My view on ZS

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Hey all, I just wanted to add a little bit more color on Diablito’s excellent review of ZS’s earnings (btw nice job).

As I write this ZS is down to 41 which I’m guessing is in reaction to their relatively tepid guidance. I’m not at all worried about their guidance because as Diablito said they have already almost met their guidance with their backlog. Their Q1 guidance is quite good at 48% which they will almost assuredly beat. Doesn’t take too many quarters of 48% + growth for them to totally blow out their full year guidance. Let us also look at what is happening to the old model security folks. Symmantec got slaughtered in enterprise and they are the leader is the old model of appliance based network security. There are a ton of articles like this one, https://www.networkworld.com/article/3194285/security/9-reas… . That isn’t to say that ZS won’t have competition but they definitely have the mind share and a complete cloud based security solution. As more companies move to a data/appliance based security instead of network security the space will get more complicated. OKTA is getting in on the game with their latest acquisition of scaleFT, but they don’t have a complete product yet. VRNS focuses on data security but they are more of company that addresses the weakness of network security instead of replacing it.

ZS valuation is the best (i say that sort of tongue in cheek) that it has been since june. When the company first came out they had an EV/S of ~18, it peaked at a little above 31 and now is down to 24. Don’t get me wrong they are very expensive but they are kicking the stink out of the competition, all their operating metrics are improving, they are basically at the point of self funding and they don’t have any viable competition that I know about in the near horizon. In the pipeline are companies that are operationalizing google’s zero trust initiate with data centric and app centric approaches. ZS will continue to use that time to build out their moat and product. I don’t have a crystal ball to say what the price will do over the next couple months but ZS looks like a pretty darn good long term buy to me. I bought more today.

-e

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ZS valuation is the best … now is down to 24. Don’t get me wrong they are very expensive but

I am looking at $300 m revenue for 7/20 and 150 m shares assuming the share price stays where it is we are looking at $6 B market cap for $300m revenue. Just saying. I know valuation is not a major concern or a factor here…

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300m of revenue in 2 years would be a massive disappointment. Their own conservative projections for the end of 2019 is 260, but really should be closer to 280-290. At the end of the year they should have somewhere around 134 million shares per their CC. I agree in 2020 they should have around 150 million share count but their revenue hopefully is in the 400-450 million range. If trends hold they should be solidly cash flow positive and perhaps non-gaap earnings positive. Solving the above shows that their EV in 2020 would be around 5.5 billion at current share price. Revenue of 400 million would put their EV/S around 14. I think they have room to do better than the rough model above. If they come close to anything that I have written they won’t have a EV/S of 14 but 20+. I do think your point is well taken though. ZS is expensive no matter how you look at it, they are priced for perfect execution and even when they execute perfectly their price can go down (as we just saw).

best
-e

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their revenue hopefully is in the 400-450 million range

That is assuming growth will be 50% for next 2 years. My projections are more pedestrian 25% growth.

they are priced for perfect execution and even when they execute perfectly their price can go down

In my view, ZS is priced to expand beyond their current cloud security. If you are not visualizing them to grow into other areas, grow rates doesn’t matter, the stock is pricing not related to its current TAM.

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25% growth for Zs is absurd. If that is all they grow then their entire narrative is a lie, and the entire disruptive nature of their product is a fallacy. The latter is clearly not true, so I doubt the former is.

25% growth, no one with any industry knowledge is predicting anything that pedestrian. This said, just because no one else is doing it does not mean that you will be found correct. If there were no risks, no uncertainties, there would be no potential for outsize rewards. We would all just receive fixed bond/dividend payments.

Zs will be in long term hyper growth like Nutanix has been and is in, like SHOP has been and is in, like MDB has been and is accelerating. Zs has recurring revenues with customers that will likely have retention rates that exceed TTD’s retention rates. This is a company where customers are paying three years in advance, and in some cases dumping their prior security structures and hiring Zscaler with no other competitive bids because “I am sick of dealing with all these appliances”. I do recommend, if you are interesting, listening to GE’s CIO presentation at Zenith (where he admits he had nothing to sell anyone in the audience but yet showed up to give a keynote) why GE went Zs, and why there is nothing else like it out there, and just how it is so disruptive.

The SD-Wan market alone is expected to grow at a compounded 68% a year rate according to that magic square company (yeah, names not my strong suit tonight), and Zs is going to dominate in that market alone.

But that is the bullish side I guess. Always good to have other perspective, but I do not see the rationale of how you come up with 25% growth based upon 73% billings growth, and the fact that Zscaler always ready, literally, has 81% of next year’s revenue guidance in their bank account as deferred revenues to be recognized within the next 12 months. That is they have already made 81% of their year for next year, and the money is literally in the bank as pre-payment.

Tinker

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My projections are more pedestrian 25% growth.

If you think growth will slow to 25% then of course you shouldn’t be invested.

You can take any growth stock, cut its growth rate in half, and call it overvalued.

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25% growth, no one with any industry knowledge is predicting anything that pedestrian.
Consensus revenue is at $330, I am bit lower than that.

The SD-Wan market alone is expected to grow at a compounded 68% a year rate

So you are expecting SD-WAN related zs revenues to show similar growth? I could be wrong, still bulk of the revenue on that segment goes to network solution provides and ZS taking only a portion of the revenue related to security. What am I missing?

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In my view, ZS is priced to expand beyond their current cloud security. If you are not visualizing them to grow into other areas, grow rates doesn’t matter, the stock is pricing not related to its current TAM.

Consensus revenue is at $330, I am bit lower than that.

King:

Count me in the group that thinks ZS is overvalued but even I can’t see how you get your numbers…surely you are not just pulling this from thin air???

They are guiding to $260 million for next fiscal year…so you are saying in the year after, their growth will fall off to 27%?

IMO, I assume the total year figures by the companies themselves are pure WAG…they have no way to be sure and most assuredly underpromise…their clarity is at best the next 1-2 quarters. But we all know these companies usually underpromise and try to over deliver.

If they can’t be sure, I rather doubt your projections can be any more certain…you havent provided the numbers to justify your projections.

I do think the “Billings” pro-argument may have a bit if a chink in its Armour based on their qualification at earnings:

Excluding upfront greater than one year Billings in both periods, Billings would have grown slightly below 60%. Excluding the effects of the $16.5 million from our Q4 Billings, we expect the sequential percentage decline in Q1, 2019 to be consistent to our previous Q4 to Q1 sequential declines. In the last two fiscal years, Billings declined approximately 25% from Q4 to Q1.

This customary historical decline in Billings might pressure the stock that has so much promise already built into its share price but again it still doesn’t drag the revenue growth rate to 27%.

Regarding TAM…here is what they say it is…again they all exaggerate this number but nonetheless, it is much higher than you intimate:

We are going after a $70.7 billion TAM that our analysis of IDC’s data indicates is spent annually on network security products. Our strong business momentum is reflected in our financial results..

Again, I am not invested due to the high P/S…the stock has in fact languished other higher revenue growth stocks with less massively high P/S ratios…but even so, I just dont get where you are getting your numbers from.

Side issue BTW…if the data I previously presented on this board regarding stock lockup expirations holds true in this case as well, the time to take a position (ignoring the high valuation) would be Sept 12th.

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surely you are not just pulling this from thin air???

LOL. Generally for aggressive growth companies analysts are bit optimistic, hence I moderated their consensus revenue a bit. That’s my projection. I understand many here feels the company is conservative in their guidance. I get that.

We are going after a $70.7 billion TAM that our analysis of IDC’s data indicates is spent annually on network security products

Please see my earlier comment, “In my view, ZS is priced to expand beyond their current cloud security”. But there are established players and unlike cloud security, they have to win against install base, and the success and growth rate will be completely different. That is not to say ZS will not have success but it will take time, and the market share gain will be slow and you cannot extrapolate their growth rates in cloud security to that market.

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So you are expecting SD-WAN related zs revenues to show similar growth? I could be wrong, still bulk of the revenue on that segment goes to network solution provides and ZS taking only a portion of the revenue related to security. What am I missing?

You may also want to listen to the AT&T keynote at Zenith 2018. AT&T was there solely because they are the leading provider of SD-WAN holistic services in the country. Zscaler is the only security company in the world that enables SD-Wan to be set up with out any hardware, without any complications, and just by connecting it to the Internet. Rather doubt AT&T would have done a keynote for a small security company (like GE, Siemens, VMWare, Microsoft (who gave two, one CEO, the other CIO of Azure).

I am not sure what you mean that Zs only gets a portion of SD-WAN revenues? Of course they only get a portion, just as Arista only gets a portion of it, Cisco a portion of it, AT&T a portion of it. The issue is the rate of growth, which may be the fastest growing segment of technology build out currently in all of technology. Zscaler is a key disruptive enabler of SD-WAN, materially decreasing cost and complexity of pre-Zscaler architectures (which means when anyone else provides security).

This is also mostly all greenfield opportunities, as are most of Zscaler’s current business, although they are displacing appliances in many of these greenfield opportunities as well.

Zscaler is not a company that is going to revert to the mean. If you note Symantec, they are the primary competitive force to Zscaler in these greenfield opportunities. Blue Coat (whom Symantec purchased - made their CEO Symantec’s CEO, and sold off Veritas (their storage company) to make their company the Blue Coat internet security company) is the only company that is in the leadership square with Zs.

And yet, while Zs is growing billings by more than 70% for 2 quarters in a row, Symantec is falling apart unable to close deals in the same market that Zs is putting together almost perfect quarters.

So yes, when such a company is dominating in such rapidly growing business sectors, I do expect that they will grow +/- around the growth of that market, at least.

Tinker

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