Zscaler, Inc. (ZS) Earnings Call Transcript & Summary

Everybody, Fatima Boolani here. I jointly run the software research team here at Citi. I have the pleasure of the Zscaler's C-suite on the stage with me. To my right, Jay Chaudhry, CEO and Founder; and to his right, the inimitable CFO, Remo Canessa. Thank you so much. I'm so glad to be hosting you today.

Thank you.

Thank you.

So look, a couple of fireworks. So I want to dig right into the discussion. You did report results earlier in the week. I want to start with the highlights from the quarter, and then I specifically want to talk about how you're thinking about your guidance and the outlook, but some of the milestones and the highlights from the quarter and then we can unpack things from there.

It was a great Q4 for us. We had revenue of $593 million, which is a strong growth rate over the prior year. Our billings we're 27% growth rate year-over-year at $911 million. Free cash flow came in at 23% year-over-year as well as on a quarterly basis. But on a total year basis, our free cash flow was 27%. Operating profitability above 20% also for the year. So a very strong quarter, a record quarter on bookings over $1 billion, a record quarter on new ACV. Also going through a sales transition, and that's going very well in our go-to-market. We made a change about 8, 9 months ago or so. Leadership, both the top level and the second level leadership brand. Currently, we're hiring into the account reps and our focus is to the large accounts, so the majors, which is over 40,000 employees and large enterprise. So all in all, great quarter, more Zscaler. We're very, very proud of our accomplishments in fiscal '24.

Two stats that I'm proud of, in addition to Remo said, surpassing $2.5 billion in ARR, a big thing, how many enterprise SaaS companies are in that range, very few. Two, crossing 0.5 trillion transactions per day for our cloud, that's an amazing number. That really says our customers are using products to secure themselves. It's a big deal for us.

Remo, you talked about 27% billings growth. It's actually 30% pro forma because you had a $20 million upfront payment in the fourth quarter of last year. But you've talked to us about fiscal '25, the starting point of 19% to 20% billings growth. Can you please help us step through in order of sequence in size in terms of what is being factored into your outlook that is causing this optical deceleration as we work through fiscal '25?

Well, the numbers are getting bigger. And again, we like being prudent with our guidance, from our perspective, also, if you recall in our Q3 call, we said that we'd be growing billings on an annual basis, 20%, our guide for Q4 into fiscal '25, we reaffirm that based on a dollar basis. So the growth rate in billings in fiscal '25 is 19% to 20%, but the dollar amount is the same, as we talked about on Q3. One of the things that's come up on the call, which I'm sure is on a lot of investors' minds, is related to the growth rate in billings in the first half versus the second half. So total year billings, we reaffirmed what we said in Q3, but the growth rate in the first half is lower than the second half. And what's causing that? If you think about billings, there are 3 things that go into billings. It is new and upsell, renewals and contracted billings. So as -- just contracted billings, we have contracts generally 3 years and then we bill annually. So those contracts are set. If you go back to the first half of fiscal '23 and to a lesser extent in the first half of fiscal '24, we had a challenging macro environment. So what's happening is those scheduled billings, that's what we call scheduled contracted billings, which are pretty much guaranteed, that billing rate in the first half is 7% growth first half of fiscal -- in fiscal '25 versus fiscal '24. Second half billings growth is 23%. And what's happened with -- the company will become more back-end weighted -- so put that back-end weighting, overall billings still at 19% to 20%, no change. The growth rate in the first half, lower than what the Street was expecting. Back half billing rates stronger than what the Street was expecting, overall is the same. So the overall business, though, we take that contracted billings out, the business is still very strong. So if you take a look at our renewals and you take a look at our upsells, they're very strong, and they're consistent, both in the first half and second half with higher growth going in the second half. In addition, one of the things we're going through, we're going through this sales transformation where we had higher attrition in Q3 fiscal '24. We called that out. And also, we said we expect attrition to stabilize in Q4, which it did, but it's still high. We're hiring new sales reps. Sales reps generally take -- they'll get full quota after 1 year. So there's a ramp period of the sales organization. We do see sales productivity increasing in the second half. And the reason for that is that our focus with the new sales leadership is that we're looking -- we're going to be going after the higher-end type of the market we always have. We're going to go after it even more. So the reps that we're hiring are the ones that will be going to the majors, which are companies are grater than 40,000 employees or large enterprise. So those sales reps carry higher quotas than the commercial reps. Commercial reps are the 100 to 2,000 employees. So moving more towards a large enterprise-type sales organization -- the overall core quotas just on a total company basis will go up. And also, we expect higher basically production from these sales reps.

One other comment I'll add to what Remo has said is, while the growth in first half of billings seems a lot lower than second half -- and the question being, is there a higher risk? How are you going to get to such a higher growth in second half? Remo already explained to the contracted part of billing, which is creating a big gap. But out of our guide, if you take our contracted billing, the noncontractor billing which is new upsell and renewal, that growth in first half is in the high teens to 20% range. And the second half of the same thing is slightly above 20%. So the gap in the noncontractor part is not that significant. So just want to make sure there's clarity about it. This is a mechanical factor that happened to take place because of fiscal '23 and some of the '24 kind of tightness we had during the time.

Remo, just to kind of put a finer point on how you've expressed and articulated the notion of scheduled contracted billings. We were all fairly braced for and prepared for the fact that, hey, there is a sales transition going on. You all have worked really hard to rebuild your sales capacity over the last 6 to 7 months. So there was a general sense of "Hey, there is going to be a ramp period that's going to manifest in the back half of the year." But specifically on this input of the scheduled contracted piece, what limited your visibility in the fiscal third quarter time frame that change 90 days later in that it became a more important variable that explains why there is this lopsided seasonality for fiscal '25?

It's a great question. So when you take a look at what we do when we do our annual operating plans for the next year, we break it on a quarterly basis. When we do our long-range plan for the year subsequent, we do it annual. When we're going through our annual operating plan preparation at the tail end, taking a look at because the growth rate did not seem out of line on an annual basis. But as we got into our annual operating plan process, then we saw the difference basically on a quarterly basis. Now it's at the end of our annual operating plan basis. . So now going forward, what we're going to do -- hindsight's always 2020 is that we'll extend out that following year, 1 year out on a quarterly basis, we'll be able to see if there's any anomalies.

And then just to put a bow on this, you talked about having 3 or contractual durations with your customers. So fiscal -- the first half of fiscal '23, having a little bit of a maybe anemic demand and macroeconomic backdrop against what you are executing, it's sort of creating hangover effect clearly in the first half of '25. So just mathematically, if it's 3 years, should we expect some of that to weigh in first half of fiscal '26, maybe not to the same magnitude, but just directionally, is this something we'll have to be mindful of as we think about the trajectory of the business on a calendar 12-month basis?

Directionally, we feel comps will get easier in fiscal '26.

Okay. Okay. Putting aside this topic for a second and just focusing back on fourth quarter and certainly the back half of this past year, still putting up 30% billings growth. That's generally been very respectable in an environment that I think you would agree has been confounding with mixed data points at best, right? So in general, how would you articulate in that? How have you been may be more successful in bucking the trends. And I know one of the things that you've been talking about over the course of the last 2 years is this notion of selling a business value, right, like business value conversation. So how is that resonating and basically helping you stay above the fray in an environment where budgets are no longer free flowing, and you don't have open spigots even if it's cyber, it's clearly -- spigots are not open.

Yes. I'll talk about it. So first of all, yes, macro hasn't changed a whole and deal scrutiny remains tight. But as compared to many other segments, cyber is often a higher priority. But all cybers are not created equal. When it comes to Zero Trust, that's a higher priority on most CIOs and CISOs mind. So we are viewed as the leader in that area. We've got to build a pretty strong brand in that area. So we do get to engage with customers when we can show them, this is how we can help you reduce your ransomware threats because of Zero Trust architecture, which eliminates lateral threat movement. Now that creates pipeline and engagement. That doesn't mean the deal can be closed. Now comes the second part, justification. If I can tell the CIO or CISO that I not only fix your cyber issues, I can reduce your overall cost, they get interested. We are one of the very few companies that actually reduce cost. Take any other example, you think ADR reduces cost? Not really. Symantec or Norton was $10 and ADR wants $50, $60. Identity saves it? No. Even a company like ServiceNow, you have to invest for 18 months to customize, deploy the product and then you see productivity improvements. When we go in, we are able to take a number of products out fairly quickly to start showing savings and then we start taking on more and more pieces of the puzzle. So we are able to build a very strong business value, CFO-ready case studies to show that you invest so much quarter by quarter. In fact, they insist these days quarter-by-quarter for the first 4 quarters, and then I can do annual [ stuff ]. The numbers are very impressive. That's really what gets us there. So our challenge is, how do I engage at the C-level and how do I make a business case. 5 years ago, engaging with C-level of a large company used to be much harder. Today, our brand is much, much stronger. So getting a meeting with C-level is getting easier. Then I need to make sure that as we engage with more and more customers out there, my sales force at large is able to do the same thing. So if I were to give you my personal view, before we made the sales change -- sales leadership change, about 20%, 25% of my account reps were able to do a good job at account-centric stuff. That's why you're seeing a decent amount of success in the past. But I don't want to sit at 20%, 25%. I want 80%, 90% of my salespeople to be able to do account-centric stuff. That's why we brought [ micro-chain ] and really expanded our sales execution. But the point I'll come back to your point is, we have a very strong business case. We have a very strong cyber case. The 2 together are able to actually help us deliver the numbers we need to deliver.

Jay, you were very early in pioneering and basically creating the blueprint for what we all know as SASE today. Thank you, Gartner, for coining that term. But look, in the success you found in essentially pioneering this category, there has been a surge of entrants, insurgents, competition, both from kind of the lower end, but some of -- maybe some of your largest rivals on the traditional incumbent firewall space. So what I want to ask you is, as you continue to focus on bringing on the majors, swimming in the uppermost echelon in the enterprise tier of the market, how do you combat -- certainly some of the -- in the trench warfare with the Palo Alto Networks and with others, but also stay true to your differentiation. I mean, certainly, the landscape today is significantly different than it was 5 years ago. So how are you navigating this evolution in the landscape? And ultimately, how is that translating in the way your salespeople are communicating the message and you're extracting the business value that you are providing.

Yes. Excellent question. Now if you think about what we did, we did not create a new market for cyber. We brought a new disruptive technology to do things in a new way. It's like when Tesla came in, they didn't really create a new category of cars. It's saying I can build better engines to do a better job. So when we came in Blue Coat, Symantec, McAfee, Websense, Cisco, were the incumbents in this market, and in around the high end of the market, Blue Coat had 85% market share among Fortune 500 companies. Our goal was to show them a disruptive new technology that does a better job. At the time of IPO, you were asking lots of questions about Blue Coat still being so big, all the noise has gone away. When we brought in Zscaler Private Access, it was to disrupt the way remote access was done first, VPN, then the whole inbound gateway. So we had to compete there with Cisco offering some of the products, Citrix offering some of the product, Juniper offering -- all the companies gone away. The next wave came, some of these CASB, a lot of these new companies, most of them have gone way out the door, hardly any. And then came the firewall guys. Yes, Palo has been making noise for 5 or 6 years. It used to be earlier on. Everyone has heard the story in large enterprises. Firewalls are not taken seriously when it comes to doing actually what we do as a Zero Trust architecture. This SASE thing is a little bit confusing. I mean, Gartner loves to throw out a 4-letter acronym every couple of quarters. You need to sell more research reports, right?

It's their toxic trait. That's what...

Right. So what is SASE? SD-WAN plus SSC, okay. Now we really never want to do SD-WAN. SD-WAN enables lateral threat movement, right? I've been told by investors and Gartner, you got to play here. And that's when you're going to get into MQ. I don't care about getting to MQ. I care about really taking your customers and doing what they need to do. So the differentiation for us, the core architecture that we built takes time. New entrants are trying to take their firewall spend them in the cloud and say, we are SASE, we're all that stuff. Large enterprises are savvy. They understand it. They get it. That's why our win rate has been very good. Honestly, if you think about the 3 factors for the growth of Zscaler business. Macro, we talked about it, comfortable, used to it, know to deal with it. And in fact, being able to save cost is becoming a very, very important message of Zscaler. Do you think a firewall company talks about consolidation is going to remove firewalls out there? Why would they? We do. Competition, in my point, is a non issue. Do we remain paranoid, so we don't underestimate them? Yes. But we drive where we need to go rather than trying to follow someone. Third area is the go-to-market area, being able to scale our business. This was a step function we wanted to do, so we took a proactive step in this area to bring in [ Mike ] who could take us there. We did the same thing 5 years ago. When we brought Dali at that time, we are sitting at about $350-some million. My sales team was a little start-up-ish. We needed more process, more cadence, more discipline. Done a good job, but it is more opportunity centric. And what we're doing now, it's moving well. Actually, if I tell you, it has exceeded my expectations with the pace of execution they're doing.

And just -- I'm glad you brought this up because it's a segue to my next question around sales productivity resiliency. Remo, I know you're talking about a material degradation in your sales productivity levels. Certainly in the first part of the year for some of the obvious reasons around, hey, you've actually just got new capacity that's been onboarded into the organization. But just on a relative basis, you've got maybe 5 months' worth of data points of the accelerated hiring you've been doing. Can you give us the flavor of, hey -- in so far as you're being conservative around the ramp, what have been the actual data points around how folks have been ramping so far if you were to compare them to vintages and cohorts of past years of hiring?

I think from a -- just a guidance and also planning perspective. I think it's good to think about that they're going to ramp at the same level as what we said before, which is you get to full quota after 1 year. So I would still keep that in mind. So I wouldn't really change that view going forward. It's too early right now to say, to be honest with you, because the team has been on board for just 5 months. And typically, your first quarter, you don't have anything. Again, you're building up basically your book, you're building up your relationships and so forth. You start seeing incremental months in the second quarter, bigger step, third quarter, before you get the full -- so just from a planning, thinking about where it is, I'd say it's comparable at this point. However, having said that, the level of salespeople that we're hiring are more experienced, deeper relationships and also higher end. So if you look at the -- one of the key things regarding Zscaler is that we have a huge opportunity to sell into our existing base. Our ARR, which as Jay talked about is $2.5 billion. On the user side, if we sold everything on the user side, we can increase that 6x to $15 billion. Now are you going to get to that 6x? Probably not. Is there 2 to 3x? We feel yes. Could it be more? Could be more significant opportunity to sell into our existing base. Customers, we have 35% of the Global 2000 customers. We got over 40% of the Fortune 500. Those companies buy more. By building the sales organization at that higher level to sell into those types of companies, to sell the value of Zscaler and putting our go-to-market team in place that we've made this transition about 9 months ago, I think bodes very, very well for Zscaler. Ramp period, still think about it as a year.

Remo, I think maybe one of the differences in terms of what your sales folks have in the bag today versus what they had in the bags 3 years ago, 5 years ago, very different. So that certainly would have to have play a part in how quickly they ramp, et cetera. But what I specifically wanted to ask you is, and this is one of the questions we get from investors a lot is your flagship products, ZIA, ZPA, they are a seat-based model, a headcount-based model. And so what is the scope of opportunity with respect to some of those flagship products? And what do you see that we don't see in that there could be a perception that you're potentially saturated from a head count perspective, right? And as we zoom out, it's sort of ARPU conversation. And then we can certainly talk about what else is in your portfolio to help bolster that. But how do you dismiss some of the concerns around, hey, your core products have had a fantastic run. And now you're kind of at the upper limit.

I think good points. You're talking about 2 points, how much opportunity do we have to sell new logos, and then how much is the upsell opportunity to expand. Let's talk about some of the numbers. We have 35% of Global 2000 companies. There's 65% out there. Then you would say, well, aren't they taken by some of these people. I can tell you, I'm out there in the field very often. Those, the high-end customers aren't getting -- aren't settling down on firewalls as becoming the SASE out here. That market is a very attractive market to us. We think we'll get to a pretty impressive number. Now I have aspirations to do the same kind of stuff that Blue Coat did at one time with 85% of Fortune 500 companies. And ServiceNow has done in the 85-plus percent of the companies. On the high end, this kind of stuff very few products work as well as we do. We are sitting in line. We are mission-critical applications. Customers don't settle down with a new entrant for something that's mission-critical and something where cyber is important. So that market is fairly open for us. If I give you a couple of other data points related to it, take 567 customers pay us over $1 million. If you dissect it further, about 300 of those customers are actually from Global 2000 companies. That means 267 are smaller companies that are giving us $1 million today. That means $1 million opportunities are not just restricted to Global 2000, it goes beyond. That's number one. Number two, if you look at it, how much upsell we can do. We disclosed some of the numbers where we have over 60 customers paying us over $60 million, okay. And now we're seeing a number of customers paying us $10 million or more. I believe that if you really do the math, every Fortune 500 company that's a customer of ours should be -- we should be able to get $10 million ARR from that. And that's because of the platform. Competition talks about, yes, we compete with Zscaler, all they're trying to catch up on is build what we have, Zscaler for users, ZIA or ZPA. And ZDX doesn't even exist with them because some of the firewall companies that use hyperscalers, they can't even do performance because once they get on the Google Cloud, they lost visibility into the traffic and performance issues. So when we have offering for Zscaler for workloads, that's Zero Trust communication. The only alternative to that is firewalls, traditional where you have risk of lateral threat movement. Then we have Zscaler for IoT/OT, a very exciting market. IoT/OT may take some time because it's linked to plants and factories, but it's a big opportunity. Plants and factories are becoming more and more important because it's part of the infrastructure. Then the couple of acquisitions we made recently, they've expanded our TAM quite a bit. Think of the Airgap product. It's fascinating. It's allowing us to go inside the branch where firewalls did an east-west kind of stuff. Now we can take them out. Zero Trust, our branch box is taking out firewall at the edge of the branch. These are great opportunity. Then data protection has become a very big, very comprehensive portfolio. Last year, we shared with you that it has crossed $0.25 billion in ARR. It's one of the faster-growing segments. So I can tell you the amount of offerings that are well integrated, they work together is a big deal for us. Our customers deploy our products. We're not selling ELA as shelfware. The numbers of transactions at 0.5 trillion is proof of that stuff there our customers are using. So from a new point of view, ample runway for us. From upsell point of view, ample runway for us. We just need to do a focused sales execution.

Remo, just to kind of riff off of something Jay mentioned around, hey, you've got $567 million paying customers. There is a pathway to $10 million. So when you think about the -- that path from $1 million to $10 million, right, what are the most obvious ways you can 10x a customer's wallet, right? And I'd love for you to spend time on, hey, is this grabbing more seats? Is this grabbing more product? What are some of the vectors to help you get there?

Yes. It's generally -- once you buy ZIA, then you're buying it for all your employees. So it's less seat related, but more product related. And as I mentioned, just for the users, if you bought everything, there's a 6x opportunity. So let's think about it. Let's just say it's a 3x opportunity. So basically, be going from $2.5 billion to $7.5 billion. Then you take a look at basically the emerging products. Emerging products representative of our new and upsell this past year, 22%. We expect them to be 25% this next year. Those are large markets for us. We're just getting into those markets. So buying more emerging products, the data -- the data loss, analytics, ZDX, workload, branch, cloud protection. There's just a lot of products. So it's really not so much the seats as well as the expansion of buying what we have in our product portfolio.

Remo, there's one exception. In federal business, they don't start with all users or agencies. 13 of the 15 cabinet-level agencies are Zscaler customers. We just added a 13th one, which I covered during my prepared remarks. This agency has 100,000 employees. They started with 5,000 employees, but they bought Zscaler for users. Pretty significant deal, but that's with 20x opportunity for just Zscaler for users. Our federal agencies will generally start from 5,000, 10,000, 15,000, 20,000 users. Then they go higher up from there. So there's opportunity to expand the user base in our current customer base in federal quite a bit. Same thing in the defense area, right? A lot of our federal business, we had talked over the years has come from known DoD. We have been working very well with DoD. In Q3, we announced a meaningful deal with one of the branches of DoD. That was the first significant deal. We think DoD becomes a pretty sizable opportunity for us because they do care about Zero Trust. They understand Zero Trust. They're well engaged with us. So literally, there's no lack of opportunities, no competitive issues. Market conditions, I think we know how to deal with that. We just need to execute, and I think we are well on our way to deliver the numbers that we deliver.

And to follow on Jay, since you have followed me. So the federal piece also was mid- to -- mid- to high single digit in fiscal '23. It was high single digit, basically of our new and upsell in fiscal '24. Also the ability to grow federal, it's the early stages. It's the very, very early stages. And the fact, as Jay said, 13 of the 15 cabinet agencies also sell into the DoD as well as other international governments. It's a market -- it's an area of focus, and it's early stages.

I'm glad you brought this up because U.S. Fed has been a very important opportunity for you and you've tackled it very well. But I think for a lot of us here, we see all the press releases from your peers and some of your competitors, FedRAMP this and FedRAMP that. So what I want to ask you is what gives you the right to get 100% of the cabinet agencies and get more than your fair share of the DoD budgets and is there a barrier to entry with the level of certifications that you've amassed that you were leaps and bounds ahead of some of your peers. Can you help us understand that? Because I think that sort of -- it's so Byzantine that you kind of maybe can appreciate. So what is that barrier to entry that gives you so much confidence that your U.S. Fed business has so much opportunity?

Right. So first of all, yes, we got 13 of 15 as customers.

Why didn't you get the other 2 of the 15?

We will. We will. But this is how you think about it. If you are looking at buying firewalls, whether it's federal agencies or large cooperations. They all have 2, 3 firewall providers out there. Why is that? Because these are the boxes. You buy boxes for this country from here, this country from there, they are kind of standard stuff. When people go for a cloud service like Zscaler, they standardize on it. So how many enterprises are out there that's saying, I'm going to use Zscaler for users and also want to use another firewall company to do the same thing. You don't find that. In the federal space, too, the agencies I'm talking about, when I talk about Zero Trust access, ZIA, ZPA and ZDX. I don't know any of the 13 that are saying, I'm also going to use for some of my users and other vendors, no. Do they have firewalls from someone out there? Of course, they do. Do they have some of the other stuff out there? Yes. But the products we're talking about, customers standardize it. Simplification, standardization is important for them. It also reduces complexity and all. And when the solution is working so well, our customers are generally so proud of it. If you ever went to a public sector summit we do once a year, all these agencies CIOs, they stand on stage and talk of how much transformation they're driven, how much user experience they improved, how much fiber cyber partially improved. So that's why we feel very bullish about standardization. Once we are in, we get -- become the standard across all users.

So great perspective on the U.S. Fed. Maybe just from a broader strokes around end market and vertical-based behavior. You have a good cross-section of different parts of the economy that you call customers in your base. What are some of the dynamics you're seeing from an end market perspective, buying behaviors, macro impacting some sectors of the economy and some proportion of customers more than others?

Look, cyber is a cross vertical stuff. It's a horizontal stuff. So we're seeing interest across the board. Financials always have been very, very paranoid. So no wonder financial is our #1 segment. Health care has become very paranoid. It's an important segment for us. You know the area that used to be less security savvy 5, 6 years ago, used to be manufacturing and retail. Okay. They have been hit so hard with ransomware and the like. There's a lot more urgency in those segments, too. So I really don't see slowness in any of the segments. It's a matter of us to reach at the right level, engage with them, show value and drive the deal.

So we talked a lot about kind of the growth avenues and the growth vendors in the business. Remo, when you think about resource allocation from an OpEx and investment standpoint, what's on the fiscal '25 policy agenda as it relates to investment priorities?

Yes. It's going to be across the board, but really the top 3 priorities, go-to-market, R&D and cloud, those are the top 3 always are. But pretty much when I take a look at resource allocation, capital allocation, it's across the board. But that's -- those are the priorities.

And are you comfortable with the level of sales capacity that you have? I mean, certainly, in May and June time frame, you were really stepping on the gas pedal to build out and grow sales capacity and sales headcount. Where are you? And what's your temperature on -- do you have the requisite capacity need to deliver that sort of back half ramp that you're committing to?

Yes. capacity supports our guidance. And what I can say also, I'd rather make sure that we get the right people on board. When you take a look at our leadership that we have in our go-to-market, it is very, very strong. When you have the right leadership, then they will hire the right people. Right now, we're in a position. We're stepping on the gas, hiring account reps. We have the leadership in place with the maturity pedigree, professionalism and also strength that I feel very good about hiring the right level of account reps. The account reps we have now support our guidance, and we're going to keep on building that into fiscal '25.

And from a free cash flow perspective, there is a unique element of capital intensity in your business. Can you talk about how much of that is structural versus temporary as you kind of build out your back end because as Jay mentioned, you don't run your service on hyperscalers, right? This is built and delivered in-house. So how does that kind of influence the way you're thinking about CapEx decisions and for us, implications from a free cash flow perspective? Because I know there's some shifting around, but there -- we are expecting to see a spike in CapEx next year.

Right. And so we were expecting to build out our data center capacity in fiscal '24, and we called out that we're going to have a reduction in free cash flow in '24, which we didn't have. So fiscal '24 free cash flow margin was 27%. We've called out this year that we're going to do that investment in fiscal '25, and that's why we called out our free cash flow margin at 23.5% to basically 24%, the 3% impact is what we see. Going forward, this is a onetime increase in CapEx. Going forward, you can think of higher single-digit type range, which is what we've historically run.

Jay, I want to end the conversation sticking to this notion about resource allocation and how you think about running the business short to medium term, long term. M&A, you haven't been a stranger to M&A. I think you've been very judicious and selective broad thoughts on what the asset landscape looks like, what the valuation expectations of private companies, how they've evolved -- and as a founder of this business who has been really involved in the technology, how do you adjudicate the build versus buy decision? Because that's very close to you.

Yes. So first of all, we want to make sure it's a good innovative platform where things come together, work with each other. I don't want the combination of multiple products with a single facade UI on it to say it's one product because customers see through it. So we look for innovative technologies to expand, either build or buy. If buy can get me into the market 12 to 15 months sooner, I'll go for acquisition. So we're not hung up that we must build. But we also like to do early stage because you can easily integrate. The bigger the company, the later stage, the harder it gets to build it together because they have bigger customers, you have to worry about supporting those customers and the like. So I think take some of the example, Airgap, Avalara, very, very good acquisitions. In terms of larger acquisitions, there is a lot of good technology out there. If there's a large company, there's a lot of legacy technology that's growing at hardly anything. It's going to drag my growth rate down. And it's -- we don't like old technologies because we want innovative, simplified, great stuff. That's what our brand is. In terms of multiples, before macro conditions got tight, some of these expectations are totally crazy, okay? Now they've actually become very good. We have lots of inbound calls coming in. Yes, are there some crazy multiples under the name of AI, GenAI? There are. But overall, there are lots of opportunities out there. You expect us to keep on doing some similar to what we have been doing, selected acquisition to add to the portfolio. I mean this Airgap thing has been fascinating. It has exceeded my expectations, the amount of interest in our customer base is impressive. So organic and inorganic, both combination. Take data protection, one of the most comprehensive portfolios in the market. It mostly built in-house. We did one acqui hire. We hired a 24 person team to build one of the key products in it. We've done a couple of small acquisitions. I think the strategy is working well. I'm extremely proud of the way our platform expanded. It's a big barrier to entry for someone to come from behind. That's why I feel bullish about the technology and platform. We just need to keep on selling with a more sophisticated machine, and that's what we're focused on.

One last one for you. 30 seconds on -- Remo and Jay, both for you. What is the one thing that you think investors are absolutely misperceiving about the business that you kind of want to put to bed today in data and metrics and things you can see that might not be apparent?

It's the first question you asked related to the first half, second half question. So I think we've hopefully cleared that up.

Yes. From my point of view, I think investors still get overly react around on competition. I think the reason I think that is because you talk to vendors every day. If you talk to more customers, you'll have more appreciation for Zscaler technology and how much customers love us.

Fantastic. This is an excellent conversation. Thank you for all your candid perspectives. I always love having a conversation with you. Thank you.

Thank you very much.

Thank you.

Appreciate it.