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Shares of the more than thirty nine billion dollar cloud security and software companies z Scaler are easily outperforming both the S and P five hundred and Nasdaq one hundred today. The stock is up nearly forty percent year to date, and yet we did see shares under pressure today, dropping nearly four percent after Bernstein downgraded the software company to market perform from outperform on growth concerns. Bernstein, by the way, setting its price target on the stock to two sixty
for a share. That's a five percent increase from the Friday close. I should put out that initially Bernstein when the company reported earnings last week, they initially maintained their outperform rating. So there's been a lot of movement allis in general, tim a flurry of them weighing in, some raising their price targets on the stock, others lowering them. And we should point out the stock did drop about thirteen percent last week. That was on Wednesday following their earnings.
Yeah, the forecast was annual revenue that was only slightly above estimates from one of the company were joined by Jay Chawdry, founder, chairman and CEO of z Scaler. He
joins us from San Diego, also San Jose. Excuse me also with us as somebody who knows this company very well, Bloomberg Intelligence's global head of Tech research, Man Deep saying, he joins us here in the studio, Jay, I just want to start with you the growth concerns, the disappointment over the annual revenue forecast that was only slightly above estimates.
Is growth slowing, not at all. We had an outstanding quarter. Our AIRR growth twenty six percent, revenue growth twenty six percent, free cash flow margin fifty two percent, operating margin twenty two percent. We beat all the metrics that Wall Street was looking for. In fact, if you take our free cash flow margin and add it to our revenue growth, that's seventy eight percent. That beats the rule of forty that many investors look for very very well. And this
is at scale of three billion dollars or higher. There are only about five pure play enterprise SaaS companies that are in that unique class, So you're done extremely well. We are very proud of what we delivered and be passed a meaningful beat. We did and raised our annual target, So I think we're very pleased with it. I think investors get it wrong from time to time. This is one of those times.
That's what's going to ask you know what, do you think investors just got it wrong? Because I mean, thirteen percent is a pretty big hit, So you think, I mean, that's not like them wavering at all. They really wanted more from you guys. I mean the expectations were certainly high.
Look, markets do what they do. I have one focus, keep on innovating and serving our customers. And those innovations started with zero trust architecture with a chained the world of old school firewalls and VPNs. And now as AI security is coming, a security is becoming a big concern and zero trust that we pioneered is the foundation of it. So we have amazing interest from our customers. That's why
we're able to deliver these strong numbers. Over forty five percent Fortune five hundred companies trust us, depend upon us, so I'm very bolish about our future.
So talking about AI security, I mean, you have a business model that's reliant on companies hiring more people and you have a C based model, how does that change with AI security? Because AI, you know what we are seeing out there is more consumption based. So how does that impact you and your business?
It's a good question. So we started out with bringing zero trust for users, so users can access applications without being on the company network, and natural pricing for that is user based. Then we move the model to our architecture. The next thing, how about zero trust communication for workloads cloud workloads that's actually based on number of workloads and actually mount traffic, so it's not just user based. If you think about AI security, there are many facets of
a security well. One of the biggest thing our customers look for is as every company starts using a lot of agents. These agents are some like people. They need to access their applications, they need to talk to other agents. So we are extending our zero trust exchange that are designed for users and workloads and branches now to agentic exchange so that right agent can talk to right agent and right application. So obviously there's an opportunity for us
to secure that communication. Yes, the number of users may not grow significantly, but I believe every company will have scores of agents for every single employee and they need to be secured and we are extremely well positioned to handle that.
And talking about agents, it sounds like one of your biggest competitors is doubling down on observability and identity, especially on the browser side. As an area of focus for agent Tachai is that something you feel is very important to roll out the agents.
So some companies try to go and buy many companies to create a collection of things. We are very focused on what we want. We are focused on zero trust and then we focused on AI. Regarding observability, we actually do observability for the areas that matter to our customers.
We sit between the user and the application. So today we have a size business, hundreds of millions of dollar business with the product we call z Skinnar Digital Experience, where we can tell our customers if any user is having any performance issues as they try to access those applications. It's integrated with a platform. While many companies have many point products and they are separate, we like to have
integrated platform that serves our customers. So we not only provide secure and reliable experience, we make sure that it is fast and you can trouble shoot those things. But I'm not going into broad observability, which has become a broad area. We are focused on the areas that are relevant to our customers.
And identity is that something you care about? The identity on the browser.
Identity is important. Think about identity for users. We have been working from day one with all leading ID provider for users or whether it's Microsoft and oct and others. Now, when it comes to identity of agents, I believe there'll be many contenders Microsoft, Google, Aws octors of the world. Our philosophy is to federate those identity providers use that identity and we are the zero trust exchange, the switchboard to make sure the right AI agent talks to right
agent in this world. I do not need to own everything. I need to do some of the things I do the best and integrate with partners with proper API integration so our customers get the biggest benefit. We believe in doing a few things, but do them extremely well and partner with others.
So I do feel like we're all learning as we go. And of course man Deep and Jay, you guys are ahead of us in a big way. But when they talk Man Deep about zero trust is never trust, always verify. I think about digital touch points thinking that there are threats within an organization and outside, and you've got to make sure there's security everywhere.
Yeah, no matter where you are, and that's where you know. Sase is a term that gets thrown a lot, and z scaler is in the leading position in that magic quadrant. So I have one other question Jay for you. So, given the amount of data in the world of security, and you know you guys generate trillions of data points, will the security world have its own.
Lell Yes, the answer is yes. We are actually working on building our security focus LM, and I do not need to have the large large language model. Security is very focused set of high equality data. With over eight thousand customers and forty five percent of Fortune fire and companies, we generate over half for trillion transaction logs a day. Those logs are anonymized, but they can give us an idea of where the threats are coming from. We can find a needly hoistag and help all of our customers.
So AI is only as good as the data that powers it, and we have the best data and we believe we can help identify some of these threats in almost near real time and provide a closed loop system so that the threats can't really exploit our customers and
provide them benefit at a much faster ways. That's why we have focused on AI powered security operations, and our acquisition of redcnnety is part of the strategy because they build some very very good, egenic AI technology that we're integrating with our platform.
The use of AI to make the system more robust certainly makes sense, but I got to tell you min deeper and I are actually moderating some panels next week at a Bloomberg Live event that's focused on cybersecurity, and in the prep that we're doing for that, what I keep hearing from these chief security office, from these chief information security officers, is the concern about how AI has made the attackers just more robust and the attacks more robust.
Can you point to specific instances where hackers have actually used AI to enhance their attacks and did it work?
Yes, there are many many examples. Let me give you a few simple ones. Every attack starts by finding your attack surface, who where you are and public IP address is the starting point. Every firewall, every VPN, every application portal is an attack surface. In the past, a hacker may have taken weeks to identify it. Now you can go to chat GPT and say tell me all the firewalls and VPNs that have won abilities and give it to me in a nice tabler format. Under sixty seconds,
you can get that now. The second part attackers would do is these phishing emails. Now they can ask AI to say, write an email that looks like a cfo's writing style, no typos, make it very targeted. That's number two. Third, hackers are using automation that AI provides. Once they are on the network, automation can find the key applications and try to encrypt that data. A lot of that is happening. What does these kin do in this case? Number one,
we hide your attack surface. Your applications are hidden behind our cloud. Bad guys can even find you. They can't find you, they can attack you. And the second is on the network. The biggest problem with firewalls and vpnss. Right, they're trying to protect the castle, and we actually make it zero. Trust.
Jay, We've got to run. This was so informative and so enlightening in terms of AI security. We so appreciate it. Jay Toddray is founder, chairman's eeoz Scaler and of course our own Mandi saying a va