Zero-trust and cloud security vendor Zscaler announced plans to lay off about 177 employees. The news came during its second quarter of 2023 earnings call. Executives claim the “targeted cost-optimization plan” is to adjust the company’s business model as it sees inefficiencies in certain positions and macroeconomic headwinds that resulted in large deal delays.

“After significantly growing our teams in recent years, we took a fresh look at our organization and found opportunities to streamline operations and to align people, roles, and projects to our strategic priorities,” Zscaler Chairman and CEO Jay Chaudhry said during the earnings call.

CFO Remo Canessa noted the company doubled its headcount in the past 18 months to about 5,900 employees, as it “invested aggressively based on strong market momentum.”

However, it watched the macroeconomic uncertainty starting last fall. “We commented that if the business environment becomes more challenging, our business model allows us to adapt quickly and to deliver expanded operating profitability while we grow,” Canessa said.

To adjust the company’s business model as needed and drive additional operational efficiency, Zscaler is reducing its workforce by around 3%. “Most of the impact from these changes will be seen in Q3, and we will take a charge of $8 million to $10 million, including non-cash expenses,” he added.

Meanwhile, Zscaler also plans to slow down hiring, according to Chaudhry. But the company will continue to invest in its selling capacity.

“We are still selectively going to hire quota-carrying sales reps as well as core engineering leaders -- sorry, core engineering team members,” he said. “And we expect our year-end headcount to be higher than the headcount today.”

Zscaler Sees Higher Scrutiny on Budgets

For the second quarter, Zscaler reported that its revenue grew 52% year-over-year to around $388 million. Its billings increased 34%, but “were impacted by new customers being more deliberate about their large purchasing decisions at the start of the calendar year,” Chaudhry noted.

Despite being relatively more resilient, cybersecurity is not immune to economic slowdowns, he added.

“With macro concerns weighing on business leaders, more organizations are being cautious and measured about their spending,” Chaudhry said. “In January, we saw a higher scrutiny on budgets compared to December, resulting in additional delays in large deals. These deals haven't gone away, and customers are taking longer to make decisions and requiring additional approvals.”

Zscaler expects the customer's cautiousness to continue for the second half of the fiscal year, so its outlook has accounted for the further lengthening of sale cycles and the uncertain timing of large deals.

“ Even though our current pipeline has grown and has more mature deals, we are assuming a slight deterioration in close rates,” he said.

Zscaler Layoff News Follows Canonic Security Acquisition

Zscaler’s layoff announcement comes on the heels of its Canonic Security acquisition, which was unveiled in mid-February.

Canonic Security offers Software-as-a-Service supply chain security capabilities, which Zscaler plans to integrate into its data protection services to enhance its Cloud Access Security Broker and SaaS security posture management (SSPM) offerings.

“Together with our inline DLP, browser isolation, out-of-band CASB, and SSPM for SaaS posture management, Zscaler now provides unprecedented visibility and the most comprehensive data protection for SaaS applications and customer data,” Chaudhry said.

The two companies didn’t reveal the financial terms of the deal. By far, Canonic Security raised $6 million in funding.

On top of the supply chain security investment, the company also announced a new set of cloud resilience capabilities built on its security services edge (SSE) and zero-trust platform in February.

“Our Zero Trust Exchange is the largest in-line security cloud in the world, processing over 280 billion transactions and preventing 9 billion security and policy violations per day,” Chaudhry claimed.