ZS Q3 2020 CC notes

Hi all,

TL;DR = Going into this quarter, my thoughts were: “This is a big one of ZS with the clouds of COVID19. Last quarter they were talking “slowing sales cycles” etc. Will COVID be a head or tailwind?”

What happened? ZS had a great quarter. Almost every analyst congratulated them, and it seems like COVID is a tailwind as you might expect. The longer COVID is an issue, the better for them? Revenue growth had a small pickup to 40%, billings grew 55%, and their guidance is a little under that.

Stock up 30%, >100% ytd. EV/S is 34.

ZS Q3 summary. I’ve held ZS, betting that their sales issues were fixable given the “air on inevitability” of their products and the relative simplicity of the message. As opposed to NTNX for example, where they had sales issues, and a plethora of products and a transition to subscription and massively dropping revenue growth and…

One thing I like about ZS is the (relative) simplicity of their offering. “Get rid of all those expensive network security boxes that don’t scale”.

They’re now up >100% YTD. It’s a pretty volatile stock, but hopefully the sales issues are gone, and the digital transformation acceleration continues. They are a B2B business, so sales cycles tend to be long, they need to talk to people and convince them about the product etc. I still like the simplicity of the story but not buying here.

One thing, their stock-based compensation, I’m still trying to get my head around what that means, but SBC is 25% of revenue which seems crazy to me.

ps. As always, copy and paste into dillinger.io for a pretty version.

Q3 2020

My thoughts


  1. Revenue growth is 40%. It’s good in this climate, but its a little at odds with the positivity of the call. COVID is a big tailwind (evidently) and big customers need to deal with WFH, they “Couldn’t be happier” with sales progress, they now are “delivering world-class sales execution”.
  2. SBC is high. $27.8m in the quarter, with revenue of $110m.
  3. EV/S is now 34. It’s not ZM, but… thats way up there.
  4. Up >100% YTD!


Q: What is revenue doing yoy?
A: 49.16m, 56.17m, 63.30m, 74.30m, 79.13m, 86.11m, 93.59m, 101.30m, 110.5m
{49.1%, 53.7%, 58.8%, 65.2%, 61.0%, 53.3%, 47.9%, 36.3%, 39.6%, 40%} ?

{GD:Actually a mild acceleration - This was unexpected, after last quarters sales issues and COVID. Very interesting.}

Q: What are customers doing q-1?
A: According to IR, they only release annually. Thats annoying.

|               | Customers |      | G2000 |
| :------------ | :-------- | :--- | :---- |
| July 21, 2019 | 3900      | +20% | 400   |
| July 21, 2018 | 3250      |      |       |

A: 119% This is an interesting metric for ZS, because they have 2(main) products and they tend to be big-bang installs.

Q: Revenue per customer up or down (either revenue/customers or ARR)?
A: ???

Q: Expenses as percent of revenue going up or down (ie, any sign of leverage)?
A: Expenses as percent of revenue:

|         | Q3 18  | Q4 18  | Q1 19  | Q2 19  | Q3 19  | Q4 19  | Q1 20  | Q2 20   | Q3 20   |
| :------ | :----- | :----- | :----- | :----- | :----- | :----- | :----- | :------ | :------ |
| Revenue | 49,163 | 56,174 | 63,298 | 74,302 | 79,128 | 86,108 | 93,590 | 101,268 | 110,524 |
| yoy %   |        |        |        |        | 61%    | 53%    | 48%    | 36%     | 40%     |
| R&D     | 9,907  | 11,480 | 13,186 | 15,071 | 16,499 | 17,213 | 20,271 | 20,706  | 24,117  |
|         | 20%    | 20%    | 21%    | 20%    | 21%    | 20%    | 22%    | 20%     | 22%     |
| S&M     | 29,892 | 32,479 | 36,545 | 38,756 | 45,295 | 49,317 | 59,411 | 61,621  | 67,727  |
|         | 61%    | 58%    | 58%    | 52%    | 57%    | 57%    | 63%    | 61%     | 61%     |
| G&A     | 8,964  | 8,638  | 10,131 | 10,386 | 15,911 | 10,170 | 12,625 | 28,983  | 14,615  |
|         | 18%    | 15%    | 16%    | 14%    | 20%    | 12%    | 13%    | 29%     | 13%     |

G&A dropped off a cliff, but in Q2 2020 “we made a payment of $15.0 million to Broadcom” (to settle Symantec lawsuit).
They state “G&A increased 22% sequentially” so implies they’re using about $12m for Q2 2020.

CC Summary

“Since February, Zscaler Private Access (ZPA) traffic grew over 10x and the Zscaler Cloud Security Platform reached a new milestone of securing 100 billion transactions per day.”

Very strong results. Increasing guidance for 2020.

Cloud and digital transformation market. Further acceleration + improved sales execution.

“ZS founded on belief in cloud/mobile world, users must be able securely access any application from anywhere on any device”
More critical in WFH world. Traditional perimeter-based applications.

{GD: Recall ZIA provides secure access to intranet and SaaS and ZPA - provides zero trust to internal applications}

“Enabled customers overnight to WFH”

10x growth in usage of ZIA. Many customers provided 100’s of 1000s of new users.

NPS - more than 2x average for SaaS companies.

DBNRR: 119%

GM slightly lower because of increased use of public cloud. Moving that traffic to own datacenters.


Large Insurance Company - “ZS deployment executed to near perfect execution - 10000 users”
UK Hi-tech company - “ZS acquisition one of the most timely and beneficial purchases in 25 years”

Virtual whiteboarding to conduct interactive architectural workshops.

Europe-based global conglomerate added >200k users in 3 weeks. Across 185 countries.
US insurance company: added 30k users in 1 week
Oil&Gas: 27000 users in 10 days
India financial services: 11k users in 2 days.

Fintech F500 company - Purchased transmission bundle + for 40k users. ZPA 25k users. Increasingly using cloud apps. Appliance based security a bottleneck. Deal started as legacy web-gateway replacement but sales team changed to ZS. Consolidating 4 different vendors, removing 8 point products including Secure web gateway, next-gen firewall, sandbox, DNS, DLP, CASB, SSL inspection {GD: this seems pretty compelling}. ZS scales.

  • allows quick integration of mergers etc.

Major US Bank - performance issues with incumbent Web Gateway. Traffic requirements of Office 365. 23k users. ROI>100% in <12 months as well as adding capabilities. SDWAN important, but COVID 19 moved focus to protecting users.

F500 company - upgraded 50k subscription from business to transformation bundle. Driven by new products Out-of-band CASB and browser isolation.

European public sector company - transformation bundle + DLP {GD: whats DLP? Data-loss prevention.} for 100k users. Replaced recently purchased “so-called cloud security service” from a legacy next-gen firewall vendor. 10 months to on-board 14k users - had to stop deployment. Needed to inspect SSL. Virtual firewall could “ostensibly” inspect SSL traffic, but couldn’t do it at any meaningful scale.

“Vendor offered to replace it with on-prem firewall appliances.” {GD: ?!?}

Customer also purchased ZPA for 30k users

“Architecture matters… single tenant architectures only work for not-inspecting SSL”


Many vendors claim to be SASE, but can’t inspect SSL traffic.


  • Broad strength across verticals, particularly Financial services.
  • Strong growth in ZIA and ZPA, standout in ZPA - 43% of new and add-on business, versus ~20% in first half of 2020. ZPA natural p
  • ZPA very large opportunity for upsell in the future, 32% of G2000 customers have purchased ZPA.
  • COVID19 accelerating adoption (of ZPA).
  • World of zero-trust, no place of firewalls and VPNs. New customers increasingly purchasing ZIA and ZPA together.

ZIA protects employees working from home. Without ZIA need VPN which hits corporate datacenter first. Even cloud-based VPN puts users on corporate network and represents a major cyber risk {GD: why?}.

Processed >100b transactions per day.

Four new products

GA this quarter

  1. CASB
  2. Browser isolation
  3. ZS B2B
  4. ZS Digital Experience ZDX

CASB and BI - beginning to generate revenue. Expect add to growth in F2021.

Next opportunity

Expand into protecting applications and data in the cloud

  1. Out of band CASB - comprehensive data protection for SAAS applications.
  2. Acquistion of Cloudneeti - data protection for public cloud workloads - emerging security market segment.
  3. EdgeWise - extending Zero-trust to east-west traffic in public cloud and datacenters. Machine-to-machine communications. Microservices level. Automatically creates and authorises process-to-process communications “to provide application segmentation”.

Believe ZS is the most comprehensive security platform.

Goto market progress

Played major role in success this quarter.

  • Hired record field sales reps.
  • Built out strong sales leadership.
  • Increased sales productivity.
  • Generated strong pipeline.
  • Recruited cloud focussed channel partners.

“Could not be happier with progress”

On-track to increase field sales headcount by 60% by end-of-year.


|                 |         |          |                                                                           |
| :-------------- | :------ | :------- | :------------------------------------------------------------------------ |
| Revenue         | $110.5m | +40% yoy | +9% q-1                                                                   |
| --- US          | 51%     |          |                                                                           |
| --- EMEA        | 40%     |          |                                                                           |
| --- APJ         | 9%      |          |                                                                           |
| Billings        | $131.3m | +55% yoy | Terms 1-3 years, invoice 1 year in advance. Flat                          |
| RPO             | $654m   | +31% yoy |                                                                           |
| -- current      | 56%     | +36% yoy |
| DBNRR           | 119%    | 116% q-1 | Benefitted from increased adoption of ZPA. Bigger transformation bundles  |
|                 |         |          | can reduce DBNRR. Feel 119% outstanding.                                  |
| GM              | 80%     |          | 10x traffic - GM slightly lower because of increased use of public cloud. |
|                 |         |          | reduce over next 3 quarters.                                              |
| Opex            | $79.6m  | +35% yoy | +11% q-1. 72% of revenue, vs 74% yoy.                                     |
| Headcount       |         |          |
| S&M             | $52.6m  | +35% yoy | Higher compensations, goto market.                                        |
| R&D             | $17.1m  | +39% yoy | More headcount.                                                           |
| G&A             | $9.9m   | +26% yoy | Compensation, building teams, acquisition costs                           |
| OpMargin:       | 8%      | flat     |
| NetIncome       | $9m     |          |
| EPS             | 7c      |          |
| Cash and equivs | $391m   |          |
| FCF             | +$9m    |          |

Offering shorter commitments and invoice periods for COVID 19 continuity reqs. Also, China and Japan - free ZPA for 3 months. Modest impact to billing duration, contract duration down slightly.

Higher mix of upsell business


No negative impact to topline this quarter.
Good linearity in quarter, strong march and april and May continues to be strong.
No meaningful pressure on collections or renewals.
Transportation, hospitality, retail & leisure exposure < 10%


| Guidance   |                     |            |
| :--------- | :------------------ | :--------- |
| Q4 revenue | $117m to $119m      | 36% to 38% |
| Op Profit  | $2m to $4m          |            |
| EPS        | $0.02 to $0.03      |            |
| Shares     | 140m                |            |
| GM         | 76-77%              |            |
| FY2020     |                     |            |
| Revenue    | $422m to $424m      | 39% to 40% |
| Billings   | $529m to $531m      | +36%       |
| OpProfit   | $24m to $26m        |            |
| EPS        | $0.20 to $0.21      |            |
| Shares     | 138m                |            |
| F2021 GM   | 78% to 80% 2nd half |            |


Acquisitions expected to have immaterial impact on revenue in F2021 (early stage companies).
Adds $2m in operating expense. in Q4
$12 to $14m in F2021.

CloudNeeti: Cash purchase price $9m

April 2020, Zscaler acquired Cloudneeti Corporation, a cloud security posture management (CSPM) company which prevents and remediates misconfigurations of applications in SaaS, IaaS and PaaS.

EdgeWise: Cash purchase price $31m

ZS announced acquisition of Edgewise today (29 May). EdgeWise =“a pioneer in securing application-to-application communications for public clouds and data centers.”.

{GD: I’m not sure what this gives them - ‘microsegmentation’ is mentioned a lot on the EdgeWise website}

Launched the Zscaler Summit Partner Program

Jays 5 points of excitement

  1. Secure digital transformation accelerating.
  2. Architecture matters - only cloud-native multi-tenant architecture.
  3. Customers simplifying legacy network infrastructures.
  4. Next big opportunity expand into protecting apps and data.
  5. Delivering world-class sales execution.

Question-and-Answer Session

  1. Great quarter - increased pipeline from legacy issues (as per anecdotes)? Not many customers using firewall-based cloud security services so not much impact on pipeline from those customers.
  2. Cloud-direct model - Kubernetes, points in the cloud, connectivity becomes critical. CICD processing. Applications are destinations. ZPA can access any application, independent of where and how app is deployed. Most important next step - Application/process to Application/process communications.
  3. Fantastic quarter - ZPA pricing vs ZIA. Indifferent to starting point? 2 independent product lines, ZIA - external apps, ZPA - internal apps. Doesn’t matter where they start. ZIA has large install base. Some customers starting with ZPA.
    3 tiers - pro, business and transformation - both products have similar pricing
  4. Hiring targets - on target for 60% field sales reps. Feel high quality people coming on-board.
  5. Very impressive “to see acceleration”. Balance of COVID19 headwinds and tailwinds. COVID forced WFH, accelerating digital transformation, so benefit from COVID. Future… accelerating transformation. Net/net good tailwinds. Headwinds could be reduction in spend. Think this is more compelling for ZS, consolidation of vendors, to best-of-breed platforms.

“If all employees are working from home without the corporate network… why do I need the corporate network?” {GD: good question!}

  1. Net expansion rate - de-emphasising - ticked up significantly Q3. Thinking forward? Stayed pretty consistent over last 3 years. Don’t see composition of business changing in near future.
  2. SDWAN driven sales - Q3 for ZIA thats tied to SDWAN. SDWAN headwind persist going forward? WFH → network changes put on hold. We benefitted from lack of SDWAN projects (cos they can take longer). Shown CIOs they don’t have to depend on network. “Less focus on network, more focus on access from anywhere”
  3. ZPA strength between land and expand. Mostly existing. ZIA and ZPA growth very good. ZPA represented close to 40% of new customers. 3 sources - 1. existing who had ZPA, 2. ZIA customers, 3. Customers who bought ZIA and ZPA (new logos). {GD: 50/50 mix typical. 30-… didn’t understand this}
  4. Acquistions - a little different from ZIA/ZPA. Per user/per year pricing model. How do they fit? ZS focussed on protecting users. Next natural step to protect cloud apps and data. CloudNeeti protects workloads because of misconfiguration. EdgeWise - why not app to app, process to process (zero trust). Pricing ZIA/ZPA number of users. Acquisitions workload-based pricing.
  5. Durations - shorter commitments implied Q4 billings guide. No change in billing duration 10-14 months. Last few quarters lower part of range, expect Q4 the same.
  6. Good quarter - What new sales process looks like? Core is transformation of network (ie, don’t need hub and spoke). Need to do architectural discussion. {GD: so white-boarding is discussions with architects}. Complicated? Not so, but different because its not ‘box-centric’. C-level discussions, but depends on architects. No slowdown in engagements with C-Level and Architects. COVID - easier.
  7. Good results - Linearity, material benefit from WFH? May vs April. Linearity in Q3 better than prior quarters. Momentum in Q3 carrying over into May, continues to be strong.
  8. 90-day trials on ZPA in March/April - how big is the opportunity? Most trial converted to paying customers. Many to multi-year commitments. No global free-trial, in China. “Less of an issue of money, more employee productivity” {GD: sounds like big tailwinds from COVID}
  9. Great quarter. AWS because of lack of capacity. Getting more capacity is easy (but takes a bit of time). COVID happened overnight. “Got a call from conglomerate in Europe, 300k users” 2 days notice to turn ZPA. Can use Azure, AWS in emergency, gross-margin impact, then can dial down as add capacity.
  10. Pipeline - SDWAN, Office365… number 1 driver is Digital Transformation {GD: no kidding}. Every CIO, CFO more cost-conscious. Need to consolidate, and be ready for digital transformation. ZS allows consolidation. Network less important.
  11. No unusually large deals in quarter.
  12. 4 new products ramping in 2021. Revenue contribution will be small. ZPA-type trajectory, immaterial in 2021.
  13. Americas growth accelerated (39% with tougher y2y comparison). Upsell. All regions did very well, EMEA, APJ and Americas all did well.


Thanks for the write-up. With the recent pop, ZS is down my 7th largest holding.

I have a technical question, that is more general than ZS. Impacts many our stocks WFH and move to cloud. I never was a network engineer, but at least I used to know how to talk to them. I’ve been out of the game now for 10 years.

“If all employees are working from home without the corporate network… why do I need the corporate network?” {GD: good question!}"

How does the WFM employee access the cloud over the public network? VPN tunnel? IPsec? Are WFM employees getting help from their employers to increase bandwidth to home? Is it necessary? In our house, we’ve beefed up our WIFI, but we’d already max’d internet access from centurlink VIOS merely for Netflix, etc. We’ve got 2 WFM-ers in house and 1 high school student. ZOOMing all the time. Multiple monitors, multiple apps, multiple laptops going all the time. And of course, on our urban residential street, most of our neighbors doing same. One of our WFMers access is OKTA managed, uses TEAM and WORK …

Anecdotally, network responsiveness/quality is not quite as good as the office but at least it functions.

I wonder if just like voice quality degraded from wired to wireless, but the convenience of a personal mobile device easily trumped that, can-you-hear-me-now? … a similar thing is happening with WFM. That maybe there isn’t equivalent bandwidth to each employees house, but the convenience of working from home, avoiding the commute etc., and not catching COVID, those benefits far outweigh the occasional sluggishness of some of the apps, some of the data access, some of the time.

This topic may be OT as technical, and I it has been touched on in conversations on this board, but I’d like to understand better what is happening (security, bandwith) at the edge for the WFM employee.


When employees remote-in to work, they work on their work computers which is still on the same network as before and needs to be secure.

Hi Bill

ZScaler is a replacement for your corporate VPN/Security boxes. So your WFH employees don’t need to connect to your corporate datacenter anymore to access anything, they go through the (‘infinitely’ scalable) ZScaler datacenters.

Theres 2? main advantages to this:

  1. ZScalers datacenters are potentially closer than your corporate datacenters, because ZScaler has a lot of them and corporate datacenters are not so distributed. So performance with ZScaler should be better.

  2. Lets say your VPN/SSL/… boxes in your corporate datacenter have been spec’d to expect 20% of your workforce to be WFH at any given point in time. Then COVID strikes, and 100% are now working from home. Your VPN boxes will probably melt, and your only alternative (other than a cloud-based tech like ZS) is to buy and install much more powerful boxes.

Essentially ZScaler is operating as a proxy, but an infinitely scalable one, that does all the security stuff you want.

Even in the best of times, routing internet traffic (eg: to Office365) through a corporate datacenter is signing you up for slow responses, unless you’re geographically right next to your corporate datacenter.

Hope that helps. My personal expectation is that WFH will continue to be much more prevalent going forward, the advantages are too great, and the disadvantages have been proven to be less than expected over this period.