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Hey, we are also watching shares of Zscaler. They're getting smacked down a bit today. Down about 13%, hitting a 52-week low, now down about 36% year to date. Stock is down more than 60% since November of 2021.
Investors selling shares after the security software company's second quarter results. They beat estimates. They weren't though seen as strong enough to reverse recent negative sentiment toward software companies. It comes on top of a tough week for company shares. Stock tumbled 10% on Monday on the AI scare. Worries again, Carol, over the impact of AI on companies and industries. Shares though rallied back close to 17% in the next three days thanks to a calming down a little bit in the trade.
Yeah, it's been a crazy week for Zscaler. No doubt about that. We should point out a bunch of analysts weighing in on the company's earnings and lowering their price target on the stock. But let's get into the business, the outlook and more. Delighted to have back with us Jay Chaudhry. He's founder, chairman, and CEO of Zscaler. Joining us from San Jose, California. Welcome back. Also with us someone who understands, follows this company very closely, our own Mandeep Singh. He is Bloomberg Intelligence, global head of technology research here in studio. Jay, tell us a little about the quarter. And I think we all want to know how AI is impacting your business. Let's start there.
So AI is a massive opportunity because what AI is doing is bringing lots of AI agents in the enterprise. Agents are somewhat like people. Traditionally users have been the weakest link for cybersecurity. Now AI agents are becoming the weakest link. How do you secure them? Well, you need to make sure that you can do one-to-one connection. That means an agent can only access certain applications and nothing more. That requires a global infrastructure that Zscaler has built in the form of Zero Exchange. That's why we're very bullish about our future.
So, go ahead, Mandeep.
Yeah, I mean Jay, I think the street obviously didn't like the billings number in your print and that was seen as moderating. Was that attributed primarily because of seat growth slowing down and we keep hearing, you know, layoffs like the one that Square announced yesterday or was there anything more to the billings number last night?
So billings is a secondary number for us. The number one area of focus for us is ARR growth and revenue growth. Our revenue grew 26% year-over-year. ARR 25%, free cash flow 18%, operating margin 22%. They're all great numbers. Now we have a Z-Flex program that gives some flexibility in billings. So billings can get impacted. But with Z-Flex, customers are doing multi-year, four or five year deals with us committing to Zscaler, which is a very strong sign. So I don't think the billings should be viewed in a negative light. Overall business is very strong.
Jay, I want to go back to what you said about AI and protecting these AI agents and just how you're thinking about that because I think a lot of people are trying not just to understand the impact of AI on cybersecurity, but the impact of AI on a company like yours when it comes to operations. So from an operations perspective with the context of what we saw from Block late yesterday, the company relying more on AI and less on actual human beings. How are you using AI at the company operationally to increase your margins to make your employees more productive or get rid of employees?
Well, everyone should and need to use AI. We use AI to make sure we can deliver better customer support to our employees. The AI agents are helping us. We are increasing the productivity of our engineering team by using all this stuff. But I think the numbers that Block shared, they seem way out of line that anyone else is saying out there. We are seeing some reduction in additional hiring. But I do think that in some of these critical areas you need people. I am hiring more developers for AI development, for example. And for us, many times customers think that as the number of employees may not grow, that means it impacts our user base pricing. The user base may slow down from a growth point of view, but we are actually securing all the agentic traffic, all the agents. When we have millions of users, we'll have billions of agents to secure. That provides an opportunity for us to secure the enterprises and monetize it.
Maybe Jay, I want to go to a different topic around sovereigns because we've been hearing more and more that, you know, every sovereign wants to build their own AI. How does that impact a company like yours that operates globally given, you know, sovereigns are more keen to deploy this on-prem? Does that impact a cloud security company like yours?
Actually sovereign clouds is a positive development and opportunity for us. We built Zscaler architecture where the data that we store, which is essentially metadata and logs, can stay in that country. We have had a cloud that's built for EU and is EU with data in EU for a long time. Now many of the large countries also want to operate the cloud in that country as well. We're working with many large countries to really provide them a sovereign security cloud that will access the data wherever the data is. So there are two aspects. There may be AI models sitting in India or France or Germany but our sovereign security cloud will make sure they can access the model whether it's sovereign or non-sovereign. So overall it's a positive thing for us. It's our architecture that allows us to build sovereign security clouds.
Yeah. And look, I mean Amazon today announced this $50 billion investment in OpenAI. Google we know they've closed their acquisition of Wiz. So how do you see, you know, the hyperscalers playing in this space where they obviously are deploying the models on their cloud, they are bundling security, is that going to have some sort of an impact in terms of the AI security aspect that you alluded to not directly on providers like Zscaler?
