Thank you for standing by, and welcome to the Zscaler Fiscal Year 2023 First Quarter Results Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentations, there will be question-and-answer session. [Operator Instructions] As a reminder, today's conference call is being recorded. I will now turn the conference to your host, Mr. Bill Choi, Senior Vice President, Investor Relations and Strategic Finance. Please, go ahead, sir.

Good afternoon, everyone, and welcome to the Zscaler first quarter fiscal year 2023 earnings conference call. On the call with me today are Jay Chaudhry, Chairman and CEO; and Remo Canessa, CFO. Please note that we have posted our earnings release and a supplemental financial schedule to our Investor Relations website. Unless otherwise noted, all numbers we talk about today will be on an adjusted non-GAAP basis. You will find a reconciliation of GAAP to the non-GAAP financial measures in our earnings release. I'd like to remind you that today's discussion will contain forward-looking statements, 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, future hiring decisions, remaining performance obligations, income taxes, earnings per share, our objectives and outlook, our customer response to our products and our market opportunity. These statements and other comments are not guarantees of future performance, but rather are subject to risks and uncertainties, some of which are beyond our control. 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, please see our filings with the SEC as well as in today's earnings release. I would also like to inform you that we'll be attending the following upcoming events in December, UBS Global TMT Conference in New York City on December 5. Nasdaq Investor Conference in London on December 6. Now, I'll turn the call over to Jay.

Thank you, Bill. I am pleased to share our Q1 results. For the quarter, our revenue grew 54% year-over-year and billings grew 37% against a difficult comparison. Normalized for higher billings duration a year ago, billings grew 42% as customers continue to embrace our Zero Trust Exchange platform to secure the digital transformation. Our disciplined approach to growth is enabling our operating profits to grow 76% year-over-year, with operating margins expanding by 150 basis points over the same period. Our free cash flow margin was 27%, which, once again, placed our performance above the Rule-of-80 for the quarter, a combination of growth and profitability that we believe only 1% of the public SaaS companies achieved. As the world's largest security cloud platform, we have outstanding unit economics in our business, reflecting high 90% gross retention rate and over 80% gross margins. These industry-leading retention and margins are possible because of our differentiated service and highly scalable multi-tenant cloud platform. In September, Zscaler celebrated our 15th anniversary. When cloud and mobility were in their infancy, we founded the company with a bold idea to transform security and the corporate network. We started with a clean slate and created the Zscaler multi-tenant in-line cloud platform, establishing modern Zero Trust architecture. This approach is now recommended by NIST, one of the most respected standards bodies in the industry. Our Zero Trust Exchange is built on a unique architecture that securely connects users, devices and applications using business policies, regardless of their location. I could not be more proud of all our accomplishments to date, and I want to thank our employees, customers and partners for being a part of this journey. The vision we started Zscaler with is even more relevant today. Hybrid work and public cloud adoption are now mainstream as organizations.…

Thank you, Jay. Our Q1 results exceeded our guidance on growth and profitability even as we manage through additional deal scrutiny and longer reviews. Revenue was $356 million, up 54% year-over-year, and up 12% sequentially. ZPA product revenue was approximately 19% of total revenue, growing 78% year-over-year. From a geographic perspective, Americas represented 52% of revenue, EMEA was 33% and APJ was 15%. Our total calculated billings in Q1 grew 37% year-over-year to $340 million against a difficult comparison. As we expected, billings duration was a headwind to growth this quarter. Our Q1 billings duration was above the midpoint of our normal 10 to 14 months range, but was below last year's higher levels. We estimate that duration negatively impacted our billings growth by approximately 5 percentage points. Normalized for this higher duration, our billings grew 42% year-over-year. Our remaining performance obligations, or RPO, grew 57% from one year ago to $2.682 billion. The current RPO is 50% of the total RPO. Our strong customer retention rate and our ability to upsell the broader platform have resulted in a high dollar-based net retention rate, which is once again above 125%. We have a strong base of large enterprise customers, which provides us with a significant opportunity to upsell our broader platform. At the end of Q1, we had 348 customers paying us more than $1 million annually, up 55% from 224 in the prior year. The continued strength of this metric speaks to our large enterprise focus and the strategic role we play in our customers' digital transformation initiatives. We added 128 customers in the quarter, paying us more than $100,000 annually, ending the quarter at 2,217 such customers. Turning to the rest of our Q1 financial performance. Total gross margin of 81.4% was up nearly 85 basis points year-over-year.…

Thank you. [Operator Instructions] Our first question comes from Matthew Hedberg of RBC Capital. Your line is open.

Great. Thanks for the taking the question guys. Maybe just a question on the sales segment reorg. It seems like a really good thing to achieve these longer term goals. Maybe just a little bit deeper understanding of what that looks like. And also, I think, Jay, you may have mentioned that there was maybe a slight impact to Q1 billings as a result of that. Wondering if that was the case and if there's any way to quantify that?

Of course, Matt. As you know, we start to pursue smaller enterprise segment a couple of years ago. At that time, we put the enterprise sales team under a global leader who directly reported to our CRO. As this segment has nicely grown, it was the right time for us to move it in geo teams under geo leaders. So that was one change. The second, we made changes where accounts got redistributed among our four market segments at the field level, as you know, we've got major, we've got large Enterprise and Commercial. And this contributed to a late ramp in a seasonally tougher Q1 but these changes are done, and we're already seeing better results, better pipeline, and we think this is the right thing for us to do to grow to our big target of $5 billion ARR.

Thank you. One moment please. Our next question comes from Alex Henderson of Needham & Company. Your line is open.

Great. Thank you very much. First off, I'd like to complement your outstanding execution in what is obviously a toughening environment. I was hoping you could give us a little bit of context of what's going on in the lower end of the marketplace for you. I know you don't do much in the SMB space, but that's obviously been an area that a lot of other companies have seen challenges. I was wondering if you were seeing any issues in what you call your smaller business segments. Thanks.

Yes. Alex, overall, I mean I think all segments were impacted in the quarter. I think the macro environment, as you mentioned is that all companies are basically feeling the macro impact. The enterprise segment change that we made also impacted basically results in the quarter. On the lower end, we're doing okay, but it did impact all segments. I think it's more driven by macro than anything else.

But Remo, the low end wasn't more impacted than others, so.

Yes. No, low ended a little bit better than the upper end.

Yes.

Thank you. One moment please. Our next question comes from Andrew Nowinski of Wells Fargo. Your line is open.

Great. Thank you very much for the question and congrats on nice -- another nice quarter. I guess, I just want to ask a question on the billings guidance. Maybe a little bit less of a raise than you've done historically. I'm wondering, number one, did you factor in a change in duration, or what kind of duration assumptions do you make with regard to your billings? And then did you add any extra levels of conservatism into that guide given the macro backdrop? Thank you.

Yes. The billing guide for Q2, the duration is similar to last year. It's slightly above the midpoint. One thing to call out for fiscal 2023, Q3 is going to have headwinds, because in Q3 of last year, the duration was longer. Related to the conservatism, related to our billing guide, it's really related to what we saw happening in Q1. So what we saw happening in Q1, we're taking forward into Q2 and for the rest of the year. What we're seeing basically is elongation of sales cycles. As we talked about and Jay mentioned on the prepared remarks, our deal size is getting bigger. Customers are buying more of our platform. It's more of a platform sale, all good. Our pipeline is increasing. Our pipeline is increasing five regions. Each region pipeline is increasing. But whereas before for the larger deals, we talked about, it was nine to 12-month sales cycle. It was trending down into more than nine months, now it's trending up more into the 12-month type range. So, all those things basically were taking into consideration with our guidance.

Remo, if I may add. The strong pipeline in Q2 is what we feel pretty good about. But we do know that there's a closing time factor we are factoring in.

Thank you. One moment please. Our next question comes from Joel Fishbein of Truist. Your line is open.

Thanks for taking my question. Jay, just wanted to follow-up on your comments about the Fed space. Obviously, being the only one that has FedRAMP high. I'd love to understand how you are positioned there competitively, how long the tail is on some of those deals as the government undergoes some of these security transformation projects. Just a lot more color around that. Thank you.

The Fed business was quite good for us. We have been building on it. We are investing on it. That's where it has taken us to all these certifications. The impact of macro is less on the federal business. It has its own budget cycle goes through its own process. We now have landed 12 of the 15 cabinet level agencies and we're helping them, and they all start actually at a fairly small level and they have been growing at a pretty decent pace. And so it's an early stage. Though last quarter, we did have sizable $46 million project, which actually gets billed on a periodic basis. So feel very good and strong about the Federal business, but Federal takes its own time in closing some of these deals.

Thank you. One moment, please. Our next question comes from Hamza Fodderwala of Morgan Stanley. Your line is open.

Hi, guys. Good evening and thank you for taking my question. Maybe for Jay or Remo, feel free to chime in. So, obviously, macro is impacting every company. So that's clear. I think on the other hand, Zscaler did have the chance to, kind of, give a full year guide back in September. And it seemed like at that point, a lot of your outlook seemed derisked for what we're growing macro concerns at that time. So is it really these sales force changes that's driving that perhaps somewhat incremental headwind that you're talking about? And are we talking about a full-on sales reorg, or is it just some tweaks that are being made to help you align better to your long-term growth opportunities. Thank you.

Yes. I'll start. I think it's both the macro basically things that we're seeing. For the full year guide that we had at beginning of the year, we had $1.2 billion -- $1.92 billion of billings growth up to $1.94 billion. The billings growth that we've revised it to was $1.93 billion up to $1.94 billion. So the midpoint has increased. Macro is playing into it. And what we've talked about is that, if there's uncertainty related to the macro, and that's why we gave the guide that we did and we tried to derisk basically our guide, but it's both, it's really primarily the macro and also somewhat the changes. But as Jay mentioned, the changes are pretty much behind us and things were looking very positive.

Yes. So, if I may add, first of all, it was not a full reorganization. As I said, we have four segments. And as our deals are getting bigger, some of these deals that sat in lower segments, they're getting bigger. They need to be handled by the upper segment and so on and so forth. So realigning the segment was good for us to optimize the deal size and who should be working on them. It's that. And the second was, this lower enterprise team, which used to report to the CRO directly, now is linked to geos. So they're not massive changes, but they are more than normal that we typically have done. But none of these deals are going away. We are well positioned. We're winning some already. We are working on more. So -- and as I said, the pipeline, as a result of some of these changes made, is growing. And I feel very good and comfortable about it.

Yes. One other point. Really, when you take a look at the amount of accounts that shifted, it was a pretty substantial amount of accounts that shifted, into the various segments. So, again, as we mentioned, as Jay mentioned before, we feel largely that is taken care of. Could there be some impact going forward, there is. But again, from our perspective, it's largely macro.

Thank you. One moment, please. Our next question comes from Tal Liani of Bank of America. Your line is open. Please, make sure your phone is on unmute.

Here you go. Can you hear me now?

Loud and clear.

Perfect. Thank you. I have two related questions. The first one is Prisma -- Palo Alto Prisma had much better-than-expected results on the same kind of like-to-like. And the question is, do you see any changes in the competitive landscape? Do you see any changes in the pricing dynamics and aggressiveness of other players that might drive some of the changes we're seeing? And the second question is, I want to understand the bigger picture. If someone asked me a year ago what could be the impact of economic slowdown, I would say that this particular area where you're acting should not be impacted much because you're replacing CapEx with OpEx, and you're actually enabling the change to customers without putting out tremendous CapEx upfront. So if they are budget issues, they should actually do it. And the question is, why are we seeing this area impacted as well despite the fact that it enables companies to lower their spending if they need to?

Yeah. So okay, I'll start. Your first question about competition and pricing dynamics, I'll tell you on the higher end of the large enterprise segment, we haven't really seen much competitive changes at all. These large enterprises aren't savvy. They look for the right architecture. They take this thing very seriously. And almost all these large deals, when firewall companies have tried to come in and compete, they're often excluded. I mentioned some of them during the call. So I do wonder where do those deals come from, because if you ask me some of my largest deals, if you took top x-deals, we aren't really competing with the firewall companies out there. Price dynamics will matter if you really are competing. That's number one. But also number two, the service we're selling is very mission critical. In fact, it's probably more mission critical than Office 365. That's what I hear from CIOs, because we are on the switchboard. We are connecting everything to everything. So we have not seen pricing pressure from competitive side of it. We have been told a few times that the customer said, yes, this vendor came and offered us a third, the core price, but we decided we are not serious about it because it doesn't meet the requirements. Your second part of the question was impact of economic slowdown. It is very true that the area we are playing in really does two things for customers. One, it's important cyber area. Number two, with consolidation, simplification and standardization, customers do save money. So those are the two things that are helping us a lot more than many other market segments. But when the broader macro is there's, obviously, some impact but I would say, relatively speaking, it is far less than other areas. As I had talked to many CIOs and CXOs, they don't see securely budget getting reduced much. As compared to IT budgets, we are in a much better shape, but there is impact. And sorry, and one part of the impact is these large deals are going more and more through CFOs and CEOs for approval.

Thank you. One moment please. Our next question comes from John DiFucci of Guggenheim. Your line is open.

Thank you. So guys, this macro slowdown is much different than the last one we saw due to COVID, where Zscaler benefited from more distributed access. So as we look out into fiscal 2023 and beyond, as we layer in the soft and perhaps softening, further softening macro backdrop, how should we expect the appetite for new customers to undergo a transformation of their security paradigms?

Yes. That's a good question. You're basically saying, will new customers start transformation projects? It depends upon what kind of projects you're looking at. CIOs are prioritizing projects must do versus projects that can wait. That's one part. But if you look at what we do, where we fit, okay. Cyber is not going away. The risk of cyber is still there. It is a Board-level discussion. It's happening. Number two, there is pressure on cost consolidation and simplification. Yes, while customers won't start big new projects, but projects that can be done without big investments, and they are being done. If you look at the total IT budget of a CIO and the security is a fairly small part of it. By engaging at the CIO level, we are actually able to get a fair share of the budget. So I think we feel pretty good about fiscal 2023. Having said that, will there be a bigger hurdle to cross to close those deals? Absolutely, yes. But to do so, you need two things: one, you need CIO, CXO level engagement, which we have traditionally done; two, you need better business justification to make a strong case CFO that it makes sense. And we have been doing that for quite a while, and now the number of assessments, value assessment we're doing is actually much higher than it used to be.

Yes. A couple of comments, John. So our split with new and upsell in Q1 was approximately 50-50. Now Q1 was driven, Jay talked about on the call, Federal calls. We had large Federal deals. And also we did well in the financial sector with new accounts. So that's on a go-forward basis, I still think for fiscal 2023, as I mentioned before, probably the 40-60 range is probably the right way to think of things 40% new, 60% upsell. But we shouldn't lose track to how big this market is. I mean this market from both user and workload, we estimate that two years ago to be $72 billion, that's clearly bigger now. I mean it's growing. And you look at the penetration that we have in this market as well as others, we're in the very early stages built, so as you go through this global economic macro environment, it's going to work itself -- through and we're in a position now that the macro environment is not favorable, but it will turn, it will turn. The advantage of Zscaler is that from a cost perspective, security perspective and user experience, it is a top platform we feel in the world for networking and security. So again, we need to kind of way through this macro environment, keep on executing, and we feel things will take care of themselves.

Thank you. One moment please. Our next question comes from the line of Roger Boyd of UBS. Your line is open.

Great. Thanks for taking the questions. I think you gave the contribution of emerging products to new business, and forgive me if you did, but it sounded like you did have some nice wins in the quarter there with ZDX and Zscaler for workloads. So I'm wondering if you can just update us on how you're thinking about upselling these solutions in the current environment relative to your guide last quarter for, call it, high teens percent of the new business. Thanks.

Yes. Hey, Roger, they're tracking still to the high teens. So they're doing well. ZDX and our cloud protection products are tracking in the high teens for the year.

Yes. If I may add, ZDX has been our fastest-growing service. It has grown faster than ZPA, if you look at a similar time line or similar stages. And the cloud protection has two main areas. One is, what we call, CNAPP, its API-based security, that's a posture control product. And second is, Zero Trust in workloads for in-line security, and we are the only vendor who has done tight integration between the two. And our actually customer interest has been pretty strong. Our new ACV nearly doubled year-over-year for our Zero Trust for workloads. I talked about a couple of deals, large deals during the earnings thing. One was a seven-figure ACV workload deal. It more than doubled customers' annual spend with us. That's significant. Another deal I mentioned, workloads now represent one-third of this customers are $1 million annual cost spend with us. So these things, which used to be fairly small three, four quarters ago, are beginning to get pretty significant.

Thank you. One moment, please. Our next question comes from…

Nice conversation. And if so, is it fair to assume that in the first -- hi, can you hear me guys?

Yes.

Hey. So just a quick question. You talked about the pipeline growing. Just wondering, is the coverage ratio growing at a significant enough level to offset the elongation in sales cycles. Thank you.

We take that all into account in our guidance. So it's all been taken into account in our guidance. And -- so, yes, it's been taken into account.

Thank you. One moment, please. Our next question comes from the line of Fatima Boolani of Citi. Your line is open. Our next question comes from Fatima Boolani of Citi. Your line is open.

Hey, good afternoon. Thank you for taking my questions. Either for Jay or Remo, please chime in. I appreciate a lot of the commentary you shared around the opportunity that you have with large multi-year, multi-pillar deals, the pipeline composition for those types of transaction is increasing, but against a much, much tougher environment. So there's a little bit of a dichotomy there, and I wanted to peel that back a little bit, because if your business and execution and pipeline is that much more reliant on some of these larger deals and the environment is admittedly harder to execute in. What are some of the things that you are doing and that you have under your control to make sure that we don't see the type of slippage that could cause some more variability into your building performance? And just as a related matter, are you changing incentive to ensure you're driving that type of behavior and successful close rates on those large transactions, which, it seems like you're becoming more dependent on. Thank you.

Right. Fatima, yes, multi-year, multi-pillar deals, those pipelines are growing. And, yes, tougher environment with more scrutiny and more approval levels, that's what we're seeing. So there are two significant trends that we have been doing that are helping us to make sure we're able to get those deals closed. One is customers look for better business justification. That's what I mentioned on CFO-ready business cases, business value assessment, which we do to help quantify them. If you remove these eight-point security and networking products, this is the ROI you can get. And in fact, we're showing more than 200% ROI in many most majority of our cases. That's very strong. It's -- we've done it. We're doing a better job in that area. The second thing to get deals done in a tougher environment is having strong C-level engagements, because you're going to make a case there to show what needs to be done. And also, if you're part of the CIO's budget rather than just security budget, you actually have a better chance of doing it. Both of those things are helping us, and we are keeping those factors in mind as we are providing you our forecast.

Yeah. And from an incentive perspective, I wouldn't say we're doing anything out of the ordinary that we've done in any quarter. So no real changes from an incentive perspective.

Thank you. One moment please. Our next question comes from the line of Mike Walkley of Canaccord. Your line is open.

Great. Thanks for taking my question. Just maybe following up on that last answer. As you work with closing these larger deals, are these larger customers may be slowing their pace deployment to help their own OpEx in terms of how they're ramping deals, or once you close them, they're ramping similar to prior experiences?

Yes. So it is an interesting dynamic in the market. Market is tougher. But when CIOs look at what needs to be done, they look for consolidation, simplification that's driving our deals to get bigger. Bigger deals mean more scrutiny. Now and -- but we are helping our customers to ramp into larger commitments to deploy our platform. So it is a phased thing we are doing. So we are -- we have been doing that for a few quarters, and it does continue.

Yeah. So we're not seeing any increased ramping. It's always been part of our business. We've called it out. I mean, you look at the type of deployments we have with hundreds of thousands of users, you can't do that overnight. So again, we're not seeing any increased ramping, and it's been part of our business for a long time.

Thank you. One moment please. Our next question comes from the line of Joshua Tilton of Wolfe Research. Your line is open.

Hey, thanks guys for squeezing me in here. I just have two quick ones. First one goes back to Andrew's question. I just want to ask it a little differently. If 2Q has normal duration comps, is there any reason we shouldn't expect that billings growth should return to this 40-plus range that you saw in Q1 after adjusting for the duration? And my second question is, if you look at the deferred revenue, it did decline sequentially from 4Q to 1Q for the first time in a while? So just anything unusual to call out there.

Yeah. I mean, you've got our guidance. So we feel comfortable with it and how we're going to come in. We'll see at the end of the quarter. Related to the decline in deferred revenue Q4 to Q1, again, there's seasonality to our business. So the growth rates from Q4 to Q1 have been very small. It declined slightly this quarter. Nothing really to call out other than seasonality and our performance in the quarter.

Thank you. One moment, please. Our next question comes from the line of Peter Levine of Evercore. Your line is open.

Great. Thank you for squeezing me here. So maybe one just to kind of repeat, I think, on an earlier question from John, could you talk about what you're seeing at the top of the funnel meeting? Given we are kind of closer to the tail end of the COVID work-from-home wave of deals that you saw, could we -- is there a risk of a drop off in the pipelines or hit to net new billings, obviously, given the backdrop here, but it sounds like 2Q pipeline seems strong, but any color you can add to that?

Yes. The Q2 pipeline is strong. It is a record pipeline. We did get some benefit of COVID, but that was starting in March of 2020 and most CIOs had to do something in a quarter or two of that. So most of the effect of COVID actually ended by mid of 2020. So since then, it is kind of growth of our business driven by the need for security, transformation, digital transformation and the like. I think we have been doing good pipe funnel. It is true that some of the changes we made in start of Q1 did kind of cause some slowdown for us. We are past that. It's a good pipeline. And the question is how much -- how well do we overcome the scrutiny and extra level approvals to land the deals we need to land. And that's what we are working on. That's really part of our job, but good strong pipeline. Remo, you want to add anything? Okay.

Thank you. Our next question comes from the line of Keith Bachman of BMO. Your line is open.

Hi. Thank you very much. I wanted to ask Remo a question, and there's two parts to it. Remo has been talked about the billings beat this quarter was one of the smallest in many years, and you're moving the midpoint up, but the top end of the billings guide is remaining the same. The macro has gotten tougher. Last quarter, I think a lot of us jumped off the call and said, it seems like Zscalers derisk the numbers. But given all that backdrop, it just seems like there's been incremental risk introduced to the billings and just wondered if you'd characterize I'd like to respond to that. And the second part of the question is you're raising op income by about $6 million from the previous guidance. And yet it seems like, how would you respond to -- why not raise it more if in fact, the growth isn't accelerating and you kind of keep the billing range to saying, why not give a little bit more on the op income side? That's it for me. Thank you.

Yes. I mean, great questions, Keith. If the macro environment has changed. I mean, we talked about the uncertainty going into calendar 2023. There's a lot of uncertainty in -- mean, you're seeing all the earnings reports coming out or most of the earnings reports. And we're all seeing the same thing. It's the macro backdrop, which is the primary reason. As I mentioned, secondarily, is the enterprise segment change, but that's a lot less. So the macro environment has changed. That's number one. Related to getting more operating profitability, as I mentioned, with our contribution margin as high as it is in years two and three, it's over 60%, getting to operating profitability is the easy thing, but I believe it's short changing, the company and our shareholders. It's -- if you look at our free cash flow margin, you look at our profitability, we are increasing our operating profitability, we're going to be prudent and disciplined related to our approach in how we're going to run the business. The key thing is -- and the size of this market, and its early stage. Our priority is growth. And -- but we will -- as we go forward, as you've seen, a slight increase in operating profitability, we're more focused on operating profitability than we have been in the past. But it's going to be a measured approach from our perspective. It will be measured in what we feel is the right balance and really true on our business.

Thank you. One moment, please. Our next question comes from Shrenik Kothari of R.W. Baird. Your line is open.

Hey, guys. Thanks for taking my question. Either for Jay or Remo, just chime in. You spoke about Federal vertical, call our friends in financial services, vertical clearly, our top 10 global banks for your $10 million commitment. So, broadly, we'll be hearing, thinking in some verticals, to tech or CPG retail kind of getting impacted more than others, including public sector to science, utilities, more solid. Is that something that you guys are observing in terms of bifurcation or divergence in sectors there? Is there a guidance now building into itself a potential accelerator of macro into so far less of factored verticals, yes?

I'll speak specifically about the verticals. Jay, if you'd like to add more comments, please do. In Q1, the verticals that we saw do well for us were financial, federal services and healthcare. Those are the strong verticals for us. Have we taken into account the impact of verticals going forward? The answer is yes, not specifically per vertical, but current customer and where that deal is, in the deal cycle. So it is being taken into account. But speaking to other verticals, maybe, Jay would like to comment more on that.

Yes. I think, even though we did well in some of the verticals Remo pointed out, I'm not sure overall vertical is a big, big factor. Macro is impacting broadly, but there are certain verticals that have less, for example, in oil and gas, doing differently than many of others. But I won't say it's a big factor for us. It is a factor, but not a major effect.

Thank you. One moment, please. Our next question comes from the line of Saket Kalia of Barclays. Your line is open. Please, make sure your phone is unmute. Our next question is from -- okay

Sorry. I'm so sorry. I was on mute there. Hey, guys. Thanks for taking my question here. A lot of my questions have been asked. Jay, maybe for you, just a little bit of a broader one. Clearly, the fiscal year for Zscaler is very different, but -- than a calendar year. But a lot of your customers operate on December fiscal years. Maybe the question for you is, what have you heard anecdotally, just on the prospect of budget flush this year from your customers? Is that something that you think is going to be more muted for security this year, or is it more related to timing? Any perspective that you have there would be helpful.

Look, as you have seen in the past few quarters, deals are getting more and more back-end loaded. We saw that a few quarters ago. We saw it in Q1. We think we will have a linearity thing, similar to Q1, maybe a little bit better than Q1. But I don't think that December will significantly change everything out there. Remo?

Yes. I mean from -- could there be a positive impact related to 12/31 December, there could be. From a linearity perspective, low socket, I would be thinking something similar that we've had basically in Q4 and Q1, which is more back-end loaded. But can it happen? It can, but I would be thinking more of a similar type of linearity.

Thank you. One moment please. Our next question comes from the line of Adam Borg of Stifel. Your line is open.

Awesome. Thanks so much for taking the question. Just two quick ones just on the Federal space. Not sure if I missed it, but what was the mix that the Fed business represented in the quarter? And when you think about the opportunity, it's great to hear those wins, is it really just on ZIA and ZPA, or what's the opportunity for ZDX and Zscaler for workloads in the Federal space? Thanks.

I'll start at the broad level for a month, and you can get into specifics. Yes. Federal is most of the stuff in place is ZIA and ZPA, but it's building strong interest on ZDX and some of the newer products. But currently, it's a strong mix of ZIA and ZPA.

Yeah. From -- as Jay mentioned, 12 of the 15 cabinet agencies, four deals greater than $1 million, it's clearly a good quarter for us for Federal. We'll beginning how Federal is doing on an annual basis on a new and upsell perspective. So -- but Federal was a strong, good quarter for us in Q1.

Thank you. Ladies and one, this does conclude our conference. I'd like to turn the call back over to Jay Chaudhry for any closing remarks.

Thank you for your interest in Zscaler. We look forward to seeing you at upcoming investor events. Thank you, and goodbye.

Thank you.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.