Zscaler Inc (NASDAQ:ZS) Q2 2023 Earnings Call dated Mar. 02, 2023.
Corporate Participants:
Bill Choi — Senior Vice-President, Investor Relations and Strategic Finance
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
Remo Canessa — Chief Financial Officer
Analysts:
Brad Zelnick — Deutsche Bank — Analyst
Sterling Auty — Moffett Nathanson — Analyst
Andrew Nowinski — Wells Fargo — Analyst
Alex Henderson — Needham and Company — Analyst
Roger Boyd — UBS — Analyst
Joel Fishbein — Truist — Analyst
Patrick Coleville — Scotiabank — Analyst
Saket Kalia — Barclays — Analyst
Matt Hedberg — RBC — Analyst
Mike Walkley — Canaccord — Analyst
Keith Bachman — BMO — Analyst
Jonathan Ruykhaver — Cantor — Analyst
Gabriela Borges — Goldman Sachs — Analyst
Peter Levine — Evercore ISI — Analyst
John DiFucci — Guggenheim — Analyst
Shaul Eyal — Cowen — Analyst
Presentation:
Operator
Hello, and welcome to the Zscaler Second Quarter Fiscal Year 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Bill Choi, Senior Vice-President, Investor Relations and Strategic Finance. Sir, you may begin.
Bill Choi — Senior Vice-President, Investor Relations and Strategic Finance
Good afternoon everyone, and welcome to the Zscaler Second Quarter Fiscal Year 2023 earnings conference call. On the call with me today are Jay Choudhry, Chairman and CEO, and Remo Canessa, CFO. Please note that 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 a 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, 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 opportunity. 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 would also like to inform you that we’ll be attending the following upcoming events in March. Morgan Stanley TMT Conference in San Francisco on March 6th, JMP Technology Conference in San Francisco on March 7th. Now, I will turn the call over to Jay.
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
Thank you, Bill. We delivered a solid Q2 despite economic challenges that has impacted the broader tech industry. For the quarter, our revenue grew 52% year-over-year and billings grew 34%, Billings were impacted by new customers being more deliberate about their large purchasing decisions at the start of the calendar year. These deals have not gone away and we have closed a few already in February. On the other hand, we had strong growth in our expansion business with existing customers, increasing the deployments and adopting our broader platform. Once again our dollar-based net retention rate was over 125%. We continue to delight our customers by accelerating the path to better security, business agility and cost elimination helping them solve some of their highest priorities. This drove our net promoter score or NPS to a new high. Our NPS now exceeds 80, which is more than two times the average for SaaS companies, and today more enterprises than ever before recognize Zscaler as the best choice to secure the digital transformation, strengthening my confidence in our 72 billion-dollar serviceable market opportunity.
Our disciplined approach to growth is reflected in our strong operating profit and free cash flow, both of which doubled on a year-over-year basis. Our operating margin expanded by approximately four percentage points, while our revenue also continued to grow at a very high rate. As the world’s largest security cloud, we have outstanding unit economics with a stable, high 90% gross retention rate and 80% gross margins. These best-in-class metrics are the result of our differentiated services, market leadership and highly scalable multi-tenant cloud platform.
Let me share with you some of my observations about the environment and how we plan to manage our business for the remainder of 2023. With macro concerns weighing on business leaders, more organizations are being cautious and measured about their spending. In January, we saw a higher scrutiny on budgets compared to December resulting in additional delays in large deals. These deals haven’t gone away and customers are taking longer to make decisions and acquiring additional approvals. In select instances where timing of budgets was a hurdle for new customers, we enable them to ramp into larger subscription commitments. These strategic deals lowered our first year billings but will grow into a higher annual run-rate level in the second year. We typically have some ramp deals each quarter but in Q2, the impact of ramped deals on our billings was higher. These ramp deals position us to expand the customer relationship over time to create long-term value.
As we enter the second half of fiscal ’23, we are expecting customer cautiousness to continue. We had accounted for further lengthening of sales cycles and the uncertain timing of large deals in our outlook. Even though our current pipeline has grown and has more mature deals, we are assuming a slight deterioration in close rates. While not immune to economic slowdowns, cyber security is relatively more resilient. In my conversation with hundreds of IT executives, cyber security remains their organizations number one IT priority. Two weeks ago we hosted a seesaw [Phonetic] summit with ADC source from Global 2000 companies. They talked about the business need to innovate, become agile and gain competitive advantage with security as an enabling foundation. They talked about the plans to shift to zero trust security, to reduce attack surface and to adopt direct to cloud architecture that Zscaler pioneered. Customers are excited by the new innovations being added to our platform and their engagement with us remains very strong.
Given the large opportunity we see in front of us, we will keep on building and integrating, while also increasing profitability. After significantly growing our teams in recent years, we took a fresh look at our organization and found opportunities to streamline operations and to align people, roles and projects to our strategic priorities. As a result of their review, we initiated our targeted cost optimization plan to drive additional operational efficiency that best positions us to deliver profitable growth. Remo will cover this in more detail.
As I mentioned before, I believe that periods of uncertainty can accelerate the adoption of disruptive technologies like ours. C-Level leaders are telling me that technical depth of legacy network and security point products impedes progress and slows down business operations. By consolidating point products and embracing zero trust architecture would Zscaler, our customers are modernizing their security while reducing costs, giving them the competitive edge they need to succeed in today’s rapidly evolving business environment. We have expanded our business value team to collaborate with customers to create CFO ready business cases with clear ROI and payback periods that facilitate necessarily deal approvals. In today’s environment, customers can’t afford to risk their mission-critical projects with immature offerings from unproven vendors. We are starting to see deal wins from customers who initially purchased our single-tenant SASE solution from the incumbent firewall vendor that failed to deliver in the real world. These customers were misguided by the flawed message, Keep on buying my boxes and use my so-called cloud service when your users are on the road or in a branch office.
Our single-tenant architecture whether deployed as appliances or as virtual machines spun up in a public cloud will not allow enterprises to fully realize the benefits of secure digital transformation. Every customer we have won has lots of firewalls in the data centers but when it comes to Zero Trust security and digital transformation, they are choosing Zscaler because of our multi-tenant cloud architecture that scales and delivers business agility. Our Zero Trust Exchange is the largest in-line security cloud in the world, processing over 280 billion transactions and preventing 9 billion security and policy violations per day. This massive amount of traffic provides us with more than 300 trillion signals per day to feed our machine-learning and AI engines for better detection of user and application traffic anomalies resulting in superior check protection. Our AI/ML capabilities are driving customer success at scale in the real world today.
Let me share an example with you. In December, we helped a Global 500 conglomerate experiencing targeted a cyber attack on one of its divisions. Our threat labs team worked closely with the customer to identify the root cause of the attack and act quickly to prevent any potential damage. Subsequently this customer upgraded to our CIA Transformation Bundle to prevent zero day attacks and secure the entire ecosystem. This win highlights the value of our high-end product bundles and the benefits that our threat labs research brings to our customers.
I’m delighted to share that an increasing number of customers are purchasing our comprehensive platform capabilities, which not only accelerates their business value realization but also establishes us as a critical partner for their success. As I mentioned before, customers are increasingly buying Zscaler for users, our complete platform for user protection, which includes ZIA, ZPA and ZDX bundled together. In addition, we are gaining traction with workload protection powered by the same core ZIA and ZPA technology. Thanks to new and existing customers purchasing these expanded bundled, we drove a 51% year-over-year growth in the number of customers with greater than $1 million in ARR ending with nearly 380 of these customers and over 30 of these customers have ARR greater than $5 million.
Let me highlight three deals this quarter where the customers purchased all four product pillars. In a new logo win, our top 10 global IT software and services company purchased Zscaler for users bundle for 400,000 users, including our advanced data protection suite and our Zero Trust for Workloads for 3,000 workloads. This customer pursued a zero trust strategy due to their business growth resulting in a complex application and network environment and heightened risk from data sprawl. They selected Zscaler as the only scalable Zero Trust platform that reduces their attack surface and protects their sensitive data while bringing agility to their business. With an integrated platform, they will simplify their security operations by consolidating dozens of point products, including firewalls, VPNs, ZDI, DLP and CASB. By purchasing all four product pillars, the customer is making a platform bet on Zscaler to secure their users, workloads and devices regardless of their location.
Next in an exciting upsell wind, a major auto manufacturer upgraded to Zscaler for users bundle for 35,000 users and purchased Zero Trust for Workloads for 8,000 workloads. This platform purchase was driven by the customer strategy to digitally transform their business operations including management of the vast supply chain. In fact, we are helping them accelerate time-to-market for new EVs. Before purchasing ZPA this customer experienced significant delays in commissioning new vehicles as third parties did not have fast and secure remote access for collaboration. By using ZPA and ZDX, they can now provision secure access to new third parties within a few days compared to over a month, it used to take with legacy remote access technology. In addition Zscaler for users significantly reduces the risk of ransomware their active firewalls and VPNs allow.
Finally a Global 500 pharmaceutical company upgraded from ZIA for 45,000 users to Zscaler for users bundle for 85,000 users and purchased Zero Trust for Workloads for 2000 workloads. They purchased all four product pillars to pursue a cloud-first strategy with zero trust security for all users and workloads. With this up-sell the annual spend of this existing million dollar customer increased by 6x with additional opportunity for workload protection as the public-cloud usage grows. Earlier I mentioned that in some instances, we enable new customers to ramp to larger commitments. In one such new logo win, we are excited to partner with an innovative retail leader that’s using facial recognition technology and cashless checkouts to redefine the future store experience. This is a significant win for us as retail was a smaller vertical for us historically, where we are now enabling new digital transformation possibilities. This retail company committed to an 8-figure total contract value for a multi-phase ramp to secure over 90,000 ZIA users, 20,000 ZPA users and 400 petabytes per month of data from the 20,000 retail store operations. This customer had bought a fiber-based SASE solution, which failed to scale as well as expanded data attack surface. Leveraging our highly scalable and reliable Zero Trust Exchange platform they will use ZIA to create direct Internet access for employee tablets and terminals while using ZPA to secure private access for store managers.
Additionally Zero Trust for Workloads will secure all traffic from cameras and terminals in the retail stores to the cloud. Workload protection accounts for approximately 40% of the total deal value. As these deals show customers are embracing our expanded platform, including our two emerging product pillars, ZDX for digital user experience management and Zscaler for workloads for securing servers and workloads. These emerging products are on track to meet or exceed our full-year target of contributing high-teen percentage of our new business. Our Zero Trust for Workloads solution is roughly doubling year-over-year. In addition, our new CNAPP solution is generating significant customer interest. You may recall at CNAPP live in June, we launched our CNAPP solution called Zscaler Posture Control, which is an integrated solution that correlates vulnerabilities and risks across CSPN, CIAM and infrastructure as Code scanning. This quarter we had a Posture Control upsell win with a global 1,000 engineering company for half a million dollar ACV to secure 5,000 workloads.
Posture Control provided visibility across multi-cloud assets remediated compliance violations and revealed previously undetected high-risk vulnerabilities. We are proud that our Posture Control solution were recently recognized by [Indecipherable] in the leader quadrant based on independent peer reviews. We are bringing more innovations to our customers than ever before. In our latest major cloud software release, we brought over 150 new features to market, including product innovations such as AI-powered phishing detection and dynamic risk-based access policy. We continue to drive both internal innovation and highly targeted acquisitions to expand our leadership in the SASE and zero trust security markets.
As announced a few weeks ago, we acquired Canonic Security, an innovative start-up in SaaS supply chain security, which protects customer data in SaaS applications. For example, Google Suite could be sharing data with 30 other third-party connected SaaS apps that are posing significant risk of data breaches and data loss. Together with our in-line DLP browser isolation out-of-band CASB and SSPM for SaaS posture management, Zscaler now provides unprecedented visibility and most comprehensive data protection for SaaS applications and customer data. As we look ahead to the next few years, we are committed to driving broader adoption of our zero trust platform for users, workloads and IoT and OT to maximize the value of our customer’s secure digital transformation efforts. CIOs are telling me that they are using this challenging environment to drive change. ROI and cost optimization are becoming bigger priorities as they are being asked to do more with less. With our superior architecture and proven experience, we deliver measurable outcomes at the CXO level that are aligned with our customers’ top priorities. Our business value proposition is resonating and more customers are consolidating multiple point products with our broader platform, which increases our wallet share with them. We believe that we are still in the early stages of a significant market opportunity to enable secure digital transformation and we are on track to achieve our $5 billion ARR goal.
Now, I’d like to turn over the call to Remo for our financial results.
Remo Canessa — Chief Financial Officer
Thank you, Jay. Our Q2 results exceeded our guidance on growth and profitability even as we managed through continued deal scrutiny and longer reviews. Revenue was $388 million, up 52% year-over-year and up 9% sequentially. ZPA product revenue was approximately 20% of total revenue, growing 74% year-over-year. From a geographic perspective, Americas represented 53% of revenue, EMEA was 32% and APJ was 15%. From a new business perspective, EMEA grew strongly on a year-over-year basis despite continued macro challenges in the region.
Our total calculated billings in Q2 grew 34% year-over-year to $494 million. Until we get more certainty around the macro environment, we believe looking at total billings on a sequential basis can be a relevant measure of our billings performance in the near term. On a sequential basis, billings grew 45% quarter-over-quarter. Our current billings grew 32% year-over-year, which includes the impact of strategic deals with sales, subscription ramps that Jay talked about earlier. Our remaining performance obligations or RPO grew 44% from a year ago to $2.809 billion. The current RPO is 51% of the total RPO. Our dollar-based net retention rate was once again above 125%. We have a strong base of large enterprise customers which provides us with significant opportunity to upsell our broader platform.
At the end of Q2, we had 378 customers with greater than $1 million in ARR, up 51% from 251 in the prior year. The continued strength of this metric speaks to the strategic role we play in our customers’ digital transformation initiatives. We added 120 customers in the quarter with greater than $100,000 in ARR in the quarter at 2,337 such customers.
Turning to the rest of our Q2 financial performance. Total gross margin of 80.4% is unchanged from the prior year. Our total operating expenses increased 6% sequentially and 44% year-over-year to $263 million, primarily due to higher compensation expenses. As we indicated last quarter after exceeding our hiring plans in Q1, we moderated our pace of hiring in Q2. This contributed to a strong operating margin performance in the quarter with operating margin increasing 380 basis points year-over-year to 12.6% which exceeded our guidance. We’re seeing the leverage in our financial model that is driven by our strong underlying unit economics. Our free cash flow margin was 16%. We continue to expect data center capex to be around the high-single-digit percentage of revenue for the full year. We ended the quarter with over $1.9 billion in cash, cash equivalents and short-term investments.
Next, let me provide more details about the targeted cost optimization plan that Jay mentioned. In the past 18 months, we doubled the size of our team to approximately 5,900 employees, as we invested aggressively based on a strong market momentum. As we watched the macroeconomic uncertainty at the start of fiscal 2023 in the fall, we commented that if the business environment becomes more challenging, our business model allows us to adapt quickly and to deliver expanded operating profitability while we grow. With the announcement today, we are adapting to the changes we saw in Q2. This is a targeted optimization initiative to address inefficiencies in certain job functions and projects. As a result, we are reducing our workforce by approximately 3%. Most of the impact from these changes will be seen in Q3. It will take a charge of $8 million to $10 million including non-cash expenses. We’ll continue to hire the best candidates in high-priority areas.
Now moving on to guidance and modeling points. As a reminder, these numbers are all non-GAAP. For the third quarter of fiscal 2023, we expect revenue in the range of $396 million to $398 million reflecting year-over-year growth of 38% to 39%. Gross margins of approximately 80%. Operating profit in the range of $55 million to $56 million. Net other income of $10 million. Income taxes of $4.5 million. Earnings per share of approximately $0.39, assuming 156 million fully-diluted shares. Please note that starting fiscal 2023, we adopted the new accounting standard, which requires the use of the if-converted method for calculating EPS. To account for convertible notes, we will need to add back $360,000 in quarterly interest expense.
For the full-year fiscal 2023, we expect revenue in the range of $1.558 billion to $1.563 billion for year-over-year growth of approximately 43%. Calculated billings in the range of $1.935 billion to $1.954 billion, a year-over-year growth of approximately 31%. For Q3, we are assuming billings to decline by approximately 9% sequentially compared to the mid-single digit percentage declines we’ve seen over the last few years. This guidance incorporates the macro-related uncertainties that Jay mentioned in his comments.
Operating profit in the range of $213 million to $215 million. Our guidance reflects approximately 350 basis points of operating margin improvement compared to last year which is an increase from our prior guidance while growing revenue at about 40%. Income taxes of $18 million. Earnings per share in the range of $1.52 to $1.53 assuming approximately 156 million fully-diluted shares. As noted earlier to account for our convertible notes and EPS, you will need to add-back $1.4 million in annual interest expense.
Let me conclude with comments on our investment framework. We remain confident in our ability to deliver on our growth opportunity while increasing profitability. We will balance growth and profitability based on how our business is growing. The recurring nature of our business model gives us good visibility on top-line revenue and allows us to adapt quickly to changes in market conditions to deliver on our operating profit margin goals. If the environment becomes more challenging, we will continue to prioritize profitability, leveraging our strong unit economics and driving efficiencies in our cost structure.
In fiscal ’23 as a result of our focus on operational efficiency, we’re increasing our profitability in the second half to achieve a full-year operating margin of 13.7%, reflecting 350 basis points expansion while revenue is still growing over 40%. If the environment improves, we will prioritize growth. Our long-term investment framework still applies. If we’re growing revenue faster than 30%, you can expect less than 300 basis points of margin expansion in the year. We remain confident of reaching 20% to 22% operating margin in the long-term. With a large market opportunity and customers increasingly adopting the broader platform, we’ll continue our disciplined approach to managing our business to maximize value for our shareholders.
Operator, you may now open the call for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Brad Zelnick with Deutsche Bank. Your line is open.
Brad Zelnick — Deutsche Bank — Analyst
Great, thank you so much for taking the question. Jay, I appreciate the backdrop is tough. We heard from every company, but can you frame for us your outlook in terms of things within your control and things that aren’t and maybe also if you could comment on the integrity of the data that you look at that underpins your confidence in Zscaler’s competitive position in the market. Thank you.
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
Thank you. If you look at the quarter, we found that our upsell was quite strong. Customers are loyal to us, they like our solution. Upselling becomes easier for us. In terms of challenging new logos with large deals but more challenging as there was additional scrutiny and additional approvals needed. The other thing that worked well whilst the customers like the fact that we are able to do consolidation of lots of point products, the clean architecture and give them strong ROI. That thing has worked well for us. In terms of competitive positioning, we haven’t really seen any change. In fact, I would say that on the high-end of the market, we actually feel like we are stronger than even before because we have established that we actually have the right architecture, right solution with thousands of customers well deployed and very happy customers. In fact, other people [Phonetic] are beginning to see that some of our solutions are better sold by firewall vendors and SASE solution and when customers can deploy then they are coming, falling apart. You know, I have been asked many times in the past three years. Hey, are you replacing some of our firewall based solution. Answer I used to give is, I haven’t seen very many out there. Now we are beginning to see some of that. A large retailer, I mentioned on my call with 20,000 stores tried for about 18 months to deploy a firewall based SASE solution and eventually gave up and we are really taking care of it. The other thing. I would mention is Remo has often said, we can adjust our business model as-needed. As environment is getting tighter, we are adjusting the model by slowing down hiring. Our unit economic cost is very high. So you’re seeing expansion in gross margins and operating margins. So, your operating margins, which investors do like to see. Lastly, my confidence is coming from tons of customer calls I make we had ADC source with us for two days doing an exchange. All of these guys. I have deployed, have done a great job, they understand the architecture. The more the word spreads out, they have better understanding of the architecture, the more they are able to fend off the stuff being spent by competitors. So I’m very confident and comfortable in our ability to stay far ahead of the competition.
Brad Zelnick — Deutsche Bank — Analyst
Jay, thank you very much for the added color and thanks for taking the question.
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
Thank you.
Operator
Thank you. Please standby for our next question. Our next question comes from the line of Sterling Auty with Moffett Nathanson. Your line is open.
Sterling Auty — Moffett Nathanson — Analyst
Yeah, thanks. Hi guys. I’m just kind of curious, Jay. When you look at the business, can you give us a high level sense of how much of the business in the quarter is replacement of legacy security solutions where cost savings is a driving factor and how much of the business is actually brand new implementations to enable some sort of project where maybe it’s a little bit riskier in these tighter budgetary times.
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
As you know, every company has some kind of legacy solution for Internet Gateway or even VPN access. Those are the two starting point for us ZIAs starts to replace in some kind of secure web gateway and ZPA starts to replace in some kind of VPN and expand from there. So almost all business we do starts by replacing something except while upsell too. If you look at our upsell, that means we may have ZIA some pieces deployed, we may be upselling to replace DLP of some vendor or we may be replacing VPN of some vendor or some of the other stuff. So almost all business is replacement for us. You can call some of those stuff expansion. For example, when customers want to have access to application sitting in Azure and AWS without going through the data center, we are still replacing some of the stuff sitting in the data center and some that direct connect, they may have bought. So its replacement of a bunch of point products into a fewer offerings. That’s really where the savings come from. That’s really simplicity and operational east it comes from.
Sterling Auty — Moffett Nathanson — Analyst
Got it, thank you.
Operator
Thank you. Please standby for our next question. Our next question comes from the line of Andrew Nowinski with Wells Fargo. Your line is open.
Andrew Nowinski — Wells Fargo — Analyst
Great, thank you and good afternoon, everyone. So, I just wanted to ask about those ramps deals that you talked about. Just wondering if you could quantify how much those deals would have added the billings in Q2 if they were normal deals versus ramping over time and also are customers contracted to spend a certain amount that was deferred or can they still back out of that ramped piece of it. Thanks.
Remo Canessa — Chief Financial Officer
Yes, so we are contractually obligated to the ramps and the ramps are strategic that Jay talked about but with large deployments we are seeing more ramps. The impact on billings probably a couple of percentage points is what you can think but again with large customers, large deployments buying more of our pillars, ramps were more in Q2.
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
If I may add, I mean if you look at it at this as a strategic investment on our part to help customers get started and actually manage their cash flow investments in year 1 by deferring some of that stuff to future years.
Andrew Nowinski — Wells Fargo — Analyst
Understood. Thank you.
Operator
Thank you. Please standby for our next question. Our next question comes from the line of Alex Henderson with Needham and Company. Your line is open.
Alex Henderson — Needham and Company — Analyst
Great, thank you so much. So, it was actually interested in asking about the ramps as well but I also wanted to put it in context, the duration in the calculated billings numbers. Can you give us some sense of the magnitude of each of those. I guess a couple of percent on the ramps, but if I look at the ramps once should get all of that back and in a couple of quarters, once they get past the initial start there, so isn’t that actually just a timing issue.
Remo Canessa — Chief Financial Officer
I mean, you’re absolutely right, Alex. I mean the ramps are a timing issue. Lower billings upfront and higher billings later based on the ramp. Related to the billing duration, there was a slightly favorable in Q2. If you look at our billings, calculated billings, they are 34%, short-term billings for 32%. That’s generally what you can think about the favorable is related to the billing duration.
Alex Henderson — Needham and Company — Analyst
Great, thank you.
Operator
Thank you. Please standby for our next question. Our next question comes from the line of Roger Boyd with UBS. Your line is open.
Roger Boyd — UBS — Analyst
Hey, thanks for taking the questions. Well, if I could poke at the efficiency versus capacity debate, I know you reiterated the $5 billion long-term goal and Jay, your confidence in the market opportunity. But if you do see conditions improve, how do you think about sales capacity heading into fiscal ’24 and your ability to accelerate growth in an agile pace. Thanks.
Remo Canessa — Chief Financial Officer
Yeah, that’s a great question. We are a growth company. We feel that the market opportunity is huge. $5 billion is still what we are shooting for. We saw this is based on the comments I made, we’ve increased our headcount almost 100% over an 18-month period. And we saw basically inefficiencies in our organization. That’s why we’re doing this cost optimization. Having said that, our selling capacity remains very strong and we continue, we are going to continue to invest in our selling capacity as we go forward into the second half. So we are going to moderate hiring throughout the company, but our focus is still selling capacity and R&D development.
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
Yeah, so we are still selectively going to hire quota-carrying sales reps as well as core engineering leaders, sorry, core engineering team members. And we expect our year end headcount to be higher than the headcount today.
Roger Boyd — UBS — Analyst
Perfect. Thank you.
Operator
Thank you. Please standby for our next question. Our next question comes from the line of Joel Fishbein with Truist. Your line is open.
Joel Fishbein — Truist — Analyst
Thank you for taking my question. Hey Remo. Just on the billings guidance. If you could just give us a characterization of how you would give or say is it conservative, is it based on what you’re seeing today getting worse, the environment risk and a lot of questions on that, I’d be happy hopefully you give any color you have on that. Thank you.
Remo Canessa — Chief Financial Officer
Yeah. I mean, thanks for asking the question, Joel. So there was elongation of the sales cycle. So we are basically baking that into our second half, slightly worse, not a lot, slightly worse than what we saw in Q2. So a little more conservatism related to our billings guidance in the past.
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
Yeah, and we are assuming that current levels of these scrutiny will continue.
Joel Fishbein — Truist — Analyst
Thank you very much, appreciate it.
Operator
Thank you. Please standby for our next question. Our next question comes from the line of Patrick Coleville with Scotiabank. Your line is open.
Patrick Coleville — Scotiabank — Analyst
Hey team. Thank you for taking my question. So, I guess I’d like to ask about the sales changes that we discussed last quarter on the call. Is the slowdown we’re seeing have any bearing on the sales changes that were made earlier in the fiscal year or has that process been kind of wrapped up and that’s in the background now.
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
Patrick, as we discussed, we made changes to our Enterprise segment, the lower end of the market segment at the start of the year and we are [Indecipherable]. Those changes are behind us. They are done in Q1, there is no bearing on Q2 numbers. The main thing we’re seeing at the highest level is on the macro conditions that are impacting some of the higher-end larger deals. Our low-end of the market segments, enterprise and commercial, they actually had done quite well. There are still impacted.
Patrick Coleville — Scotiabank — Analyst
That’s very clear. Thank you so much.
Operator
Thank you. Please standby for our next question. Our next question comes from the line of Saket Kalia with Barclays. Your line is open.
Saket Kalia — Barclays — Analyst
Okay, great. Hey guys, thanks for taking my question here. Remo, maybe for you. Can we just dig into the ramped deals just a little bit more and maybe specifically, are these deals that take multiple years to ramp up to their sort of normal run-rate on average or are these things that maybe come back in the next couple of quarters. And relatedly, are you assuming a similar mix of ramp deals in the second half, as you think about the conservatism in that guide.
Remo Canessa — Chief Financial Officer
No, it’s not multiple years. This ensures that. Also related to what we think in our ramps in Q3 and the second-half similar to what we saw in Q2. Again, as we talked about deals are getting bigger by more of our platform, it is a very, it’s a strategic buy for large companies. Regarding the architectures throughout today the Company’s understand. They understand that they’ve got a problem. And for that, these ramps do help us. I would expect it to continue at the same pace in Q3, Q4.
Saket Kalia — Barclays — Analyst
Very helpful, thanks guys.
Operator
Thank you. Please standby for our next question. Our next question comes from the line of Matt Hedberg with RBC. Your line is open.
Matt Hedberg — RBC — Analyst
Great guys, thanks for taking my question. I just wanted to ask about linearity. It sounded like in your prepared remarks that January was worse than December. I’m curious, did those trends continue into February, was February worse than January, and is there any way to quantify sort of the impact of the deals that pushed out of the quarter.
Remo Canessa — Chief Financial Officer
I mean some deals, certainly pushed into February and February, again, some of the deals that we thought we do in January came through February. Regarding linearity overall linearity was actually better in Q2 versus Q1 but that’s also a function of the elongation of the deal. So that’s why one area is better. Going-forward. I would expect back-end loaded linearity as we’ve seen in the last few quarters. I really don’t see that changing.
Matt Hedberg — RBC — Analyst
Thank you.
Operator
Thank you. Please standby for our next question. Our next question comes from the line of Mike Walkley with Canaccord. Your line is open.
Mike Walkley — Canaccord — Analyst
Great, thanks. Remo, I guess with the new customer pipeline taken longer to close it seems like upsell is going to be maybe even greater mix over the intermediate term. Can you share with us maybe how that mix changes over the implied guidance for the remainder of the fiscal year.
Remo Canessa — Chief Financial Officer
That’s a great question. If you recall in Q1, it was about fifty-fifty. And we said we felt on for the year, it’s going to go more in the 60-40 upsell versus new. In Q2, it was about 35% new and 65% upsell. From my perspective, I think for this year, I think 60-40 is still the right metric to think about, 60% upsell and 40% new.
Mike Walkley — Canaccord — Analyst
Thank you.
Operator
Thank you. Please standby for our next question. Our next question comes from the line of Keith Bachman with BMO. Your line is open.
Keith Bachman — BMO — Analyst
Hi, good evening, good afternoon. Many thanks. I wanted to ask about if you look at the phased deals and-or just the general economic backdrop, is there a change in pricing. In other words, are more customers asking for relief in terms of pricing. And related to that, Remo. I know you’ve talked about the billings and you’re assuming some more conservative or things can get worse, but if I look at the billings guide in fact billings are down 9% sequentially in the April quarter. In order to make the annual guide, the sequential growth in July quarter is 50% or higher and that’s that’s roughly equal to or above the sequential growth for the last three years. So I’m just struggling a little bit to understand why the billings guide we should think there’s basically some room, if you will, when I look at the Q4. It just seems like you’re asking a lot for Q4.
Remo Canessa — Chief Financial Officer
I will start on the pricing pressure and discounting, and Remo can get into the billing part of it. So due to macro environment, there is increasing scrutiny and pressure on CIOs this year. Our customers are negotiating order over payment and deal terms. But customers do view us as one of the most mission-critical service and they want to make sure they buy the service that works, the service they can depend upon. They are not looking for the cheapest solution. So from that point-of-view, I would say we aren’t seeing tremendous pressure on discounting. We’re seeing some focus on it. And to help that that’s where some of the ramp deals come in to help lower the cost for the customer, to manage their spend, but being strategic being dealing in the right level and actually delivering on our ROI value reduces pressure on us from pricing point of view. Yeah, so if you look at the average we’ve had in the second half sequentially from Q3 to Q4, it’s been in the 48%, 49% range. But we’ve got our guidance as 46% at the midpoint.
Keith Bachman — BMO — Analyst
Okay, all right, thank you.
Operator
Thank you. Please standby for our next question. Our next question comes from the line of Jonathan Ruykhaver with Cantor. Your line is open.
Jonathan Ruykhaver — Cantor — Analyst
Yeah, hi, thanks. So, Jay, wondering if you could talk in more detail on the adoption trends you’re seeing around cloud workload protection and what those initial lens look like from a from a deal size perspective relative to ZIA and ZPA and also just touch on the go to-market. Are all ramps equipped to sell that solution today. Is there an initial overlay strategy. Thanks.
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
Thank you. Our overall adoption of cloud workloads product is pretty good as planned. And as customers are launching more and more workflows, they have two options. Either they extend their corporate network, just like a branch network to every Cloud region and put firewall there, all they do is Zero Trust architecture with Zscaler. So these products are primarily sold to our customers. The customers understand the value of it and that’s why they are embracing it now but initial deals are smaller. Customers are growing and there are some large deals but majority of the deals start small and customers start buying into it. They largely end up doing the same thing just like ZIA for users, ZPA for users and there is a ZIA for Workloads, ZPA for Workloads. That’s where we believe the opportunity for us is significant. In terms of go-to-market all ramps are equipped to sell but we also understand that there are a bunch of nuance discussions in this area. So we do have product specialists. This is not overlay sales team. These product specialists are experts in this area and they do help in the sales process. Overall, we are expecting the emerging products too. Yeah, emerging products still tracking to I think, new and upsell.
Operator
Thank you. Please standby for our next question. Our next question comes from the line of Gabriela Borges with Goldman Sachs. Your line is open.
Gabriela Borges — Goldman Sachs — Analyst
Hi, good afternoon. Thank you. Jay, I wanted to ask you on the market opportunity with regards to breed. With Zscaler now having over set a percent of the Global 2000, how do we think about the risks that the enterprises that care most about best-of-breed are essentially already Zscaler customers and where do you think the ceiling is that G 2000 penetration rate, and are you getting feedback from let’s say the next set of, that perhaps don not [Phonetic] care much about best of breed technology. How do you think about that. Thank you.
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
I’m sorry, can you expand the last part again.
Gabriela Borges — Goldman Sachs — Analyst
Yes, essentially the deals that you are competing for today, are you getting any signs of feedback from customers saying, we may have best agreed, so we are now trying to prioritize you.
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
Yeah, well, our customers are not looking for best-of-breed point products. They’re looking for best-of-breed platform with a bright architecture. When you talk to the low-end of the market, they can live with some solutions that are kind of halfway, but when you talk about Global 2000, these customers are generally pretty savvy, their requirements are complicated and we believe the best architecture will win in the long term. I gave you an example, this time, we had a large retailer who had gone a different way thinking that a firewall based architecture would work. Tried, failed and came back. I expect to see a lot more customers do the same thing. I think we have ample opportunity in the Global 2000 to take on penetration to a much, much higher level.
Operator
Thank you. Please standby for our next question. Our next question comes from the line of Peter Levine with Evercore. Your line is open.
Peter Levine — Evercore ISI — Analyst
All right, thanks guys for squeezing me in here. Maybe just a piggyback off on an earlier question on upsell versus that new. So it seems like you’re able to kind of somewhat cogwheel your sales force to focus more on those back to base opportunities. So one, are you changing your incentive comp plans at all. I guess better incentivize your sales force to focus more on those back to base opportunities. And then second, the ones that you are seeing a better upsell, like what product is recognized right. Thanks.
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
So we weren’t really making any special changes to upsell versus new logo. This has been asked to us many times over the years. Do we have a special incentive for new logos. Not really. Our platform is very broad. And so we really we want new logos and we want expansion. In expansion, we know that expansion means upsell is a little bit easier than new logos. That’s why you’ve seen some of the upsell numbers going up this quarter as compared to new logos now. We keep on making refinements to our go-to-market structure and model from time-to-time but there is nothing significant we’ve done now to make any changes. I think one of the best thing is we have a very good sales organization. Our architecture is very good. Our deployments are very good. That’s why customers come back and rave about us. I mean talking to so many customers, they believe we have the best service, best architecture and best security. That’s why we win and I think we’ll keep on driving it but in today’s market, we expect upsell numbers to stay high because it’s a bit easier as compared to a new logo.
Peter Levine — Evercore ISI — Analyst
And then which products are getting the biggest hit rate.
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
Oh, sorry, which product, yes. So if you look at almost every Zscaler customer as ZIA, ZPA can be a starting point for desktop common, but more-and-more customers are starting with ZIA, ZPA, ZDX, but there is still a sizable installed base that is ZIA. Now ZIA, ZPA together in a higher end will be close to 60%. That means so many customers have ZIA, ZPA both. This is an upsell opportunity on ZPA. There’s an upsell opportunity within bundles. All of these customers have bought business that move to transformation, from transformation there is a big opportunity for us to sell data protection. Data protection especially advanced data protection is very much in the mind of large corporations, and there’s a lot of old stuff sitting from Symantec 1 to and some of the Microvista. And when you deploy Zscaler you can be barely sitting with the old school DLP technology but data protection is a big opportunity for us. If there is one other product, I would highlight it is ZDX. Digital experience is one of the favorite services of CIOs and Head of Networking because when someone is coming from some home, some coffee shop, some hotel, when things are slow customers struggle to figure out. ZDX has become very sophisticated to help them pinpoint issues and take care of them. User experience is becoming more-and-more important and this is highly highly differentiated service that we offer. Did I answer your question?
Peter Levine — Evercore ISI — Analyst
Perfect. Yes, thank you very much.
Operator
Thank you. Please standby for our next question. Our next question comes from the line of John DiFucci with Guggenheim. Your line is open.
John DiFucci — Guggenheim — Analyst
Thank you. You said that EMEA grew strongly year-over-year but what is the kind of growth you thought it would be because the reason I ask is that our checks in the regions was they were pretty mixed and your revenue growth decelerated in the region and given the recurring model revenues usually are a lagging indicator, I get that, but I guess the answer to that question. And how do you expect the region to progress for going -forward, is there any reason that region might be more competitive.
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
I’ll start and Remo can add things to it. This quarter, EMEA had less dependency on large deals and as you know large deals are getting more scrutiny and US was, relatively speaking, weaker because they had higher dependency on large deals. Remo, do you want to add any more.
Remo Canessa — Chief Financial Officer
I mean, you’re right, John. I mean, revenue is a lagging indicator, and our new and upsell business, it was one of our strongest. That’s not our strongest now, so EMEA did do well.
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
And there is one on the other, I could give you on the market vertical kind of stuff. There are certain verticals that did better than others. As you would expect that tech vertical was weak in today’s market. If some were reaching [Phonetic], was the lowest score.
John DiFucci — Guggenheim — Analyst
But that would be more for the US, right. Jay, the tech vertical?
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
For the US. That’s correct.
John DiFucci — Guggenheim — Analyst
Got it, okay. Thanks a lot guys.
Operator
Thank you. Please standby for our next question. Our next question comes from the line of Shaul Eyal with Cowen. Your line is open.
Shaul Eyal — Cowen — Analyst
Thank you and good afternoon, guys. Jay or Remo, one of the topics in recent quarters is cloud-related costs or in other words, some enterprise customers are indicating that some of the cost benefits they have subscribed under the big cloud promise and we can here at times that is not living up to their expectations. So interested to learn whether your customer have been bringing up that point in recent discussions.
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
I had a hard time hearing you. I think we’ve got something about hyperscaler and then perhaps if you could repeat that.
Shaul Eyal — Cowen — Analyst
Yeah, I was asking whether some customers have been bringing up maybe some disappointment with the overall promise as it relates to cloud-related costs. Is that a topic that has been brought up in recent discussions with your customers.
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
Yes, so let me share with you lots of conversations I had. Customers are embracing costs. Okay, there is no — somebody who’s not saying I’m going to come back and not embrace the cost, that’s point number one. Point number two, the speed at which these guys are moving forward is slowing down. You can expect because some of these large, software development projects are slowing down for cost reasons. Number three, that’s actually creating an interesting phenomenon whereby customers aren’t to use all spend that’s committed. That’s actually giving us an opportunity where we are actually partnering more closely with some of these hyperscalers where our R&D can be part of that customer because we are as an approved part of for some of the cloud spent. So those are some of the things we are seeing. But overall, we do see it’s rare to find a CIO that says I don’t like cloud anymore. Are there complaints about cost in the cloud? Yes. Do we you see an alternate to go back to data center. No.
Shaul Eyal — Cowen — Analyst
Thank you so much for that. Jay, I appreciate it.
Operator
Thank you. Ladies and gentlemen, due to the interest of time, that concludes our Q&A session. I would now like to turn the call back over to Jay for closing remarks.
Jay Chaudhry — Founder, Chairman, and Chief Executive Officer
Thank you for your continued interest in Zscaler. We look forward to seeing you at some of the upcoming conferences. Thank you again.
Operator
[Operator Closing Remarks]