My ZS Q4 2018 notes:

Hi all!

First of all Q4 2018 was a great quarter for ZS. There were a lot of questions in the CC about competition, but management doesn’t really see direct competition to their disruptive product yet (also I’m not the one to discuss competition with my limited knowledge - but I like managements confidence). Furthermore, they gave very „prudent“ guidance again. As of this writing shares are down 4.7% AM. Could be because of the low guidance and/or the general negative sentiment following yesterdays general sector drop. Anyhow, let’s look closer at the quarter:

Remember my write up, where I was weary about their guidance of 40% rev growth yoy and 4% sequentially for Q4. Well, they actually came in at 54% growth yoy and 14% sequentially.

Guidance for Q1 2019 calls for 48% yoy-growth and 5% sequentially.

They also gave revenue guidance for the full year 2019, which is at $260 million (implying only 37% growth yoy - a severe deceleration). But at another time in the call they mentioned their total backlog is at $398 mil currently and they expect 53% of that to be revenue next year. That’s $211 million revenue they already made - or, expressed in another way, 81% of their guidance! So from their guidance they expect to make additional new revenue of $49 million in 2019. That’s insanely low and they will surely beat! Also consider: They had their largest deal at $16 mil this quarter - that’s for one deal!

Billings growth (the number that Bert and Saul loved so much last quarter) came in again at 72%, which is amazing again. For the full year Billings grew 65% in 2018.

They gave guidance for full year 2019 Billings in the CC: $330 mil, which is 28% yoy growth. I won’t even comment on that, it’s just ridiculous.

Deferred Revenue
Came in at $164 mil for 70% growth yoy and 31% (!) sequential. Q4 is a very strong quarter seasonally, but still 31% is great!. Last year they were at 24% sequential (and 47% yoy).

Gross Margin
Gross Margin came in at 80%, slightly lower than last quarter but up from last year. Here is what management had to say: „We feel 80% is a very strong gross margin and our focus is not to maximize our gross margins at this stage. We feel it is important to continue to invest in our platform and to drive customer satisfaction to drive top-line revenue growth.“

Net loss / EPS
Net loss came in at $-1.4 mil against guidance of $-6 mil. That’s -2.5% of revenue currently. EPS came in at -1 Cent against guidance of -5 Cents.

I like this statement from the CC (CFO speaking): „And so we are --like I think probably two most frugal people I know Jay is and I think I put myself in the same category, incredibly frugal of people. We’re going to might try to maximize the value of the company and the shareholders by driving top-line growth…
In Q1, we also had our sales kickoff so there was a significant expense which is coming through in Q1 with the sales kickoff." (those will be $2 mio approx.)

For the first quarter 2019 they expect EPS of $-0,05 (this includes the higher expenses due to the sales kickoff). For the full year they expect EPS of $-0,12 (down form $-0,38 in 2018 and $-0,68 in 2017!)

Cash Flow
Operating Cashflow came in at $14.7 mil (from $-3.7 mil last year) - that’s 26% of revenue. Free Cashflow came in at $11.9 mil (from $-5.4 mil last year) - that’s a 21% FCF-Margin!

In my last writeup I expected both Cashflow numbers to go down because of seasonality patterns seen in 2017. They didn’t! OCF was up 81% sequentially and FCF was up 220%. Nice!

Net dollar retention rate
Lastly, the net dollar retention rate came in at 117% (up from 115% yoy, but down from 122% last quarter). I was concerned about that at first, but here is what management had to say: „Our increased success selling bigger deals up front which start with the transformation bundle and faster up-sells within a year, while good for our business can reduce our net dollar retention rate which is calculated on a year-over-year ARR basis.“ If you see this also together with the top line growth rates above, this slight decrease in retention rate should not be a big concern.

So all in all I liked the quarter a lot. Guidance is very low, but at least it potentially provides us with lower entry points. I will definitely look to increase my position in the upcoming days. Can’t wait to hear what you have to say!



Outstanding quarter and numbers… thanks for posting notes.
Here are few things just outstanding.

  • Calculated billings grew by 70%+ for second quarter in a row
  • Deferred revenue grew by ~$40M… contributing big time to cash flow growth
  • Cash flow grew to $14.6M (was $8.1M last quarter) despite huge drag from account receivable and contract acquisition cost (is this sales commission being paid upfront?)

Not many companies in this league.