Zero Trust Branch, which essentially replaces MPLS or SD band. I was wondering how many customers will be saying, I love my SD-WAN, okay? I can tell you I don't find any [indiscernible] customer. Now these are customers. They all want to replace SD-WAN for cost reasons and for security reason, [indiscernible] SD-WAN enables laterals that moment. So attention -- interest is very high in the branch.

On the cloud side of it, too, it's a fascinating new disruptive play [indiscernible] no real competition other than old-school firewalls and trying to do firewalls and food with IP address an ACL is a nightmare. So we're seeing that traction going. So very bullish on both Zero Trust Branch and Zero Trust Cloud. So I will look to see that every Zscaler customer in a matter of time, we will be a Zero Trust Everywhere customer.

And that concludes our Q&A session. I would now like to turn the conference back to Jay Chaudhry, CEO, Chairman and Founder, for closing remarks.

Thank you for joining us. We look forward to seeing you at 1 of our investor conferences we'll be attending. Thanks again.

And this concludes today's program. Thank you for participating. You may now disconnect.

All right. Well, good morning, everyone. Welcome to day 2 of the Barclays Tech Conference. My name is Saket Kalia. I cover software here. Honored to have with us the team here from Zscaler. We've got Kevin Rubin, Chief Financial Officer. Also have the Investor Relations team here with Kim Watkins as well as [ Catherine Hua ], who I think is somewhere around here as well.

So we've got about 30 minutes together. Let's take maybe the first 20 or 25 minutes to go through some fireside chat with Kevin, which I know is going to be real fun. And then -- we'd love to make this interactive. So if anyone's got a question, just pop up your hand, we can get a mic around.

So with that, Kevin, thanks so much for being with us here today.

Thank you for having us. We're thrilled.

Yes. So it's -- we've been very lucky since the IPO to have Zscaler at our conference for years. But I think this is the first Barclays conference where we've had you here as CFO, hopefully the first of many. Maybe with that said, just tell us a little bit about your background and what attracted you to the opportunity at Zscaler.

Sure. So I've been in enterprise software for about the last 15 years prior to joining Zscaler. Prior to that, I had been in other elements of technology. My experience is kind of abstracted as the tech stack has abstracted, started with wafer fabrication into data storage and then more recently into software. After we sold Alteryx, which was my last longer-term gig, I got introduced to Jay and candidly didn't know a lot about Zscaler. But as I got engaged and learned more about the company and the opportunity, it was very clear to me that we had a very differentiated opportunity in the space. And aside from the fact that I thought the management team was exceptional and people that I would love to partner with and work with, I really thought the Zscaler opportunity was incredibly unique and one that I wanted to be part of.

I totally understand that. Very, very helpful context. I think everybody here in the room is certainly familiar with Zscaler. But just to make sure we're all on the same page, can you just recap some of the points from last quarter that you were particularly proud of?

Yes. So for us, Q1, like many other enterprise software companies, tends to be the smallest seasonally quarter -- seasonal quarter within a given fiscal year. For us, it was a great start to the year. We had 26% ARR growth. Within that, we had 22% organic growth. For those that have followed us, we did acquire Red Canary at the beginning of the quarter, which contributed to ARR for the period. But we really did see strong performance across -- broad-based performance across the organic business, whether that's geographical dimensions or product vertical dimensions. We really did see strong organic growth.

I think Jay even mentioned on the call that it exceeded our internal expectations. And so that was really color intended to share how we saw the performance in Q1. From a profitability perspective, it was a Rule of 78 quarter. We had 52% free cash flow margin. Now that is also seasonally affected. Q1 tends to be the highest cash collection quarter of the year. But all things considered, we felt really good coming out of Q1. That strength in the underlying organic business gave us confidence to raise guidance, which we did for the full year. And we think it really does position us well.

Yes, absolutely. I totally agree. That 22% organic point is very helpful, and it was clear that, that was ahead of your internal expectations. I think this is the first full quarter that we had Red Canary as well. Remind us, how did that do versus what you expected?

Yes. So as we had mentioned going into the quarter, we expected Red Canary to contribute $83 million of ARR at the close. So that was the amount of underlying business that we picked up. And then we had shared that we expected Red Canary to deliver $95 million throughout fiscal '26, which effectively implies, if you just straight line it, $3 million a quarter. And our commentary was that they actually did a little better than that in Q1. So in addition to the underlying strength we saw in our organic business, we also saw better performance in the Red Canary in the quarter.

Yes, absolutely. It was a good start to the year. I want to take that point just on organic growth and a better start with Red Canary and maybe think about kind of what we've said for the fiscal '26 ARR guide. Have we given any guardrails around how much we should think kind of coming about -- coming from organic? And more importantly, what are some of the fundamental drivers that you think about in terms of underpinning that growth?

Yes. So our guidance going into the year on the fiscal '25 call implied that net new was 6% or 7% growth in fiscal '26 organic. And hopefully, the takeaway from having raised guidance is that's now going to do better. So as we think about the opportunities in the business, we are more bullish as we're here in Q1, obviously, than we were in Q4. When we think about the growth drivers, we talk about 3 growth pillars, right? That is Zero Trust everywhere, and I'll talk a little bit about what's included there. Data security everywhere and AI security.

I think what has gotten lost in that discussion is we're actually seeing very good growth still in what people have described as the core business. So you think about ZIA and ZPA for those that know Zscaler, basically, our ability to provide security for users. Zero Trust Everywhere extends that into other types of resources. So yes, we have accelerated growth and higher growth in our 3 growth pillars. But we are still seeing pretty strong performance in just the core ZIA, ZPA business.

That's a great segue, and I really want to talk about sort of the growth differentials between the 2. But those 3 growth pillars, I think, are super important. Maybe just -- and I want to dive into each one of those individually. But can you just remind us what we said about the scale and the growth of those businesses collectively?

Yes. So as it related to Zero Trust Everywhere, we described that in the context of how many customers were Zero Trust Everywhere customers. And how we define that is Zero Trust users, that is the ZIA, ZPA customer base. And then we have since released Zero Trust Cloud. So how do you apply Zero Trust principles to cloud workloads and Zero Trust branch. So how do you extend Zero Trust to your IoT, OT devices that are sitting in your branch offices. And we know that there are millions of branch offices in the world.

So moving a customer from a Zero Trust user to a Zero Trust Everywhere customer, not only does it from the customer's perspective, allow them to employ Zero Trust principles across all of their resources, it does result in a 2 to 3x increase in ARR for us. So that movement is, we think, incredibly strategic. The target that we set was to achieve 390 of those customers by the end of fiscal '26, and we actually achieved over 450 in Q1, so 3 quarters earlier.

That was a very healthy start to that goal. I want to follow up on that. That was a great summary and particularly want to dig into kind of the Zero Trust branch part of that opportunity. That feels like one of the bigger ones as we think about the 3 things that a customer has to fulfill in order to become a ZTE customer, right? So can you just talk about how you think about the Zero Trust branch opportunity within the customer base? I mean, should we think about all ZIA customers as candidates for Zero Trust branch? How do you think about that?

Yes. There -- from our point of view, there is no reason that a Zero Trust user customer would not be a Zero Trust everywhere customer. If you have bought into Zero Trust principles being that anything that is connecting to anything should be authorized, should be authenticated before it has an opportunity to connect as opposed to, I authenticate you coming into the network and then I let you run free. If you bought into the notion that Zero Trust is better security, there's no reason you shouldn't apply that to cloud workloads, applications talking to applications. There's no reason you shouldn't apply that to badge readers in your buildings, security cameras, printers, anything else that would need to have access to your network.

There are examples of those devices getting hacked and it end up permeating into issues within your corporate network. Steve House, our Head of Product, mentioned in an earlier conversation this morning, you don't want to see somebody hack your set-top box that happens to sit on your network and ultimately affect SAP or have an issue with those. But once you're in the network in a traditional architecture, you're in the network and you can run around and create issues. But in a Zero Trust world, you are authorized and authenticated for that particular use and that use only. You don't even have exposure or visibility to anything else existing.

So back to the question, we see no reason why if you've adopted Zero Trust for your users that you wouldn't extend that naturally to any other type of resources within your environment, including agents, and we can talk about that in the AI security section. But there's no reason that agent-to-agent communication shouldn't follow the same principles. And you're going to have -- if everything plays out the way that people are predicting, you're going to have far more agents communicating with agents in the world in the future than you have users. And you're going to want to also apply these principles to that communication.

That's interesting. And just to put a bow on Zero Trust Everywhere, did you say a 2 to 3x uplift? So Zero Trust users only moving to a Zero Trust Everywhere contract, that's a 2 to 3x uplift is that what we said? Well, that's compelling Interesting. Got it.

I want to move over to data security everywhere as well. And maybe just foundationally, can you just walk us through some of the key modules that are included in that pillar? And similarly, what have you said on kind of size and growth for data security specifically?

Yes. So we have 8 modules that we offer from a data security perspective, things like in-line DLP, endpoint DLP and other types of data security-related protections. The concept of Zero Trust allows us -- we sit in line of traffic. So we inspect packets, we apply policy at that level as you have communication running through your network. That is a unique position that allows us to also naturally do data protection and understand what data is being transmitted across that in-line communication path.

We have, to the best of my knowledge, the largest purpose-built security cloud in the world. And we operate 0.5 trillion transactions in this cloud each and every day. That's orders of magnitude greater than just Google searches. And I think that competitive advantage and unique advantage is underappreciated. And because we have this such broad platform that is in line to all of these communications, it allows us to naturally extend into areas like data security. So at the end of Q1, we mentioned that data security had exceeded $450 million in ARR. So it's also a very significant concentration of our business. And I'm very proud of it.

Yes, absolutely. And I think you answered one of my next questions, which is what gives Zscaler the right to win in that data security space, particularly with all the M&A and sort of the noise that we've seen in kind of the CSPM space in general. And it sounds like by sitting in line, right, with kind of that communication, that's what gives you the right to win there. Is that a fair summary?

Yes, 100%. I mean there's no reason that you should think about data protection in any area of your network outside of the communication path that is happening. So that's the approach that we've taken that is core to Zero Trust principles. And again, I think, we -- I think it's underappreciated the size and scale of the actual platform that we operate and that we offer to our customers. So we provide customers the opportunity to be able to start with simple Zero Trust for users.

We give them the opportunity to then expand that use into data protection modules. We give them the opportunity to expand that into SecOps and ITOps with respect to some of our AI security offerings. We give them the opportunity to inspect AI-related traffic. So that you can understand prompting when your employees are interacting with the language model, and you want to make sure that they're not asking how do I build a bomb on company resources or how do I do things that I should not be asking my LLM within a company to do. So we have the opportunity to inspect those prompts. We have an opportunity to ensure that the policy that you want to apply to that use is properly applied.

So again, we have a right to win, I think, in both data security and AI security by the nature that we are sitting in line to that traffic. We see -- we have access to the largest possible data set underlying that traffic, and we can use that for things like understanding pattern recognition and understanding vulnerabilities and threats and be able to apply that across the entire Zero Trust Exchange, which is incredibly unique to our platform and one that none of the other vendors can claim or offer.

Absolutely. So we've talked about Zero Trust Everywhere. We've touched on data security everywhere. I want to just kind of wrap up the trifecta here with AI security. Remind us -- similar question, sorry, just to frame everything. What have you said about size and growth there? And walk us through some of the more material modules in that part of the business?

Yes. So our AI security growth pillar exceeded $400 million in ARR at the end of Q1. So it has been doing incredibly well. It includes -- we bucket it into 2 elements. We have securing AI. So I talked a little bit about understanding prompts and guardrails around how organizations are interacting with large language models and applying policy to that activity. That's securing the use of AI. And then there's AI security. So how do you then use AI to provide better security. And again, when you think about just the breadth of the platform and the underlying data that we see, it gives us a massive competitive advantage in terms of being able to use AI to then provide far better security and posture to our customers. Things like AI guardrails, right?

So that's the prompting. AI asset detection. So how we think about understanding the actual posture of your AI environment. We recently acquired and spoke to SPLX, which allows you to do AI red teaming to stress test your AI applications before you deploy it and make sure that you have an understanding of what vulnerabilities may exist before you expose those to customers.

So AI is a significant opportunity for us in an area that you've seen us participate from an M&A perspective quite a bit. And lastly, we have within the AI security, that's where our agentic SecOps activities exist. And it started with the Avalor acquisition that we made a few years ago -- a couple of years ago. Around how do you contextualize your data, how do you synthesize your data for purposes of understanding and vulnerability management. And then now that we have the agentic technology from Red Canary, we can start to apply that to this massive data set and be able to provide better security and vulnerability management to the broad-based customer base.

Interesting. So we've kind of -- we've talked about those 3 pillars. I want to kind of bring it all together. If we think about those growth businesses making up over $1 billion in ARR, this is one of the topics you touched on earlier. I'm curious to hear how you think about that [indiscernible] is a total $3 billion ARR business. How do you think about the other $2 billion plus in ARR that comes from kind of what we call core or maybe those a la carte purchases of ZIA, ZPA and ZDX. It feels like that Zero Trust SASE market continues to see healthy secular growth. But I guess as we see more customers move to Zero Trust everywhere, for example, could we see some business shift out of that $2 billion bucket into that $1 billion bucket? How do you think about that sort of dichotomy?

Yes. I don't -- I think we've kind of created a little bit of unnecessary confusion in how we've talked to kind of these growth pillars and by extension then what it implies to the rest. Yes, I think mathematically, the challenge is as the underlying Zero Trust user customers begin to adopt more of the elements that are sitting in these growth pillars, you just mathematically kind of create this movement of their underlying business into the growth pillars, which I think a little bit obfuscates what's happening underlying the growth.

We've actually seen pretty strong performance in our ZIA and Zero Trust user business. That does not come through, I think, in the way that we have talked to these elements of the business. And so we'll think about how we better provide clarity to investors on what we're seeing underlying the business. But we are seeing broad-based support. We have about 45% of the Fortune 500 companies as customers today, implying that we've got more than half of those that are not yet customers that we have intent to go out and capture. We have about 40% of the Global 2000. So again, you've got over 50% of the Global 2000 companies that we believe should be Zero Trust and Zscaler customers.

So there is a significant opportunity both within our existing base to upsell into more of the Zero Trust user population, more of the Zero Trust Everywhere population into data security, AI security. But there's also just a significant opportunity from a net new logo perspective vis-a-vis these large customers. One other data point just to keep in mind, we have about 4,400 customers that we would consider kind of an enterprise customer, meaningful size organization with a meaningful sized user count. We estimate there's no less than 20,000 of those customers that are addressable by what we do. And so if you look at it from that perspective, you've got about a 4x opportunity in that context, if you want to look at it separate from Fortune 500 and Global 2000.

Very helpful. And maybe that's a good segue into -- one of the questions I get sometimes is just on the competitive landscape in the Zero Trust/SASE market, particularly as we think about some of the firewall vendors, we just had Fortinet here, right? As we think about some of the firewall vendors getting into the SASE space, of course, we've got some smaller pure-play vendors as well. Listen, I think about this as a rising tide type of market. But maybe you can just talk to us a little bit about how -- what are you seeing in terms of competitive win rates? Do you think this is a rising tide type of market just based on the number of opportunities? Or how do you think about kind of that competitive landscape and the metrics that you can see?

So when it comes to SASE, we think very clearly about Zero Trust. And that is a fundamentally different approach to just generic SASE. It's -- as I kind of described earlier, it is this notion that you're adopting principles that you believe that only certain resources should have access to each other for only the limited purpose that those need. So you're not creating -- you're not simply creating a network infrastructure that previously was on-premise and pushing that infrastructure into the cloud and calling that cloud security. You are approaching cloud security in a fundamentally different way.

We offer that through our Zero Trust Exchange. We offer that through the ability to basically trust nothing and nobody and only authenticate and authorize as it relates to a particular task at hand. So when we think about that market, I agree. I think that there is a lot of effort and push that's going into the need for Zero Trust. You look at the proliferation of AI and soon to be agents, and there has got to be a methodology to be able to orchestrate that communication between those agents. We think we are uniquely positioned in that, specific to what I kind of described through the Zero Trust Exchange.

We have talked a lot about being -- creating an agentic exchange, so extending the Zero Trust principles that apply to users to cloud and branch, but then also to agents and being able to orchestrate that communication since again, we sit in line, and it's kind of the natural way to do it.

The other thing I would just reinforce when you think about Zero Trust architecture vis-a-vis traditional architecture is the cost arbitrage to deploying Zscaler, I think, is also significantly underappreciated. You no longer need all of this heavy legacy hardware equipment to be able to offer better security. You're doing so in a point-to-point relationship through our cloud service. And so you don't need your SD-WAN architecture. You don't need your VPN architecture. You don't need your firewalls. And simply shifting that investment into a cloud service is not eliminating the need for those costs. But when you adopt Zero Trust through Zscaler, those costs go away. And so that is an incredibly powerful tool that we use, especially in difficult markets to make very compelling value-based arguments from a competitive perspective.

Yes. Super, super helpful context. I want to dig into some financial questions here on the time that we've got left. Kevin, I know that we've talked about sort of investing for growth, which makes a ton of sense given the market opportunity we've talked about. But at the same time, I think we've reached really the top end of the long-term margin target that the team gave several years ago, right? I think the range was 20% to 22%. We're close to the top end of that. So looking forward, maybe I'll ask the question broadly, how do you think about that balance between growth and profitability?

Yes. We have been, I think, very fiscally responsible in our growth. We've been -- fiscal '25, we were a Rule of 50 company. We have been a rule of 50-plus company since going public in 2018. So we have been very responsible with how we deploy capital and resources in the organization. And there's no intention to change that philosophy going forward.

Now we've also been able to do that with higher levels of growth. And as we mentioned on the earnings call, we are one of only 5 pure-play software vendors that are growing at 25% or greater at a $3 billion or more scale. And so we continue to be able to grow at high rates. but deliver significant profitability in doing so.

As it relates just to the longer-term model, we do intend to hold an Investor Day later this year where we take an opportunity to kind of reset how we think about the opportunity ahead, what's the strategy underlying that? And then what's the longer-term financial model that you should expect given that strategy. I will put out there if anybody has any recommendations or thoughts on things that you'd like us to address, please reach out to our IR team. We're happy to have those conversations. But that will be a good opportunity for us to be able to kind of reset how we're thinking about the business from the perspective of investors because we haven't provided a lot of update to that since, I think, '21.

I think that's going to be a great event. I can't wait to hear more specifics on it. Maybe just to follow up on it. I think that Jay has anecdotally talked about a path to $5 billion in ARR. You even kind of dangled the $10 billion ARR on the last call. I mean now that we've shifted the focus metric here to ARR, which, by the way, was great, you've -- as we said, we've kind of reached the high end of the long-term margin target. I mean, how is Jay sort of thinking about those kind of top line targets? Because at $3 billion in ARR, $5 billion doesn't seem that hard anymore from what it's worth. Broad-based question, but curious your thoughts.

Yes. I mean, ultimately, we'll go into far more detail and share our view of kind of the path to a much larger company. What I will just say offhand is, obviously, Jay has a lot of aspiration and a lot of confidence in our business. And his aspirations don't stop at $5 billion and frankly, probably don't stop at $10 billion.

That isn't surprising at all. Maybe one point that I wanted to touch on as part of that, one of the things that launched this year, and I think it has done really well is Z-Flex, right? So maybe we can just dig one level deeper into how those contracts are structured. And I want to be sure that we talk about, could there be any kind of model impact as that Z-Flex concentration or mix grows that we should know about?

Yes. So Z-Flex was -- is our offering that provides our customers with a very flexible deployment model. It allows them to think beyond kind of an initial order and plan out what could a much broader Z-Flex -- excuse me, a Zscaler deployment look like over time and give them confidence that whatever commitment they're making is protected in that they have opportunities to mix and match the technologies that they use from Zscaler over time. So if dynamics in their business were to change, those monies that they're committing and investing in us are protected.

So that is our approach to providing customers with greater value, greater flexibility. And in doing so, what we find is those customers tend to make longer-term commitments to Zscaler, and those deals tend to be notably larger, because of the dynamics of Zscaler.

One of the other natural byproducts of these longer-term broader contracts is you go through a negotiation, a pricing discussion and a contracting discussion once. And so every time a customer wants to expand, deploy more technology, they don't have to get their procurement teams involved. They don't have to stand up additional PRs, purchase requisitions and purchase orders internally. They've already gone through the process. They know exactly how much each of the modules on the platform are going to cost them and what it takes to deploy.

From a modeling perspective, there's nothing per se unique to the Zscaler contract that is any different than an a la carte purchase structurally other than these features that allow them the opportunity to easily move into more modules, different modules and then they tend to be larger and longer.

Excellent. Excellent. Well, in the time that we've got left, I want to ask kind of a little bit of a deliberately open-ended question. But as you look at your own internal metrics like pipeline and opportunities and all the fun stuff that you folks get to see, what do you sort of -- how does this sort of feel in terms of customers' willingness to invest and spend in security in calendar '26, open-ended?

I think it's fair to say this is still a challenged market. Budgets are not free flowing like we saw in '20 and '21. Customers are very mindful as to where they deploy capital. And to maybe just draw back to one of the points I made, one of the very powerful conversations that we can have with customers is the cost arbitrage that they can see by deploying Zscaler. And one of our sales motions is to be very explicit on as you deploy more of the Zscaler platform in your environment, what costs are you able to remove from your environment with other technologies that are no longer needed. And that dynamic is incredibly powerful.

Super compelling. I couldn't think of a better way to end there. Kevin, team, thanks so much for the time. Appreciate it.

Thanks for having us, our pleasure.

All right. We will get going here. Thank you all for joining for day 2 of the UBS Tech and AI Conference. I'm Roger Boyd. I cover cybersecurity here at UBS. Very pleased to have Jay Chaudhry, Co-Founder, Chairman and CEO of Zscaler. Thanks for being here, Jay.

Thank you, Roger.

Yes. We're going to do a fireside chat. I've got the iPad up here. So if you have any questions, you can submit them through the app, and we'll weave them into the conversation.

I wanted to jump into one of the big debates coming out of the quarter, which was the concept of organic growth. And I felt like it masked a lot of what was a really strong first quarter. But just kind of in your words, what have you been talking about in terms of organic growth? I felt like there was pretty good success on the organic business in 1Q. And how should investors think about that? I know it's not the focus going forward, but address it.

I think probably -- yes, the very important point to cover for us, probably I can show you a slide to make it clear. So if you look at our ARR growth overall, this is the growth number. You know historically, what we've done, last quarter we had about 22%. And this year, yes, the total growth is 26%, but in line with the Q4 growth we had.

So the business -- organic business is strong by itself, okay? And I think we expect the organic to keep on staying strong. The question gets asked is, why aren't you peeling off the Red Canary numbers, right? So Red Canary is the first acquisition we had, had some revenue. Others were very, very early-stage revenues out here. And Red Canary was acquired to give us 2 main things: one, agentic technology they have to do SecOps functions better because they have been doing for 10 years.

They had playbooks and all to do it right. And number two, they have the expertise in this area. We're not trying to build an MDR business. As we evolve our SecOps platform, that's the business I want to count, that's the business I want to share with you. So that's one piece of it. And the numbers, when we went through the audit and looking at the numbers of the company and getting complete with auditors, we were comfortable recognizing about $83 million of that number, which is reasonable.

And then there's some renewals around left over. So the business, they've done quite well, but this is a small contribution of the business. That's why it makes no sense to keep on focusing on it. So the issue is not that we're not trying to share information. I think we should share information which is relevant to our business, which is our focus.

Yes. Cool. Thanks for addressing that. And then I wanted to shift to one of the areas of strength, in my view, was the strength you have in Zero Trust Everywhere and now 450 customers that are buying across 3 different platforms. What's exciting about that? Kind of where are you in terms of bringing that to the entire installed base? And what's driving that momentum?

So we started Zero Trust market. We are the pioneers of the market. It started with Zero Trust users. That means making sure users are not on the network, they simply access on an application. It's the opposite of network security. We've done very well there. Then it's natural for us to pioneer the next areas, Zero Trust cloud, cloud workloads. They're someone like users, they should talk to each other in a Zero Trust fashion going through a switchboard. Then Zero Trust Branch was the next thing.

And in the branch IoT/OT devices. It's a natural part of security to go and become Zero Trust Everywhere rather than just the users. So we are seeing success in all the areas. And it's also a differentiation for us as some of the copycats are coming from behind and say, "Oh, we do Zero Trust too, even though they're spinning off firewalls the market. When it comes to Zero Trust Everywhere, there's really no competition. It shows our leadership.

So we're seeing strong adoption. And when we started the program about 3 quarters ago and said, let's target how many customers are becoming Zero Trust Everywhere. And the target we set out -- we set the targets. It's good to see better, faster adoption happening. So I expect Zero Trust Branch and Zero Trust cloud will be a big part of our growth.

When you talk about growth, you look at the growth rate and you look at the meaningful contribution. You can start with a higher growth from a very small base and that's where you're going to see in security for AI applications starting from nothing. But the big contribution to our growth in the next 12 to 18 months, one is our core platform because people still start with Zero Trust users. Zero Trust Branch, Zero Trust Cloud and data security are big pieces.

The pillar you see on the right side under AI security, security of AI applications and agentic operations. Agentic operations are SecOps and all this stuff, which is relatively new. We'll be launching some of those solutions in coming months. And I expect both of those to grow rapidly from a small base. But there's plenty, plenty of platform for us to sell. And it's integrated platform. It's not a platform by buying these 5 companies and they're dissimilar products.

Makes sense. I want to come back to data security, but specifically on AI security and what you're doing around security analytics. It felt like with Avalor and Red Canary, there's been more of a platform expansion in that direction. And you talked a little bit about this, but why is that compelling right now? It feels like there's a big opportunity for you to get more strategic with customers, provide more around detection and response. Like what's the opportunity there?

Yes. So Zscaler is processing over 0.5 trillion transactions a day. I mean that's a massive number and that number becomes a basis for doing security operations. So our customers have been telling us, you do all the things, you have all the logs, and then I have to go to Splunk or somewhere else. Why can't you provide me more value when you are the source of data? That's number one.

Number two, I believe that AI is the biggest disruptor for security operations because AI can do that stuff in a much, much better way. And AI models are only as good as the data. If we have the best data, we are in a better position to do this than anybody else. That's why to build this thing, we started with our own data, some of our own technology, then Avalor giving us the semantic layer and Red Canary giving the front end, stitching all this thing together becomes a very compelling, very effective solution in detecting things, investigating things than the traditional market out there.

And it also established a closed-loop system. I find something, I send it to Zero Trust Exchange to change policy, to block certain things in near real time. Today, it can take days or weeks for things to be found and do that system. So it's a very compelling solution that we offer to our customers, and that's what we're counting on as a part of our expansion strategy.

Makes sense. And then to talk about the size of that AI security bucket. I think you just crossed $400 million in ARR and Red Canary in that. You have some products that have been in the market for a while like ZDX that are contributing there. But it does seem like there's been some pretty strong momentum on specifically the AI for security business or security for AI. AI security posture management is something that you've had for a little bit. What does the momentum look like there? And what are customers telling you about that AI for security?

So first, clarifying 2 buckets under AI security that you see on the screen. Agentic operations is using AI to do certain solutions. It's either security operations, which is what we talked about, or it is IT operations, which is user experience. We -- the reason that sits there from day 1, actually, ZDX was built by using AI. We started predictive AI, then Gen AI came along. So that and SecOps, yes, they are a bigger piece of it, and they are powered by AI.

They are -- ZDX has done very well. It's growing very well. Security operations, we expect it to start showing growth. We plan to do the first launch of integrated services next month. And then we'll keep on adding functionality as time goes along. The other area, security for AI applications. This is a brand relatively young market. We have built a number of solutions in this area. We acquired SPLX, a small tuck-in to round it out. It's starting from small -- customers have tremendous amount of interest in it.

Those are deal that are starting with small, people are trying to learn and understand it. And we have to have a strong foundation to start with these deals and grow from there. But AI security is a very important area for us. We're making sure we have the right solutions in place and be a meaningful part of that market.

Yes. And to that point, you noted a couple of larger AI security posture management wins last quarter. I think there's a view amongst investors that, that market is still relatively early, but it seems like you have some traction there. And I'd be curious to get your perspective on what gives you the right to win in that market. We've seen all the other vendors go out and acquire products there. I think you feel like you've got a differentiated product and a point in line with applications. But what gives you the right to win that business?

So one of the things customers are looking for, for securing AI applications is that they don't want to deal with 5 different vendors. They look at what's needed to have a meaningful security in that case. One is we start with Gen AI security. When ChatGPT and all these Gemini came out, customers are worried about loss of data. We're sitting in line. We built the product for securing the data. That is number one, over 2 years ago, that has -- now that gets bundled in data security because it is about not -- making sure data doesn't leak out.

The second thing we built was AI discovery, essentially risk and posture. What do you have? How risky is it? All that stuff is very important. That's a [Audio Gap] want to start there. And AI SPMs, AI security posture management is part of that. And then the third was red teaming. Companies are building more and more AI applications. And when you build applications, you want to know essentially the vulnerabilities around those applications.

Red teaming is essentially penetration test of those applications. That's a young new area, and that's what SPLX gave us because they built a very good product. And AI guardrails is the fourth product. This is when you build the models, how do you put guardrails so the traffic of users and agents goes through you to make sure they're not doing what we call prompt injection or we call data poisoning type of stuff.

So you have secure use of it. So our customers need a comprehensive solution in this area that we have. A lot of vendors, there are 100 red teaming companies out there, okay? We look at -- we started with 70, and we whittled down and bought one of them, okay? And they are all kind of point solutions. Integration becomes important and richness becomes important. We are pretty well positioned to do that.

Now many times, companies go and buy 6 companies out there. Just because you bought 6 companies, doesn't mean they are integrated. The benefit of going to a single vendor is to have an integrated solution that's easy to deploy and easy to operate. That reminds me of an interesting dialogue I had with a large customer, they had about 2,000 stores, retail customer. This is about a year ago. He said, I was sold a platform, so to speak, with all these products. And as I tried to deploy it, I discovered that the only area of platform where I could get value was consolidated billings for 8 products, okay? All these other things are individual products.

Our goal is not to be too like that. Our customers are very proud of Zscaler. Our Net Promoter Score sits between 75 and 80. We've got so many repeat customers who go from company A to company B to buy us. That's because we have the best solution, it works and scalable. So integrated great solution is what we take pride in rather than becoming a Computer Associates who buys all these companies and pick one, and that's not Zscaler.

Yes. Maybe to round out the emerging products. In data security, you've had a pretty unique entry to that market with in-line CASB and DLP. How do you think about that market evolving? There's obviously a bunch of noise around the data security posture management side. Do you find that customers are trying to consolidate that? Do you feel like that's going to continue to progress over the next year?

Data security market is becoming bigger because your data is sitting in all kinds of locations. So you can no longer just do 1 or 2 pieces. Data security is also hard to put policies in place, enforce them, false positives, all those things happen. Often CISOs tell me, doing one data security vendor is hard enough. Now I'm doing 3 vendors to do policies and all, it becomes almost impossible.

So about 6 years ago, we decided that we want to be the most comprehensive data security platform and that's because we already had very good solution in DLP, in-line DLP that has traditionally been served by companies like Symantec 1, 2s of the world out there then we expanded into CASB of the world. And it's also natural for us to do data, DLP because we are sitting in line, the traffic is already flowing through Zscaler.

Then we added CASB, we added SaaS security posture management was important. We did a tuck-in that brought us third-party supply chain for SaaS security. Then we added endpoint DLP, and we built e-mail DLP, then cloud DLP for S3 buckets and the like. So we have integrated very, very good solution.

The area you hear a bunch of noise in lately is what Gartner coined one more 4-letter acronym called DSPM. Now what's DSPM is about data security posture management. It starts with discovering data, where -- what all data is sitting where. Once you discover it, you want to classify it, what kind of data is it. And then once you classify, you want to be able to show what policies can be applied to what data.

We have been doing pieces of DSPM all along. But with a new focus, there's a bunch more functionality we have added in this area. So DSPM itself doesn't do data protection because it doesn't really stop data from leaking out. You need DSPM plus in-line DLP to do proper data protection. We came from strong DLP side of it, and we have enhanced DSPM, the 2 together makes the best solution. Customers do not want multiple data security vendors.

Look, with $450 million ARR in the space, that has been growing very nicely. If this business of Zscaler were an independent company, it will be the largest data security company out there. And I think we're just getting started. There's a big, big opportunity to grow this area.

Yes. One of the other questions I got coming out of last week was what is -- what's going on with the core business? What's the strength of the core business? And I think it's kind of a challenging question because the core business is ZIA, ZPA, but increasingly ZDX and data security and agentic AI. Like how do you think about the market for -- I won't use a SASE term, but how do you think about the core market for user security?

Right. So a very sizable part of our business comes from core business. I was listening to some of the comment last week and said, well, they used to tell us, are you expanding your platform? Are you growing your new business? We've been telling you the growth of emerging products for the last many years. And suddenly they say, oh, what -- if new business is doing so well, is core business weak? It's like, okay.

So core business, and if you look at just some of the stuff, even Zero Trust Everywhere, when we talk about Zero Trust Everywhere, we talk about customers who actually have both ZIA, ZPA, ZDX branches, cloud and everything. So there's part of the core business sits out there. It is true that the new pillars of growth are bound to grow faster than the older pillars, but there's plenty of opportunity for core business.

Take even ZIA, ZPA, ZDX. We have 45% of the Fortune 500 companies. It's not that others are gone. We still are finding lots of new companies to go and embed. We are adding new logos at various levels. Now the size of the business is sizable, so you're going to find a lot of business coming from upsell. And when business comes from upsell, what do you sell? You are getting some of the new pillars.

And when I went public, it was about 20% upsell and 80% was new logo. We didn't have very many customers to upsell to. In fact, at that time, investors used to ask, you're a ZIA company, would you ever become ZPA. ZPA added ZDX and all these products. You're seeing the story. You're seeing us prove that all this can be done.

Every quarter, our upsell has been going up. It should go up. Upsell is easier. Now we are sitting in the 70%, 30% range. And if you look at the ServiceNow model, they're sitting at probably 80%, 90% upsell. They have a lot of customer base. But I think you'll see growth from both areas, the new logo. We are also getting new business. Now the entry point for us is also, for example, security for AI applications.

I do not need my core platform to sell those things. That becomes a new entry point for us. In data security, the DLP side generally has been upsell. But some of the DSPM part doesn't even need an upsell. We're doing some of the DSPM in the new logo space as well. So we -- I feel very confident and comfortable about the business at the core level as well as the platform level, there's a good synergy between the 2.

Great. I think I want to talk about go-to-market changes and efficiency that's coming back there. I think maybe you admit that last year was a bit of a challenging year for Zscaler. You had some turnover in the go-to-market organization. Mike Rich has now been in place for over a year. Where are you today? And how should we think about sales efficiency, sales capacity over the next year?

Yes, last year was a transitional year for us. We told investors that we're going to make changes at the management level and to the sales level and the process and focus we bring to the table. And amidst changes, we showed you the numbers we'll deliver. There are a bunch of skeptics talking about the second half committed billing, not committed billings. Okay, while we change all the tires of the car, we delivered -- we exceeded the expectations we set.

All the changes we plan to make were made or done at the end of last fiscal year in July. We are essentially now growing and focusing on. If you look at Q1, our sales productivity went up pretty nicely. In fact, we -- the beat we had, we passed all of that beat for the rest of the year. That's good stuff. That also implies expansion in margins. So the sales machine is doing very nice. All the changes are through. And the estimates we're giving you, the guidance we're giving you is taking into all the factors, and we feel very good about the business.

Awesome. Like some other vendors in the space, you introduced a Flex contract with Z-Flex and the momentum has been really good there. I'd be curious to get your view of how customers have received that and what you've seen from a contract duration perspective, what that means for additional flexibility to try new modules, expand across the platform? How has that reception been so far?

First to clarify, I mean, Z-Flex is not ELA. Some companies do ELA, ELA sits out there. ELA says, here's all of my stuff, do whatever we need to use and create shelfware, okay? We are very mindful of adoption of our technology. Now Z-Flex says, you have the flexibility of swap some of these modules. If data security has 8 modules and the customer says, I'm ready with a budget and all to do 4 of them, which 4 do I want?

Ability to swap those things makes it easier for them to make a decision. And also, sometimes they say, I can only consume these 2 first year, these 2 next year. So the ramp gets involved in it and there's rate card to change stuff. So it's a good, very good initiative to reduce some of the procurement back and forth kind of stuff. It doesn't generate pipe on its own.

You still need to go and work with the customer to show the opportunity, the pain they have for cloud or workloads or DSP kind of stuff. So what's the impact we're seeing of it? One, we generally ask for a 5-year commit deal for this. So most of our deals with Z-Flex are 5-year deals. You are seeing impact of that in some of the RPO, the RPO is going up as the Z-Flex has a part to play. But you're probably also going to see some of the, if may use the negative impact on the billing side of it, if you're building some of the ramps kind of stuff, that's going to reflect in the billing part of it. But overall, it's a very good program. I'm surprised how quickly it has grown. And I think it will be good for us, and it will be good for our customers.

Yes. Very good. I want to get your impression on the M&A strategy. And you've obviously made a couple in the past few years. You've had a pretty consistent track record of acqui-techs, acqui-hires have rolled into the platform. We've seen some of your peers, competitors make more strategic M&A. How do you think about kind of the balance there? And how do you think about markets like observability? Is that kind of within the realm of where you want to go? Or is it more targeted?

So some vendors want to expand in -- probably in more random markets, if I may use the term, random means markets aren't synergistic, aren't really tightly coupled to us. We are thoughtful about the markets we want to go to. There's no point in trying to expand too much and become like Computer Associates, for example, or one guy -- one investor said, do you want to become a PE firm? Or do you want to become a company that offers an integrated platform?

We are going to stay in the offer integrated platform, but that doesn't mean we don't expand. You've seen our thoughtful expansion. It started with ZIA, ZPA, ZDX, then it became Zscaler users, then cloud, branch, IoT/OT, data security. We have done extremely good job in building integrated solution with tuck-in acquisitions that have given us pieces to integrate. The beauty of tuck-in is it's small early enough, you can build it as part of the platform, and most of these have been pre-revenue out there.

So for AI security operations, we looked at 25 AI security companies that would do SecOps. But as we dug underneath, there really is more demoware than real stuff. We couldn't find any customers who had done business with us. With Red Canary, we found some good technology underneath it. So that's why we acquired it. So we don't really look for big acquisitions out there. We look for meaningful acquisitions because customers like the integrated story. Now we'll keep our eyes -- ears and eyes open, but as a strategy, I think it has worked.

It's almost like what traditionally ServiceNow has done. They've done a bunch of small acquisitions. They have a good integrated platform and that platform allows our customers to expand and get integrated offerings. So you'll keep on seeing what we're seeing, there is no change in strategy from M&A point of view.

Great. Maybe 2 questions to close. I think with any technological change, it sort of necessitates a rethinking about how to do security. And we've seen adoption of SaaS and remote work, poke holes and the concept of perimeter defense. How do you see AI kind of accelerating that or changing that further? And I know you've seen some strength with Zero Trust Gateway, which is a relatively new product in terms of how to secure the cloud. How do you see that kind of evolving from here?

So there's no doubt that AI security is creating some big, big security issues. It discovers your attack surface. You can ask ChatGPT and say, tell me all the firewalls and VPNs with vulnerabilities for this customer and give it to me in a tabular format. In the past, it would have taken weeks for a hacker to find it.

Now under 60 seconds, you got the answer. Okay? And you can see automation being used by hackers, the Anthropic thing that came out a few weeks ago, the agent got hijacked, and you could do all kinds of stuff with it. So while there are many AI security products that will come out, the best way to block this kind of stuff is to have Zero Trust as a foundation.

What Zero Trust says, every location is an island, every branch is an island, every application is an island. That means if something got compromised, the blast radius that is contained to that and that place itself. So having a strong foundation of Zero Trust becomes even more important for AI security. And then you need to do securing AI applications on top of that red teaming, discovery and the like.

And then the third area where AI is truly disrupting everything is SecOps. Literally, rather than having people to do the stuff, AI agents can do a lot of that work, and we think that's a very, very exciting area. And the other disruption we see is at the branch and user level -- sorry, branch and cloud level. Look, things may take some time. But when you have a great solution, it works.

We are seeing adoption of Zero Trust cloud where people have traditionally used east-west firewalls, north-south firewalls. They're complicated. The world of cloud is hard to deal with IP addresses that firewalls depend upon. We see a big opportunity there. Take Zero Trust Branch. We're the only company that's actually talking about that. Everyone else is mesh network, SD-WAN, this and that. And as we built a solution 6 or 9 months ago, I would think that this is such a wonderful solution.

We already talked to a dozen, 2 dozen customers who loved it and said, how will the broad market respond to it? I have no idea. Now having talked to hundreds of customers, I haven't found one that says, I want to stay with my SD-WAN, my mesh network. It's exciting. I mean, I don't know exactly the reception. The reception is strong.

When you have a platform, when you have technology that's so differentiated, branch is unique. Zero Trust Cloud. There's nobody else who offers Zero Trust communication cloud workloads. The competition there is legacy virtual firewalls. And when we bring all these technologies to the market, our customers appreciate it. That's why they're spending money, they're growing with us. And as we finalize, as we have honed our go-to-market engine, we think we're very well positioned for the long run.

Awesome. Well, it's -- I think we're up on time. So we'll end it there. But Jay, thank you for being here. It was great. Thank you all for joining.

Thank you. We appreciate it.

All right.

Good day, and thank you for standing by. Welcome to the Zscaler First Quarter 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Ashwin Kesireddy, VP IR and Strategic Finance.

Good afternoon, everyone, and welcome to the Zscaler First Quarter Fiscal Year 2026 Earnings Conference Call. On the call with me today are Jay Chaudhry, Chairman and CEO; and Kevin Rubin, 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, annual recurring 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: UBS Global Technology and AI Conference on December 3, Barclays Tech Conference on December 11, Needham Growth Conference on January 1.

Before I turn the call over to Jay, I wanted to share that I recently transitioned to a new role as Product Manager of AI Security at Zscaler. So this will be my last earnings call as the IR leader. It's been a pleasure engaging with all of our shareholders over the last few years. Kim Watkins, who some of you may know from her tenure at Intuit, will be joining Zscaler in early December to lead Investor Relations and Strategic Finance. Please join me in welcoming Kim to Zscaler.

Now I'll turn the call over to Jay.

Thank you, Ashwin. We had a strong start to our fiscal year. In Q1, annual recurring revenue or ARR growth accelerated to 26% year-over-year, and RPO growth accelerated to 35%, combining our strong free cash flow margin of 52% and revenue growth of 26%. We operated at rule of 78, making us one of the rare companies consistently outperforming the coveted Rule of 40 metric. We are one of the only five enterprise SaaS companies with over $3 billion in ARR, growing at over 25%. The continued success of our three growth pillars, AI security, Zero Trust everywhere and Data Security Everywhere is driving our strong top line performance.

ARR from these three growth pillars accelerated in the quarter. I'm particularly pleased with our AI security pillar, which grew over 80% year-over-year and has already exceeded our FY '26 target of $400 million ARR, three quarters earlier than expected. With the strong demand, I expect AI Security ARR to exceed $0.5 billion by the end of this fiscal year.

Diving deeper into our AI security pillar, while enterprises are leveraging AI to drive innovation and accelerate productivity, the proliferation of AI is also making them increasingly susceptible to attacks. One of the largest AI companies recently reported that a bad actor hijacked its AI coding assistant to autonomously perform a large-scale cyber attack against multiple organizations.

This incident highlights two important trends. First, threat actors are using AI to dramatically increase the speed, effectiveness and blast radius of attacks. We have been predicting an increase in this type of automation by AI agents and we are now seeing it happen. Second, just like users and organizations, AI agents are also becoming the weakest link in their security. It is only a matter of time before millions of AI agents interact with each other across enterprises. Imagine a threat actor, hijacking even one of an organization's trusted agents and thereby accessing critical corporate resources and sensitive information resulting in a serious breach.

We have a long history of securing users with our Zero Trust Exchange, which enabled our customers to safely adopt the latest technologies such as mobile, cloud and SaaS. Over 45% of Fortune 500 companies and nearly 40% of the global 2,000 companies have adopted our Zero Trust Exchange and trust Zscaler to secure their businesses. With the rise of consumer Gen AI applications, including ChatGPT, Perplexity and more, security issues related to access control, data loss and content moderation made enterprises cautious about allowing employees access to these popular apps. We extended our Zero Trust Exchange to provide visibility into thousands of Gen AI apps, enabling enterprises to inspect prompts and responses and enforce proper guardrails for safe and secure use of Gen AI apps.

Several large enterprises adopted our Gen AI solution in the quarter, including a G2K technology company, a Fortune 500 communications equipment company and a large health care software provider. As AI adoption moved beyond consumer Gen AI apps into building and running enterprise AI applications, we introduced solutions in three key categories to secure them.

First, AI asset discovery and posture management. AI applications and agents are being developed, and deployed today without full visibility for IT teams to safeguard them to provide organizations with visibility and control. Last year, we introduced an AI asset discovery solution called AI-SPM. AI-SPM can detect unauthorized AI applications, prevent over permissions for AI agents and strengthen governance for model deployments. In Q1, several customers, including a leading software solution provider, a global 2000 manufacturer and a leading insurance company purchased AI-SPM from Zscaler. With our recent acquisition of SPLX, we are extending our AI-SPM capabilities by unifying discovery of LLMs, workflows and MCP servers. These capabilities enable customers to meet evolving regulatory requirements for AI to be transparent and explainable, among others.

The second key area of innovation is AI red teaming. As part of AI life cycle, customers need to regularly test the applications for vulnerabilities. With SPLX, we now deliver AI red teaming to enable automated and continuous testing of AI apps at scale. Our AI red teaming solution integrates with customers' CICD pipelines, making it easy to test for hallucination, bias, behavior drift and more. Several customers, including a Fortune 150 transportation company and a Fortune 100 service providers have already deployed AI red teaming.

The third area of innovation is AI guardrails. Customers need AI guardrails for in-line policy enforcement for acceptable use of AI for cybersecurity and for data loss prevention. In line policy enforcement is one of our key differentiators, which we seamlessly deliver through our Zero Trust Exchange at scale as we process 0.5 trillion transactions daily. Our AI Guard solution leverages the core competency for runtime protection. Zscaler AI Guard sits between the application and LLMs, inspecting comps and sponsors in line to enforce customer-defined policies.

To share an example, this quarter, a leading consulting firm purchased our AI Guard to secure the use of public AI applications and the private in-house applications such as AI chatbots and AI agents.

With our platform capabilities, we are securing over 90 billion AI ML transactions per month. As AI and AI agents define the next era of transformation, we are further extending our platform to secure AI agents, agentic workflows and AI applications.

In addition to securing the use of AI, we are leveraging AI to deliver agentic operations, including agentic SecOps and agentic ITOps. In our Agentic SecOps, we are making great progress towards delivering an AI power SoC that simplifies customers' operations and automatically hunts for threats. In August, we acquired Red Canary to combine the agentic technology with our Data Fabric technology to deliver actionable SoC insights for our customers. This quarter, a Fortune 500 financial service company, a Global 2,000 health care equipment company and Global 2000 energy company and more purchased our agentic SecOps solution.

In our Agentic ITOps, we are introducing several Zscaler digital experience, or ZDX innovations to enable faster resolution to application and network performance issues. Our innovations like the ZDX copilot continue to resonate with customers and have driven over 80% year-over-year growth in bookings of ZDX Advances Plus in the last 12 months. I'm very pleased to see continued momentum for our AI security solutions. As I mentioned, we are expecting AI security ARR to surpass $0.5 billion by the end of fiscal '26.

Turning to our second growth pillar. We continue to see strong momentum in Zero Trust every year. which includes Zero Trust users, Zero Trust branch and Zero Trust cloud. Three quarters ago, we introduced Zero Trust everywhere and set a goal to secure 390 enterprises with Zero Trust every year by the end of fiscal '26. I'm delighted to share that we now have over 450 Zero Trust Everywhere enterprises, achieving our goal three quarters ahead of our target date. Our Zero Trust Everywhere customers benefit from reduced cost and complexity by eliminating legacy network and security products. This expanded relationships through Zero Trust Everywhere also creates follow-on demand for data security and AI security.

One of the key components of Zero Trust everywhere is Zero Trust cloud, which allows customers to eliminate VPNs, north, south and east west virtual firewalls, express route and Direct Connect networks, resulting in far better cybersecurity. To share a customer example, in an 8-figure TCV win, an existing $1 million plus Fortune 500 health care customer adopted our Zero Trust cloud solution, along with ZDX Advance Plus, data security modules and more. Zero Trust Cloud secures workload communication across their VPC or virtual private cloud and SAP RISE cloud-based ERP. Without Zero Trust Cloud, the customer would have had to deploy a significant number of north-south and east-west firewalls, resulting in increased cost and many months of delay.

This customer told me that in the last 15 years, they have not been so excited about the solution that not only brought better security but also was easy to deploy and operate. Just like the migration of Microsoft Exchange to Office 365 was a big tailwind to our business a few years ago, I believe the migration of SAP on-prem to SAP RISE will have a similar impact on our business.

We continue to see strong interest from customers for Zero Trust branch, which is another key component of Zero Trust Everywhere. Zero Trust branch eliminates a need for legacy point solutions at branches, factories and campus. To give you an example, in a 7-figure [ upsell win ], a global 2,000 manufacturing customer, more than triple their ARR and became a Zero Trust Everywhere customer by purchasing our Zero Trust branch, CPA, ZDX Advance Plus, Risk360 and more.

Moving to data security everywhere. We offer a comprehensive data security portfolio with 8 modules providing data discovery, data classification, posture management, data loss prevention and more. Customers are eliminating data security point products in the environment by consolidating data security functionality on our unified platform. To share an example, in a 7-figure new logo ACV win, a large health care provider purchased 5 out of our 8 data security modules for their 23,000 users. This enterprise chose Zscaler over a leading CASB vendor due to our integrated platform, which delivers data security across all channels for all types of data. I'm excited to share that our Data Security Everywhere ARR accelerated to approximately $450 million.

The growth across our three pillars is powered by our strong go-to-market engine. One of the key initiatives we recently introduced was our Z-Flex program, which enables customers to commit to a spend and provide flexibility to swap or activate additional modules without undergoing new procurement cycles. Z-Flex is driving meaningful upsells and reduced sales cycle and is consistently exceeding my expectations. Z-Flex generated over $175 million in TCV growing over 70% quarter-over-quarter. To show you a couple of customer examples, an existing large aerospace customer made a multiyear 8-figure TCV commitment under the Z-Flex program, increasing their annual spend with us by over 40%. As part of the Flex commitment, the customer added 9 new modules, including asset exposure management identity threat detection, unified vulnerability management, e-mail DLP and expanded commitment for data security. In a 7-figure upsell win, a Fortune 500 business services provider more than doubled their annual spend with us as the expanded adoption of 9 modules under the Z-Flex program.

In conclusion, our business is benefiting from the strong tailwinds from the combination of Zero Trust and AI security. The best AI security is built on the foundation of Zero Trust. Our clear leadership in Zero Trust security, combined with our comprehensive AI security offerings, positions us well to capture the large and growing AI security market. And with our strong go-to-market engine, we are well positioned to exceed $10 billion in ARR.

Now I would like to turn over the call to Kevin for our financial results.

Thank you, Jay, and good afternoon, everyone. We exceeded our growth targets in Q1 and operated at Rule of 78 for the quarter. We ended Q1 with over $3.2 billion in ARR reflecting approximately 26% year-over-year growth. ARR from each of our three growth pillars accelerated in the quarter, including on an organic basis.

Q1 revenue was $788 million, growing 26% year-over-year, 10% sequentially and exceeding the high end of our guidance. Geographically, the Americas accounted for 58% of revenue, EMEA for 27% of revenue and APJ for 15% of revenue.

Our remaining performance obligation, or RPO, grew approximately 35% year-over-year to $5.9 billion with approximately 47% classified as current RPO. We closed Q1 with 698 customers generating over $1 million in ARR and 3,754 customers exceeding $100,000 in ARR demonstrating the strategic role we play in customers' digital transformation journeys.

Turning to the rest of our Q1 financial performance. Our gross margin was 79.9% as compared to 80.6% last fiscal year Q1. We'd like to remind investors that we are introducing new products that are experiencing strong growth and are optimized for faster go-to-market rather than margins. This will continue to influence our gross margins on a quarterly basis. We plan to optimize new products for margins over time as they scale.

Operating expenses increased 11% sequentially and 23% year-over-year, reaching $458 million. Operating margin was 21.8% towards the higher end of our long-term range and growing by approximately 40 basis points year-over-year. Our free cash flow margin for Q1 was 52% including data center CapEx at 2% of revenue. We ended the quarter with $3.3 billion in cash, cash equivalents and short-term investments.

Next, let me provide our guidance for Q2 and full year fiscal '26. As a reminder, these numbers are all non-GAAP. For the second quarter, we expect revenue in the range of $797 million to $799 million, reflecting year-over-year growth of approximately 23%. The gross margins to be approximately 80%. Operating profit in the range of $172 million to $174 million, net other income of approximately $19 million, earnings per share in the range of $0.89 to $0.90, assuming a 21% tax rate and 170 million fully diluted shares.

For the full year fiscal '26, ARR in the range of $3.698 billion to $3.718 billion, reflecting year-over-year growth of 22.7% to 23.3%. We anticipate approximately 47.8% of net new ARR to be recognized in the first half. Revenue in the range of $3.282 billion to $3.301 billion reflecting year-over-year growth of 22.8% to 23.5%. Operating profit in the range of $732 million to $740 million, earnings per share in the range of $3.78 to $3.82, assuming a 21% tax rate and approximately 170.5 million fully diluted shares and free cash flow margin to be approximately 26.0% to 26.5%.

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.

Before moving to Q&A, I'd like to thank Ashwin for his significant contributions to IR and Strategic Finance and wish him well as he transitions to his product role. I'm also excited to welcome Kim to Zscaler.

With that, operator, you may now open the call for questions.

[Operator Instructions] Our first question comes from Brad Zelnick with Deutsche Bank.

Congrats on such a strong start to the year and hitting your Zero Trust Everywhere goal three quarters ahead is just amazing. Jay, I wanted to ask about Zero Trust Branch, which we continue to hear good things about. It's showing some nice early adoption. But as we look ahead, how much more work needs to be done on the product and/or go-to-market fine-tuning to see real acceleration from here?

Thanks, Brad. We have done some amazing work on the technology side to build a Zero Trust Branch, where each branch is merely an island, no lateral movement that's generally caused by traditional networking with [indiscernible]. The product is in a great shape, go-to-market. We put together a specialty team that [indiscernible] can engage with the right buyers to explain the solutions. The numbers are pretty impressive [indiscernible] joke internally that Zero Trust Branch needs no pipeline generation effort because there's so much demand in the customers.

I think we shared some numbers on Zero Trust Branch customers have now exceeded over 450 customers. A lot of our customers start small, they do the smaller rollout, and then they move on to bigger deals. In my prepared remarks, I gave an example of Global 2000 manufacturing customers, whose ARR more than tripled. I think there are many, many such examples. We got about 4,400 enterprise-class customers. We only gone through 10% of them. So I see a big opportunity. I think it's an exciting area for us, and it's part of our Zero Trust Everywhere platform.

Our next question comes from Saket Kalia with Barclays.

Maybe a little bit of a joint question for you, Jay and Kevin. The $1 billion in ARR that's coming from the three emerging areas is clearly outgrowing the rest of the business. In fact, I think you said it accelerated and for good reason. But I was wondering if you could help us think about the other $2 billion in ARR and maybe specifically, is it fair to think about that other tranche as more of a la carte Zero Trust tools like ZIA and ZPA? And maybe relatedly, how do you think about the growth rate for that $2 billion versus an emerging bucket that's clearly growing faster than the rest of the business?

So yes, it's very true that our three buckets, $1 billion ARR has been growing very well. The remaining $2 billion, yes, a big part of that is ZIA, ZPA. It has been going quite well. But the big opportunity for that business is also to emerge into Zero Trust Everywhere.

Remember, we said that, Zero Trust journey start with users. We've taken it to branches, we've taken it to cloud and next to [ IoT OT ]. While other vendors who tried to claim Zero Trust tried to say we got Sassy, they're merely sitting with Zero Trust trying to do for users and we have expanded our platform to give a lot of opportunities. The core business by itself will grow at a smaller rate than the rest of the overall business. But our goal is really to take every customer to Zero Trust Everywhere. And that's what we are successfully doing.

Our next question comes from Meta Marshall with Morgan Stanley.

Great. Maybe I just wanted to ask a question about Red Canary and just how it's kind of performing towards expectations given that you guys have been looking at a fair amount of churn within your kind of assumptions for that business. Just any context around that performance would be helpful.

I'll start with broad comments, and Kevin can go deeper. In the integration of Red Canary with Zscaler is doing very well. [indiscernible] done right away. The two other main areas were: one, engineering end products. We're integrating Red Canary's agentic AI technology with Zscaler platform doing well. Second is go-to market. Red Canary's go-to market team has become security operations specialties team. It's working with our field sales organization, which is uncovering opportunity. So seeing a vast majority of Zscaler Red Canary pipeline is now coming from Zscaler customers. Kevin?

Yes. Look, I would just add that Red Canary is trending slightly better than our previous guidance. But keep in mind that we don't believe that Red Canary's contribution is material to our overall business. So as we go forward, we don't intend to provide specific color on Red Canary.

Our next question comes from Tal Liani with Bank of America.

This quarter was stronger than actually we see because if I look at the year-over-year growth in dollars last year, First of all, first quarter last year was very strong. So you're growing 26% almost on a very strong quarter. And second, last year, on a year-over-year basis, you added between $122 million to $130 million every quarter on a year-over-year basis. And this quarter, you're adding $160 million. So that means that the growth is strong. And I'm trying to understand if you can break down on revenue level, not an ARR level, what is driving the strength. I mean the stock is down, but the trends beneath the surface seemed very strong. And I'm trying to understand what is driving it? And if you can break it down, even not in numbers, even if it's just qualitative to discuss what's happening in the core versus what are the key leading products that are driving this strength?

So I'll start with a broad product area. As you know, we built a platform, that we are expanding our platform. We got three big pillars of our platform have been Zero Trust Everywhere, AI security and Data Security. All three areas are growing very well. They are actually accelerating, and that's part of the strategy. Our strategy is if every customer starts moving to Zero Trust Everywhere, we become very, very differentiated because no one in the market is even coming close to that. They're all trying to figure out how to solve the user side of it. And on data security, our customers are basically saying "We are tired of seeing point products, so many point products in data security" and we have the best platform. AI security is evolving. It's a new area for us. Agentic operations has done well for us and security of AI products is young, but it's growing pretty well. So I think we're very pleased with that growth we wanted from the three key pillars and it's beating or exceeding our expectations.

Kevin, do you want to give it more color?

Yes. Thanks for the question, Tal. I mean, I think that's, frankly, both the qualitative and the quantitative response, which is we are seeing accelerated growth in our three growth pillars, which is contributing well to the business. I also mentioned in my prepared remarks that we saw organic growth come in at similar levels to what we saw last quarter. So we are seeing very strong performance.

And just -- I was just going to add some color that we did see the business perform better than our internal expectations in the quarter.

And how is the core business? You have Cisco with a new product, Checkpoint with the new product, [ Paolo ] talking about very strong growth. How is the competitive landscape when it comes to the core business?

Compared to landscape, it hasn't changed a whole lot. If anything else, our brand has gotten bigger. Most of the large enterprises know us very well. We are very well engaged here. A number of new entrants who have come in the market in the past year or so, largely some of the firewall companies, we have hardly seen them out there. So compared to landscape, it hasn't really changed much to mention.

Our next question comes from Joseph Gallo with Jefferies.

Jay, I think when some look at the recent massive M&A in the space, they're fearful of the implications for underlying cyber growth. In your conversations with customers, how are they thinking about spend in calendar 2026? And what are the priority areas that they have as a part of that?

So customers' priorities for spending? Right?

Yes. Just with the -- how is the fundamental cyber growth been? How do you expect it next year and what the priorities are?

Broadly speaking, there's no significant growth in macro environment. IT budgets remain tight. There is pressure on CIOs. There is far less pressure on the cyber side of it. So cyber is under less pressure. We do see scrutiny for large deals similar to what we shared in the past. But two areas are still of high interest to customers. One is Zero Trust Security because all these breaches happening out there and second is AI security because everyone is trying to do some level of deployments of AI applications because CIOs feel like if they aren't doing anything in this area, they'll be viewed as laggards. That is also mix. Some of the customers are seeing better results than others in terms of AI. But as soon as they start thinking about doing AI applications and models, the security becomes a worry for them. So we are going in with two leading messages, Zero Trust everywhere being one and AI security being two. So with that, we're able to get the pipeline created. And the second part is to close deals, we must show strong cost takeout, and we can do that as we eliminate a lot of point products. So we are able to do both of those things. That's what's really leading us to deliver these strong results.

And also if I mention that, since our brand has become so much stronger, and we've become pretty strategic partners to customers all these CIOs, C-Source meetings, [indiscernible] it's wonderful to see them to say, "Jay, I mean, we moved from company A to company B and we called your team to help us here as well.' So look, we are tracking well. We are excited about what lies ahead for us.

Our next question comes from Mike Cikos with Needham.

I just wanted to come back to the SaaSy market specifically. And Jay, I know you're probably already cringing at the word SaaSy but there was a lot of security vendor out there last week discussing some success and competitive displacements in the SaaSy market. I just want to get your feedback specifically on what you're seeing as far as trends from a competitive or pricing discipline standpoint.

Yes. Look, we remain very strong in when it comes to, I will call the Zero Trust market because the SaaSy word has no meaning, every vendor claims [indiscernible] calling SaaSy. For example, if you do Zero trust, you don't do SD-WAN. And most of these SD-WAN vendors competing in the SaaSy space are -- expansion in our customer base is because of all the new functionality we are bringing to take Zero Trust Everywhere. Our expansion is happening as we have taken our data security platform and made it much bigger.

So we've done so many innovations in so many spaces. So we think in spite of new entrants in the market, I think the market has already kind of sorted out the winners, and we are creating more distance among the number of other vendors who are entering in this space. So I feel very strong. Our pipeline remains strong. Our winner rates remains strong, and you see our results are very, very strong.