A：During the Z Scaler first quarter of fiscal year 2026 earnings conference call, the key topics discussed included the company's strong start to the fiscal year with accelerated year-over-year revenue growth of 26%, RPO growth of 35%, and a strong free cash flow margin of 52%. The discussion also highlighted the performance and contribution of the company's three growth pillars: AI security, zero trust everywhere, and data security everywhere.

A：The three growth pillars of Z Scaler are AI security, zero trust everywhere, and data security everywhere. These pillars contributed to the company's strong top line performance, with particular acceleration noted in the AI security pillar, which saw over 80% year-over-year growth and is expected to exceed a $500 million ARR by the end of the fiscal year.

A：Recent developments in AI security that highlight the need for specific security measures include an incident where a bad actor hijacked an AI coding assistant to carry out large-scale cyber attacks against multiple organizations. This incident underscores two important trends: the increased speed, effectiveness, and blast radius of attacks when performed by AI, and AI agents becoming a new weak link in security as they interact across enterprises.

A：Z Scaler has extended its Zero Trust Exchange to provide visibility into thousands of consumer-grade AI applications, such as ChatGPT. This allows enterprises to inspect prompts and responses and enforce proper guardrails for the safe and secure use of these AI applications. As a result, several large enterprises, including an AG 2K technology company, a Fortune 500 communications equipment company, and a large healthcare software provider, have adopted Z Scaler's Zero Trust Exchange for GenAI solutions.

A：Z Scaler has introduced solutions in three key categories to secure enterprise AI applications: AI asset discovery and management, AI red teaming, and AI guardrails. The AI asset discovery solution, called AI SPM, helps detect unauthorized AI applications, prevent over-permissions for AI agents, and strengthen governance for model deployments. The AI red teaming solution automates and continuously tests AI apps for vulnerabilities. AI guardrails provide inline policy enforcement for acceptable use of AI, cybersecurity, and data loss prevention, leveraging Z Scaler's core competency for runtime protection.

A：The company has secured over 90 billion AI ML transactions per month and acquired Red Canary to combine agente technology with data fabric technology for actionable insights. Fortune 500 companies in financial services, healthcare equipment, and energy have purchased the Agen tech solution, and the company is making progress towards delivering an AI power socket for customer operations.

A：The company is introducing several CSK digital experience innovations, such as Zx Copilot, which has driven over 80% year-over-year growth in bookings of Zdx advanced plus in the last 12 months. They are expecting AI security ARR to surpass half a billion dollars by the end of fiscal 26.

A：The Zero Trust Everywhere initiative has secured over 450 enterprises, surpassing the target of 390 by the end of fiscal 26. It helps reduce cost and complexity by eliminating legacy network and security products, and creates follow-on demand for data security and AI security. The Zero Trust Cloud component allows customers to eliminate VPNs and improve cybersecurity.

A：The Zero Trust Branch solution eliminates the need for legacy point solutions at branches, factories, and campuses. A global 2000 manufacturing customer more than tripled their ARR and became a Zero Trust Everywhere customer by purchasing the Zero Trust Branch solution.

A：The data security portfolio includes eight modules providing data discovery, data classification, posture management, data loss prevention, and more. Customers are consolidating data security functionality on a unified platform, eliminating data security point products. A large healthcare provider purchased five out of eight data security modules for 23000 users.

A：The Z Flex program enables customers to commit to spend and provides flexibility to swap or activate additional modules without new procurement cycles. It has driven meaningful upsells and reduced sales cycles, with Z Flex generating over $175 million in TCV and growing over 70% core over core.

A：The company's businesses are benefiting from the strong tailwind of the combination of Zero Trust and AI security. They are well positioned to capture the large and growing AI security market with their clear leadership in Zero Trust and comprehensive AI security offerings.

A：The company exceeded its growth targets in Q1 with an ARR of over $3.2 billion, reflecting approximately 26% year-over-year growth. Q1 revenue was $788 million, growing 26% year over year and 10% sequentially, exceeding the high end of guidance. The company ended Q1 with 698 customers generating over $1 million in ARR and 3754 customers exceeding $100,000 in ARR.

A：For Q2 fiscal 26, the company expects revenue in the range of $797 million to $799 million, year over year growth of approximately 23%, with gross margins around 80%, operating profit in the range of $172 million to $174 million, and net other income of about $19 million. Earnings per share are expected to be in the range of 89 to 90 cents, assuming a 21% tax rate and 170 million fully diluted shares. For the full year fiscal 26, AR is expected to be in the range of $3.698 billion to $3.718 billion, reflecting year over year growth of 22.7% to 23.3%, with an anticipated 47.8% of net new ARR to be recognized in the first half.

A：The projected revenue for the full year is in the range of $3.282 billion to $3.301 billion, indicating year over year growth of 22.8% to 23.5%. The projected operating profit is in the range of $732 million to $740 million, with earnings per share estimated at between $3 and 30 cents to $3 and 82 cents. The projection assumes a 21% tax rate and approximately 170.5 million fully diluted shares.

A：The Zero Trust Branch is showing early adoption and positive feedback, with a growing customer base exceeding 450 customers. Many customers start with a smaller rollout and then proceed to larger deals. An example given is a Global 2000 manufacturing customer whose ARR more than tripled. With about 4400 enterprise-class customers and only 10% penetration, there is a big opportunity for future growth. The Zero Trust Branch is an integral part of the Zero Trust Everywhere platform.

A：The growth of the three identified emerging areas is significantly outpacing the rest of the business. The remaining $2 billion in ARR is mainly tied to AI and CPA, but there is also a substantial opportunity to expand into Zero Trust everywhere. The core business is expected to grow at a smaller rate compared to the overall business growth. The company's goal is to transition every customer to a Zero Trust model across all areas, which is anticipated to be successfully achieved.

A：The integration of Red Canary is going very well, with the technical integration completed promptly. The engineering and product integration is going well, with the Red Canary technology being successfully incorporated into the C-skills platform. In the go-to-market aspect, the Red Canary team has become a security operations specialist team that is collaborating with the field sales organization to uncover new opportunities. Consequently, the majority of the Red Canary pipeline is now originating from these collaborations. It is mentioned that Red Canary is trending slightly better than previous guidance, though its contribution to the overall business is not deemed material, hence specific guidance will not be provided moving forward.

A：The three pillars of the company's platform are zero trust everywhere, AI security, and data security. The company is experiencing very strong growth in these areas, with AI security showing particular evolution and success.

A：The core business is performing better than internal expectations in the quarter, and the competitive landscape has not changed much. The company's brand has grown larger, and most large enterprises are well aware of them. New entrants in the market have not been significant factors, and the competitive landscape remains similar to the past.

A：Customers are prioritizing zero trust everywhere and AI security in their spending plans for 2023 due to recent breaches and the need to deploy AI applications. They are scrutinizing large deals but are still interested in these two areas despite challenges in the macro environment and tight budgets.

A：The company is focusing on two main messages: zero trust everywhere and AI security. They are creating a strong pipeline by showing cost takeout and eliminating point products. The company's expansion is driven by new functionalities and innovations in the zero trust market, distancing themselves from competitors and strengthening their position.

A：Organic growth in the quarter was consistent with the previous quarter and better than internal expectations. While specific numbers for net new ARR growth are not provided, the company hints at a positive trajectory, suggesting that the acquisition of Red Canary, Avalor, and Splunk could align with the threat intelligence market and add value through enhanced data visibility and threat intelligence capabilities.

A：The AI security platform, developed through partnerships with companies like Red Canary and leveraging technology such as smart agents, enhances security operations. It provides security analysts with meaningful intelligence, uncovering threats that other means might miss, which offers customers significant incremental value.

A：Customers are concerned with dealing with multiple vendors and sharing data with startups, leading them to seek a comprehensive AI security platform. The company has addressed these challenges by developing a portfolio of AI security platforms, including Gen AI, AI Guard, and AI Discovery, and acquiring technology like red teaming to provide a complete zero-trust solution.

A：The company has observed traction in AI security primarily driven by the demand for visibility into applications that users access, as well as AI asset discovery and posture management. This is evidenced by the successful launches of products such as general security, AI asset discovery, and core red teaming technology, which customers are adopting to protect their AI assets and ensure compliance.

A：The company is investing in innovations such as AI and red teaming technology while carefully managing its operating margins. As these models and technologies evolve, the focus is on maintaining consistent gross margins without drastic changes, and the company will inform stakeholders if there are any significant alterations.

A：The Zero Trust Cloud approach eliminates the need for many traditional firewalls, especially in cloud environments. It simplifies deployment and management, reducing the time needed to deploy solutions from hours to under 10 minutes. This innovation helps customers transition away from legacy firewalls and toward a more efficient zero-trust workflow.

A：The Zero Trust Everywhere initiative has been strong and successful. The company is seeing customers seek cost savings, operational efficiency, and enhanced protection. The initiative not only eliminates lateral movement that leads to attacks but also reduces the need for multiple products in branches, which drives down costs and complexity. The company views these factors as indications that the performance is exceeding expectations and signals a substantial opportunity for displacements and future growth.

A：Zscaler is positioned to benefit from SAP's shift to the cloud by providing a clean, simple, and elegant architecture that eliminates the need for legacy firewall technology, special access routes, and VPNs. This allows for better and faster user experiences and supports the quicker deployment and running of SAP applications. Additionally, Zscaler's cloud technology helps ensure protection and communication for the SAP applications.

A：The customer response to Z Flex has been very positive, with a 70% sequential growth in bookings. It is seen as a more significant commitment than on an a la carte basis and allows customers to easily deploy additional modules without negotiations. Z Flex also provides customers with the flexibility to modify their commitments as their business dynamics change. It has generated greater visibility for the company because of the longer-term nature of the contracts.

A：Z Flex might influence the company's future revenue visibility by providing greater long-term visibility due to the nature of the commitments made by customers through Z Flex. These commitments typically involve longer contracts, and the company understands how these commitments will play out in the future, potentially leading to more predictable and stable revenue streams.

A：The estimated impact of Red Canary on the company's full-year ARR has trended slightly better than previous guidance, although it's mentioned that the contribution of Red Canary to the overall business is not considered material. Going forward, the company will not provide commentary on Red Canary's impact on ARR.

A：The integration of Red Canary contributed to the company's outperformance in the first quarter by helping to trend slightly better than previously expected. The company's guidance for the full year includes the impact of Red Canary, which implies that the actual performance in the first quarter met or exceeded expectations.

A：Zscaler's data security offering is differentiated from competitors by several key factors: a comprehensive data security portfolio, enhanced data classification through AI leading to better detection, and a closed-loop system that leverages signals from Zero Trust to prevent data breaches. This system operates in tandem with the data fabric platform to quickly identify potential threats, offering a significant competitive advantage.

A：The exact average Z Flex upsell is not quantified, but it is implied that Z Flex has created a formal program to provide customers with flexibility, score modules effectively, and facilitate larger deals. The company is seeing good results from these initiatives and believes that growth in customers moving toward zero trust and AI adoption will be facilitated by programs like Z Flex. The Z Flex pipeline for the remainder of the fiscal year is not specifically quantified but is considered to be positive based on the company's overall performance and customer momentum.