is it time to look at ZS (again?)

I might be late to the party and this company doesn’t get a lot of interest on this board but it might be time to take another look at ZScaler. Their story has improved, by my assessment, and it looks interesting. This follows the investment thesis of investing in the best of the best, with strong revenue growth, margins, management strength, competitive differentiation, and large TAMs.

Spoiler alert: ZS satisfies most of the financial metrics I look at but one thing that concerns me is Cloudflare is a competitor and Cloudflare is quickly becoming one of my highest conviction companies. NET’s pace of development and product release is impressive. I don’t like betting against NET. Maybe ZS and NET are complimentary in some ways?

The first things I look at are
revenue growth, both YoY( looking for > 40%) and sequential growth (needs to be positive, at least: ZM is a good example of why we should look at sequential growth), then
recurring revenue,
adj gross margin (>70%),
customer growth (positive),
Dollar based Net Retention rate >110%
adj operating margin (growing),
outlook(growing and positive),
management strength,
and competitive differentiation

Let’s start with YoY and QoQ Revenue Growth

Revenues in $M
           Q1    Q2      Q3      Q4                                           
FY2019         	 74      79      86              
FY2020     94   101     111     126              
FY2021    143

YoY % Revenue Increase
           Q1    Q2      Q3      Q4                                                                                  
FY 2020          36      41      47                
FY 2021    52

QoQ % Revenue Increase
           Q1    Q2      Q3      Q4                                                                                                                                                        
FY 2020     9     7      10      14             
FY 2021    13

So YoY rev growth is 52% (and accelerating) and QoQ rev growth is positive, so this looks good.

Next, let’s look at recurring revenue. The majority, if not the entirety, of ZScaler’s revenue is subscription based. I searched around and found Zscaler Private Access Professional pricing based on 12 months, 24 months, and 36 months, based on the number of users. See sample below

Users		12mo	24mo	36mo
50		$7k	$11k	$16k
1k		$48k	$93k	$139k

Next, I look at adj gross margin, ideally looking for something >70%. From ZS’s last quarterly, their adj gross margins were 81%. This is very good.

Now let’s look at customer growth. I couldn’t find anything about number of customers won each quarter but see that they have over 4500 customers, and 450 of the Forbes Global 200 customer base.

Dollar Based Expansion (trailing 12 month) is 122%, which is good

adjusted operations margin was 14% in their last quarter’s announcement, which was up from 4% in the previous quarter; good.

outlook: Management raised full-year outlook: $608M to $612M during FY2021, which corresponds to YoY growth of 41.5% at the midpoint, compared to 42% last year. For the next quarter, they are forecasting $148M, which would result in +47% YoY and +3% sequential. Assuming they sandbagged, they would need to hit $154M, or a measly $6M (4%) beat to equal the previous quarter’s 52% YoY growth,

management strength: founder led, although ZS had some hiccups in the past, they seem to have improved their execution

competitive differentiation: this is where I don’t have a good feel. As mentioned above, they compete against Cloudflare, which is doing very well. So they have some strong competition.

valuation: I know “valuation” is a tricky topic, but I typically do a quick look, just for my own education, and ZS is priced for perfection: It’s trading at 44 times forward looking 4 Q revenue outlook, which indicates the market expects phenomenal results over the next year and longer. See below for some comparisons to other popular companies

Company	      EV/N4Q	(EV/N4Q)/(factor that considers YoY Rev growth, GPM, and ARR)
ZS		44		24
CRWD		43		10
NET		53		17
SNOW		94		20
OKTA		43		16
DOCU		29		10
ZM		37		 2
DDOG		52		15

In summary, Zscaler looks attractive from a fundamental perspective, but given NET competes with them, I’m not sure how to assess their future potential.


Jamin Ball, VP @redpointvc (Investing predominantly in enterprise software businesses) tracks the performance of the cloud computing companies. After evaluating the recent ER release, he had the following:

"The biggest winners of this quarter, in my opinion, were the companies that grew >50% YoY AND also accelerated. This list includes:


Including the “impressive maintainers” I’d add:

Here is his twiter account:


Cloudflare has entered their market this year and I believe they are better positioned for success due to the overall offering of their services along with much better visionary leadership team.

ZS was a major struggle prior to the pandemic and I don’t think their management team will be able to compete with Cloudflare moving forward. Their sales cycle is still long and technology hard to understand and long time to implement.

Cloudflare on the other side benefits from secular growth from edge, and is not limited to security offerings only.


I think you should not worry too much about Cloudflare as a competitor. There can be multiple winners in this shift to zero trust and SASE network security architectures. The ones who have to worry are the incumbent companies like Palo Alto and Cisco with their expensive legacy network technology. They are the ones being disrupted here.

I gave this example in December 2018 about a customer of Zscaler: “General Electric (GE) had a very challenging problem: Over their 125-year company history, they have grown into over 180 countries, over 4,000 locations with more than 425,000 users. At the same time, their IT-network has been growing – a lot – and with that, complexity was increasing constantly. According to Chris Drumgoole, CTO of GE, in such an environment “the drawing of the network never gets simpler and the performance never gets better and the cost never goes down.“ Since GE saw that they can’t really secure their network, they can’t afford their network and they can’t scale their network, it started to dawn on them that they actually can’t trust their network, which made it necessary to rethink basically everything. Long story short, they went ahead to remodel their legacy IT network, and Zscaler was an important partner in that process. What was the end result? GE had saved $30 million annually, increased capacity by 35% and improved latency by 80%.”

This is the main reason why cloud businesses are doing so well, and it is true for almost any niche. They save the enterprise a ton of money while also increasing productivity. You would be stupid not to implement these things as a CEO.

I agree that Zscaler is doing very well again and I always liked it a lot because of its very strategic position in the enterprise. I am no technology expert but for me, it seems logical that you wouldn’t change your network security architecture very often as a company and that you also wouldn’t want to change the supplier – so I assumed that switching costs might be quite high, which in turn might give Zscaler a bit of a wider moat than other SaaS companies. On the other hand, you could also make the argument that once a company changed to zero trust network security, it becomes much easier to change suppliers. So in the long term this very defensive field – network security – might get a bit less defensive. But we don’t know that yet.

Zscaler had their troubles a year ago and most on this board have sold out during that time. And while I agreed that the numbers looked bad for a while, I only sold half and am happy I kept the rest. Zscaler is a great company in my eyes and the numbers show that they are doing very well at the moment.



I view this similar to Niki does.

Some additional thoughts - I believe ZS is a much stronger and proven sales machine focused on largest of large enterprises… vs NET has strong roots on freemium market and going upward… between them, there is huge market to be taken and almost no-one else today has anything near these guys… so I think it will be a couple of years before they actually compete head to head on any deal… or if anything, ZS poses a bit of risk to NET on the top end of the market…

On product front, NET is certainly a lot more prolific than ZS, or at-least thats what we have seen so far… does not mean ZS is doing nothing. They are more focused on serving needs of the largest enterprises and I would think they are adding in slow and deliberate fashion that helps the enhance their footprint in those largest companies.

If you pay attention to CEO’s commentary, he has started talking about evolving beyond security and offer “digital experience technology” and they have started offering this product for last quarter or two. We will have to wait for a couple more quarters to see how it evolves in revenue.

All in all, it is a large, growing market, expanding just as cloud migration continues and I think both NET and ZS will have tremendous success…

The main difference I see is NET is well structured to keep steady, sustained hyper growth for a long period… at-least next five years… while ZS due to its high dependence on top end of the market and some old school enterprises, will grow in spurts and at times may even grow faster than NET.

(Honestly, I think even Fastly will continue to grow… however, it is a different animal and has different dynamics and certainly less of a security play than these guys).

Currently I have small position in NET and don’t have a position in ZS or FSLY… I am certainly tempted to add ZS in near future.


I have owned ZS for about 15 months. I held even after their disastrous earnings report in the fall of 2019. I am writing from a Twitter feed:

. “for 10 straight years, Gartner the leading IT industry analyst and trusted advisor determined Zscaler as a leader in the Leader X Visionary (top right) quadrant of the Gartner Magic Quadrant for Secure Web Gateways - and as of 2020 ZS is the ONLY player in this quadrant. Gartner is a resource that is used by most major enterprise IT shops to explore the best technologies during transformational project due diligence and this rating should increase global visibility and sales”

Crowd strike is my largest position, but ZS is not far behind. The company seems to have solved its issues concerning poor sales execution. It’s last earnings number appear solid. I think that both crowd and ZS will be the long term winners in the security space.


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