Zscaler, Inc. (NASDAQ: ZS) Q3 2021 earnings call dated May 25, 2021
Corporate Participants:
Bill Choi — Senior Vice President, Investor Relations and Strategic Finance
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
Remo E. Canessa — Chief Financial Officer
Analysts:
Alex Henderson — Needham & Company — Analyst
Matthew Hedberg — RBC Capital Markets — Analyst
Gregg Moskowitz — Mizuho Securities — Analyst
Gray Powell — BTIG — Analyst
Michael Walkley — Canaccord Genuity — Analyst
Andrew Nowinski — D.A Davidson Companies — Analyst
Keith Bachman — BMO Capital Markets — Analyst
Patrick Colville — Deutsche Bank — Analyst
Catharine Trebnick — Colliers Securities — Analyst
Saket Kalia — Barclays Capital — Analyst
Tal Liani — Bank of America Merrill Lynch — Analyst
Erik Suppiger — JMP Securities — Analyst
Hamza Fodderwala — Morgan Stanley — Analyst
Rob Owens — Piper Sandler & Co. — Analyst
Brian Essex — Goldman Sachs — Analyst
Presentation:
Operator
Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Zscaler Third Quarter 2021 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. [Operator Instructions]. As a reminder, this conference call is being recorded.
At this time, I would like to turn the conference over to Mr. Bill Choi, Senior Vice President, Investor Relations and Strategic Finance. Mr. Choi, you may begin.
Bill Choi — Senior Vice President, Investor Relations and Strategic Finance
[Technical Issues] 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 and market share, 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 and earnings per share. These statements and other comments are not guarantees of future performance, but rather are subject to risks and uncertainties, some of which are beyond their control, including, but not limited to the duration and impact of COVID-19 on our business, the global economy and the respective businesses of our customers, vendors and partners, market adoption of our offerings, the impact of any previous or future acquisitions and the development of the markets in which we compete. 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. We will upload a copy of today’s prepared remarks to our Investor Relations website when we move to the Q&A segment of the call.
I would also like to inform you that management will be presenting at the following upcoming virtual events: JPMorgan Technology Media and Communications Conference tomorrow on May 26, Bernstein’s Strategic Decisions Conference on June 4, Bank of America Global Technology Conference on June 8, Baird’s Global Consumer Technology and Services Conference on June 10 and Mizuho Cyber Security Summit on June 15. Sessions, which offer a webcast will be available on our Investor Relations website.
Lastly, we would like to invite you to Zenith Live 2021, which is our virtual customer and partner cloud summit. The Americas and EMEA events will run from June 15 through the 17 and for APJ will be June 22 to the 23. We encourage everyone to register and attend our Summit from our website, zscaler.com/zenithlive.
Now I’ll turn the call over to Jay.
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
Thank you, Bill. As you saw in our earnings release, we delivered outstanding results for the third quarter, with accelerating growth at scale while increasing adoption of our broader platform. We drove 60% growth in revenue and 71% growth in billings. We also generated strong growth in operating profits and delivered record free cash flow. Enterprises are looking to Zscaler to secure their digital transformation and architect for the work-from anywhere economy, which we believe is the new normal. Our results exceeded our expectations, and we are again increasing our guidance for fiscal ’21.
Our business is firing on all cylinders. Our superior architecture and optimized go-to-market engine is elevating us above the competitive noise. Our Zero Trust Exchange platform connects users, devices and applications, which is fundamentally different from firewall-based castle-and-moat security. Our platform prevents lateral threat movement and eliminates the attack surface by making applications invisible from the Internet, hence reducing business risk. Furthermore, our proxy architecture, designed to inspect SSL-encrypted traffic, blocks sophisticated threats and prevents loss of sensitive data. Faced with the latest news-making ransomware and other cyberattacks, CISOs and CIOs are turning to Zscaler to dramatically improve their security posture, while reducing their legacy IT costs.
As you have heard me say before, architecture matters. Zscaler purpose-built the right high-performance, multi-tenant proxy architecture from day one, whereas many vendors are trying to retrofit their existing solutions, which inevitably fails. Built from the start to enforce policy at the edge, as advocated by SASE framework, we are deployed across 150 data centers with 5-9’s of availability. We are processing more than 160 billion transactions daily, preventing up to 7 billion security incidents and policy violations. This unmatched network effect provides better security and user experience.
Let me highlight three factors that drove our strong performance in the quarter. First, building on our strength, the large enterprises, we closed a record number of seven-figure ACV deals across a broad range of industries. Most of these wins are three-year commitments to provide our customers the foundation for application, network and security transformation. Second, an increasing share of our sales is coming from broader platform purchases by new and existing customers. Strong platform upsells drove our 126% dollar-based net retention rate in the quarter. Our newer solutions like out-of-band CASB, Zscaler Digital Experience or ZDX and Zscaler Cloud Protection or ZCP, are increasingly contributing to our wins. The breadth and depth of our platform is resonating with customers, and I believe Zscaler is the go-to platform for vendor consolidation, cost savings, increased user productivity and better cyber protection. Third, our strategic decision last year to increase our investments in go-to-market is yielding fantastic results. I am very pleased with our performance and momentum across all geos, all market segments and all products. Earlier this year, we expanded our investment in the enterprise segment, which consists of organizations with 2,000 to 6,000 employees. This quarter, we saw a higher mix of new business from this segment.
Now let me highlight key wins in the quarter, starting with ZIA. Because of the pandemic, a Global 500 technology company in Asia was routing Internet traffic of their employees working from home over VPN through the corporate data center. This created a poor user experience for SaaS applications like Office 365 and overwhelmed their security appliances. To power their workplace modernization initiative for their 80,000 employees, the customer purchased ZIA Transformation Edition including SSL inspection, cloud firewall, and sandboxing as well as ZDX. ZDX improves productivity by identifying and helping resolve user performance issues over the entire cloud network path, in real-time before users complain.
In another new logo win, a global business services company facing challenges supporting work-from-anywhere purchased our Business Edition plus cloud firewall, CASB, DLP and ZDX for all 46,000 employees to directly access SaaS applications to reduce business risk and improve user experience. In addition, they replaced their legacy VPN with ZPA to provide zero trust access to private applications for their 29,000 call center employees. With the purchase of three of our four platform pillars, this customer is accelerating their digital transformation from a five-year goal into a six-month reality.
Next, let me share two significant deals that show our growing momentum in the financial services vertical and our increasing success working with our tech partners. A top tier global investment bank is pursuing a zero-trust strategy by rebuilding its security architecture for the modern, hybrid work environment. They purchased our ZIA Business Edition plus DLP, cloud sandbox and ZDX for 50,000 users. With security as a major requirement, only a proxy architecture with SSL inspection at scale was considered. Our 10-year track record of running a massive, highly reliable and available inline security cloud made us the best choice. Taking advantage of the breadth of our platform, this customer also started limited deployments of additional products, including browser isolation, CASB, workload segmentation and ZPA. This deal is a great example of the successful field sales collaboration between Zscaler and our tech partner CrowdStrike.
In another financial services win, a multi-national company embracing cloud transformation purchased the entire ZIA portfolio including CASB, advanced DLP and CSPM for Microsoft Office 365, plus ZDX for 30,000 employees. Like the prior deal, this customer only considered a proxy architecture and firewall architectures were disqualified. Their Zscaler platform purchase consolidated four vendors, streamlined their operations and reduced IT costs. This is another great example of field sales engagement with another important tech partner, in this case, Microsoft. As these new customer wins show, the attach rate of our data protection products including DLP, out-of-band CASB, browser isolation and CSPM for SaaS is growing.
Now, let me discuss an upsell deal that was primarily driven by data protection. An existing Global 200 pharma customer with headquarters in Europe purchased CASB, advanced DLP and Sandbox for all 79,000 employees to up-level their security. We displaced the incumbent out-of-band CASB point product, a trend we are increasingly seeing as customers are standardizing on Zscaler’s integrated platform. In addition, to access private applications, they bought 3,000 ZPA seats, the first step to eliminate their legacy VPN. This latest purchase was a seven-figure ACV deal, which doubled the customer’s ARR. As we look forward to a post-pandemic world, in which employees unwittingly bring infected laptops back to the office, organizations need a true zero-trust platform to eliminate the risk of lateral threat movement.
Secondly, we’re also seeing SD-WAN projects restarting, with companies moving to direct-to-cloud architecture from their legacy hub-and-spoke network and castle-and-moat security. In the quarter, an existing Global 200 manufacturing customer with headquarters in Europe upgraded their 120,000-user subscription from Business to Transformation bundle to secure local breakouts at their 1,000 locations worldwide, some with SD-WAN and some without SD-WAN. The Transformation bundle added cloud sandbox and cloud firewall, which doubled this customer’s ARR.
And finally, I’ll highlight an upsell win with a global pharma company that previously purchased the Transformation bundle and ZPA for 15,000 users. Their SD-WAN deployment was delayed last year, and now they are accelerating their network and application transformation with a five-year commitment to Zscaler. This quarter, they purchased an additional 50,000 ZIA and ZPA seats to cover all 65,000 employees, while also adding DLP for all users. They also purchased our new ZPA Private Service Edge, to enable zero trust access for their employees returning to the office. This demonstrates customers are implementing ZPA for all employees, not just for remote users. In addition to our ongoing success in protecting users, our next big opportunity is protecting workloads with Zscaler Cloud Protection. We are rapidly expanding our ZCP portfolio, through organic innovation and targeted acquisitions.
Let me highlight our recent M&A activity. As announced last month, we acquired Trustdome, a leading provider of cloud infrastructure and entitlement management or CIEM, to complement our CSPM solution. CIEM and CSPM together, properly integrated, can correlate identity information with configuration data and enforce least privileged access for cloud environments, hence reducing business risk. This further expands our market opportunity for workload security. In addition, today, we announced a definitive agreement to acquire Smokescreen Technologies, which
Provides us with a deception technology to detect active attacks and lateral threat movement. We plan to integrate Smokescreen with our ZIA and ZPA solutions to enhance our active defense capabilities. You will hear more about these solutions at our Zenith Live Cloud Summit next month.
As we look forward to the next few years, we are focused on driving broader adoption of our four platform pillars, which together maximize the success of digital transformation. Our core ZIA and ZPA business has never been stronger and we’re excited about the early traction of ZDX and ZCP, the next growth engines for the company.
Now I will highlight three points about our go-to-market machine which is scaling very well. Our field organization continues to scale and is executing on all cylinders. Moving to our partners. As I mentioned in our deal wins, we have strong and growing technology partnerships. In addition to incremental product integrations, we continue to grow our go-to-market partnership with CrowdStrike, who also became a customer this quarter. I am proud that Zscaler was named the Zero Trust Champion at Microsoft’s 20/20 Partner Awards. Further expanding our technology relationships, we recently partnered with IBM to add Zscaler services to their zero trust security offerings. This partnership includes integrating with their identity, MDM and SIEM solutions, and joint go-to-market initiatives.
On the channel front, we are expanding our Summit Partner program and adding VARs that are building cloud transformation practices. Our service provider relationships are strong and we’re building joint engagements with system integrators. On the marketing front, we are aggressively investing in thought leadership for Zero Trust security and expanding demand generation programs.
In summary, we are making tremendous progress across all three areas, sales organization, marketing and channel partners and delivering strong results quarter after quarter. I believe we are on track to capture a material share of our $72 billion serviceable market.
Now, I’d like to turn over the call to Remo for our financial results.
Remo E. Canessa — Chief Financial Officer
Thank you, Jay. As Jay mentioned, we are pleased with the results for the third quarter of 2021. Revenue for the quarter was $176.4 million, up 12% sequentially and 60% year-over-year. ZPA product revenue was 16% of total revenue. From a geographic perspective, we had broad strength across our three major regions. Americas represented 51% of revenue, EMEA was 38% and APJ was 11%.
Turning to calculated billings, which we define as the change in deferred revenue for the quarter plus total revenue recognized in that quarter. Billings grew 71% year-over-year to $225 million, with billing duration towards the upper-end of our 10 months to 14 months range. We had several customers choosing to pay upfront for their multi-year contracts. As a reminder, our contract terms are typically one to three years and we do not offer any special incentives for upfront payments. With that in mind, we are also pleased that short-term billings, which are calculated based on the change in short-term deferred revenue plus reported revenue for the period, grew 61% over the prior year. Remaining performance obligations or RPO, which represent our total committed non-cancelable future revenue were $1.2 billion as of April 30th. RPO grew 85% from one year ago. The current RPO is 51% of the total RPO.
Our strong customer retention and ability to upsell the broader platform have resulted in a consistently high dollar-based net retention rate, which was 126% compared to 127% last quarter and 119% a year ago. As we have highlighted, this metric will vary quarter-to-quarter. While good for our business, our increased success selling bigger bundles and selling multiple pillars from the start and faster upsells within a year can reduce our dollar-based net retention rate in the future. Considering these factors, we feel that 126% is outstanding.
Total gross margin of 81% was flat quarter-over-quarter and improved by 1 percentage point year-over-year. As a reminder, gross margins in the second half of last fiscal year were pressured by the augmented use of public cloud to meet the 10x surge in ZPA traffic as pandemic lockdowns began.
Turning to operating expenses, our total operating expenses increased 6% sequentially and 53% year-over-year to $119.7 million. Operating expenses as a percentage of revenue declined by 3 percentage points from 71% a year ago to 68% in the quarter, primarily due to lower T&E, which was partially offset by increased hiring and M&A expenses. Sales and marketing expense increased 6% sequentially and 56% year-over-year to $80.9 million. The year-over-year increase was due to higher compensation expenses and investments in building our teams and go-to-market initiatives. R&D expenses increased 8% sequentially and 55% year-over-year to $25.9 million. The increase is primarily due to continued investments in our engineering teams. G&A expenses increased 4% sequentially and 33% year-over-year to $12.9 million. The growth in G&A includes investments in building our teams, compensation-related expenses and professional fees.
Our third quarter operating margin was 13% compared to 9% in the same quarter last year, and T&E spending had a positive 270 basis point benefit. Operating margin was better than our guidance range due to stronger than expected performance in the business and due to timing of certain sales and marketing spend. Net income in the quarter was $21.4 million or a non-GAAP earnings per share of $0.15. We ended the quarter with over $1.4 billion in cash, cash equivalents and short-term investments. Free cash flow was positive $56 million in the quarter, which compares to $9 million during the same quarter last year. This increase was driven by our strong billings growth, receivables collection and operating performance.
Now, moving on to guidance. As a reminder, these numbers are all non-GAAP, which excludes stock-based compensation expenses and related payroll taxes, amortization of debt discount, amortization of intangible assets and any associated tax effects. For the fourth quarter of fiscal 2021, we expect revenue in the range of $185 million to $187 million, reflecting year-over-year growth of 47% to 49%, gross margins of 79%. I would like to remind investors that a number of our emerging products, including ZDX, Workload Segmentation and CSPM will initially have lower gross margins than our core products. We are currently managing the emerging products for time-to-market and growth, not optimizing them for gross margins. With this in mind, we believe 79% to 80% is a good range for us in the near-term. Operating profit in the range of $13.5 million to $14.5 million, other income of $300,000, net of interest payments on the senior convertible notes, income taxes of $1.7 million, earnings per share of $0.08 to $0.09, assuming approximately 146 million fully diluted shares.
For the full-year fiscal 2021, we now expect revenue in the range of $660 million to $664 million or year-over-year growth of 53% to 54%, calculated billings in the range of $878 million to $880 million or year-over-year growth of approximately 60%, operating profit in the range of $71 million to $72 million, earnings per share of $0.47, assuming approximately 145 million fully diluted shares.
The acquisitions of Trustdome and Smokescreen are expected to have an immaterial impact on revenue in Q4 and in fiscal 2022, as they are early stage companies. Our plan is to further develop these products and incorporate their technologies into our platform. We expect to incur $2.5 million to $3 million in additional operating expenses in Q4 related to the acquisitions, including a new R&D center of excellence in Israel. This is incorporated into our Q4 guidance. For your modeling purposes, we expect to incur approximately $13 million to $15 million in operating expenses related to the acquisitions in fiscal 2022. With a huge market opportunity, we remain committed to investing aggressively in our company behind the growth in our business. We have a highly efficient business model and are making investments across the organization today in order to capitalize on the large opportunity ahead of us. While we will balance growth and profitability, growth will continue to take priority, considering our strong business momentum.
Operator, you may now open the call for questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question or comment comes from the line of Alex Henderson. Your line is open.
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
Why don’t we move to the next question please. Howard, can we move to next question? Howard, are you on?
Operator
Mr. Henderson, please repeat your question.
Alex Henderson — Needham & Company — Analyst
Could you hear me?
Operator
Yes, sir.
Alex Henderson — Needham & Company — Analyst
[Speech Overlap] First off, let me thank you for a superb quarter, outstanding results. And the question I have is really on the sales capacity that you’ve been adding over the last year. To what extent do you see that capacity now maturing in terms of its productivity and how do you think about additional continuation of that incredibly successful program? Thanks.
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
Alex, thank you. As you know, we have been adding and rather accelerating sales capacity. We are pleased with the performance and we are counting on it to deliver accelerating growth.
Remo, do you want to give a better color to it?
Remo E. Canessa — Chief Financial Officer
Yeah. The majority of our field quota sales reps are still ramping, so significant portion of our organization is still in ramp phase. The key thing that we brought up in the past is that we are aggressively hiring and we had a good quarter of hiring in Q3 or expect to have a very good quarter in Q4. So our plans as Jay talked about in the earnings call is that the market is really strong. It’s moving to us. All indications are that we’re in a great position, so we’re going to continue to aggressively hire and really go after the growth of the Zscaler going forward.
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
And if I may add one more statement. While it’s a competitive market for talent, Zscaler has become a top destination for top talent. So we are able to attract good talent and grown our sales team stronger.
Operator
Thank you. Our next question or comment comes from the line of Matt Hedberg from RBC Capital. Your line is open.
Matthew Hedberg — RBC Capital Markets — Analyst
Hi guys, thanks for taking my question and congrats on very strong results, obviously. Jay, there’s obviously a lot of success you’re seeing in the enterprise on upsell and large deals, but I had a question on the federal or I guess public sector market. Obviously the Colonial Pipeline attack highlighted the risk here that some utilities are at — just can you talk to us about how you think about zero trust architecture could benefit the public sector and might that be an accelerant as we look forward for the next year or two?
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
I think we have been hearing enterprises talk about zero trust more and more over the last 12 to 18 months, especially after some of the SolarWinds type of attacks, this picked up steam. But now, it’s good to see that federal government is waking up and saying, they need to do something. It’s good to see a very clear directive coming from Biden Administration, which highlight the need for zero trust and by the way, I must say that many vendors are trying to hijack the Zero Trust, but Zero Trust as written by the EO [Phonetic], based on the MIJST [Phonetic] research paper, it is not done by firewall, it is connecting entities to entities without a pass-through connection and we believe we’ll have a big advantage of it. We started investing in Federal space about three years ago, had to go through a lengthy process of certifications of FedRAMP and the like. We are very well-certified. We started investing in sales organization about two years ago, have a strong team, a strong and growing pipeline. So federal business seems great.
And the second part of your question is actually public sector, which is the non-Federal part, which is state, local and educational stuff. We are doing in that part very well as well. Remo?
Remo E. Canessa — Chief Financial Officer
No, I think, Jay you hit it. I mean, the key thing is that we’ve invested significantly in federal as Jay talked about the FedRAMP certifications. FedRAMP high for ZPA, and also we are moving towards FedRAMP High for ZIA, which puts us in a completely different position than other companies. In addition, I think one of the strengths is that we’ve been able to build the sales organization at the organization very strongly and partners and federal. So I feel we are well positioned in the federal market going forward.
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
Yeah.
Matthew Hedberg — RBC Capital Markets — Analyst
Thanks guys. Well done.
Operator
Thank you. Our next question or comment comes from the line of Gregg Moskowitz from Mizuho. Your line is open.
Gregg Moskowitz — Mizuho Securities — Analyst
Okay. Thanks for taking the question and congratulations on a phenomenal quarter. Jay, maybe to follow-up a bit in the last question and you sort of touched on this a little bit, but from what you’re able to gather, have the recent high-profile breaches dating back to SolarWinds that inclusive of the Colonial Pipeline attack, have they had any discernible impact on your pipeline. So again, we hear the anecdotes much like you do. I’m just kind of curious if there’s anything that is able to translate to some extent from what you’re able to tell?
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
So first of all, the number of inbound engagement from not just CIO and CISOs, and in many instances, the Board have stepped up. So it’s clear that there’s high degree of interest in making sure that companies are secured. That’s point number one. Point number two, when those level of C-level get engaged, the budgets open-up, they become less of an issue. When you’re dealing with the CIO whose budget is hundreds of millions of dollars, to get a few million dollar deal for us generally becomes a lot easier. So we are seeing tremendous interest. Our customers having discussions that they need to do Zero Trust implementation because of security factors, including Colonials and SolarWinds? Yes. Can I quantify what part of business and pipeline? Probably I’ll be guesstimating too much. So I’ll leave it open to, say, a positive impact, but hard to quantify.
Gregg Moskowitz — Mizuho Securities — Analyst
Okay, very helpful context. Thank you.
Operator
Thank you. Our next question or comment comes from the line of Gray Powell from BTIG. Your line is open.
Gray Powell — BTIG — Analyst
Great, thank you very much for taking the question and congratulations on the good results. So yeah, you mentioned that you expanded investment in the mid-market or the mid-enterprise segment — companies with 2,000 to 6,000 employees contributed a higher mix this quarter. Is there a way to roughly quantify how much of the upside this segment is driving? And then how should we think about the potential contribution from the segment ramping over the next six to 12 months?
Remo E. Canessa — Chief Financial Officer
Yeah, I mean, just for clarification, the Enterprise segment is for employees of 2,000 to 6,000 employees per company, and it is the fastest-growing segment that we have. On a quarter-over-quarter basis, the growth for new and upsell business has been a couple of percentage points. What this shows basically is our investments in the Summit Program that we’ve made so the Summit Program targeted primarily towards bars and bars primarily towards the segment. We are seeing very, very good growth, and we’re happy with the growth. As I mentioned, it’s the fastest-growing segment that we have. The segments we have are majors, large enterprise, enterprise and commercial. So this is the largest one. So this is growing large assets.
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
Yeah. If I may add, it was natural for us to expand into enterprise. We started from the high end, having strong presence in majors and large enterprises. It’s a natural part for us, and we are pleased to see the performance. In this area, we have been adding quite a bit of sales force in this area and partner program together is delivering good results.
Gray Powell — BTIG — Analyst
Got it. And are sales cycles faster there or is there anything different in the competitive environment?
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
Yes, they are faster, as you would expect, typically the bigger the deal, the longer the sales cycle. The smaller the company, fewer the stakeholders and faster the sales cycle.
Gray Powell — BTIG — Analyst
Understood. Okay, thank you very much.
Operator
Thank you. Again, ladies and gentlemen, In an effort to ask as many questions as possible, we please ask that you limit yourself to one question. Our next question or comment comes from the line of Mike Walkley from Canaccord. Your line is open.
Michael Walkley — Canaccord Genuity — Analyst
Great, thank you and my congrats also on the strong results. Just wanted to dig in on the comments on ZPA, about it’s going to all users, not this remote. Any way to size the opportunity of further penetration within your customer base? And just thinking about ZPA with it taking off with the pandemic, any thoughts on longer-term modeling giving potential tougher comps even though the pipeline sounds strong? Thank you.
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
So first of all, from day one, our belief was that ZPA was never designed for remote access VPN only. It was designed as a Zero Trust architecture implementation. No matter where the users are, they go through our switchboard, so they are never on the corporate network. And when pandemic happened, since everyone was remote, so ZPA actually got bought from almost every employee most of the companies, that was a big shift we saw whereby previously, companies would buy ZPA for 20%, 30%, 40%, 50%, 60% of the employees, but we knew the number will get to 100%. And as employees are coming back to the office, in fact, customers are worried about these people bringing their infected machines back to the office, so they want to do Zero Trust even when they’re in the office.
So for that, they want to go through our Zero Trust Exchange. In fact, for that, we built another service, we call it Private Service Edge. Imagine a private switchboard running in your data center to implement Zero Trust for on-prem users, which is actually a great opportunity, further giving customer segmentations for the applications, which is what customers are looking for. So I think it’s a matter of time. And every employee of our customers will have ZIA, ZPA and actual ZDX as well. Because while ZIA and ZPA allows you to work from anywhere and access any applications, ZDX makes sure users have a great experience and the issues, they can be easily resolved.
And Remo?
Remo E. Canessa — Chief Financial Officer
Yeah. And from a penetration perspective for our ZT [Phonetic] customers, a little over 40% have ZPA. So significant opportunity for us to upsell into our existing customers — sorry, a little over 40% of ZIA customers have it, to clarify.
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
Yeah. That is correct.
Michael Walkley — Canaccord Genuity — Analyst
Okay, that’s helpful. Thank you.
Operator
Thank you. Our next question comes from the line of Andrew Nowinski from D.A Davidson. Your line is open.
Andrew Nowinski — D.A Davidson Companies — Analyst
Okay, thank you. Congrats on another great quarter. So I had a question on the CrowdStrike win. You hear a lot about how endpoint security and specifically EDR technology is necessary to stop breaches like the Colonial Pipeline attack. Given that CrowdStrike prides themselves on stopping those breaches, I’m wondering why they would need Zscaler. So if you could provide any more color on — maybe on and what they’re deploying and how they’re using Zscaler and whether you think any other enterprises may follow their lead and deploy both CrowdStrike and Zscaler together?
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
You know, I am yet to come across a serious large enterprise, who doesn’t believe in layered security approach. The endpoint serves as an important layer and cloud serves as a second layer. That’s the most common thing out there. So when you buy into that notion, which is what we do and most customers do, it’s natural for a customer to say, endpoint from CrowdStrike and cloud security from Zscaler and what’s exciting for customers is, for the two to be able to work together with proper API-based integration, CrowdStrike and Zscaler had done this product integration over the past 12 to 18 months and that integration keeps on going to the next level, where we can help each other and customers got the benefit of it. So driven by product integration that customers wanted and then our joint sales engagements on field, where our teams are working together because we complement each other, it’s a great win-win partnership for both of us, CrowdStrike and us.
Did I answer your question?
Andrew Nowinski — D.A Davidson Companies — Analyst
Yes, you did. Thanks, Jay.
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
Thank you.
Operator
Thank you. Our next question or comment comes from the line of Keith Bachman from Bank of Montreal. Your line is open.
Keith Bachman — BMO Capital Markets — Analyst
Good evening and thank you for taking the question. Jay, I wanted to see if you could give some more color around both ZCP and ZDX, and the question really is, any comments or color on attach rates, how much are contributing, where the wins are, any more color, so we could get a sense about how much those assets — new solutions rather contribute today and how you see that unfolding over the next 12 months? Many thanks.
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
Yeah, thank you. I’ll start with the strategic positioning and Remo can add on the quantitative side of it. As you know, ZCP, its cloud protection is a massive opportunity for protecting workloads. There are a couple of areas there. One big one is communication among workloads, which is traditionally done the old-school way by connecting various workloads and availability zones with a wide area network, side-to-side VPN and the like, which creates big risks because of lack of movement. So with workload segmentation, we have implemented our Zero Trust architecture, which will disrupt legacy network-based security for workload just like we’ve done it for users of ZIA and ZPA. That’s one part of it and obviously it’s easy for us to start with our own customers and that’s a large customer base and that’s where early traction is.
And then on the second side is the security posture type of stuff. This is where some of offering is cloud security, posture management CSPM and Trustdome acquisition combined give us a strong offering. We are bullish about the ZCP market, which is nascent, but it’s growing rapidly. The ZDX part is very interesting. This is complementing ZIA and ZPA to identify and resolve any user performance issues. So this is a natural add-on to any ZIA ZPA sale. Remember, we used to sell ZIA only, then we started selling ZIA and ZPA together. More and more deals are with ZIA and ZPA together at the start. And now, we are seeing more and more deals with ZIA, ZPA and ZDX together, which makes a natural bundle for our customers to enable their employees to work from anywhere and have great experience.
Remo, color on —
Remo E. Canessa — Chief Financial Officer
Yeah. I mean, just from a numbers perspective, we still expect the contribution for new and upsell for ZCP and ZDX to be mid-single digit this year. As Jay mentioned, the reception of both products has been high and we feel good about those products going forward, but think about the contribution this year for new and upsell in that mid-single digit range.
Keith Bachman — BMO Capital Markets — Analyst
Okay, perfect. Thank you.
Operator
Thank you. Our next question or comment comes from the line of Patrick Colville from Deutsche Bank. Your line is open.
Patrick Colville — Deutsche Bank — Analyst
Hey, thank you so much for taking my question. So just on the math, CRPO billings, if I’m not mistaken rose 85% this quarter, which looking at the disclosures since you guys have been kind of giving RPO and CRPO seems to be the kind of highest growth rate ever, so hugely impressive. What are you guys seeing to kind of have this real acceleration this quarter, what are the kind of confluence of factors. And I guess kind of importantly, how sustainable are they as we look forward into the rest of calendar ’21 and ’22?
Remo E. Canessa — Chief Financial Officer
I’ll take the first part and have Jay give some color. You’re right. Patrick, it’s outstanding results. I mean the CRPO growth is 68% and the RPO growth is 85%, which is absolutely outstanding. When you couple that with our billings growth of 71%, it just shows that basically, things are going very well for us. What’s changing is basically what we’ve seen. We have been talking about with the accelerant last year related to COVID hit and companies recognized that they had to get their employees connected to their networks in order to ramifications, in order to do business and we saw that. That was the big increase for last year with ZPA, which is 43% of our new and upsell business.
Since then, basically that brought to light is basically that yesterday’s networks aren’t going to work, infrastructure is still not going to work. Those are the discussions that we’ve been having with customers. That is basically a change, which is occurring, is recognizing the current infrastructure in place, it’s really not the optimal infrastructure that companies need going forward. With that, what we’ve done — as a company, we broadened our platform, we broadened our platform as we just talked about, ZDX, workload protection and additional basically features under our product. So the broadening of the platform related to the movement to really transforming your networks has led to basically deal sizes becoming larger, more strategic, partnership. And also just the credibility the Zscaler had, now they have got public company through three plus years, and we’ve got a strong balance sheet and we’ve got strong team.
And again, the key thing is Zscaler was built for this world. The platform was built for this world over 10 years ago and if you take a look at the expansion basically of the amount of traffic that we put through to have the type of gross margins, with the type of traffic across over 150 data centers with SLAs being almost zero quite frankly on a quarterly basis is a testament to the strength of Zscaler and I think that’s what’s playing through with our communications with our customers.
Jay?
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
I think you said it all. But accelerating digital transformation being one, expanded portfolio and platform being two, large, great sales force being three; and our brand and customer references, all four are accelerating our sales.
Patrick Colville — Deutsche Bank — Analyst
Great. Thank you so much for taking the time.
Operator
Thank you. Our next question or comment comes from the line of Catharine Trebnick from Colliers. Your line is open.
Catharine Trebnick — Colliers Securities — Analyst
Well, thanks for taking my question and congratulations, phenomenal quarter. Can you unpack a little bit Summit program and how well you’re doing there versus your sales through the service provider channel, give us a better idea where you really seeing explosion in your opportunities? Thanks.
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
Yes. Our service provider channel evolved fairly early on as our customers wanted new transformation and CIOs told SPs to work with us to make that happen. It’s a strong channel, it’s a growing channel, VARs took time. In the past couple of years, more and more VARs have realized that the box sales are not going to last forever, so they’re pivoting more. The one who are pivoting to embrace cloud transformation services, they are our favorites, they are actually becoming part of our summit program that’s what the program was built and we have good participation from VAR programs. And as a result of that, we are seeing the growth of VAR contribution of business growing at a faster rate.
Remo E. Canessa — Chief Financial Officer
From numbers perspective also VARs, percentage of our revenue is below 50% range, SPs and SIs combined below 40% and direct is mid-single digit. The growth rate in SPs and SIs has been significant year-over-year also. So we’ve got significant growth in SPs and SI on a year-over-year basis.
Catharine Trebnick — Colliers Securities — Analyst
Thank you.
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
Thank you.
Operator
Our next question or comment comes from the line of Saket Kalia from Barclays. Your line is open.
Saket Kalia — Barclays Capital — Analyst
Great. Hey, thanks for taking my question here guys. Actually maybe just maybe just to piggyback off that last question on channel. Maybe a little bit more of a strategic one for you, Jay. The service provider channel has been an area that Zscaler has worked with for years as you noted and it felt like this quarter you’re starting to see some other security vendors maybe start to work them a little bit as well. I guess the question is how are your conversations with those service providers and how do you think that sort of plays out in the future as other security vendors maybe start to work with that channel as well, on SASE specifically?
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
Yeah. So first of all, as Remo said, our business at SP-SI’s year-over-year is going quite well. I think in terms of other firewall type of vendors, that’s not new news. Service providers have been selling firewalls, have this spare stuff, especially for MSSP servers for years and years, so not a new area. Yes, adding to SD-WAN to those firewalls is probably a new area we hear about, but most of that stuff has happened on the lower end. When you talk about larger enterprises, they actually engage with us and then partner together and drive the transformation. None of that has changed. On the lower end, probably this combination of some SD-WAN combined with firewalls, but we are bullish about the SP channel, SI channel as well as the VAR channel. In fact, our investments in channel are growing significantly because that’s giving us more and more leverage, and we will continue to do so.
Saket Kalia — Barclays Capital — Analyst
Very helpful. Thanks.
Operator
Thank you. Our next question comes from the line of Tal Liani from Bank of America. Your line is open.
Tal Liani — Bank of America Merrill Lynch — Analyst
When I ask you, why are you successful, the answer is always the same. So I’m not going to ask you again. But I want to ask you about competition and the fact that you are so successful for such a long period of time and we do see new players in the space. I’m wondering how the competitive landscape changed? Who do you see today in competitive bids versus what you’ve seen before and how is the gap between you and the competitors. So anything you can share with us on the competitive landscape. Thanks.
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
Well, you know, we ask this question to ourselves many, many times. We analyze that every quarter. Frankly, the truth is, not a whole lot has changed on the competitive landscape. We are hearing so much noise from firewall vendors and alike, have we seen any change on that? On the larger segment, larger customers that we always talked about haven’t seen a change much at all. We have seen a few cases and I mentioned a couple of them during our prepared remarks. We are firewall vendors trying to go in and compete, but got disqualified because they didn’t have to architecture. Well, you could say that now, some of them are saying, yes, we have a proxy architecture, but announcing is one thing, building a scalable, reliable proxy that a large enterprises will depend upon is a very different thing altogether.
Having said that, when we come down to the lower end of the spectrum, say under 5,000 users, so we do see some of the vendors, where it’s kind of less security savvy customers, but as we are engaging more and more in this space with our enterprise segment, we do some of them, but once we engage we are winning pretty handsomely. So very comfortable on the competitive front because customers are more and more actually on every segment looking for consolidation and simplification. So low-end players that are coming from point product and trying to expand, so to speak, don’t really make it well. Some of the bigger ones, our legacy vendors, the old story, our Zero Trust Exchange platform does much better because we are truly a Zero Trust architecture. And as I said, you can convert a firewall into a Zero Trust architecture, that’s kind of oxymoron.
Tal Liani — Bank of America Merrill Lynch — Analyst
Got it. And do you feel that you need to make acquisitions in order to grow the TAM or is it more time to focus on execution and sales and marketing and just try to within your current TAM, try to get more market share where is your focus between the two?
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
It’s a good question. Both, why not? Having said that, I would say, we won’t be looking for acquisition to grow TAM. We are looking for acquisition to fill-in any potential area that we need to kind of strengthen or expand into adjacent markets. Okay, it’s pretty open to it. We’ve done a few small acquisitions at the right opportunity, the right technology, we will look for everything that makes business sense. We see there is a market opportunity for us, our momentum is so good, so why not keep on moving at a faster pace. And on sales and marketing, we are investing, we are investing heavily. In fact, Remo and I have lots of internal debates, our topline growth was the bottom line. We kind of say top line is a priority, so both of us happened to be such that we can’t be spending like drunken sailors, you’ll obviously our bottom line being pretty good.
Tal Liani — Bank of America Merrill Lynch — Analyst
Thank you.
Operator
Thank you. Our next question or comment comes from the line of Erik Suppiger from JMP. Your line is open.
Erik Suppiger — JMP Securities — Analyst
Yeah, thanks for taking the question and congrats. In the SD-WAN space, who are your best partners at this point? Are there different architectures for SD-WAN that fit well with you or how do you look at that space?
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
For SD-WAN, so the answer is pretty simple. Starting with vendors who compete on the higher end, who have enterprise class architecture, they are natural to work with us because our large customers want that. As I said, kind of before there, three vendors we see frequently for SD-WAN deployments of large enterprises. It’s VMware, it is HPE Aruba and it is Cisco. Most of our customers have one of the three deployed on the high end. And the low end customers coming from the firewall side of it, do they have some large enterprise customers, yes, but a lot of their business ends up being on the lower end and we see them less often, but we do have customers who may have other SD-WAN vendors, but they decided that we were the security cloud of choice and we are open. We integrate with everyone. I can take traffic from almost any SD-WAN vendor, but with some of them we have stronger working relationships. VMware is our best partner when it comes to go-to-market.
Erik Suppiger — JMP Securities — Analyst
Very good. Thank you.
Operator
Thank you. Our next question or comment comes from the line of Hamza Fodderwala from Morgan Stanley. Your line is open.
Hamza Fodderwala — Morgan Stanley — Analyst
Hey guys, thank you so much for squeezing me in. Jay, just maybe a high-level market question for you. I think some of these you touched on earlier, but we’re clearly seeing a critical math in terms of adoption of trends, such as SASE and Zero Trust network access, a lot of the stuff that obviously you’ve been aligned towards from day one and you’re clearly a big beneficiary of that and have been. But at the same time, I think at least in the short-term, it seems to be kind of a rising tide lifts all boats, right and many of the firewall competitors that you mentioned earlier are talking about similar approaches, Not to necessarily code you to talk about any one particular vendor, but at what point do you think that some of the FUD, right from your perspective, kind of winnows down and people are — look for a solution that’s truly architected for this trend like you have talked about.
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
Yes. We’ve seen this movie before, if you recall, there are some proxy vendors whose sales were rising and people were saying Jay, you guys are winning, why aren’t they losing. We are still young, we still have a small part of the market with 25% to 30% of the customers deployed us. What are other guys doing to keep on dealing with the data-centric architecture, network-centric architecture, they’re buying more and more firewall, right. It will take some time. Inertia is powerful thing. But I think when it comes to doing truly the new architecture with Zero Trust, where you don’t put people on the network, you don’t have a pass-through architecture, that’s the only way to stop Colonial type of threats, Pipe kind of threats and SolarWinds type of threats.
I think you’ll see things changing and that’s what I think overall the market is pretty big right now. We are not fairly inhibited or impacted by any of those competitors who are doing well. I think inertia will keep them going for some time till the architecture really changes. Take for example, spinning a VPN in the cloud doesn’t make anyone Zero Trusts, it’s still VPN. Are customers buying and deploying it? Of course, they are, all right. Will that change over-time? Of course, it will. Can you make VPN into a Zero Trust? You can’t.
Hamza Fodderwala — Morgan Stanley — Analyst
All right. Thank you.
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
Thank you.
Operator
Thank you. Our next question or comment comes from the line of Rob Owens from Piper Sandler. Your line is open.
Rob Owens — Piper Sandler & Co. — Analyst
Great, thanks for taking my question. Jay, relative to return to work, do you think about reopening, how would you expect the pace of digital transformation and therefore network transformation potentially change and where are customer conversations right now around the sense of urgency? Thanks.
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
So customers are beginning to make plans to come and work from the office, many of them have partially opened up. What they learned during the COVID crisis was that the corporate network doesn’t play a very important role. They could work from anywhere. But having said that, when employees are in the branch office, they need to make sure that traffic can go directly from the branch office to the cloud, just like it went from employees home directly without going back the data centers. So that is actually restarting some of the SD-WAN projects, so they can do local breakout.
But the bigger issue that’s helping us or the bigger opportunity that’s helping us is they want to make sure employees in the office still do Zero Trust architecture with a product like ZPA. So we are seeing good interest in fully Zero Trust, so they don’t have an issue where the lateral movement or threats like SolarWinds can get them in trouble or the infected machines coming back to office can get them in trouble and we are helping companies implement a better security, full security as they return to the office as well. Overall, a good positive opportunity for us.
Operator
Thank you. We have time for one final question. Our last question comes from the line of Brian Essex from Goldman Sachs. Your line is open.
Brian Essex — Goldman Sachs — Analyst
All right, back of the bus. Thank you for taking the question. I really appreciate it and congrats on the results. I was wondering, maybe Jay, if you could expand a little bit on some of the drivers here in terms of, you’ve got macro headwinds, you’ve got sales productivity, you’ve got transformational shift to the cloud, expansion of your platform, how does that relate to customer growth? Is there anyway, you can kind of quantify customer growth and then grade those tailwinds in terms of which are the most meaningful with regard to the growth trajectory that you’re experiencing now?
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
When you said customer growth, are you telling number of customers or revenue growth —
Brian Essex — Goldman Sachs — Analyst
Yeah, I guess I’m looking for logo growth relative to some of the kind of platform expansion and sales productivity initiatives that we have currently in play.
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
Right. We are doing well in both areas, new logo growth and upsell. So it’s interesting debate inside the company, should we pay more for new logo or not, okay and we decided not to because there’s so much an opportunity to sell the platform, which falls under upsell. The new logo, we have a good mix of business coming from new logo as well as upsell. So, the opportunities as you said, the macro environment is helping more focus on security is helping us. Sales force, we’ve done a phenomenal job in the sales organization. Now we are seeing very good results from our early focus in channels at Summit Partners. Marketing, we’ve got our new CMO. We expanded and strengthened the marketing team, a lot more investments in the marketing area And platform and product machine is really humming at a very good speed, very bullish on our opportunity going forward.
Remo E. Canessa — Chief Financial Officer
Yeah. From a total customer perspective, we grew our customer base by about 20% year-over-year.
Brian Essex — Goldman Sachs — Analyst
Got it, that’s super helpful. Thank you very much.
Operator
Thank you. That concludes our Q&A session. At this time, I’d like to turn the conference over to Mr. Jay Chaudhry for any closing remarks.
Jay Chaudhry — Chief Executive Officer, Chairman and Founder
I would like to thank you all for your continued support. Please join us at our Zenith Live Annual Cloud Summit in mid-June. Thank you again.
Remo E. Canessa — Chief Financial Officer
Thank you.
Operator
[Operator Closing Remarks]