WEBVTT - Zscaler CEO Jay Chaudhry on Battling Global Cyber Threats

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News.

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<v Speaker 2>You're listening to Bloomberg Business Week with Carol Masser and

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<v Speaker 2>Tim Stenovek on Bloomberg Radio.

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<v Speaker 3>Shares of the more than thirty nine billion dollar cloud

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<v Speaker 3>security and software companies z Scaler are easily outperforming both

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<v Speaker 3>the S and P five hundred and Nasdaq one hundred today.

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<v Speaker 3>The stock is up nearly forty percent year to date,

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<v Speaker 3>and yet we did see shares under pressure today, dropping

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<v Speaker 3>nearly four percent after Bernstein downgraded the software company to

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<v Speaker 3>market perform from outperform on growth concerns. Bernstein, by the way,

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<v Speaker 3>setting its price target on the stock to two sixty

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<v Speaker 3>for a share. That's a five percent increase from the

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<v Speaker 3>Friday close. I should put out that initially Bernstein when

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<v Speaker 3>the company reported earnings last week, they initially maintained their

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<v Speaker 3>outperform rating. So there's been a lot of movement allis

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<v Speaker 3>in general, tim a flurry of them weighing in, some

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<v Speaker 3>raising their price targets on the stock, others lowering them.

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<v Speaker 3>And we should point out the stock did drop about

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<v Speaker 3>thirteen percent last week. That was on Wednesday following their earnings.

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<v Speaker 1>Yeah, the forecast was annual revenue that was only slightly

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<v Speaker 1>above estimates from one of the company were joined by

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<v Speaker 1>Jay Chawdry, founder, chairman and CEO of z Scaler. He

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<v Speaker 1>joins us from San Diego, also San Jose. Excuse me

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<v Speaker 1>also with us as somebody who knows this company very well,

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<v Speaker 1>Bloomberg Intelligence's global head of Tech research, Man Deep saying,

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<v Speaker 1>he joins us here in the studio, Jay, I just

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<v Speaker 1>want to start with you the growth concerns, the disappointment

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<v Speaker 1>over the annual revenue forecast that was only slightly above estimates.

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<v Speaker 2>Is growth slowing, not at all. We had an outstanding quarter.

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<v Speaker 2>Our AIRR growth twenty six percent, revenue growth twenty six percent,

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<v Speaker 2>free cash flow margin fifty two percent, operating margin twenty

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<v Speaker 2>two percent. We beat all the metrics that Wall Street

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<v Speaker 2>was looking for. In fact, if you take our free

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<v Speaker 2>cash flow margin and add it to our revenue growth,

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<v Speaker 2>that's seventy eight percent. That beats the rule of forty

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<v Speaker 2>that many investors look for very very well. And this

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<v Speaker 2>is at scale of three billion dollars or higher. There

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<v Speaker 2>are only about five pure play enterprise SaaS companies that

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<v Speaker 2>are in that unique class, So you're done extremely well.

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<v Speaker 2>We are very proud of what we delivered and be

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<v Speaker 2>passed a meaningful beat. We did and raised our annual target,

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<v Speaker 2>So I think we're very pleased with it. I think

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<v Speaker 2>investors get it wrong from time to time. This is

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<v Speaker 2>one of those times.

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<v Speaker 3>That's what's going to ask you know what, do you

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<v Speaker 3>think investors just got it wrong? Because I mean, thirteen

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<v Speaker 3>percent is a pretty big hit, So you think, I mean,

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<v Speaker 3>that's not like them wavering at all. They really wanted

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<v Speaker 3>more from you guys. I mean the expectations were certainly high.

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<v Speaker 2>Look, markets do what they do. I have one focus,

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<v Speaker 2>keep on innovating and serving our customers. And those innovations

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<v Speaker 2>started with zero trust architecture with a chained the world

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<v Speaker 2>of old school firewalls and VPNs. And now as AI

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<v Speaker 2>security is coming, a security is becoming a big concern

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<v Speaker 2>and zero trust that we pioneered is the foundation of it.

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<v Speaker 2>So we have amazing interest from our customers. That's why

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<v Speaker 2>we're able to deliver these strong numbers. Over forty five

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<v Speaker 2>percent Fortune five hundred companies trust us, depend upon us,

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<v Speaker 2>so I'm very bolish about our future.

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<v Speaker 4>So talking about AI security, I mean, you have a

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<v Speaker 4>business model that's reliant on companies hiring more people and

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<v Speaker 4>you have a C based model, how does that change

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<v Speaker 4>with AI security? Because AI, you know what we are

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<v Speaker 4>seeing out there is more consumption based. So how does

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<v Speaker 4>that impact you and your business?

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<v Speaker 2>It's a good question. So we started out with bringing

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<v Speaker 2>zero trust for users, so users can access applications without

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<v Speaker 2>being on the company network, and natural pricing for that

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<v Speaker 2>is user based. Then we move the model to our architecture.

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<v Speaker 2>The next thing, how about zero trust communication for workloads

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<v Speaker 2>cloud workloads that's actually based on number of workloads and

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<v Speaker 2>actually mount traffic, so it's not just user based. If

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<v Speaker 2>you think about AI security, there are many facets of

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<v Speaker 2>a security well. One of the biggest thing our customers

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<v Speaker 2>look for is as every company starts using a lot

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<v Speaker 2>of agents. These agents are some like people. They need

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<v Speaker 2>to access their applications, they need to talk to other agents.

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<v Speaker 2>So we are extending our zero trust exchange that are

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<v Speaker 2>designed for users and workloads and branches now to agentic

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<v Speaker 2>exchange so that right agent can talk to right agent

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<v Speaker 2>and right application. So obviously there's an opportunity for us

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<v Speaker 2>to secure that communication. Yes, the number of users may

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<v Speaker 2>not grow significantly, but I believe every company will have

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<v Speaker 2>scores of agents for every single employee and they need

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<v Speaker 2>to be secured and we are extremely well positioned to

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<v Speaker 2>handle that.

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<v Speaker 4>And talking about agents, it sounds like one of your

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<v Speaker 4>biggest competitors is doubling down on observability and identity, especially

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<v Speaker 4>on the browser side. As an area of focus for

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<v Speaker 4>agent Tachai is that something you feel is very important

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<v Speaker 4>to roll out the agents.

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<v Speaker 2>So some companies try to go and buy many companies

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<v Speaker 2>to create a collection of things. We are very focused

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<v Speaker 2>on what we want. We are focused on zero trust

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<v Speaker 2>and then we focused on AI. Regarding observability, we actually

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<v Speaker 2>do observability for the areas that matter to our customers.

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<v Speaker 2>We sit between the user and the application. So today

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<v Speaker 2>we have a size business, hundreds of millions of dollar

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<v Speaker 2>business with the product we call z Skinnar Digital Experience,

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<v Speaker 2>where we can tell our customers if any user is

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<v Speaker 2>having any performance issues as they try to access those applications.

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<v Speaker 2>It's integrated with a platform. While many companies have many

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<v Speaker 2>point products and they are separate, we like to have

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<v Speaker 2>integrated platform that serves our customers. So we not only

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<v Speaker 2>provide secure and reliable experience, we make sure that it

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<v Speaker 2>is fast and you can trouble shoot those things. But

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<v Speaker 2>I'm not going into broad observability, which has become a

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<v Speaker 2>broad area. We are focused on the areas that are

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<v Speaker 2>relevant to our customers.

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<v Speaker 4>And identity is that something you care about? The identity

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<v Speaker 4>on the browser.

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<v Speaker 2>Identity is important. Think about identity for users. We have

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<v Speaker 2>been working from day one with all leading ID provider

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<v Speaker 2>for users or whether it's Microsoft and oct and others. Now,

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<v Speaker 2>when it comes to identity of agents, I believe there'll

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<v Speaker 2>be many contenders Microsoft, Google, Aws octors of the world.

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<v Speaker 2>Our philosophy is to federate those identity providers use that

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<v Speaker 2>identity and we are the zero trust exchange, the switchboard

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<v Speaker 2>to make sure the right AI agent talks to right

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<v Speaker 2>agent in this world. I do not need to own everything.

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<v Speaker 2>I need to do some of the things I do

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<v Speaker 2>the best and integrate with partners with proper API integration

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<v Speaker 2>so our customers get the biggest benefit. We believe in

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<v Speaker 2>doing a few things, but do them extremely well and

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<v Speaker 2>partner with others.

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<v Speaker 3>So I do feel like we're all learning as we go.

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<v Speaker 3>And of course man Deep and Jay, you guys are

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<v Speaker 3>ahead of us in a big way. But when they

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<v Speaker 3>talk Man Deep about zero trust is never trust, always verify.

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<v Speaker 3>I think about digital touch points thinking that there are

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<v Speaker 3>threats within an organization and outside, and you've got to

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<v Speaker 3>make sure there's security everywhere.

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<v Speaker 4>Yeah, no matter where you are, and that's where you know.

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<v Speaker 4>Sase is a term that gets thrown a lot, and

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<v Speaker 4>z scaler is in the leading position in that magic quadrant.

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<v Speaker 4>So I have one other question Jay for you. So,

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<v Speaker 4>given the amount of data in the world of security,

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<v Speaker 4>and you know you guys generate trillions of data points,

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<v Speaker 4>will the security world have its own.

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<v Speaker 2>Lell Yes, the answer is yes. We are actually working

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<v Speaker 2>on building our security focus LM, and I do not

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<v Speaker 2>need to have the large large language model. Security is

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<v Speaker 2>very focused set of high equality data. With over eight

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<v Speaker 2>thousand customers and forty five percent of Fortune fire and companies,

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<v Speaker 2>we generate over half for trillion transaction logs a day.

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<v Speaker 2>Those logs are anonymized, but they can give us an

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<v Speaker 2>idea of where the threats are coming from. We can

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<v Speaker 2>find a needly hoistag and help all of our customers.

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<v Speaker 2>So AI is only as good as the data that

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<v Speaker 2>powers it, and we have the best data and we

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<v Speaker 2>believe we can help identify some of these threats in

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<v Speaker 2>almost near real time and provide a closed loop system

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<v Speaker 2>so that the threats can't really exploit our customers and

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<v Speaker 2>provide them benefit at a much faster ways. That's why

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<v Speaker 2>we have focused on AI powered security operations, and our

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<v Speaker 2>acquisition of redcnnety is part of the strategy because they

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<v Speaker 2>build some very very good, egenic AI technology that we're

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<v Speaker 2>integrating with our platform.

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<v Speaker 1>The use of AI to make the system more robust

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<v Speaker 1>certainly makes sense, but I got to tell you min

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<v Speaker 1>deeper and I are actually moderating some panels next week

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<v Speaker 1>at a Bloomberg Live event that's focused on cybersecurity, and

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<v Speaker 1>in the prep that we're doing for that, what I

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<v Speaker 1>keep hearing from these chief security office, from these chief

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<v Speaker 1>information security officers, is the concern about how AI has

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<v Speaker 1>made the attackers just more robust and the attacks more robust.

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<v Speaker 1>Can you point to specific instances where hackers have actually

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<v Speaker 1>used AI to enhance their attacks and did it work?

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<v Speaker 2>Yes, there are many many examples. Let me give you

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<v Speaker 2>a few simple ones. Every attack starts by finding your

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<v Speaker 2>attack surface, who where you are and public IP address

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<v Speaker 2>is the starting point. Every firewall, every VPN, every application

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<v Speaker 2>portal is an attack surface. In the past, a hacker

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<v Speaker 2>may have taken weeks to identify it. Now you can

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<v Speaker 2>go to chat GPT and say tell me all the

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<v Speaker 2>firewalls and VPNs that have won abilities and give it

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<v Speaker 2>to me in a nice tabler format. Under sixty seconds,

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<v Speaker 2>you can get that now. The second part attackers would

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<v Speaker 2>do is these phishing emails. Now they can ask AI

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<v Speaker 2>to say, write an email that looks like a cfo's

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<v Speaker 2>writing style, no typos, make it very targeted. That's number two. Third,

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<v Speaker 2>hackers are using automation that AI provides. Once they are

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<v Speaker 2>on the network, automation can find the key applications and

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<v Speaker 2>try to encrypt that data. A lot of that is happening.

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<v Speaker 2>What does these kin do in this case? Number one,

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<v Speaker 2>we hide your attack surface. Your applications are hidden behind

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<v Speaker 2>our cloud. Bad guys can even find you. They can't

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<v Speaker 2>find you, they can attack you. And the second is

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<v Speaker 2>on the network. The biggest problem with firewalls and vpnss. Right,

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<v Speaker 2>they're trying to protect the castle, and we actually make

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<v Speaker 2>it zero. Trust.

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<v Speaker 3>Jay, We've got to run. This was so informative and

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<v Speaker 3>so enlightening in terms of AI security. We so appreciate it.

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<v Speaker 3>Jay Toddray is founder, chairman's eeoz Scaler and of course

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<v Speaker 3>our own Mandi saying a va