Zscaler is a large player in network security. It competes with Palo Alto’s next-gen suite, Cloudflare and many others. Zscaler’s Zero Trust Everywhere (ZTE) is its latest and greatest cloud security approach. It was rebranded from Zero Trust Exchange this quarter.

ZTE blazes a trail between users, apps and devices across eligible networks — while securing data at rest and in motion. Zero Trust is exactly what it sounds like: never trusting a device or end user. The exchange vets and verifies all traffic as it moves within a company’s perimeter. It does not allow bad actors to breach the most vulnerable piece of infrastructure and freely move about it thereafter, without any subsequent verification. That’s called “lateral threat movement.” Zscaler uses risk scores to assess needed levels of security for requests. That makes sure it’s only creating user friction when there’s actual security concern.

This Zero Trust approach routinely cuts infrastructure costs for customers. How? By shrinking the attack surface down to grant permission to one app, one user and one piece of traffic at a time. Permissions are based on client policy.

ZTE replaces an antiquated firewall and virtual private network (VPN)-based philosophy in which every device & user within a perimeter gets perpetual and unconditional access. So? Zero Trust is safer, cheaper AND allows remote employees to responsibly work from anywhere.

Zscaler Network Security Definitions:

Zscaler Major GenAI Product Definitions: 

Zscaler Major Data Product Definitions:

More Sector-level Definitions:

As discussed for the last 6 months, Zscaler signs 3-year contracts with customers. Macro headwinds during this past cycle were strongest over parts of 2022 and 2023. Meaning? That weakness is currently being reflected in its scheduled, contracted billings growth. Macro headwinds abated during the second halves of both 2022 and 2023, which is why it guided to 7% billings growth during the first half of this year and 23% growth during the second half. This quarter kept it firmly on track to deliver this objective or beat it.

It’s always uncomfortable to bank on future accelerations to meet guidance. In this case, however, its forecast is not related to optimism, but observed data, pipeline strength and non-voidable contracts. That and the firm’s pristine track record made me quite comfortable in the rosy viewpoint being the right one. The beat & raise this quarter bodes very well for that being the case.

“We feel our guidance is prudent.”

CFO Remo Canessa

ZS trades for about 64x forward EPS. EPS estimates will likely rise a tad following this report. Due to a change in tax rate assumptions, EPS is expected to fall slightly Y/Y before compounding at a 22% clip over the next two years. It trades for 45x forward FCF. FCF estimates should rise more than EPS via the revenue and margin boosts. FCF estimates currently call for 11% growth this year and 28% growth next year.

Go-To-Market Overhaul Progress:

As a reminder, Zscaler has been overhauling its go-to-market approach for the last few quarters. There were a few big changes. First, it shifted focus to account or client-specific selling and larger deals with more modules. Next, it made global system integrator (GSI) partnerships a much bigger part of its growth engine. Its new Chief Revenue Officer (Mike Rich) has been tasked with beefing up Zscaler’s selling teams with better people, better focus and optimized incentives. So far so good. Despite stable macro and continued budget scrutiny, it was these changes that helped Zscaler deliver outperforming results. Momentum is building. Sales productivity rose and should keep rising as a large cohort of new sales reps matures. New and upsell business growth was strong and sales attrition continues to be lower than expected. That’s important, considering ZS overhauled sales incentives. That disruption was seemingly handled well by the people it wanted to keep.

This progress is giving leadership more confidence in its 2nd half billings growth acceleration and reaching at least $3B in ARR by the end of the year. Initially, Zscaler leadership said they’d get to at least $3B on their Q4 call. But? Last quarter, they said $3B was the target, rather than the minimum. This quarter, they moved back to calling it a minimum. Maybe I’m reading too far into wording here, but that sounds like a raise to me.

In terms of GSI news, they’re enjoying a “sea change” in engagements vs. a year ago and seeing many large GSIs “consider ZS as a top strategic partner.” GSIs delivered multiple 7-figure wins during the quarter.

Zero Trust Everywhere:

“Zero Trust Everywhere” (ZTE) is its latest, fully-unified product bundle. It is the updated conjoining of all Zscaler product utility under a simplified umbrella. It is the next iteration of its Zero Trust Exchange ecosystem.

Like Palo Alto with “Platformization,” as well as most cybersecurity firms in various parts of the sector, Zscaler is reorganizing its offering to drive easier platform-level adoption. This means better data sharing, better outcomes, lower costs, and happier customers that are increasingly reliant on Zscaler. As a result, that raises cross-sell rates and deal sizes while shrinking sales cycles. Platform-level adoption helps everywhere.

Microsoft ran this enterprise bundle playbook flawlessly for decades to become a multi-trillion-dollar company. It’s no coincidence that virtually all public software disruptors are trying to do the same thing.

Not only do ZTE customers benefit from core ZIA, ZPA and ZDX, but they also enjoy Zero Trust for Cloud and its Zero Trust for Branches offering. Combining all of these use cases inherently enables it to flex a broader, higher-efficacy, more dynamic toolkit than the competition. It already had these products available. Now, it is organizing them more neatly to support its revamped go-to-market engine.

The timing of this (re)launch is not-so-coincidentally perfect. There’s a large firewall and hardware refresh cycle coming due this year. ZTE will help ZS clearly communicate all of the unique value, simplicity-fostering vendor consolidation and cost savings it can provide. It’s the better outcomes and lower costs that really get customers excited. They are “leaning into the refresh cycle with surgical field campaigns” to educate the world on its superior offering. So far, these campaigns are going quite well. Zscaler already has 130 ZTE customers, with goals (informed by customer interest) to triple that by the end of next fiscal year.

More on Branch & Cloud Security:

The firm’s zero trust branch and cloud security products are the two most exciting developments for ZTE. They’re giving Zscaler more tools to differentiate from others and clear opportunity for more legacy hardware displacement. This quarter, these two products allowed its ZTE platform to win a Fortune 50 energy company. Cloud workload security is a rapidly growing, relatively greenfield opportunity and so it’s great to see that attached to a deal with such a massive enterprise. The customer shed a large portion of hardware needs to… you guessed it… improve outcomes and lower costs. Branch security specifically also netted the firm a 7-figure upsell and two other sizable deals. Furthermore, 57% of new branch security customers were brand new logos, showing how this is already turning into another compelling top-of-funnel tool. 

Leadership sees its world-class branch security product as a major demand unlock going forward. As Founder/CEO Jay Chaudhry puts it, “customers have been telling them” that they need a great branch product to join the rest of their elite products. Now, they think they have it.

Data Protection Pillar:

The combination of zero trust architecture to properly utilize data and its cloud security data lake to ensure scalable ingestion is working. Net new bookings for this category rose by 40% Y/Y and ZS attributes this success to two main things. First, point solution consolidation appetite is as strong here as it is across the rest of its business. Zscaler’s offering (see the Zscaler 101 section for examples) helped a global 2,000 retail company displace more vendors, as it added 3 more Zscaler data products. That tripled the client’s annualized spend. Data protection unification simplifies access, permissions and policies, resulting in “rapid deployment and lower operational overhead.” 85% of its $1M+ ARR customers now use at least 2 of its data products.

“We have the most comprehensive data protection platform. It secures all types of data, whether structured or unstructured, data in motion or data at rest. We do this across all channels, including web, email, endpoints, SaaS, cloud workloads and more.”

Founder/CEO Jay Chaudhry

The other structural tailwind here is GenAI. GenAI models and apps use obscene amounts of data and frequently share context with rapid, chaotic velocity. It’s the wild west right now. This raises the stake for properly gating and securing sensitive data. ZS is retrofitting its ZTE offering with tools to analyze foundational model input and output quality and avoid things like malicious prompt injections. These aim to trick models into giving wrong answers based on erroneous data. This quarter, its data protection product for public AI apps secured two global 2,000 customers. It’s investing in the private app opportunity (like internal models for automating company source code writing, for example).

More on AI:

Its GenAI assistant for ZDX (ZDX Copilot) is off to a good start. It’s part of the Advanced Plus package for ZDX, which helped that tier enjoy 45% Y/Y bookings growth and reach nearly $50M for the quarter. The firm is now focused on upgrading this tool with more agentic capabilities, such as complex root cause analysis automation and more.

There is some concern around GenAI limiting company headcount growth and therefore lowering seat-based demand for ZS’s products. They haven’t seen that play out yet, but it likely will to some degree as apps go mainstream. Thankfully, GenAI models and apps will mean far more traffic, engagement, communication and work between various parts of networks. AI Agents are “just another entity” or asset for them to protect with ZTE. Per Founder/CEO Jay Chaudhry, “more communication means more traffic and that means more value delivered to our customers.” That value should come with pricing power to offset any seat-based headwinds. And? It has already raised pricing for usage of its ZDX Copilot as it adds more tools. That was quick.

“DeepSeek can make GenAI capabilities more widely available. This is the internet moment of AI, which will drive rapid adoption of AI in every aspect of our lives. That will create a greater need for better security.”

Founder/CEO Jay Chaudhry

This was a strong quarter. It should quiet what I viewed as unfair skepticism surrounding its Q3 and Q4 billings acceleration expectation. As I’ve been saying for months now, that optimistic view was based on contracted, uncancelable billings from a team with a fantastic track record. This was not based on guessing or hoping.

Zscaler continues to find great momentum in every single product adjacency it enters and continues to find more operating leverage despite not currently focusing on margin optimization. I’m excited to see what the fully-ramped go-to-market engine can look like, as early signs are highly encouraging. This team has always had a great product offering. Now it will combine that with a great sales motion… organized under the new ZTE umbrella. It probably trades for about 40x forward FCF following this report. I view that price tag as quite compelling for an elite cybersecurity name like this one.

This quarter was simply more evidence showing everyone how fundamentally strong Zscaler is. Pleased.

On’s results are reported in Swiss Francs, not dollars. Like for Spotify, when companies do this, I like to follow their disclosures.

G&A was 50.5% of sales vs. 48.9% Y/Y. It spent more on innovation and marketing while also consolidating some teams in a way that shifted a bit more of its OpEx to G&A. Furthermore, it invested more in distribution automation. This drove the modest GAAP EBIT deleveraging. Notably, stock comp rose by 63% Y/Y. That’s why EBITDA margin (which excludes this) was still able to expand Y/Y. While these investments will continue, its guidance (laid out below) calls for more Y/Y margin expansion.

The company is tracking comfortably ahead of its 2023 investor day targets called for 26% compounded FX neutral (FXN) growth, a 60%+ GPM and an 18%+ EBITDA margin. Its 2025 guidance implies more outperformance vs. expectations this year.

“On enters 2025 with remarkable brand momentum, propelled by impactful brand moments and the successful execution of its key strategic initiatives. On is solidifying the vision to be the most premium global sportswear brand. Fueled by strong demand in the early months of the year, an exciting innovation pipeline in running and beyond, and a strengthened operational backbone, On is poised for continued success in 2025.”

Co-CEO/CFO Martin Hoffmann

On trades for 48x 2025 earnings estimates, which should be stable following this report. EPS is expected to grow by 26% this year and by 36% next year.

The Year of Brand Building:

On’s successful 2024 was attributed to strong brand-building execution more than anything. It was “one of the most talked about” brands at the Olympics and earned awards from firms like Footwear News. Accolades and conversation are quite abstract ideas. For more quantitative evidence of this focus working, Gen Z brand awareness in the USA doubled Y/Y in Q4. As a result, revenue mix for its core franchises moved to its 35-and-younger segment by 7 points Y/Y. Younger customers mean longer spend runways for companies capable of sustainably capturing consumer preferences. On has shown a consistent ability to do just that in its 15-year history.

The company splits its approach to brand-building into three separate buckets: Making great products, cultivating strong partnerships and establishing a deeper global presence. We’ll take these in order.

Brand Building – Make Great Products to Serve Customers:

On’s 3 core running franchises (Monster, Surfer and Runner) are all thriving and delivered between 60% and 140% Y/Y growth for 2024. This year’s product roadmap looks to be just as eventful, with the Cloudsurfer 2 recently launched to a warm welcome. For the emerging all-day niche, its Cloud 6 refresh comes with a lot of promise. It will fully launch soon, and “demand from partners over the past months has been amongst the highest the company has ever seen.”

A key piece of serving customers with great products to establish delight and fuel word-of-mouth growth is sound supply chain operations. Earlier in the year, automation projects at its Atlanta warehouse led to fulfillment disruption, delays and leaving DTC revenue on the table. It temporarily shifted capacity to other avenues as it quickly worked to permanently resolve these issues. ONON has made a ton of progress, which helped drive revenue outperformance this quarter and in the 2025 guide. Still, we are not all the way through this transition. It is “progressing well on the Atlanta warehouse solution” and is confident in it being ready for deployment by the end of Q2. This is still a margin drag, which means there is still operating leverage left to enjoy when things are resolved in the near future. It sees completion of the initiative enabling years of efficient, bottleneck-free scaling.

If great products are chunky peanut butter (always chunky), then sound logistics is jelly. Both of these ingredients are vital to support On’s durable, efficient growth.

Brand Building – DTC and Wholesale Partnerships:

On talks a lot about partnerships with Roger Federer, Zendaya and FK Twigs placing it more firmly in the center of cultural dialogue. In turn, this directly supports brand-building and its own growth. This quarter, it offered another example of how impactful this can be across all of its regions. As On is associated with premium sport and fitness, it can tie itself to athletes across all of its markets to spur growth. Nike and Adidas have run the same exact playbook (with players, universities and teams) to drive generational growth at both firms. On wants to do the same.

In Brazil, the company partnered with tennis star João Fonseca and enjoyed 100% Y/Y FXN growth as a direct result. This can be replicated everywhere On operates and offers strong proof of concept for how positive and impactful these relationships can be. Building on these arrangements, this year, On will launch its first co-created products with Zendaya. That should help keep Gen Z interest humming.

“On's collaboration with FKA twigs shows the superpower of sport combined with cultural influences; it's scaling our training vertical. The marriage between sports and culture has created a unique space for powerful collaborations.”

Co-Founder/Chairman David Allemann

And while the firm is quite excited about DTC revenue mix this quarter, that doesn’t mean it’s abandoning carefully curated wholesale partnerships. Far from it. The approach here is more of the same. On is focused on growing relationships with a small number of quality brick-and-mortar partners, such as Dick’s Sporting Goods. That should be easy. Why? Because sell-out rates for these partners remain “exceptional.” That innately motivates more frequent reordering, more shelf space and more visibility for On.

Brand Building – Inserting Itself in the Global Conversation:

On sees “life moments and society-transcending topics” as becoming increasingly rare. 50 years ago, everyone watched the same television shows and movies. There were fewer sports and news channels. Now, fragmentation of consumer attention makes it harder to aggregate enough attention to effectively market at a specific event. This is why On is so focused on having a large presence at the remaining events that can capture the world’s focus. Formula One and Soccer partnerships have also supported this objective, while the firm’s Super Bowl ad this year did too. The placement, featuring Elmo and Federer, directly yielded online traffic “spikes” to more expeditiously spread the word. On thinks it’s well ahead of the pack in its marketing playbook efficacy.

“Now fashion and luxury brands are recognizing the power of sports and diving into the arena hand first… And that's where we come in as only the premium sports brand perfectly positioned at the intersection of performance and cultural relevance. We’re not just riding the wave. We’re at the heart of it.”

Co-Founder/Chairman David Allemann

Considering On is a performance-focused brand, victories from its sponsored athletes helps establish product credibility. This past month, Grant Fisher broke 2 indoor track & field world records. He’s an On athlete. Hellen Obiri winning the 2024 Boston Marathon in On’s new “LightSpray” technology helped spur interest last year, and this should be more of the same. As a reminder, LightSpray is its proprietary new manufacturing process. It combines the upper and lower parts of shoes with a robotic arm and thermal fusing rather than typically used adhesives. This means cheaper, more rapid manufacturing and fewer harsh chemicals in the creation of shoes. For now, this is mainly a marketing ploy and to showcase On’s innovative approach to design. Based on Obiri’s performance and broad interest in the new process, LightSpray is already helping brand awareness even before commercial deployment. This gets back to product-led innovation helping shape consumer focus and support more growth.

Another vital piece of gaining more recognition is through physical store expansion. Per leadership, a “physical store acts as a flag in the ground, a linchpin for emerging markets.” It opened 19 new stores in 2024 (50 total) and has its eyes on more Asia-Pacific (APAC), Latin American (LatAm) and Middle Eastern expansion in 2025. The existing stores are working as planned. In Paris and Milan, brand awareness is directly and positively correlated with store traffic, to show how incremental this channel can truly be.

Brick and mortar doesn’t just support DTC revenue, but also “gives its apparel a broader presence.” That’s why DTC apparel growth was 67% Y/Y vs. 51% overall apparel growth. These stores “increase consumer perception of On as a head-to-toe sportswear brand,” which is convincingly positive for the firm. That’s what it wants. This quarter, apparel crossed CHF $100M annualized, with most of its product introductions being renewed due to a strong reception. 

“Apparel is set up to drive strong growth and margins going forward.”

Co-CEO/CFO Martin Hoffmann

Geography-Specific Notes:

The firm is on pace for China to reach 10% of sales by the end of 2026. It has successfully expanded its teams to support go-to-market there and more recently began introducing more “China-centric” products. New product introductions are all working. Japan continues to perform very well, while Korea and parts of Southeast Asia are turning into more meaningful contributors. It opened its second store in Hong Kong during the quarter, which “quickly grew to be on par with the first location” it opened there. Good momentum.

In Europe, the Middle East and Africa (EMEA), On finished lapping Q4 2023 store closures in the region. Growth should accelerate starting next quarter with that comp headwind now gone.

More strong execution from this company, brand and team. I continue to be impressed by their ability to weather operational disruptions, and efficiently grow their brand across the globe while expanding margins. It’s no secret that macro in Europe and parts of LatAM have been somewhat weak over the past several months. It’s hard to see that weakness in these results. That is the power of structural market share gains, which this firm continues to deliver.

They’ve been around for 15 years now, so this is no longer a flash in the pan or a short-term fad. They’ve done extremely well to stay ahead of the innovation curve and debut a steady stream of current, fresh products that consumers are clearly loving. That and successful brand building will both remain vital for the longevity of this growth engine across cycles and across fashion waves. So far… oh so very good. Geographic expansion remains early… apparel remains early… accessories remain early… brick-and-mortar remains early… its core running franchise remains early. Long runway; great results.