“operating profit in the range of $55 million to $56 million”

In context

“Remo Canessa (CFO): 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, the 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 phased 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 a 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, ending 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 are 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 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, and we will take a charge of $8 million to $10 million, including non-cash expenses. We will 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 a 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 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. For the full year fiscal 2023, we expect revenue in the range of $1.558 billion to $1.563 billion or a year-over-year growth of approximately 43%; calculated billings in the range of $1.935 billion to $1.945 billion or 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 have seen in 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 above 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 in 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 and 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 are increasing our profitability in the second half to achieve a full-year operating margin of 13.7%, reflecting a 350 basis point expansion while revenue is still growing over 40%. If the environment improves, we’ll prioritize growth. Our long-term investment framework still applies. 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 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.”