“As we have discussed, if we are growing revenue faster than 30%, you can expect less than 300 basis points of margin expansion in the year.”

In context

“Remo Canessa (CFO): Thank you, Jay. We are pleased with the results for the fourth quarter and full year. Revenue for the quarter was $318 million, up 61% year-over-year and up 11% sequentially. ZPA product revenue was approximately 19% of total revenue, growing 80% year-over-year. From a geographic perspective, we had broad strength across our three major regions: Americas represented 52% of revenue, EMEA was 33%, and APJ was 15%. APJ continues to be our fastest growing region with revenue growth of 88% year-over-year. For the full year, revenue was $1.09 billion, up 62% year-over-year. This is an acceleration from the 56% growth we delivered in fiscal 2021. Our total calculated billings in Q4 grew 57% year-over-year to $520 million, with billing duration comparable to a year ago and slightly above the midpoint of our normal 10 to 14 months range. We saw strong growth in our top five verticals: Finance, Manufacturing, Healthcare, Technology, and Services. Our remaining performance obligations, or RPO, grew 68% from one year ago to $2.607 billion. The current RPO is 49% of the total RPO. As a point of clarification, the total contract value of the five-year, $46 million award from a U.S. Federal government agency that Jay mentioned is not included in our RPO. RPO for this contract will be recognized as the individual task orders are received, which are 12-month terms as is typical for our federal customers. Moving on to our product pillars, for the full year, emerging products, which include ZDX and Zscaler for Workloads, or what we used to call Cloud Protection, met our targets and contributed 14% to our total new business. Including our new CNAPP and deception offerings in the Zscaler for Workloads pillar, we expect emerging products to contribute high-teens percentage of our total new business in fiscal 2023. ZPA was 27% of our total new business in fiscal 2022, and grew as a mix between the two core ZIA and ZPA pillars. We have a large opportunity with all our pillars, and we will continue to innovate and expand our portfolio to strengthen our leadership position in the Zero Trust security market. Our strong customer retention rate and our ability to upsell the broader platform have resulted in a high dollar-based net retention rate, which was again above 125% for the last seven quarters. We have a strong base of large enterprise customers, which provides us with a significant opportunity to upsell our broader platform. We had 327 customers paying us more than $1 million annually, up 62% from 202 in the prior year. The continued strength in this metric speaks to our large enterprise focus and the strategic role we play in our customers’ digital transformation initiatives. We added 198 customers in the quarter paying us more than $100,000 annually, ending the year at 2,089 such customers. Expanding our field engagement with smaller enterprises with 2,000 to 6,000 employees and the increased investments in our Summit Partner program are contributing to overall customer growth. Turning to the rest of our Q4 financial performance, total gross margin of 81.6% was up nearly 1 percentage point quarter-over-quarter and year-over-year. Our total operating expenses increased 8% sequentially and 60% year-over-year to $221 million. Operating margin was 12%, and free cash flow margin was 24%. We continue to expect data center CapEx to be around high-single-digit percent of revenue for the full year. We ended the quarter with over $1.73 billion in cash, cash equivalents, and short-term investments. Before providing our guidance, I would like to share a few thoughts about the framework for our business outlook in the current environment. Zscaler is operating from a position of strength. We are entering this fiscal year with a record pipeline and a large set of customer opportunities. We have confidence in the durability of our business model, with very high contribution margins after the initial land, and proven ability to retain and upsell to our enterprise customer base. With customers increasingly adopting the broader platform with long-term commitments, we plan to continue to invest in capturing our large market opportunity. As Jay mentioned, there was more deal scrutiny at the end of Q4, which resulted in business being more back-end loaded. We think it's prudent to expect this higher level of review and scrutiny by our customers to continue given the uncertain macroeconomic outlook. While demand for the Zscaler platform remains very strong, if the business environment changes, our business model allows us to adapt quickly and to deliver on our operating profit and margin goals. In fiscal ‘23, in our guidance, we intend to deliver operating margin expansion of approximately 150 basis points. Now, moving on to guidance and modeling points. As a reminder, these numbers are all non-GAAP excluding stock-based compensation expenses and related payroll taxes, and amortization of intangible assets. For the first quarter of fiscal 2023, we expect revenue in the range of $339 million to $341 million, reflecting a year-over-year growth of 47% to 48%; gross margins of approximately 80%. I would like to remind investors that a number of our emerging products will initially have lower gross margins than our core products, as we are more focused on time-to-market and growth rather than optimizing them for gross margins. Operating profit in the range of $37 million to $38 million. Net other income of $5 million. Income taxes of $2.5 million. Earnings per share of approximately $0.26, assuming 155 million fully-diluted shares. Please note that starting in fiscal 2023, we adopted the new accounting standard which requires the use of the if-converted method for calculating EPS. To account for our convertible notes, you will need to add back $360,000 in quarterly interest expense and include 7.63 million shares to the fully-diluted share count. For the full-year fiscal 2023 we expect revenue in the range of $1.49 billion to $1.5 billion or year-over-year growth of approximately 37%; calculated billings in the range of $1.92 billion to $1.94 billion or year-over-year growth of 30% to 31%. While we don’t normally guide to quarterly billings, I want to remind you that we will have a difficult year-over-year comparison in Q1. In the year-ago quarter, we had a one-off deal and multi-year invoices that resulted in billings duration at the high end of our normal 10 to 14-month range. With that in mind, we expect Q1 ‘23 billings to grow approximately mid-30% year-over-year. We also expect our first-half mix to be approximately 42% to 43% of our full-year billings guide, which is higher than the first-half mix in the last few years. Operating profit in the range of $173 million to $176 million. Income taxes of $14 million. Earnings per share in the range of $1.16 to $1.18, assuming approximately 157 million fully diluted shares. As noted earlier, to account for our convertible notes in EPS, you will need to add back $1.44 million in annual interest expense and include 7.63 million shares to the fully-diluted share count. Let me conclude with comments on our investment framework. We will balance growth and profitability based on how our business is growing. If we continue to have high growth, we will prioritize investing in the business. As we have discussed, if we are 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 margins in the long term. With a huge market opportunity and customers increasingly adopting the broader platform, we’re committed to investing aggressively in our company while balancing this with our operating profit goals. However, if we see a deteriorating global economic environment, we have the flexibility to place a higher priority on operating profitability.”