Good day, and thank you for standing by. Welcome to the Zscaler Second Quarter 2026 Earnings Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Kim Watkins, SVP of Investor Relations and Strategic Finance. Please go ahead.

Good afternoon, and thank you for joining us today. Welcome to Zscaler's Second Quarter Fiscal 2026 Earnings Conference Call. On the call with me today are Jay Chaudhry, Chairman and CEO; and Kevin Rubin, CFO. Please note that we posted our earnings release, shareholder letter 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. Before we get started, 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, annual recurring revenue, net new annual recurring revenue, gross margin, operating profit, net other income, earnings per share and free cash flow margin, our customer response to our products, our expectations regarding AI and its impact on our business and customers, and our market share and market opportunity and our objectives and outlook. These statements and other comments are not guarantees of future performance, but rather are subject to risks and uncertainty, 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 these risks and uncertainties, please see our filings with the SEC as well as in today's earnings release. I also want to inform you that we'll be attending the following conferences: Morgan Stanley Technology, Media and Telecom Conference on March 2; Loop Capital Markets Investor Conference on March 10; Stifel Technology Conference on March 10; Cantor Global Technology and Industrial Growth Conference on March 11; and Wells Fargo Software Symposium on April 8. And with that, I'll turn the call over to Jay.

Thanks, Kim, and thanks to everyone for joining us today. We delivered strong Q2 results, and I couldn't be more proud of the team's execution. ARR grew 25%, reflecting continued strong demand for our platform. We are confident in our outlook for the second half of fiscal 2026. And as a result, we are increasing our guidance across the board. I'd like to zoom out for a moment and talk about what's on everyone's mind, AI. AI is the single most transformative technology of our time, and its mass adoption is only just beginning. We believe Zscaler is the security platform for the AI era, because we already protect users, data and applications across clouds and the Internet at scale. Just as we enable customers to securely accelerate digital transformation and cloud adoption, we believe we are uniquely positioned to secure the AI transformation, driving continued demand for our platform. Organizations are rapidly adopting AI to drive productivity and innovation, but doing so is creating new vulnerabilities, significantly expanding the attack surface and increasing cyber threats in scale, sophistication and speed, recasting AI from a productivity engine into a dangerous security threat. During my conversations with more than 100 CEOs and CIOs, including many at the World Economic Forum in Davos last month, the urgency of securing AI is one of the top concerns on their minds. This is the opportunity for Zscaler's industry-leading Zero Trust Exchange, which enables our customers to securely scale AI for the agentic era and beyond. Zscaler minimizes the attack surface and limits lateral movement with our unique Zero Trust architecture that enables direct one-to-one communication among users, applications and AI agents. I started Zscaler with an initial focus on securing users with Zero Trust. Then we extended our platform to deliver Zero Trust for…

Thanks, Jay. We delivered strong Q2 '26 results, exceeding our targets while investing with discipline. With 26% revenue growth and a 36% free cash flow margin, we achieved Rule of 62 performance in the first half of the year, placing us among the elite companies that consistently outperform the Rule of 40. Our Q2 '26 net new ARR was $156 million, up 19%, bringing total ARR to $3.4 billion, up 25% year-over-year. Net new ARR benefited from strength in large deals and volume of deals. In particular, the Americas closed twice the number of $1 million-plus deals this year as compared to last year. Excluding the contribution from our acquisition of Red Canary, net new ARR was $139 million, up 7% year-over-year and total ARR up 21%. These results compared to an exceptionally strong 24% net new ARR growth last year. Red Canary exited Q2 with $114 million of ARR. For the first half of the year, net new ARR, excluding Red Canary, grew 10% year-over-year, accelerating from 1% last year. This quarter, our Zero Trust Internet Access, or ZIA, and Zero Trust Private Access, or ZPA, ARR remained healthy and grew in the mid-teens. We have steadily expanded our Zero Trust platform beyond users to protect branches, workloads, AI applications and now AI agents. We believe AI agents will drive a meaningful increase in machine-to-machine and agent-to-agent interactions over time. In Q2, our non-seat-based metered usage solutions delivered just over 1/4 of new ACV and the ARR tied to those offerings grew more than 100% year-over-year. Revenue of $816 million grew 26% year-over-year and 4% sequentially, exceeding the high end of our guidance. We closed Q2 with 728 customers generating over $1 million of ARR and 3,886 customers exceeding $100,000 in ARR, both growing 18% year-over-year. We also set…

[Operator Instructions] Our first question will come from the line of Saket Kalia of Barclays.

Thank you, team, for the increased disclosure on Red Canary. Very helpful. Jay, maybe for you. I'd love if you could talk about just the competitive backdrop a little bit and anything you can touch on in terms of competitive win rates and what you saw this quarter. I mean, clearly, this is a rising tide market, but there are other players as well. Maybe the question is, where are you winning? And what impact, if any, are they having?

Thank you, Saket. We haven't seen much change in the competitive dynamics over the past few quarters. What we saw was a record pipeline conversion for Q2, which is wonderful. And we also had a record Q2 in terms of large deal wins in Q2, and by large deal wins, I mean, over $1 million. I mean, there's a fair amount of noise the market creates out there, SASE this, SASE that. SASE is a collection of all kinds of products. In many of these SASE numbers, legacy firewalls, VPNs get thrown out. But what we are seeing in the market is our customers care about Zero Trust. And as we engage and explain Zero Trust, we almost always win. And by the way, SASE is not equal to Zero Trust, and Zero Trust is what eliminates lateral movement. So very pleased with the performance. Our brand has grown. Most of the large enterprises like us, they know us. And I think the future is great for us.

Our next question will be coming from the line of Brad Zelnick of Deutsche Bank.

Congrats again on another great quarter, guys, and also appreciate the additional disclosure. Kevin, it seems you're raising your full year ARR expectation by more than your overachievement in Q2. How much might be from newer acquisitions? And are there any seasonal anomalies we should consider, perhaps slipped deals out of Q2 or anything like that?

Thanks, Brad. I appreciate the comments and the question. First of all, just remember, our business seasonality tends to favor H2. So we are going into the second half of the year feeling confident. We do see a strong pipeline of deals going into the back half, which does give us confidence in the raise, excluding Red Canary. So I would point to strength in the overall business as well as just general seasonality that we see in the back half of the year.

Our next question will be coming from the line of Gregg Moskowitz of Mizuho.

Also welcome the additional disclosure. So thank you for that. Very interesting that your non-seat-based meter usage solutions are now over 25% of new ACV. That's higher than a lot of people had thought. And with the related ARR more than doubling year-over-year, this has the potential to put some upward pressure on the growth algorithm for Zscaler in the future. But Jay, when you kind of look deeper at these non-seat-based solutions, you gave some good color in your prepared remarks, but can you help us better understand what's really most resonating with customers today as well as what you're most excited about going forward?

Of course. Yes, we started early on with Zscaler for users for Zero Trust that is largely seat-based. But now we have Zero Trust for workloads, branches, devices, and now we are extending it to AI agents as well. Now even for users, we did have a number of use cases that are non-seat based. This is ZIA, ZPA, where we were doing third-party contractors, guest Wi-Fi or B2B data exchange with suppliers and customers. And yet our growth on Zero Trust Branch and Cloud has been very strong, and that's all non-user or meter pricing. Our AI Security solutions, which are starting small but growing pretty rapidly, are all non-user-based, rather they are token-based. And yes, we are pleased to say that 1/4 of our new business came from metered usage, and we expect it to grow over time, especially with AI agents, because we believe that there will be billions of AI agents. The only way to secure communication of AI agents is to go through Zero Trust Exchange that scales, that's highly reliable and globally distributed, and that's what we have.

And our next question will be coming from the line of Brian Essex of JPMorgan.

Another set of kudos to Kevin for the organic versus inorganic disclosure. Maybe a question for you, Jay, and we saw this quite a lot during -- like a decade ago when digital transformation was the buzzword and a lot of different IT projects were classified as digital transformation products. Similarly, we're starting to hear of a lot of projects where executives are throwing AI on top of their projects to get more budget. And from that perspective, are you beginning to see any attach to budgets outside of security? How are CIOs thinking about funding some of these projects? And is Zscaler a beneficiary of that?

Yes. So we are seeing CIOs trying to really move as fast as they can to implement AI security projects. The kind of feeling is, if I'm not doing something, I'll be left behind. That's a clear thing I see as I talk to lots and lots of them. But they do all worry about cybersecurity, especially when you see all these agents showing up every other week. I mean, last night was Perplexity Computer and Claude before that and all these guys keeps on coming. They are definitely creating security issues. So our customers are asking us, what can you provide me for visibility into AI assets and risk associated with that. And then start moving around. How do we control agents? How do we have a policy that can say certain agents can access certain applications. Agents are somewhat like you. They're just more dangerous, and they're growing at a rapid pace. So there is a high degree of interest in proper security, especially Zero Trust or agents that we provide. The budget opens up. The budget either comes from the security side of it or the CIOs are allocating some number of budget out of the AI project. If you're spending $100 on an AI project, you spend $4, $5, $6 on security is viewed as very nominal thing. So we're not seeing budgets as an issue to do AI security projects. It does require that you need to engage at the C level, and we have very good C-level relationships. And we have pretty good brand and credibility with Fortune 500 companies.

Our next question will be coming from the line of Meta Marshall of Morgan Stanley.

Maybe a question for me, kind of following up on Brian's question of just what you're seeing in terms of sales cycles once kind of a deal is encompassing more AI. I guess just how does it change the dynamic of either kind of needing to take a more holistic view or needing to include more modules? Just what are you seeing there?

Thank you. So sales cycle depends on the scope of the project. The first thing our customers are trying to do is put their hands around what do they have in AI environment, what public AI application is being used and what private AIs are being used. So for that, we offer AI asset management. Then they want to do vulnerability assessment, teaming kind of stuff. As they roll out the project, guardrails become important. Last month, we launched a very integrated AI security portfolio. The sales cycle based on what modules they're doing is generally faster, because they are not really trying to go after everything, they want to start somewhere, but they want an integrated solution. And a number of customers have told me, hey, we bought this solution from a start-up, but for 1 year, until I figure out what integrated solution can I get from a trusted vendor like Zscaler, who will be around for the long term. So these sales cycles are faster. They are smaller deals to start with, and I think they'll grow over time, especially most of those deals are based on consumption or tokens. And as usage grows, users or tokens will grow.

And our next question will be coming from Fatima Boolani of Citi.

Kevin, this one is for you. I was hoping to take a step back to have you reconcile the comments around Red Canary seeing elevated churn, but also the close to 30% revision on your financial contribution expectation from Red Canary, both to ARR and top line on revenue. So just wanted to kind of better understand. I know you sort of flagged that the Red Canary business generally had much higher levels of churn relative to Zscaler proper. So I just kind of wanted to better understand the dichotomy between those statements and if you can opine on that.

Yes, I appreciate the question. So look, I mean, there is an element here that, as we talked about when we did the acquisition, as we do secure the renewals, there is a positive impact to ARR. And so you are seeing some of that come in. My commentary just around the elevated levels of renewals is just to give color around what we are seeing. As a reminder, Red Canary was a technology and talent acquisition, and it is a core feature of the Agentic SOC that we are putting together and combining. And I mentioned that we moved into the next phase of our integration earlier this month and now consolidating those teams, which we're really excited about. So I mean, the reconciliation is really just to give you guys a sense for what we're seeing in the business and how you should think about the second half of the year.

And our next question will be coming from the line of Roger Boyd of UBS.

Jay, I want to touch on sales productivity. You've made a number of changes to the go-to-market strategy over the past year in order to really help guide customers towards more transformational projects. And I know you mentioned another improvement this quarter, but can you talk about kind of the future ramp you're expecting in terms of sales force productivity? Do you see further room to upside given the push towards more of these transformational deals that are bigger, but maybe more complex?

I'll give you a broader view, and Kevin can get into more specific stuff. With the changes we have gone through, we are driving more transformational deals, better engaging with our customers. With that, you're seeing bigger deals, Z-Flex type of deals that are happening and that's leading to improved productivity. In fact, rather, we had a double-digit sales productivity growth. Very pleased with the way sales transformation has happened. As we said last quarter, the transformation is done. Now we keep on executing further. Kevin?

Yes. Thanks, Jay. So I want to just kind of double-click on that last point, right? So as we engage with our customers, the account-centric model is a much different level of engagement. We're seeing a lot of interest in Z-Flex and what that looks like from a strategic point of view. And so the nature of the conversations, the way in which we're engaging, the larger deals that we're seeing all will lend itself to continued productivity opportunity going ahead. So as I look forward, I would expect that we will continue to see improvement in productivity as a result. So we are seeing the benefits, and I expect that we'll continue to see an improvement over time.

And if I may add, the record pipeline conversion in Q2, as a good indication of that what we want to do is working. Record $1 million dollar deals in Q2, another indication of the results we're getting.

And our next question will be coming from Ittai Kidron of Oppenheimer & Company.

Kevin, I wanted to dig in into your comment on the core ZIA, ZPA growth. I think you mentioned mid-teens in ARR. Can you give us a little bit more color what was that growth rate over the last 2, 3 quarters perhaps? And how do we think about expectations for your core ZIA, ZPA business for the next 2, 3 quarters?

Yes. Thanks, Ittai. I appreciate the question. We have seen a pretty consistent performance in ZIA, ZPA. We did get some feedback that it would be helpful for you guys to get a little bit more color in that regard, which is why I added that into the script. Keep in mind that ZIA, ZPA as it relates to Zero Trust Everywhere is the foundation and, to a large degree, the base and the opportunity. If you look at the number of customers that we have today, roughly 4,400 out of more than 20,000 potential companies that we think can be customers, you look at it in terms of the Fortune 500, where we still have over half of those to prospect against, there is a massive opportunity left with ZIA, ZPA as we think about it. And even within the companies that we do have on ZIA, ZPA, we have an opportunity to upsell those to Zero Trust Everywhere and then adjacently through the other pillars, Data Security and AI. So from our point of view, it just reiterates the stability in the underlying business and really gives a sense for what's driving kind of the core of the business. But again, we've got these other 3 growth pillars that have been doing exceptionally well. And hopefully, that additional color is helpful for you.

One interesting stat on ZIA is that customers on average are tripling their initial purchase in 4 years. That's pretty remarkable.

And our next question will be coming from Gray Powell of BTIG.

Okay. So I want to follow up on some of the earlier questions, and I think you've hit on this somewhat. So you are seeing a lot of momentum in Z-Flex deals. If I'm doing the math correctly, I'm calculating that Z-Flex was over 30% of RPO bookings. I'm not sure if that's how you look at it. But I guess the question is, how does the ARR ramp on a Z-Flex deal compare to customers under historical contracts? And then just any directional commentary you can give on how big a typical Z-Flex customer is at maturity versus traditional or like what they spend? And what's sort of like giving you the most upside from a product perspective?

Yes. Thanks for the question. Let me maybe just orientate -- I mean, the way that we look at Z-Flex is it is another opportunity for us to offer a package to a customer that we think is mutually compelling. It gives them flexibility, so they have less concern about being locked into a particular product or product decision in the future. It gives them an opportunity to focus more on long-term partnership versus more transactional selling in nature. And then it does give an opportunity for them to try, in a much easier, less friction way, new modules and expand into those modules. So from a from an offering perspective, it is a much better and more strategic way to engage. We do think over time that more and more of our customers will adopt Z-Flex. It is not something that we mandate or push, but where we feel that it really is well positioned, the field is enabled to be able to offer Z-Flex going forward. Your question around differences in ramps, et cetera. Fundamentally, 2 deals, if it's a Z-Flex or if it's a non-Z-Flex, so long as they're similar structure, there's no difference in how that shows up in ARR. Z-Flex is by their nature, because they're longer term, they've got more products, they may have a ramp that is built in, so that the customer can deploy along their deployment plan, which could take anywhere from 6 months to a year. But I wouldn't think about Z-Flex is creating a different dynamic with respect to ARR other than it's just another level of indication that we are very strategic in that environment. The average Z-Flex deal is typically an 8-figure TCV commitment. And for those deals that we've done thus far, it's been about a 4-year period. As we've talked about, they tend to be 3- to 5-year deals. And right now, the average is about 4. So hopefully, that's helpful color.

And our next question will be coming from the line of Jonathan Ruykhaver of Cantor Fitzgerald.

So I think, Jay, this is for you. Just curious, when you look at SquareX, from my understanding, you're embedding browser security via an extension rather than having a dedicated secure browser. Can you just talk about that? It seems like the flexibility could be a plus, but is there any trade-off between control and functionality between extension and full browser? And then just curious also on your view of how critical is the browser layer to winning broader Zero Trust deals over the next couple of years?

Thank you. Very good question. So we have been offering Zero Trust Isolation solution using any standard browser for managed and unmanaged devices. Managed, no problem. Unmanaged devices means they were using their standard browser. Some customers wanted something like a device posture check on an unmanaged device. And for that, one option was you buy a full-blown enterprise browser from a third party. We looked at some of those acquisitions a couple of years ago. We did not like it. Full-blown browser with its own vulnerabilities and customers don't like one more agent, or in this case, this is one more mega agent on their endpoint. So what we found was with SquareX acquisition, we could add the security functionality such as device posture check using browser extensions on unmanaged device. It's a wonderful use case, but generally for third-party type of stuff for us. So it's a clean, better solution rather than trying to have full-blown third-party browser. And it really takes care of the gap that we have in this environment. So we think it expands our TAM. We have lots of customers who are using browser isolation. This actually will help us expand it to handle some of the third parties who will come from unmanaged devices. So very pleased with the acquisition and the fit and the early market reaction to it.

And our next question will be coming from the line of Eric Heath of KeyBanc.

Maybe I wanted to come back as an extension to Gregg's earlier question thinking about AI agents. So AI agents will drive a lot of network traffic. So Jay, Kevin, just how should we think about how you can monetize that increased traffic? And Kevin, how we should think about it impacting the model over a longer time period?

Yes. Thank you. We think these agents that are growing at a pretty rapid pace will generate a fair amount of traffic. The traffic means they're going to access application A or B, or one agent is going to talk to a second agent. In order to do that, we believe the best security is that they should be going through a zero trust exchange, so that a given agent can only talk to a given agent or applications. Otherwise, imagine one infected or hijacked agent will infect the whole enterprise. That's the biggest value we bring to the table. The more agents, the more agentic traffic, the more value we deliver, and the better revenue opportunity for us. So we look at it as probably the biggest upside for growth of Zscaler business.

And our next question will be coming from the line of Matt Hedberg of RBC.

Strong results you're raising, Kevin, you said by more than the beat. But I just had a clarification on ARR. I just want to make sure that I'm not missing anything. It looks like you raised the ARR midpoint by $30 million. But it looks like in the disclosure, and maybe this is where I'm mistaken, but it looks like you took your Red Canary expectations up from $95 million to $135 million. So to me, that looks like a $35 million raise. So am I interpreting that right? Because I'm just not totally certain about what kind of the organic raise here is for the year.

Yes. No, I appreciate the clarification. If you look at this on an organic basis, we are raising the organic net new from 6.7% as our initial raise in the beginning of the year to 9.5% growth for '26. So yes, there is some element of Red Canary that is mechanically inherent in the raise. But the underlying growth and strength in the organic business, giving us confidence to raise to 9.5% net new growth this year is what you're seeing fundamentally in the raised guidance. And keep in mind, just in the first half of this year, net new without Red Canary grew 10% against the backdrop of last year, where it grew 1%. So we are seeing very healthy acceleration in net new ARR growth, both first half and signaling for the back half.

And our next question will be coming from the line of Keith Bachman of BMO.

Okay. I broke up a little bit there, but I want to go ahead and ask a question about Zero Trust Everywhere. And Jay, the question for you is how significant could this be? You're at 550 customers now, you were at 130 a year ago. Two dimensions of the question are, a, what's the average ARR uplift that you experience when a customer goes to Zero Trust Everywhere? Is there some kind of lift that you could help guide us on? And then how deep do you think this could get with your installed base? What's the potential reach here?

Yes. So first of all, we are very pleased with the number of customers becoming Zero Trust Everywhere customers, the number 550 is very good, and these are enterprise customers. They are large customers out there. In terms of lift on ARR, I think we even shared last quarter that we are seeing 2x to 3x essentially move in the ARR when customers are moving to Zero Trust Everywhere, which is very good. In terms of potential out there, I can tell you, a year ago, when I was talking to customers about Zero Trust launch, which essentially replaces MPLS or SD-WAN, I was wondering how many customers will be saying, I love my SD-WAN, okay? I can tell you, I don't find any Zscaler customer. Now these are our customers. They all want to replace SD-WAN for cost reasons and for security reasons. Remember, SD-WAN enables lateral threat movement. So interest is very high in the Branch. On the Cloud side of it, too, it's a fascinating new disruptive play. We have literally no real competition other than old school firewalls and trying to do firewalls in the cloud with IP address and ACL is a nightmare. So we're seeing that traction going. So very bullish on both Zero Trust Branch and Zero Trust Cloud. So I would love to see that every Zscaler customer in a matter of time will be a Zero Trust Everywhere customer.

And that concludes our Q&A session. I would now like to turn the conference back to Jay Chaudhry, CEO, Chairman and Founder, for closing remarks.

Thank you for joining us. We look forward to seeing you at one of the investor conferences we'll be attending. Thanks again.

And this concludes today's program. Thank you for participating. You may now disconnect.