What about Zscaler?

[Diablito]

Hi all,

we are hearing so much about Zoom on this board; Crowdstrike also gets a lot of mentions, as well as other board favorites like Okta… One company that used to be a board-favorite, Zscaler, has barely been mentioned here (if at all). Here is a snippet from what I wrote in December 2018 about the company:

To understand what Zscaler does on a high level, you must be aware of two basic trends that are happening right now: First, company applications and data are migrating from company networks to the cloud. And second, employees are becoming more mobile and need secure access to company resources from any location and device.

Obviously, these trends are now accelerated at unprecedented rates. And Zscaler’s stock has already seen some more love, surging from the low $40s to the high $60s in a month. However, Zscaler is still well below their all-time high (approx. $88 in July 2019). Which made me wonder – and I know, I’m price anchoring here – if there is some untapped opportunity here?

So far in FY 2020, Zscaler grew revenue 48% in Q1 and 36% in Q2. Growth deceleration has been well discussed on this board so I won’t get into it (I sold half of my position after the Q2 report). The current company guidance calls for 35% revenue growth in Q3 2020 (= next quarter), 34% in Q4 2020 and 38% for the full year 2020. So basically, before Coronavirus the company expected further deceleration (although, given that ZScaler always beats its guidance, there could also be a reacceleration from Q2). As we know, Zscaler is in the process of figuring out how to further scale its sales machinery. This effort should get a huge tailwind from Coronavirus induced remote work, right? We know that Zscaler has a sales process that is top-down (i.e. usually sale to the C-level, so naturally you won’t see viral adoption like with Zoom. So the question is, how (and how quick) are they selling to C-level executives in this environment? Also, how quickly can you get started as a customer?

There was a blog post by the CEO on LinkedIn that gives a little insight:
https://www.linkedin.com/pulse/empowering-employees-work-rem…

Here is a little excerpt:
? DB Schenker, a leading global freight forwarding company, enabled a vast majority of its workforce across Asia Pacific to work remotely, keeping them safe while guaranteeing business continuity. Just weeks after COVID-19 first started to spread, the company implemented Zscaler Private Access (ZPA) and was up and running in a matter of a few days. DB Schenker was already using Zscaler Internet Access (ZIA) as part of its cloud-first strategy to balance security with a fast user experience. You can read more in this blog by Gerold Nagel, SVP of Global Infrastructure Services, and Markus Sontheimer, Member of the Board of Management (CIO/CDO), at DB Schenker.

? A Global 100 company that was already using ZIA globally successfully enabled secure, remote access through ZPA to more than 120,000 employees in less than three weeks.

? Since January 1, our overall traffic has more than tripled, driven in large part by existing customers fully taking advantage of ZPA; our China traffic has increased more than 12x; Seoul is up 6x; Tokyo has more than doubled; and our newly opened Milan data center quickly became one of the busiest sites across the Zscaler cloud.

What to do now? I’m happy to hold my remaining shares into earnings and am hoping to see a positive surprise (especially in guidance; although I also expect them to be “prudent” as always). But I have also flirted with the idea to increase my position… However, I’m having a hard time to make that commitment without seeing improving numbers first. Any thoughts on Zscaler?

All the best and stay healthy
Niki

[Partoftheplan]

Thanks for posting! I posted about ZS on April 1st on another board. I held it before, but sold it when it fell around $70. I saw it was up to $63, and added it back. Saul decreased his holdings by one position after selling Afterpay, and Red Violet. I had those funds set aside until I found an adequate replacement, and decided on ZS. From what I could tell Saul sold out of ZS due to the lack of returns, and that there were higher returning stocks available to replace it.

I’m hoping it will be back up in the $70s after the next earning report in June.

On the flip side, there was a poster who said that the CEO was very unimpressive in his interview on Mad Money, so that’s something to keep in mind if they have to face any adversity.

[nilvest]

Hi Niki,

Unlike CRWD and I believe Okta too, here sales cycle can begin from a success in a part of organization and spread out with time, ZS new client implementation is tops down, rip and replace, at-least to my understanding.

So, yes they may benefit from some expansion in existing client, I would think their new client sales would be hard paused for March and April which may result into strong negative reaction to share price.

On the same note, I would think later in 2020, a lot more companies may consider accelerating change to their network architecture to ZS based because the cost saving is tremendous. So medium term (say 2 to 8 quarters window), ZS should be a big beneficiary and accelerate.
I just worry about near term potential for surprise and therefore staying out for now… or in other words, expect better entry point for ZS as I am bullish in medium term.

Let me know if you think the short term worry is misplaced.

nilvest

[thejusticier]

the execution issues did not seem to have been mending and the growth was slowing. Not sure what these past month or two has made that situation any different. I would think it may have made the latter even worse.
I have the sense that ZS has been rallying because of CRWD last earning report which was good and optimisitic, and OKTA’s.

what material changes occur over the past 2 months for ZS?

tj

[12x]

From what I got out of that press release was more talks about current customers using more product rather than new customers.

On top of that, from what I understand ZScaler does not charge by how much a user uses ZScaler but instead just a flat cost per user. So just because their data centers are seeing huge increases it doesn’t mean it will be higher sales. I still have not seen any hard evidence ZScaler is going to go back to its old growth rates of 60%+.

MongoDB May be one of the few not talked about here that will profit from this. It sounds like usage is up with their customers and they do charge by usage. In their last quarterly they alluded to their customers using more due to remote work/quarantine. They specified games as One seeing more usage.

I am not planning my trades around who may benefit from coronavirus. I’m planning them around who will continue to prosper after this is gone. It doesn’t do any good if usage is up because everyone is at home playing games when next quarter they are out and about since coronavirus is gone.