Zscaler at Morgan Stanley Conference: Cybersecurity and AI Drive Strategy

Zscaler Inc. (NASDAQ: ZS) presented a robust strategic vision at the Morgan Stanley Technology, Media & Telecom Conference on Thursday, 06 March 2025. The discussion, led by CEO Jay Chaudhry and CFO Remo Kanesa, highlighted the company’s strong quarterly performance, its focus on Zero Trust architecture, and the integration of AI into its cybersecurity solutions. While the company is experiencing growth, it also faces challenges in adapting its pricing strategy and expanding its customer base.

Key Takeaways

• Zscaler reported a 23% year-over-year increase in revenue, reaching $647.9 million in Q2 FY2025.
• The company emphasizes Zero Trust architecture over traditional SD-WAN solutions.
• AI and machine learning are central to Zscaler’s strategy for enhancing threat detection.
• The company aims to triple its Zero Trust Everywhere enterprise count within 18 months.
• Zscaler’s adjusted operating margin improved by 200 basis points to 22% in Q2.

Financial Results

• Revenue: Q2 2025 revenue was $647.9 million, a 23% increase year-over-year. Full-year 2025 revenue is projected between $2.640 billion and $2.654 billion. Q3 2025 revenue is expected to range from $665 million to $667 million.
• Billings: Calculated billings rose 18% year-over-year to $742.7 million. Full-year 2025 billings are projected between $3.153 billion and $3.168 billion.
• Annual Recurring Revenue (ARR): ARR grew 23% year-over-year to $2.7 billion.
• Profitability: Operating margin improved by 2 percentage points to nearly 22%. Free cash flow margin was 22%.
• Earnings Per Share (EPS): Q2 2025 EPS was $0.78, exceeding the forecast of $0.69. Full-year 2025 non-GAAP EPS is projected between $3.04 and $3.09.
• Deferred Revenue: Increased by 25% year-over-year to $1,878.5 million.
• Remaining Performance Obligations (RPO): Expanded by 28% year-over-year to $4.6 billion.

Operational Updates

• Product Portfolio: ZIA constitutes 60% of the product mix, while ZPA makes up 40%. The data protection business is growing at over 40% year-over-year. Zscaler Digital Experience (ZDX) has also shown significant growth.
• Customer Base: Zscaler serves approximately 45% of Fortune 500 companies and 35% of Global 2000 companies. The company plans to triple its Zero Trust Everywhere enterprise count within 18 months.
• Go-to-Market Strategy: Focus on upselling to existing customers, with upsell now representing 65% of new business. Global system integrators are leveraged for customer deployments.
• Technology and Innovation: Heavy investment in AI and machine learning for threat detection and breach prediction. The data fabric from the Avalar acquisition supports AI-driven security solutions.
• Zero Trust Branch: 57% of customers purchasing Zero Trust Branch are new logos. This solution aids in phasing out existing SD-WAN solutions.
• Data Centers: Capital expenditure will remain in the high single-digit range, primarily for data center investments.
• Zero Trust Segmentation: Zscaler announced the industry’s first Zero Trust Segmentation solution for secure connectivity.

Future Outlook

• Revenue Growth: Continued growth expected, with full-year revenue projected between $2.640 billion and $2.654 billion.
• Product Expansion: Emerging products are expected to contribute in the mid-twenty percent range for new and upsell.
• Market Opportunity: Significant expansion potential within the existing customer base, with a 6x opportunity for users.
• Investment Strategy: Continued investment to gain market share and maintain dominance.
• Technology Focus: AI and Zero Trust innovations will drive future growth.
• Profitability: While focusing on growth, Zscaler will be mindful of operating profitability.

Q&A Highlights

• AI and Data Protection: AI increases demand for data protection due to concerns about data leakage. Zscaler is positioned to provide robust data protection solutions.
• Pricing Strategy: Evolving to include traffic-based and agent-based models.
• Competition: Zscaler differentiates itself through its Zero Trust architecture.
• SD-WAN and SASE: Emphasis on Zero Trust architecture over SASE, with solutions designed to eliminate lateral threat movement.
• Customer Acquisition: New customers often start with a platform that includes ZIA, ZPA, and ZDX. Zero Trust Branch is a key entry point.

For more details, readers are encouraged to refer to the full transcript below.

Full transcript - Morgan Stanley Technology, Media & Telecom Conference:

Keith Weiss, Analyst, Morgan Stanley: Excellent. Thank you everyone for joining us. My name is Keith Weiss. I run The U. S.

Software Equity Research franchise here at Morgan Stanley. Very pleased to have with us from Zscaler, both CEO and Founder Jay Chowdhury and Remo Kanesa, CFO. So thank you gentlemen for joining us. So just came off of a really solid quarter for Zscaler. Maybe just to start with like a state of the union.

What are you guys seeing in terms of overall security demand? What are you seeing in your back yard in terms of how people are shifting towards a more software focus in network security and security overall?

Jay Chaudhry, CEO and Founder, Zscaler: So first of all, cyber is no longer only CISO’s business. CIOs care about it. CFOs, CEOs and the board cares about it. So it is becoming more and more central and that’s driven by all these ransomware attacks that are happening. I was asked by a group of CFOs few months ago, it said, we are spending so much money in cyber.

Why are attacks still happening? And my answer was, you know what happens typically, a breach happens, the budget opens up, you had 200 firewalls and VPNs, you buy 200 more. Okay. You’re doing the wrong thing. You need to move the right architecture.

So there’s focus on cyber, but you also need to be able to save money. The customer says, I need zero trust architecture and I need to save cost. If you can do both of those things together, you can do good business. And that’s what we are driving towards. When we go in, we eliminate so much stuff.

If they’re spending, say 20,000,000 on network security and we can cut into half, literally.

Keith Weiss, Analyst, Morgan Stanley: Yes. Got it. And in terms of what is sustaining or kind of driving budgets on a go forward basis, I’ve always thought in terms of security, there’s three fundamental demand drivers. One, expansion of the surface area to be protected. Two, the threat environment.

And three, it’s regulatory like it’s sometimes mandated that we have to do this on a go forward basis. It seems to me AI is a big accelerant for the first two, right? It’s expanding the surface area and arming the bad guys, if you will, to enable them to make the threats worse. What are you seeing from kind of your position? Is AI expanding the market opportunity for you guys?

Jay Chaudhry, CEO and Founder, Zscaler: So let’s talk about attack surface. Everything that can be seen from the internet is your attack surface. Every public IP, every firewall, every application out there, every branch office in our attack surface. Before AI, it used to take a lot of time to find all the tax surface areas. Today, you ask a simple question.

Show me all the firewalls and VPNs and application portals of a given company and the one that have vulnerabilities, it shows up very quickly. So easy to find, attack surface discovery is easy. The second part ends up being with sophisticated threats. How do you go in and compromise? That’s the second part.

Attacks have been getting more and more sophisticated, but there’s some basic attacks. For example, phishing, probably the most common one because people fall for it. It used to be those emails you got on phishing from Nigeria where there are typos and misspellings. Not anymore. Write that email, phishing email, form a CFO using CFO style to really go and get these users.

So it’s getting easier to get in. Once you’re in, you can use automation of AI to find the most precious application and servers you want to go and encrypt. So AI is dangerous, but AI, the same AI is used by companies like Zscaler to do better protection. In the firewall and VPN model, your things are sitting as a gate, I am here to protect, I am here, come and attack me. In the Z scale world, all of your applications are sitting behind our cloud.

They are not discoverable. So that’s one thing we do that’s extremely well. If they can’t find you, they can attack you. The second part ends up being, how do they break in? The reason most attacks happen is not because of very sophisticated stuff.

Most attack happens, identity gets stolen. You log in as a VPN. Once you’re in, you’re home free. In the Zero Trust world, you never own the network. We connect you to one application at a time.

If your credential got stolen, maybe they compromise one application and that application may not be that relevant. So these are the type of things that companies are working with us. That’s driving our business acceleration and phasing out the legacy stuff. Now it has taken a while to phase it out, but the cost pressure is further helping us. There’s real cost savings when you remove legacy stuff out there.

Keith Weiss, Analyst, Morgan Stanley: Got it. Got it. So we talked about AI as kind of an expansion of the surface area. It’s also an opportunity for Zscaler to improve your products. I think about it in terms of the amount of data that you guys have visibility to.

I think you guys talk about over 500,000,000,000 transactions daily. Per day, yes. Which is unbelievable. It seems like there’s a massive amount of data that can utilize to sort of get better protection. So can you talk to us a little bit about how generative AI is changing the product portfolio?

How you’re able to leverage that to improve the security?

Jay Chaudhry, CEO and Founder, Zscaler: So if you think about Zscaler from day one, when I started the company, I don’t know if Star will be the exchange, the switchboard. So users will access application through us, almost like an international airport. We log everything, who goes in, out, whatever. Then we expanded the portfolio to do the same thing with workloads. Workloads are somewhat like users.

They talk to Internet, they talk to each other. Same core technology, but second use case. Then we expanded to IoT, OT devices. Data devices need to talk to each other. Then we added for B2B, your customer, suppliers and partners, but same core engine.

And that engine is delivering about 500,000,000,000 transactions that so many communications go through us. Some good, some bad, reconnaissance activities, all this stuff. Now you take all of that and then we added a next area for the first time, a new call it North Star, second North Star. How do we take all of the data, use AI and Gen AI to find meaningful information to detect threats that can be detected before? That’s why we bought a company called Avalar last year.

It gave us the data fabric and we’re building things on top of that. What are the kind of things we’re building? My favorite project is breach prediction. Predict the breach before it happens. How can you do that?

It’s very, very hard. If we could do it, there’ll be no breaches. But think of this way, when you got 50,000,000 users going through you, one new attacker comes, it attacks these 10 companies, 20 companies, some people fall for it. If half of the Fortune 500 companies are our customers, we see it, then we see the cross. When you see the machine’s got a compromise, with the agents sitting on the machine, we can see what the bad guy is trying to do.

Where is it trying to go? We can build the attack graph, see what’s happening. Now based on the configuration, we can use AIML to see what’s the likely thing they’re going to do. So tell them we see ABC happen. You can do this kind of stuff.

This is the power of AIML. For example, in our early sets, the early AI work, we took 10,000 attack kill chains. We train our engine on it. Now it can figure out the next attack kill chain on its own without we having to train them. That power is only good because we have the most precious proprietary data for it.

Keith Weiss, Analyst, Morgan Stanley: Got it. I want to shift gears a little bit and talk about sort of the customer journey, if you will. I’m going to show my age a little bit. When we were doing the Zscaler IPO, there was a, almost a no brainer entry route for you guys into customers. It was MPLS replacement and it was a really great value proposition.

Now you’re selling a much broader platform. Now it’s a whole zero trust architecture, which frankly is harder to implement, harder to get customers on board with. So how does Zscaler evolve in terms of go to market in terms of customer success to enable that adoption to get the customers on board with that fuller vision?

Jay Chaudhry, CEO and Founder, Zscaler: Yes, the platform has gotten bigger. The early story was traffic goes direct, MPLS expensive, better experience. But now the platform has gone much bigger. Now our story starts with the following. You got 50,000 users, they got a gateway to the internet, you got 10 boxes setting to go out, that’s taken care of by our service called Zscaler Internet Access.

Then you’ve got a dozen boxes setting on the internal traffic, your DMZ, VPN, load balancers, DDoS protection, all of that goes away. You could be sitting at home or wherever, simply with an agent, the traffic hits us, who are you, where are you going, we make the connection without you having to worry about anything. So the implementation is simple and we haven’t even touched the network and the complexity. So our number one goal is go and get it turned on. If the traffic is taking a longer path, things may be slow for the time being.

When we go in and this is where we actually see CALPHONE global system integrator. Somebody has to remove the stuff, You got 200 branches, there’s firewall from routers and this and all the setting over the next few quarters, they remove all the stuff. There’s a lot of cost savings and that becomes very good and the customer sees the results, the savings and there’s a lot of pressure on IT leaders to do cost reduction. We do that with transformation. That’s really driving our business.

Now the sales force has to get a little bit more sophisticated. The training has to be done better. We have some specialists in certain areas. When we sell Zero Trust branch, we got some people who actually are very good at it. They get pulled in by the general account manager, but partners like GSIs are helping the customer to do some of the deployment.

Keith Weiss, Analyst, Morgan Stanley: Got it. So maybe we could dig in there a little bit. I know you guys brought on board Mike Rich in November 2023 to help evolve that kind of go to market strategy, if if you will. Can you talk about some of the changes that Mike has put into place and how that go to market strategy has evolved? Yes.

Before MicRidge, when we had the previous CRO in around IPO timeframe, just after IPO, we were a much smaller company, few customers. The focus was, let’s identify opportunities, close them, close, move on to

Jay Chaudhry, CEO and Founder, Zscaler: the next to the next one, which is great. That’s a driven out growth. But then our customers started to tell us with 45% of Fortune 500 companies as our customers, they want focused people. So we evolved to the model we borrowed from ServiceNow. I have admired ServiceNow for years, eight years ago, when I met David Schneider, who was the President and Go to Market leader, I said, I want to learn from you, please mentor me.

He became an advisor to us. Then two years later, he became a board member. They have large enterprises. They know how to sell platform. They know how to sell CIO level.

So we essentially have been implementing some of that things for a long time. But last year, when we brought Mike in, it was said someone who has been doing it at ServiceNow for America’s business, which is about 70% of it, let’s bring him on board and help him drive the stuff. So Mike up leveled a number of leaders and want to bring in people who came more from solutions selling background rather than box selling background, rather than security geeks. Then we up leveled many of the sales people underneath And these people have been ramping up and basically we have that methodology that has evolved. So that’s one thing we’ve done.

All that is in place. The transition is complete. Now the people we hired in the past quarter or two, they’re still ramping up and we’re seeing the productivity benefit of it. His second focus was to bring GSI global system integrated along and doing that as well. So I’m pleased with the progress and the

Keith Weiss, Analyst, Morgan Stanley: results we’re delivering is essentially a result of the changes we have been driving. Good. ServiceNow is a fantastic template. We have a product we call SAS X-ray and we try to understand the underlying unit economics of companies and ServiceNow is the most efficient kind of go to market strategies there is. You talked about the success in the Fortune 500 and you guys have traditionally been that enterprise focused company.

You started to focus a little bit more on sort of coming into more of a mid market. How do you do that? How do you sort of capture that broader part of the market opportunity?

Jay Chaudhry, CEO and Founder, Zscaler: So, our biggest opportunity is large enterprises who are demanding, who need deep and wide functionality of broader platform. Yes, we have some presence on the lower end, but that’s not the focus. Okay. If you really think about it, the Global 2,000 is the number one focus. Then go from 2,000 to 10,000, that’s the next one.

And there’s a tier below that. We have presence, but not the biggest presence. We have such a big platform that I do not need 20,000 customers. Look at ServiceNow. It was funny when I talked to David Schneider years ago, he was sitting at $3,000,000,000 We are sitting at about $200,000,000 And I said, I want lots of customers and growth like you.

He said, do you want more customers or do you want more ARR? I said, both. He said, pick one. Okay. I said ARR.

Then he said, I have only 3,000 customers. I’m sitting at three billion ARR. So they had a platform. If you have a platform, you don’t need to go to the lowest level. The go to market significantly changes the majors to here to low end.

SMB market is very different. They don’t really understand sophistication sometimes. Telcos can bundle or outrun firewall with them. If the orders come from the low end, we take the order. We have an inside sales team, a small sales team to take care of that.

But our primary focus will remain large enterprises. And we are very good because they understand the difference in technologies and some of the smaller ones don’t.

Keith Weiss, Analyst, Morgan Stanley: Got it. Got it. So let’s dig into the platform. I think it was about a year ago, you launched an SD WAN offering. So now you can offer the single vendor SASE solution, which combines both the SecureEdge and the SD WAN components onto that single platform.

Can you walk us through the decision to finally start offering that SD WAN piece of the equation? And how do they differ from some what’s in the market today?

Jay Chaudhry, CEO and Founder, Zscaler: You used two trumps, but neither the trumps is what I like. Okay. Okay. We don’t like SASE. What is SASE?

It’s a collection of one more four letter acronym to really give something to every network and security vendor. We are about zero trust architecture. SASE is not zero trust. If we’ve gone zero trust, the reports of SASE will be bought only by a small number of vendors. Okay.

Those resource report need to be sold to everyone. So SaaS C says SD WAN plus SSC, okay. We basically have stayed out of SaaS C though. In customer conversation, they are talk about zero trust architects. In investor conversation, analyst conversation, you guys ask for SASE, because you talk to more vendors and customers.

Every vendor has SASE. That’s why I hear about SASE. SD WAN, I’ve always said, SD WAN enables lateral tech movement. Why is that? The fundamental networking was designed so you get on the network like getting on a highway.

You’re going to go left and right, there are no lights. You go unfactored. That’s why lateral movement happens and answer attacks happen. Now my marketing is using a term zero trust SD WAN. The SD WAN has no lateral movement.

I call it zero trust branch. There’s no SD WAN in our offering. We aren’t offering SD WAN. It’s literally a single plug and play appliance, just like you have it from AT and T or Verizon at home. Is there an SD WAN?

Not really. In our world, a branch is becoming like a cafe, like your home. You simply have a device that plugs, everything happens, no route tables to manage, no lateral motor like. That’s what our customers are excited about. We’re getting tons of attraction.

I mean, we are surprised to find that customers who bought our Zero Trust branch, 57% were actually new logos. I didn’t expect that. Now why did that happen? Because our customers are buying bigger bundles. The most common bundle we sell these days is Zero Trust for users.

ZIA, ZPA, ZDX. And the customers, oh, I’m buying this, I’ll also add on Zero Trust branch. So we think the world is moving where these mesh networks do not need to be managed and run by companies. Do you worry about the network when you use this? Why should you worry about the network?

It’s a matter of time when Internet will become your corporate network. Before nations built highways, if you’re a big corporation, you could afford to build private roads connecting your headquarters to different offices. After highways, you shouldn’t. As internet has become a mature cyber highway, companies shouldn’t be building networks, internet to the network. That’s a big part of the cost savings as well.

Networking is expensive. We are taking a lot of cost take out of networking as well. Got it.

Keith Weiss, Analyst, Morgan Stanley: So there’s a lot of vendors who are talking about having four letter Acrement offerings that I’m not going to mention anymore. But it’s prevalent across all the network security vendors and even like sort of CDN vendors that are evolving and trying to offer this as well. From an investor perspective, there’s the concern when it comes to Zscaler, yes, you’ve led in this market, but now it’s a lot more competitive. So from your perspective, has it become more competitive? Is it harder sort of to differentiate in that marketplace and get your message across?

Jay Chaudhry, CEO and Founder, Zscaler: The short answer is no. There’s a lot of confusion four or five years ago, when some of these firewall companies start to say, I do zero trust and all this stuff. Now most of the market heard the story. Okay. So it’s easier some ways.

Now in the past year, the remaining firewall companies are becoming four letter acronym as well. I tell you what’s good about what’s happening in the market. Firewall is one architecture, Zero Trust is totally opposite architecture. If you want to get the market, you take what you have, you repackage it, just like Siebel Systems, but ten years ago would say, I can really run my VM in the cloud and do what Salesforce does. Really?

It’s like having a DVD player spin up in the cloud and say, I offer Netflix service. So as long as the architect is wrong, this thing is not going to work. They’re going to play it out, they’re going to allocate some of the revenue to zero trust or whatever. I think the wrong non in line services better work. If it doesn’t work well, if it doesn’t really protect you, they’re going to phase out.

Keith Weiss, Analyst, Morgan Stanley: Got it. So let’s talk about the opportunities within sort of the product portfolio. ZIA was a starting point. How much opportunity or runway is left? Is there still a lot of greenfield for ZIA on a go forward basis?

Or is it shifting to become more of a like a replacement opportunity for you

Jay Chaudhry, CEO and Founder, Zscaler: guys? In large enterprise, we are focused. Good amount of runway. We are about 45% of Fortune 500 companies that have ZIA or CP or both. We have 35% of global 2,000 companies.

And if you go to the top 10,000 companies, our penetration probably in the 20% range. That means there’s a lot of upsell. Now, these large enterprises don’t really don’t have firewalls installed because firewalls never did user protection. That market belong to Blue Coat, Symantec, WebSense, McAfee, Cisco. And some of the large deals we closed today, actually the number one source of starting point is still blue coat and cementing.

It’s interesting. And that’s one. Then you look at ZPA, ZPA came as second leg. It’s selling very well. It has been very successful.

But if you look at large enterprises, about 60% of our large enterprises have ZI and ZPA above. That means 40% is still headroom on the ZIA side, sorry, ZPA side. Then data protection is becoming the big engine. Early on when customers deployed us, they deploy for cyber protection blocking bad things. Building deploying data protection a little bit more complicated.

You have to have data classification, rules need to set up. For cyber, you don’t have to set up a lot of rules. It’s our job to figure out what’s bad and what’s blocking. So our data protection business is growing. It’s growing pretty well.

It’s growing 40 plus percent year over year. Then the other product that there’s one product I hadn’t thought of for Leon, that was digital experience. When I started the company, I wasn’t thinking of whether a customer said you’re sitting in line, you should be able to tell me where the issues are. CDX has grown very, very nicely. It has become very good.

And then now Zero Trust bronze, Zero Trust cloud, we have lots of products. We just need to make sure we sell them in a most optimal fashion. That’s where the notion of account managers, quarterbacks, some of the specialists come in. Those are

Keith Weiss, Analyst, Morgan Stanley: the things we are refining and learning from. Got it. So maybe we could bring a room into the conversation and help us kind of frame this in reference to perhaps maybe total revenues or kind of the new revenues. How should we think about the proportion between ZIA, ZPA and the emerging products in terms of what’s in your revenue base today versus what you’re seeing in terms of what’s coming in the door in terms of like the new business?

Remo Kanesa, CFO, Zscaler: Yes. I mean, currently, if you look at our emerging products, we’re expecting emerging products this year to be for new and upsell in the mid-twenty percent range, up from what it was last year. When you take a look at ZIA and ZPA, just those two products, ZPA is about 40%. So it’s about 60% ZIA. Following on what Jay mentioned, the 45% for the Fortune 535% for the Global two thousand, the opportunity we have to sell in our existing base is 6x just for the users.

So, when you look at these new products, like the AI, the data protection, data protection on year over year basis has increased 40%, AI has almost doubled. Jay talked about the branch product, which is for new customers 57. All those things are really boding well related to the market opportunity. The focus I mean, you take a look at it, our focus is large customers. And once you’re in the large customer and you get that trust, the ability to expand within our existing products and new products becomes very large.

That’s the ServiceNow model. You take a look at our new and upsell. Our new and upsell, when we went public, it was probably 80%, seventy five % new, 25% upsell. Now it’s basically 65% upsell. And if you take a look at ServiceNow, it’s probably closer to 90% upsell.

That’s where we’re going to evolve to. So get large customers focused on the large Global 2,000, get a footprint, get their confidence, get them understanding of zero trust everywhere and then expand our platform. So great position, absolutely great position.

Keith Weiss, Analyst, Morgan Stanley: Got it. So maybe we could dig in some of those emerging products, some of those upsell opportunities. Zscaler digital experience, it seemed to really kind of hit the mark as we were focusing a lot on the hybrid workforce and the need to sort of understand the performance of the hybrid workforce. Does that necessity wane as I’ve started to come back into the office and the focus is a little bit less on sort of the hybrid environment?

Jay Chaudhry, CEO and Founder, Zscaler: No, no, no. All of our products are actually needed no matter where you are. So ZDx says, I’ll be user focused, no matter where the user is, I’ll tell you end to end experience. People used to talk about ZPA and say ZPA will need it only when people are outside the office. Zero Trust everywhere.

Customer realizing that they have higher risk when the user is sitting in the office with an infected machine, because the machine can traverse on the network and bring things down. So in our Zero Trust everywhere model, you’re sitting in a headquarters, you’re sitting on guest network, you are untrusted. So with that, it goes through our ZPA for every application access. So we are seeing every customer moving towards having CIS, ZP and ZDX for all users. Got it.

Keith Weiss, Analyst, Morgan Stanley: Data protection, in the current environment, I mean, data has always been important, but it’s rising important. But even more so the governance and the effective governance of that data, people are worried about data leakage, especially when we’re using these models. It seems like that’s a it should be a good tailwind behind your data protection offering. Maybe you could talk to us about how large that, how fast it’s been growing. Are you seeing that demand pick up that tailwind, if you will?

Jay Chaudhry, CEO and Founder, Zscaler: Absolutely. In the past, since the AI thing took off, one product that got a bigger boost than others is data protection. The first thing was, oh, all my employees submitting things to chat GPT source code and other stuff. We are natural. We are like an international airport.

Everything goes out through us. So for us to build a policy engine was pretty easy. We’ve done that. Then the next level came. Oh, we are putting Microsoft CoPilot.

It’s pointed to OneDrive and SharePoint to really get all the information, get trained. These things are powerful. Once you train them, they have every answer for you. They can answer the salary and bonus of every employee as well, right? How do you put guardrails around it?

We have data protection that can do data classification, build rules and policies around it. That part is helping. The next customer is worried about the models getting poisoned, the prompts, kind of inspecting prompts, inspect response, all those are big areas for us. So I’ve seen very good acceleration and we really don’t have a lot of competition in data protection. Two reasons.

Now AI is accelerator, but we are sitting in the traffic path going to the internet. Every bad thing comes from the internet, every good thing leaks through the internet. So if you’re sitting in the path, they can go to someone else and say, provide me the stuff. So that’s called DLP, inline DLP. We built that, that’s what customers are adding.

But then the data has also grown. It’s sitting in SaaS applications, sitting in S3 bucket, it’s sitting on endpoint, it’s going through email. So over the past six years or so, we expanded our data protection because customer wanted one single policy for no matter what the data is. That type of development is really giving us the biggest platform. And firewall company will never do good data in line because they’re not a proxy architecture.

That has a flow through to really inspect data to make up inspection and policy, you need to be able to open it, look at it and make a decision and proxy architecture that the foundation of Zscaler is very good. So we think data protection has a long runway for us. Got it. So you guys

Keith Weiss, Analyst, Morgan Stanley: have this great foundation within network in ZIA and ZPA. You’ve expanded out the product portfolio extensively. We’re talking about a go to market motion that is focused on selling up into that customer base. Does the pricing strategy need to evolve? And we hear a lot from some of your competitors about some more token based pricing or platform based pricing.

How are you guys, if you are at all evolving the pricing strategy to try to incent that bundling motion?

Jay Chaudhry, CEO and Founder, Zscaler: Yes, pricing strategy is evolving, has been evolving. Early on, it used to be for users, it is simple user based pricing because customers wanted simplicity. When we took Zscaler to protect workloads, what we call Zscaler cloud, it’s cloud to cloud communication. First initial was, oh, let’s do number of workloads. Then we realized some workloads are very ephemeral, some are long lasting.

So we combine number of workloads along with some of the traffic flow. IoT, OT devices, the same kind of stuff. How many devices, what communication? So we have already evolved into using traffic as an important part of it because you will have more and more data out there, you’ll have more and more communication. They’ll need us more.

We talk about agents. One other question everyone has asked is, oh, users are going down, agents are going up. No, agents are evolving. There’ll be different type of agents. But if you look at the agent that’s doing customer support, for example, if it’s going and accessing the system, if the user was doing it for policy, the agent needs the same kind of policy enforcement as well.

We become natural policy enforcement point and the charge will evolve. I’m sure there’ll be agent based pricing versus user based pricing or traffic. We are evolving and it should evolve. Got it. Got it.

Keith Weiss, Analyst, Morgan Stanley: Remind, I apologize. I’ve only left two minutes for margins, but Jay is very engaging. You guys had five percentage points of margin expansion in FY 2025. It was a great year in sort of pushing leverage. How are you thinking about that balance between growth and profitability on a go forward basis from here?

Remo Kanesa, CFO, Zscaler: We’re operating profitability this last quarter was 22%, which when we went public, we said we’d be in the 20%, twenty two % range. From my perspective, it’s a huge market opportunity. We’re significant positive free cash flow. Our free cash flow margin was 22% this last quarter. Really, we’ll be mindful of operating profitability, but it’s really from my perspective, it’d be a disservice to our shareholders and to ourselves.

With the product platform that we have not to invest continues to invest in the company. The game is basically not to drive profit short term. The game is basically to get market share and really get that dominant position. Our run rate revenues currently, we’re a large company, we’re $2,500,000,000 run rate revenues. We’re just in a very unique position.

We’re the pioneers, we’re the leaders, we’re the innovators. So and we’ve got a great team. So we’re going to keep on investing.

Keith Weiss, Analyst, Morgan Stanley: Got it. And if we think about that sort of, you feel like you’re in a good place in terms of operating margins. You want to have the capital to invest. If you think about the capital intensity side of the equation and how that’s going to sort of translate into free cash flow, anything we should bear in mind in terms of which direction we should expect capital intensity to trend?

Remo Kanesa, CFO, Zscaler: Yes, I mean, the capital intensity we called out there’d be a headwind with our CapEx this year related to investments in our data centers. Next year, you can expect to be in the high single digit type range, which has happened in the past. We’re not a capital extensive business. So, from I wouldn’t think much about the capital intensity related to CapEx investments. It’s going to be in that higher single digit type range going forward after this year.

Jay Chaudhry, CEO and Founder, Zscaler: Hey, if I may add, with the amount of traffic we handle, if someone else were to do it with a less optimized architecture, this will be very capital intensive business, gross margin low. It’s the design of the architecture optimization you’ve done is delivering 80% of the margin. You’ve seen that we have been able to sustain even when the traffic is going up. So Zero Trust Exchange is understood. The second part we look at is how about AIM now?

What kind of investments do we need in that area? Right, because those GPU and all could be very expensive. We are dealing with large amount of data, but proprietary data. We are not trying to take all the data in the world and try to train on it like ChatGP does. Our training is on the proprietary data of security communication.

So we don’t think it’ll have any massive impact. We’re also going to charge money for those products. We believe at this stage, we should be able to keep the gross margins in the kind of range we are. And if there’s some one time investments at all, we’ll call it out.

Keith Weiss, Analyst, Morgan Stanley: Excellent. Unfortunately, it takes us another time, but I think it’s a great note to end on. It’s really about the right network architectures was positioned Zscaler for this opportunity, what enables Zscaler to be so efficient in going after this opportunity. So thank you gentlemen both for kind of sharing that perspective with us at the TMT conference. Thank

Jay Chaudhry, CEO and Founder, Zscaler: you. And then combining Zero Trust Architect with AI, the two together becomes very impressive. Excellent. Thanks so much.

Keith Weiss, Analyst, Morgan Stanley: Thank you very much.

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