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Zscaler Inc (NASDAQ:ZS)
Q1 2020 Earnings Call
Dec 3, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Zscaler's First Quarter 2020 Earnings Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Bill Choi. Sir, please begin.

Bill Choi -- Vice President, Investor Relations

Good afternoon, and welcome to the Zscaler first quarter 2020 earnings conference call. On the call with me today are Jay Chaudhry, Chairman and CEO; and Remo Canessa, CFO. By now, everyone should have access to our earnings announcement, which can be found on our website in the Investor Relations section.

In addition, a supplemental financial schedule is available for download at ir.zscaler.com. Please note, unless otherwise noted all numbers we talk about today other than revenue 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. For historical periods the GAAP to the non-GAAP reconciliations can be found in the supplemental financial information referenced a moment ago. Let me remind you that we'll be making forward-looking statements during today's discussions, including but not limited to the Company's anticipated future revenue calculated billings, operating performance, gross margin, operating expenses, operating income, net income, free cash flow, dollar-based net retention rate, income taxes and earnings per share. These statements and other comments are not guarantees of future performance, but rather are subject to risk and uncertainty, some of which are beyond our control.

Our actual results may differ significantly from those projected or suggested in any forward-looking statements. 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 that could impact our future operating results and financial condition please see our filings with the Securities and Exchange Commission, as well as in today's earnings release.

I would like to inform you that we will be participating in several upcoming investor conferences. Next week management will be at the UBS Global TMT Conference and Cowen's Networking and Cyber Security Summit in New York City. And also the Barclays' TMT Conference in San Francisco. On January 14th, we will be at Needham's Growth Conference in New York.

Now I will turn the call over to Jay.

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

Thank you, Bill, and thank you everyone for joining us. We reported solid Q1 results delivering strong revenue and operating profit growth in the first quarter with positive free cash flow, while making strategic investments to scale our go-to-market machine to the next level. Our revenue grew 48% and billings grew 37% year-over-year in Q1 and we are increasing our outlook for revenue and billings for the full fiscal year 2020. Adoption of the CIA Transformation Bundle continues to grow. And ZPA remains our fastest growing product. I'm thrilled that more customers are using ZIA and ZPA together which provides a single platform for secured cloud transformation, that we believe no other vendor can match.

As you know Dali Rajic joined the September as a President Go-To-Market and Chief Revenue Officer. I'm excited about the key initiatives, our sales leadership is putting in place to position us well for the long term at our recent Zenith Live Cloud Summits. I was pleased to hear CIOs, CTOs and CISOs of Global 2000 enterprises sharing with pride their cloud transformation journeys enabled by Zscaler that delivered lower costs, improved security and provided fast and reliable user experience.

I'm very proud that Gartner recently recognize Zscaler as a leader in the Secure Web Gateway Magic Quadrant for the 9th year in a row. More importantly Zscaler is positioned the highest for both execution and vision significantly separating us from the competition. We pioneered the cloud native, integrated security platform and our cloud service is trusted by over 3,900 customers, including over 400 of the Forbes Global 2000 to access applications no matter where they live. The Zscaler cloud processes over 80 billion transactions per day which is over 10 times the number of Google searches per day. This provides an unprecedented network effect, which allows us to deliver superior security to our customers. We are aggressively investing in our business to pursue a massive opportunity to disrupt traditional network security which mostly relies on legacy security appliances.

Let me now highlight a few wins in Q1 that showcase what we believe are our sustainable competitive advantages. I will start with an upsell that highlights the scalability and elasticity of our cloud, this Fortune 100 customer purchased our professional Bundle for all 40,000 employees three years ago. In Q1 they tripled that annual business with us by upgrading to Business Bundle, adding additional users and purchasing protection for sever traffic going from the data center to the public cloud. They deployed local Internet breakouts at over 1,000 locations during their cloud journey including rolling out Office 365. Their Internet traffic increase exponentially reaching 1.2 petabytes per month which is equal to 10 billion photos in Facebook. And their IT leaders praised the elasticity of the Zscaler cloud when a companywide video conference call by the CEO went flawlessly. Even though the network traffic doubled during the event. How about a single tenant security cloud possibly handle this.

Now, I will share a new logo win of a Fortune 100 customer that needed to uplevel their security. Unlike most large enterprises they had no proxy gateways and instead relied upon next-gen firewalls for the user traffic to the Internet. No wonder they had a high risk posture. They purchased ZIA transformation bundle for all 14,000 employees. With Zscaler they can detect and prevent advanced threats and zero day attacks which are increasingly found in encrypted traffic. This results in better security.

Next, I will highlight the win that illustrates benefits of our Edge cloud capabilities and enabled faster M&A integration, a top global healthcare company that bought our Business Bundle and cloud firewall for 30,000 employees, 18 months ago purchased an additional 30,000 seats to integrate our recent acquisition that two companies have a combined global presence with hundreds of locations across 70 countries each company had embarked on a network transformation journey for local Internet breakouts but with two very different approaches to security.

The acquired company was a next-gen firewall shop which scores offline walls deployed in branch offices giving a false sense of security as 95% of the web traffic is encrypted and was not being inspected. To integrate the two companies they standardize on Zscaler, implemented SSL inspection and are ripping out all the branch firewalls. The result significant savings and a big improvement in their security posture.

Next I'd like to share considerable momentum we are building in the U.S. Federal market. Last year ZIA and ZPA received FedRAMP certification at the moderate level and last month ZPA reached FedRAMP readiness at the high impact level which puts Zscaler in an elite [Phonetic] group of technology companies. ZIA is the only FedRAMP certified secure cloud Internet gateway today. ZPA is the first and only cloud security service that has received FedRAMP certification for zero trust remote access. This positions us very well in this large market.

In Q1 we won two deals with civilian agencies each with an annual contract value greater than $1.5 million. The first win was with a large strategic agency with an initial order for ZIA and ZPA for 15,000 mobile users to deliver secure access to applications with zero trust network access. The second agency purchased the complete ZIA and ZPA platform for all 6,800 employees to enable cloud transformation to secure SD-WAN deployment for local breakouts and to provide direct access to any application from anywhere.

Turning to Japan, we entered this large market only two years ago, but have been gaining great traction. In Q1 one-off Japan's largest transportation companies purchased our ZIA Business Bundle and cloud sandbox for all 30,000 employees to secure local breakouts and increased security for all users. Non proxy technologies such as next-gen firewalls were not considered since comprehensive security was important. A common theme all these wins, is that a cloud first world requires a cloud native architecture. In a recent groundbreaking research note Gartner defined a new product category named Secure Access Service Edge or as SASE for pronounced SASE. Gartner predicts that the future of network security is in the cloud. And most organizations will move their network security to a SASE model. Importantly Gartner recommends reducing the complexity of network security by moving to one vendor for Secure Web Gateway, CASB, DNS, zero trust network access and remote browser isolation capabilities. This is Zscaler. We strongly believe this validates our vision when we founded Zscaler over 10 years ago. Here are the core architectural principles Gartner has outlined for SASE. Number one SASE demands that the security providers offer security at the cloud EDGE close to the user for good user experience. Zscaler provides in line security at the cloud EDGE in more than 150 data centers around the world. In contrast, legacy security vendors claiming to offer a SASE service are spinning up virtual machines on public clouds the traffic backhauled to centralized compute that is not security at the edge. That is not SASE.

Number two, SASE recommends that a branch office should have a light footprint which simply an SD-WAN router and all security services in the cloud. While the Zscaler cloud is a light branch architecture the legacy firewall vendors are peddling heavy branch Appliances again that is not SASE. Number three, Gartner specifically said, "many of these SASE capabilities will use a proxy model" because our proxy is required to inspect encrypted traffic. Zscaler meet this requirement while next-gen firewalls don't hence next-gen firewalls or not SASE.

Number four lastly, SASE advocates a cloud native multi-tenant architecture which is the foundation of Zscaler cloud platform. You can take legacy single tenant security appliances and stick them in the cloud as virtual machines and call it cloud security that would be like placing thousands of DVD players in a public cloud and calling it a Netflix streaming service. In summary Zscaler was designed for the SASE world that Gartner has spelled out. Some of you have asked questions about competition from next-gen firewall vendors. Over the last 10 years we have faced various competitors starting with large legacy secured web gateway vendors who claim to offer a cloud security service. Where are they today as security must move the cloud, legacy firewall vendors are now making similar noise. Next-gen firewalls are designed to build a moat around the castle, to secure the network and the data center. They are the wrong architecture for security users.

The next question is, why can't they build a platform like Zscaler, well the answer lies in the architecture. Architecture is like the foundation of a building you can't change the foundation unless you start all over which is hard and takes a long time. We know that start-ups like Salesforce and Workday competed and won against much larger on premise incumbent vendors, because of their cloud native architecture. We believe we are doing the same in the network security space.

Let me talk about our product. I will highlight a few innovations data expanding our platform. Zscaler B2B and Zscaler digital experience or ZDX. The two major product lines we announced at Zenith Live are getting great initial feedback from our customers. The outdoor band CASB that we announced at Zenith Live is receiving very good early reception combined with our existing in line CASB capabilities. We will now offer a complete CASB solution. The integration of browser isolation technology, we acquired through Appsulate is ahead of plan and is already being tested by customers.

Building upon the TrustPath acquisition we did last year. We have significantly enhanced our threat detection capabilities with machine learning and AI. Moving on to tech partnerships to complement our comprehensive platform we believe in partnering with tech leaders. This provides an integrated solution for customers and creates go to market leverage for Zscaler. For example, we have a deep and wide partnership with Microsoft Office 365 and Azure public cloud. Microsoft names Zscaler the first and only cloud security provider to be a certified partner in the Microsoft Networking Partner Program or NPP for Office 365, which has stringent requirements for user performance. Microsoft only recommends NPP partners for Office 365 connectivity. We are working closely with both VMware and Silver Peak the only two leaders in Gartner's recently published SD-WAN Magic Quadrant.

Let's now turn to our go-to-market. Zscaler is the enabler of cloud transformation. As a result we have a different top-down sales process and go-to-market strategy than legacy vendors. As I stated during the last earnings call, we are focused on improving our sales execution to take Zscaler beyond $1 billion in revenue. That is why I'm excited to have Dali on board as he is to building a highly scalable go-to-market machine. He has already driven rapid and tangible progress building a multi-dimensional go-to market model, putting us into a great position to scale.

Let me give you a few examples; we implemented a more refined metrics based model of accountability and transparency giving us better visibility into how our business is run. We are ahead of our plan to build a new sales process and enablement program that will deliver consistent and high level execution in the field, it is already having a meaningful impact in our day-to-day execution, and we continue to mature our sales leadership structure. With all that we have implemented in a very short time. I'm very pleased with our progress and confident that we are building a solid foundation for a highly scalable sales machine for our long-term growth.

Now I'd like to turn over the call to Remo for our financial results.

Remo E. Canessa -- Chief Financial Officer

Thank you, Jay. Revenue for the quarter was $93.6 million, up 9% sequentially and 48% year-over-year. From a geographic perspective, for the quarter Americas represented 51% of revenue EMEA was 41% and APJ was 8%.

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 37% year-over-year to $88.3 million. As a reminder, our contract terms are typically one to three years and we primarily invoice our customers one year in advance. Remaining Performance Obligations or RPO which represents our total committed non-cancelable future revenue was $555 million on October 31st up 35% from $411 million one year ago. Our strong customer retention and ability upsell have resulted in a consistently high dollar based net retention rate, which is 120% for the quarter ended October 31st.

This compares to 118% a year ago and last quarter. Our increased success selling bigger deals starting immediately with our Transformation bundle and faster upsells within a year while good for our business can reduce our dollar based net retention rate which is calculated on a year-over-year ARR basis. Considering these factors we feel 120% is outstanding and it will vary quarter-to-quarter. We are pleased with the continued adoption of our comprehensive cloud platform by our customers as they increasingly rely on us for their transformation journey, in fact, two-thirds of our top 25 customers were also customers two years ago in the cumulative ARR has more than doubled over this period. Total gross margin was 81% flat sequentially and down 1% year-over-year. We feel that 80% continues to be a good target range in the near term as it is important to continue to invest in our platform to drive top line revenue growth.

Turning to operating expenses, our total operating expenses increased 17% sequentially and increased 44% year-over-year at $72.7 million the decreased as a percentage of revenue, 78% compared to 80% last year. Sales and marketing increased 20% sequentially and 46% year-over-year to $49.4 million. The year-over-year increase is due to higher compensation expenses and the cost of three major marketing events, Zenith Live Americas, Zenith Live Europe and our sales kickoff. R&D was up 12% sequentially and 44% year-over-year to $14.8 million as we continue to invest to enhance our product functionality and innovate new products.

G&A increased 6% sequentially and increased 32% year-over-year to $8.5 million. The year-over-year growth in G&A includes investments in building our team these expenses exclude $2 million in litigation related expenses. Our first quarter operating margin was 3%, which compares to 2% in the same quarter last year. Net income in the quarter was $4.1 million or non-GAAP earnings per share of $0.03. We ended the quarter with $378 million in cash, cash equivalents and short-term investments. Free cash flow was positive $9.4 million in the quarter compared to positive $5.2 million for the same quarter a year ago. Our ESPP program increased our free cash flow by approximately $3 million in the quarter same as a year ago. The ESPP program does not impact overall the cash balance.

Now moving on to guidance as a reminder, these numbers are all non-GAAP, which excludes stock-based compensation expenses, amortization of intangible assets, certain litigation related expenses and any associated tax effects. For the second quarter we expect revenue in the range of $97 million to $100 million, reflecting a year-over-year growth of 31% to 35% for the year-ago comparison recall the Q2, 2019 revenue was aided by $2.3 million in nonrecurring revenue from a large public sector customer deploying our platform as a private cloud. Excluding this revenue from last year guidance reflects 35% to 39% growth. Operating profit in the range of $3 million to $4 million income taxes of 900,000 and earnings per share of approximately $0.03 assuming $138 million common shares outstanding. For the full year fiscal 2020, we expect revenue in the range of $405 million to $413 million or year-over-year growth of 34% to 36%. Calculated billings in the range of $500 billion to $510 million or year-over-year growth of 28% to 31%. Operating profit in the range of $15 million to $18 million.

In Q4, we expect to host our annual Zenith Live Events in both EMEA and Americas. We expect the cost of these two events to be in the range of $5 million to $6 million, income taxes of 3.6 million and earnings per share in the range of $0.13 to $0.15 assuming approximately 139 million common shares outstanding. Our guidance reflects our plans to invest aggressively in our business to pursue our significant market opportunity. We are pleased with the progress our CRO is making and we are confident, he is the right person to drive our sales and go-to-market execution. We are stepping up sales and marketing investments in order to build the foundation for long-term growth.

In addition, we'll increase investments in our technology platform and cloud infrastructure. As you model billings, I want to remind you that historically, Q2 and Q4 have been our strongest billing quarters with sequential declines in Q1 and Q3 quarters respectively. With our outperformance in Q1 billings we now expect first half billings to be approximately 43% of full year billings compared to our prior expectations of 42% to 43%. Also, please keep in mind that we had a large upfront billing of $1 million in Q2 of 2019 from a large public sector customer deploying our platform as a private cloud which will pose a tough year-over-year comparison in Q2.

Excluding this deal our billings guidance for the full year implies 32% to 35% growth. In terms of free cash flow please note that we'll have additional spend for tenant improvements related to our headquarters' move in January as well as ongoing cash outlays for lease payments on our existing San Jose buildings and litigation expenses related to our ongoing Symantec lawsuit. These extraordinary items are expected to be approximately $15 million to $20 million in cash payments for the full year. As a result of these payments we expect our free cash flow margins in fiscal 2020 to be zero to two points lower compared to our operating profit margins. Longer term, we expect our free cash flow margins to be higher than our non-GAAP operating margins.

Now, I'd like to turn it back over to Jay.

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

Thank you, Remo. In closing, let me state four key points that make me excited. Number one architecture matters, especially for a cloud security platform that must set in line to inspect all traffic for policy enforcement. We believe we have the best architecture with 10 years of operational experience to run a massive cloud and enormous barrier to entry.

Number two, with multiple tailwinds such as Office 365 SaaS adoption, SD-WAN and app migration to public clouds, we believe the market is coming to us. Number three, we are in early innings of the cloud journey we're disrupting a $20 billion TAM with ZIA and ZPA. In addition, we recently announced these got our B2B and ZDX, which we believe will expand our TAM significantly. Number four with new go-to-market leadership on board, we are building a sales machine that can deliver world-class execution and sustainable long-term growth. We thank you for your interest in Zscaler and look forward to reporting on our progress in the future.

Operator you may now open the call for questions.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] And our first will come from Alex Henderson with Needham.

Alex Henderson -- Needham -- Analyst

All right. Thank you very much. I was hoping to ask a question around the new sales head the Chief Revenue Officer, to what extent he's become come in and been effective, how long do you think it takes for his programs to be fully ramped and to get to the maximum benefit. Is that a three to four quarter process of reacceleration? And then the second piece of it if I could, lot of questions coming at me from clients about the competition from the next-gen firewall players. It seems to me that has not been a factor, but can you talk about whether that's shown up in terms of pricing pressure or any other notable metric, other than lost deals, but maybe some other element to the mix that may have pressured things? Thanks.

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

Yes, Alex. Thank you. This is Jay, regarding your question about our go-to market our CRO as you know we have done very well so far built our business to hundreds of millions of dollars. Now, our goal is to take it to $1 billion and plus, which means scaling our sales execution. Dali actually is the right guy who is driving a number of these things. Let me give you a perspective of what all he is driving. So for execution at scale. I'll give you three examples, one you know when you have scores of salespeople it's one thing, when you hundreds of salespeople you need far a better sales enablement, far better training for us. We used to have a small sales enablement team Dali has come in and built a pretty sizable team and the team is already rolling out some of the training programs.

Number two, do really scale your business. You need a very consistent and repeatable sales process that may be more refined and Dali has come in and taken our processed and further refined it and it's being rolled out to the whole field. Number three, while we had tools and systems in place to scale to the next level and to have better accountability, better visibility to give us better leading indicator in the sales activities he and the leadership team has started work on many areas. So a lot of these things are already making a difference and we are seeing it. And I think as each quarter goes by, we will see more and more impact of the work being done by Dali and his team.

Remo if you want to add anything?

Remo E. Canessa -- Chief Financial Officer

Yeah, a couple of add-ons to that also, I mean, our plan is still to be at a 20% plus operating margin. Once we hit $800 million to $1 billion of revenue. Related to pricing pressure, our discounts are lower this quarter our average prices per user are higher. When I take a look at our ARR for customers were greater than 3,000 users it's higher this quarter. It's in the high 300,000 range and our churn is down.

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

Alex regarding your second question about competition from firewall vendors somehow of discussion, keeps on coming. I tried to address it during my assessments. But fundamentally, if you look at the large enterprises to protect users they almost always look for a proxy architecture. You guys, do you have a large banks. If you talk to top 20 banks and ask anyone would you just depend upon on next-gen firewall for user protection. I haven't found a yes answer from a single bank so far. Now it's probably true that used to be some of that is happening on the lower end where the customer is less security SASE and they're able to go with some of that traction happening. So probably on the SD-WAN, some of that is happening in the lower end. But where our primary focus is, we don't really think any of the impact from the firewall vendors making noise this happened and impacted us so far. I think it's the architecture that we got much better that's giving us an edge, and I think it's a long term activity.

Operator

Hi, thank you. Our next question comes from Daniel Rivas with Bank of America.

Daniel Rivas -- Bank of America -- Analyst

Great. Thanks for taking the questions guys. First, for Jay maybe no mention of the longer sales cycle order. So can you just walk us through the changes you're seeing versus last quarter when you called it out? And then I got a quick follow-up. Thanks.

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

The changes in terms of the sales cycle and all haven't really changed a whole lot for us. I think what we are doing is tightening our sales process and tightening our execution. We aren't really seeing much market impact in terms of the slowdown any of the stuff with better leadership and some of the things I outlined, I think its focus execution is what we are doing and we are beginning to see it's make a difference for us. And I think it will help us in the long run because we are building a stronger infrastructure to scale our sales.

Daniel Rivas -- Bank of America -- Analyst

Great. Makes sense. And then Remo quick. Good to hear the new products are getting good reception. I'm curious if you have any ZDX or Z-B2B in your fiscal '20 expectations. And what's the potential for these new products to ramp and maybe drive some upside this year? Thanks.

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

Yeah. So no there is nothing we're planning for it and you shouldn't plan for anything either. We're planning to get these products out in the second calendar quarter of '20, you know, potential for the products as Jay mentioned, with the CASB [Indecipherable] browser isolation user experience and the B2B. We feel that there is a pretty significant upside for us with these types of products, but nothing for this fiscal '20 should be the Canaccord.

Remo E. Canessa -- Chief Financial Officer

If I may add, we are engaged with customers, as you would expect in beta stages doing evaluation and testing our interest is real. I mean just to clarify, what we announced was too big product line Zscaler B2B and Zscaler digital experience. And then, we also announced two, what I would call features [Indecipherable] CASB, CASB is a feature and browser isolation is another feature that's relevant for both ZIA and ZPA early indications are very positive. These products become generally available calendar Q2.

Operator

Thank you. Our next question will come from Patrick Colville with Arete Research.

Patrick Colville -- Arete Research -- Analyst

Thanks for taking my question. Can we just talk about the CASB product because, I mean, that's something that from speaking to your customers there's been a lot of interesting CASB right now and some I've said you know Zscaler will be natural insertion point into that CASB debates above and beyond your current partnerships right now was -- I think the Microsoft and McAfee, so just goods, but understand the product, if possible, please?

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

Yes. So for a long time we have had, what we call in line CASB if all traffic goes through us, we have to do CASB which includes threat detection and protection DLP and the like. And for outerband we dependent upon two partnerships you mentioned McAfee and Microsoft. Our customers kept on telling us that it's a small add on, we should be doing it. So we took them seriously we built it. So we become single provider so it's a natural feature for us to add-on and we're seeing lots of attraction. We will continue our partnership with Microsoft and Skyhigh, McAfee in this area. If customers want something like that they have it but we believe a large number of customers will take Zscaler and if there is another CASB solution I think we'll end up displacing it.

Patrick Colville -- Arete Research -- Analyst

Great. Thank you. And can I just also quick follow-up on the dollar based net retention rate. So 120% is extremely impressive no doubt, and especially given it's a sequential and annual increase, but it does imply that revenue from new customers would have tailed off both sequentially and annually. So, do you might just help me understand if that's correct, the revenue contribution became increasingly skew to existing customers or if there are any metrics you can share to help me better understand, new customer revenue and customer counts?

Remo E. Canessa -- Chief Financial Officer

Yeah, that's a good question. So typically we range with new versus upsell 60% or 40% new versus upsell and also 50% to 50%. In Q1, the mix was closer to 50% to 50%. What's important to recognize we don't really distinguish internally the difference between new and upsell when we track it but we incentivize our sales organization, both for new and upsell. When you take a look at the installed base that we have in the penetration we have with our installed base, there is significant opportunity for us to upsell into that installed base. We don't want to disincentivize our sales organization selling into that installed base. With Dali on board, I'm sure he will be driving all aspects of the business, including new customer acquisition.

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

Yeah, Remo, if I may add. If a company is a single product company with the narrow offering they have to keep on voting bought new customers in order to drive the growth. We have such a wide platform and more products being added to it. So we are less worried about making sure we just to new customers. So our number one goal is to maximize new ACV. Hence, we don't have a difference between new versus upsell. And Remo said, the range of new has -- varied from 50% to 60%. And I think that's a good range. But as you see more new products coming some of them can be sold on its own without the installed base. We expect over time to go up, but we don't look at NRR Net Retention Revenue as the most reliable indicator. It varies quite a bit, Remo you have commented on in the past. Why it varies.

Yeah. So, I mean 100%. It's very clearly outstanding. We've range from 118% for several quarters, we called out several quarters ago that there could be pressure on that NRR Net Retention Rate as more companies are buying transformation upfront, which is what we're seeing. In addition if customers are buying things quicker within the year because where part net -- net retention rate is based on ARR at the beginning of the year versus what it is currently. If customers buy product within that period that's going to put pressure also on the net retention rate. Now, those are the negative effects to it. The positive effects to it or is it 43% or ARR in ZIA was transformation 14% of our new and upsell business last year was the ZPA. So there's upsell capabilities with those products. In addition, as Jay mentioned, with our new products there is a potential for it also going up. The point to make is, it's going to be fluctuate, it's a hard -- hard metric to really going to put your finger on. 120% is outstanding, but it could fluctuate.

Operator

Thank you. Our next question will come from Andrew Nowinski with D.A. Davidson.

Andrew Nowinski -- Piper Jaffray -- Analyst

Great. Thank you, and congrats on the nice quarter. I want to start with a question on the Fed side. So I think you mentioned a few modest sized deals of civilian agencies. But I'm wondering if you can give us your thoughts on how Microsoft being awarded the JEDI contract might impact Zscaler given your strong partnership with Microsoft and having -- and now having both ZIA and ZPA FedRAMP certified?

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

Actually very excited with the opportunity. We started investing in FedRAMP certifications over two years ago. It's a very hard certification, but we made the investment and as you've seen in recent press releases and the like we got certification for both ZPA and ZIA and as I said we are the only vendor that's FedRAMP certified with cloud security gateway. And on the ZPA side only vendor certified for zero trust remote access that puts us in a very, very good position.

Now the way Zscaler works it's independent of cloud. We can access of Microsoft AWS Azure all these clouds work with us, but having a good partnership already in place with Microsoft will help us more closely with them the field from go-to-market point of view. So while we have begun to get some early deals, we are pretty optimistic about the opportunity though we do realize that federal deals can take a little bit of a longer time, but very pleased with the team we have put in place the team has grown quite a bit and is delivering.

Andrew Nowinski -- Piper Jaffray -- Analyst

Okay. Thanks, Jay. And then the telcos, have also been a fairly large driver of demand over the course of the last few years. Can you just give us any color on what if anything has changed with regard to the revenue contributed by the telco providers?

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

Telco they have been an important partner for us. I won't say any partner has been driving a lot of demand for us, as you know, as we drove transformation we have done a lot of evangelism. So we have been driving a lot of demand it has been high touch sales. But as customers are asking for more and more transformations we do see no more leads coming from telco partners to say my customer are asking for it. We are beginning to see RFPs coming out and say I need to do transformation.

The deal I refer to in my earnings calls from Japan actually was an RFP that was issued to three telcos and all three telcos were Zscaler because we met the requirement. It's a good business happening. We are trying to go further down market with telcos that's a new project actually Dali is trying to drive. So far a lot of business we've done the telcos on the very high end with a large enterprises. So excited about the opportunity that natural partners for us. Even though there is, yes, some contention about network costs and whatnot but we really don't impact us, it's the market that's looking for it and we are taking advantage of the market.

Remo E. Canessa -- Chief Financial Officer

Yeah, telcos typically represent around 50% of our revenue and that's about where it was in Q1.

Operator

Thank you. Our next question will come from Saket Kalia with Barclays.

Saket Kalia -- Barclays Inc -- Analyst

Hey guys, thanks for taking my questions here. Jay, maybe to start with you a lot of talk on competition particularly from the firewall side. I would actually look to shift a little bit, maybe talk about competition from the traditional secure web gateway players here that are transitioning, most notably with Blue Coat,. I guess the question is what are you seeing in terms of sales engagement with those types of opportunities since the deal is closed and really they're willingness to explore a solution like Zscaler?

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

When it comes to competition, our real competition from incumbency point of view is secure web gateway because they have the right architecture as a proxy architecture. Where, we have been winning against them is because they have been good on premise single-tenant proxy architecture, but they couldn't pivot -- to the cloud they couldn't build a viable multi-tenant architecture. All right remember my DVD versus Netflix example now, among these traditional vendors for Secure Web Gateway Blue Coat had big presence a large enterprises has an appliance and with the sales to a new owner there is somewhat uncertainty out there so we are seeing a lot of additional interest from large enterprises, who are looking for alternatives. And and also some of these customers are moving to the cloud so it is actually helping us. So we're getting inbound inquiries that we are not getting before. So we think it's a big opportunity for us. We got some focus to take advantage of it.

Saket Kalia -- Barclays Inc -- Analyst

Makes sense. Remo maybe for my follow-up for you, somewhat related, but now that Symantec is part of a larger entity you talked about $15 million to $20 million in one-time cash costs, including litigation. Can you talk about the litigation portion of it, and how does that sort of progress now that ownership on Symantec a sort of changed the hands?

Remo E. Canessa -- Chief Financial Officer

Yeah, the litigation portion is $8 million to $10 million the transaction with Broadcom, Symantec just was completed. So there is not much update. I mean, the only thing I can say is that we do not feel we infringe. We're going to defend ourselves vigorously and the lawsuit that it is currently out there is not having any impact on our business at all.

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

Yeah. We are carrying on, but as you pointed out change of hands can present an opportunity, and if it did, we will be open to it.

Operator

Thank you. Our next question will come from Brian Essex with Goldman Sachs.

Brian Essex -- Goldman Sachs -- Analyst

Hi, good afternoon and thank you for taking the question. Jay, maybe if I could point to a couple of the sustainable competitive advantage examples that you gave, one -- the first one pointed to scalability in elasticity of your platform. And the third one pointed to your Edge cloud capabilities, but both really interesting instances of pursuing Internet breakouts, maybe if you could help us understand a little bit how these deals transpired and who the partners on the SD-WAN side were and was this driven by maybe an SI that was putting the deal together and working with the company on a consultative basis? Or was this something that you led and held their hands through this process and pulled maybe the SD-WAN vendors and put the deal together on your side?

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

Yes, the way these things are happening it's still not processed where the market is mature and RFPs get sent on all the time. As we have mentioned, we are still in a high touch sales model, there is a good amount of evangelism needed though it's getting easier and easier what it used to be our typical process, our sales team goes are -- engaged with customers chose than the value of transformation that can deliver user experience on the lower cost and that basically leads where natural discussion and say, let's get and SP or SI together because they generally involved and transformation SD vendor awareness is out there.

We start collaborating with SD vendors out there. As I mentioned to you VMware and Silver Peak a good partners for us with the leaders out there and we come together and offer a proposal and solution. So what I say -- I would say, a majority of the large deals that are driven and closed there still the led by us. Can we bring the partners along. But in, and a good number of them that they do come from partners and many times the SD-WAN vendors introduced us to deal and sometimes we introduce them to a deal. So that's why we like this technology partnerships Microsoft VMware are two big technology partners that are helping us on the SP front at the large SPs the top four or five SPs are globally are very good partners.

Brian Essex -- Goldman Sachs -- Analyst

Got it. Maybe just a follow-up to you. Thank you for that. That's very helpful. Remo when we spoke with Dali in September, he had a goal of maybe taking 30 to 60 days to evaluate data on the platform build models evaluate talent and higher and so fort. Is he through with that. And do you know like definitively kind of the framework of what the incremental spend on the sales and marketing side will be for this year? Or might that kind of bleed into next year. I'm just trying to get a sense of when we might anticipate some meaningful leverage on our sales and marketing side of the model?

Remo E. Canessa -- Chief Financial Officer

Yeah, a good question. I would start seeing basically improvement next year related to, and again, the guidance that we gave contemplates the investment we're making in sales and marketing. Dali is 30 to 60 day plan. I mean, I worked with a few CROs and watching what Dali is doing here in the first couple of months is -- he is moving very quickly and doing an outstanding. I mean he's building the sales leadership in the organization, he is building as Jay mentioned, our sales enabling training, if he's better defining sales responsibility and putting in place the framework for us to be a much bigger company in place that -- in putting in place that accountability. In summary what I see with Dali steadily in he's putting structure disciplined leadership and is a passion, but he has quite frankly, I don't know when he sleeps. It's going very quickly, but it is going to take time. So that was the reason for our guidance initially 42.3% billings in the first half and we increased that 43% and increased our billings guidance from $500 million to $510 million. I'm excited working with Dali and what he's doing and look forward to it.

Operator

Thank you. Our next question comes from Matthew Wells with Citi.

Matthew Wells -- Citi -- Analyst

Hi, thanks for taking my question. Can you provide an update on customer feedback in learnings around Z-B2B and ZDX. Understand both are still on beta and plan to go live, I believe next quarter actually.

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

Yeah, I think we'll be able to give you more tangible and meaningful customer feedback probably next quarter right now, I would say that degree of interest on opportunity I had anticipated three or six months ago it seems bigger than that. So high customer interest, but again it's limited engagement so far. So it's a limited engagement we have is very high degree of interest, but we'll give you more, as we have more tangible feedback.

Matthew Wells -- Citi -- Analyst

Got it. And just a follow-up on that, is the sales force incentivized around the products while they're still in data? Or is this just when they go live next quarter?

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

We have no incentive in fact product management is actually working closely with selected number of customers. So we are not really pushing we would rather not push till the products are properly cooked and all that kinks, but out of it. Once they become GA only then sales force start selling.

Operator

Thank you.

Remo E. Canessa -- Chief Financial Officer

Just wanted to clarify that these new products are going to be generally available in calendar Q2. So it is not next quarter. Thanks. Next question please.

Operator

Thank you, sir. Next we have Melissa Franchi with Morgan Stanley.

Melissa Don -- Morgan Stanley -- Analyst

Hi, this is Melissa Don [Phonetic] on for Melissa Franchi. I was hoping you could provide some color around activity in EMEA revenue growth in that area was slightly slower than the rest of the region. So wondering if there is any macro softness in your view, or maybe execution considerations. Thank you.

Remo E. Canessa -- Chief Financial Officer

Yeah. Thank you. Your know from a macro perspective, really don't see it. EMEA grew 40% which is slower than the Americas and APJ. We did have a leadership change in EMEA, which we're very excited about but at 41% of total revenue in the media of APJ at 8% Americas at 51% is pretty consistent what it's been in the past, but from a macro perspective, not really seen any changes.

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

Yeah, we are bullish on EMEA, I think we got a good incumbent installed base. We'll keep on growing it, we are making the right amount of investments for EMEA.

Melissa Don -- Morgan Stanley -- Analyst

And just a quick follow-up to what extent is ZPA driving initial conversations with new customers versus ZIA and there's been a lot of other vendors that are seemingly trying to address this opportunity says there have been any change in what you've seen and competitive deals.

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

So in the past few quarters, we have been seeing about half the new customers coming for ZPA. Sorry, half the ZPA deals coming from new customers and half coming from upsell. So that's kind of number of customers. But having said that, that ZPA deals are smaller than ZIA deal as we said before, when ZIA is bought -- it's bought for everyone in the company for all employees and ZPA are based on number of applications. So that's one. ZPA is opening more doors for new logos than we had initially thought off. So pleased with that.

Your second question is competition for ZPA you know ZPA market end up what Gartner calls zero trust network access or others call SDP it is still a young market we kind of really run into each other because it's relatively small. So not a very competitive space it's more of a matter off evangelising and showing people that doing traditional network security with things like VPN is a dangerous thing they don't need to do it once they get it you win the deal.

Operator

Thank you. Our next question will come from the Fatima Boolani with UBS.

Fatima Boolani -- UBS -- Analyst

Good afternoon, and thank you for taking the questions. Jay, I have a question for you, and a follow-up for Remo. Jay, you talked a lot about the internal improvements and pipeline rigor and sales enablement initiatives that Dali has sort of put in place and put into motion. So internally you're really elevating the rigor in the sales organization and go-to-market. I'm wondering if you can speak to the external and external distribution avenues and sort of what you're doing there from media channel perspective or service provider or SI distribution perspective because as we understand your model doesn't traditionally lend itself well to the box pushers. So I wanted to get your sense of what sort of investments are in play from an external distribution perspective?

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

Absolutely. Number of points I could make, in fact, I heard from someone other did this at home, it seemed like you are de-focusing on channel. Right. So I'm not sure where that's coming from. Because actually we are putting more focus on channel. But the point is, it's not the same traditional channels. So what are we doing about channel. We know SPs have worked for us. We will keep on making more investments whether looking at going down stream, but some of the SPs and not just do the very large enterprise deals. On the channel or maybe call the VAR channel traditionally right, the people who largely on the box selling business that has limited -- limited synergies with us, but Dali is focused on two types of our channel partners.

One, we have done cloud native boutique [Phonetic] VARs well but only limited. We are expanding the reach Dali has successfully done those cloud native type of vendors in its previous life. So we are focused on getting those things done ; two finding more vendors who are ready to pivot every channel person doesn't want to pivot or they wish they don't have to pivot because boxes will keep on selling forever. So those are the two things are doing, I talked about sales enablement and training that's really not just needed for channel -- sorry for internal teams that's needed for channel as well. So we are actually putting a lot of focus in that area as well, because that's needed for them to become more effective.

Fatima Boolani -- UBS -- Analyst

I appreciate that and then -- that makes a ton of sense. Remo question for you, you've been very explicit on the level of investments, especially on the sales and marketing front as reflected in your guide, but if I think about Analyst Day, you were a little bit more explicit on your sales capacity investments. So maybe accelerating that sales capacity footprint is 60% this year. I just wanted to get a sense of an update of how the sales hiring has been tracking, as you started the new year? And that's it from me. Thank you .

Remo E. Canessa -- Chief Financial Officer

Yeah. Our sales tracking for Q1 is a little bit behind, but our expectation is still to get to that 60%. We're looking for Q2 to be a good quarter for us, but that's all taken into account in our guidance.

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

Yeah, I would add to that, in the past quarter we have raised the bar in hiring better quality people and also acceleration in hiring in fact under Dali we have put together a new recruiting playbook. We are educating, we are training all of our front-line sales leaders to make sure we hire the right kind of people again part of scaling, when you only have 10 leaders we are hiring. It's a small problem when you got 50 sales leader we are hiring it needs better scaling and better methodology and process and that's what we are really scaling out.

Operator

Thank you. Our next question will come from Dan Ives with Wedbush Securities

Dan Ives -- Wedbush Securities -- Analyst

Yeah, thanks. So maybe can you talk about the government market obviously why the deals moving to cloud Jay I'd just -- I think one of the just given where you are in terms of Azure in terms of that churn, or maybe just talk about that as an opportunity over the next six 12 months in terms of how you're viewing that going into 2020?

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

Yeah, I think, I'll add upon what I said earlier getting fed ramp certification is the first thing, unless you have them, nothing, not much matter. So what what we have done that. And also in FedRAMP there is a moderate level certification is a high impact having done both of them for ZIA -- sorry ZPA has both done ZIA -- we are at moderate will get to high impact shortly. The door is wide open for us to leverage and as you are with Microsoft partnership is a good opportunity, but we also work with a -- there is a fair amount of AWS out there very bullish on it Remo. Can I say that. Just a --

Remo E. Canessa -- Chief Financial Officer

A good team, I would say if you ask me, a year ago versus today I feel we are significantly ahead of where I thought it would be.

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

Operator, maybe we'll take one more question.

Operator

Thank you. Our last question will come from Yun Kim with Rosenblatt Securities.

Yun Kim -- Rosenblatt Securities -- Analyst

Thank you. Congrats on the solid quarter on the ZPA front, just wanted to ask about the competitive nature of that market, are you seeing some of the same competitors of ZIA for your ZPA product and also are you selling to the same department or highly typically two different buyers for ZPA and ZIA? Thanks.

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

So it's a good question. ZIA is generally driven by transformation in our ideal world we start from the ZIO go down to Head of infrastructure, who wants to transform the network and security gets broader long and it's a full blown play ZPA actually has a few different paths. I'll talk about three of them, because it's very different opportunities. One case that we go to the customers say if you applications are going to the cloud public cloud like Azure and AWS you don't need to go back through your data center go direct through Zscaler. It's a good opportunity in that case. So, who is the buyer it's actually generally Head of infrastructure, because he was providing that connectivity before.

Number two, many customers say yes I'll look at cloud, but I have one problem to solve today. My remote access VPN I hate it it's slow and it's not secure. So replacing that the VPN the buyer could be, security the buyer could be network. Third area very different buyer M&A when companies are bought generally they want to bring the networks together in the old world of network security. In the Zscaler world, you don't bring the networks together you simply with ZPA provide access to each other's applications transparently in that case traditional IT is lesser than buyer, you basically deal with, it is, it's a CIO level, but it's also sometimes for M&A team that's put in place to bring the two companies together some common buyer, some different buyers.

Operator

Thank you, gentlemen. That concludes our question-and-answer session. And I would like to turn the call back over to Mr. Jay Chaudhry for any closing remarks.

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

Well, thank you all for your time and we look forward to seeing you at our upcoming conferences this quarter. Thank you again.

Remo E. Canessa -- Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

Bill Choi -- Vice President, Investor Relations

Jay Chaudhry -- Chief Executive Officer, Chairman and Founder

Remo E. Canessa -- Chief Financial Officer

Alex Henderson -- Needham -- Analyst

Daniel Rivas -- Bank of America -- Analyst

Patrick Colville -- Arete Research -- Analyst

Andrew Nowinski -- Piper Jaffray -- Analyst

Saket Kalia -- Barclays Inc -- Analyst

Brian Essex -- Goldman Sachs -- Analyst

Matthew Wells -- Citi -- Analyst

Melissa Don -- Morgan Stanley -- Analyst

Fatima Boolani -- UBS -- Analyst

Dan Ives -- Wedbush Securities -- Analyst

Yun Kim -- Rosenblatt Securities -- Analyst

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