Personally I felt like this call had a fair bit of expectation management for investors and analysts. Sure they seem confident in their technology, but growth has really slowed down and they definitely aren’t saying it is going to stabilize or accelerate next quarter. Italicized are slightly edited responses from the call.
Hedging and expectation management
Also, please keep in mind that we had a large upfront billing of $1 million in Q2 of 2019 from a large public sector customer deploying our platform as a private cloud which will pose a tough year-over-year comparison in Q2.
Re: FCF and operating margin
As a result of these payments, we expect our free cash flow margins in fiscal 2020 to be zero to two points lower compared to our operating profit margins. Longer term, we expect our free cash flow margins to be higher than our non-GAAP operating margins.
Re: DNRR
The point to make is it’s going to fluctuate. It’s a hard metric to really put your finger on. 120% is outstanding but it could fluctuate.
Re: new products driving upside for 2020
there’s nothing we’re planning for, and you shouldn’t plan for anything either. We’re planning to get these products out in the second calendar quarter of 2020. There’s potential for the products as Jay mentioned with the CASB out of band browser isolation user experience in the B2B. We feel that there’s a pretty significant upside for us with these types of products but nothing for this fiscal 2020 should be accounted for.
The following is sort of non-answer about the new CRO and how much impact he and his team is making to revenue. Jay essentially doesn’t answer the question but talks around it.
Yes, Alex. Thank you. This is Jay. Regarding your question about our go-to-market, our CRO. As you know, we have done very well so far bill-to-business to hundreds of millions of dollars. Now, our goal is to take it to $1 billion and plus which means scaling our sales execution. Tony actually is the right guy who is driving a number of these things. Let me give you a perspective of what all he’s driving. So, for execution at scale, I will give you three examples. One, when you have scores of salespeople, it’s one thing; when you have hundreds of salespeople, you need far better sales enablement, far better training. For us, we used to have a small sales enablement team. Dali has come in and built a pretty sizable team, and the team has already rolling out some of the training programs.
Number two; to really scale your business, you need a very consistent and repeatable sales process that may be more refined. And Dali has come in and taken our process and further refined and it’s being rolled out to the whole field. Number three, while we had tools and systems in place to scale to the next level and to have better accountability, better visibility to give us better leading indicator in sales activities, he and the leadership team have started work on many areas. So, a lot of these things are already making a difference, and we’re seeing it. And I think as each quarter goes by, we will see more and more impact of the work being done by Dali and his team. Remo, you want to add anything?
on comparisons
“Also, please keep in mind that we had a large upfront billing of $1 million in Q2 of 2019 from a large public sector customer deploying our platform as a private cloud which will pose a tough year-over-year comparison in Q2”
on previous sale guidance at the last analyst day.
Yes. Our sales tracking for Q1, it’s a little bit behind but our expectation is still to get to that 60%. We are looking 4Q to be a good quarter for us, but it’s all taken into account in our guidance.
On the positive side
Lots of talk about technology, exciting business developments etc. So far though none of that has turned into better revenue growth.
Re: CRO’s 60 day plan they talked about before. How is it going etc
Yes. Good question. I would start seeing basically improvement next year related to, and again the guidance that we gave contemplates the investments we’re making in sales and marketing. Dolly’s 30 to 60-day plan. I mean I’ve worked with the few CROs and watching what Dali is doing here in the first couple of months as he’s moving very quickly and doing an outstanding. I mean he is building the sales leadership in the organization. He’s building, as Jay mentioned, our sales enablement and training.
He is better defining sales responsibility and putting in place the framework for us to be a much bigger company and placing in, putting in place that accountability. In summary, what I see with Dali is doing, he’s putting structured, disciplined leadership and has a passion that he has. Quite frankly, I don’t know when he sleeps. It’s going very quickly, but it is going to take time. So that was the reason for our guidance initially at 42% to 43% billings in the first half and we increased that to 43% increased our billings guidance to 500 and 510. I’m excited working with Dolly. And what he’s doing and looks forward to it.
”our plan is still to be at a 20% plus operating margin once we hit $800 million to $1 billion in revenue. Related to pricing pressure, our discounts are lower this quarter. Our average prices per user are higher. When I take a look at our ARR for customers with greater than 3,000 users, it is higher this quarter. It’s in the high 300,000 range and our churn is down.”
we have been seeing about half the new customers coming for ZPA, sorry half the ZPA deal is coming from new customers and half coming from upsell. So that’s kind of number of customers. But having said that, the ZPA deals are smaller than ZIA deal. As we said before, when ZIA is bought it’s bought for everyone in the company for all employees and ZPA are based on number of applications. So it’s one. GPA is opening more doors for new logos than we had initially thought off. So pleased with that.
re:Fedramp
Very bullish on it. Remo, can I say that? Good team. I would say, if you asked me a year ago versus today, I feel we are significantly ahead of where I thought it would be
My take
ZS is a company that is in transition. They are trying to highlight the fact that they are making the transition but so far we haven’t seen evidence in the numbers that the transition is having success. I counted how many times they mentioned Dali the new CRO…16 times. The CRO almost seemed a talism against any question that mentioned pain points. Maybe Dali will have a huge impact, I’m sure he is working hard but he has a big job to transform a sales team’s culture and infrastructure. Growth will almost surely slow down again next quarter. There is just too much hedging, expectation management etc unless something surprising happens.
In the future ZS expecst FCF margin to be higher than operating margin although not for 2020. With that in mind we should see 25%+ FCF margin and 20% + operating margin. Those are excellent numbers, the big question is now growth. They seem to be indicating that their new CRO is going to help drive growth but they are being coy about when they think that will happen and what type of growth they expect. At this point there are plenty of good companies with FCF margins and operating margins that are already in the 25+ range with growth that is stable in the 30-40% range. ZS on the other hand has aspirational goals of those margins and slowing growth. When the price spiked before earnings I cut down my position from 14% down to 3.8% . I don’t typically look at turnarounds or “transition” type of investments and to my eye that is what ZS has become. Maybe we will see some positive surprises, Hope is not an investment strategy. I personally don’t feel inclined to increase my position. More thinking ahead.
Best,
EThan