Hi Everyone,
I normally post these Ticker Guide Takes over in the Premium side of the Fool because I’m not too sure if there is much interest in Zscaler here. I lurk and I know that Saul has been in and out of ZS over the last few years that I’ve been covering it. ZS is currently experiencing two sets of tailwinds – the movement of enterprises to the cloud from the pandemic forcing employees to work from anywhere, then now with the recent increase of ransomware attacks on large companies. Moreover, ZS and CRWD are forming an alliance where they are seamlessly integrating their offerings. These tailwinds are causing a year long acceleration in sales and uptake.
And I know y’all like accelerating revenue!
If anyone is following ZS, I have a couple requests. A while ago, CMF_muji wrote about his concerns of the scalability of ZS products. He pointed to the increase in demand forcing ZS to move to the AWS and Azure services which impacted Gross Margins. muji stated that he was concerned about whether they can scale. To me, this was a temporary dip in Q4 2020 and it seems to have recovered, but I don’t have a way of assessing whether they are still having problems scaling. Does anyone have any insight into this?
Also, and this is a silly request, but I recently cracked the “Top Favorite Fools” list! (Saul is deservedly #1). I was hoping that if you guys like this analysis, if you could “Follow” me.
https://discussion.fool.com/profile/CMFTedyun/activity.aspx
Some of the others on this list are Day Traders and people that frequently post on the political boards, so I was hoping to try to push those guys off the list. Anyway, it’s no big deal, but I promise if you Follow me, I’ll reciprocate.
Onwards!
2021 Q3 Earnings:
For my previous TG Takes, see here:
https://discussion.fool.com/4056/master-thread-zs-017-34391015.a…
Press Release:
https://ir.zscaler.com/static-files/b141ddcb-0662-4a06-b396-…
10-Q:
Not yet available
Earnings Call Transcript:
https://www.fool.com/premium/coverage/earnings/call-transcri…
Good references and reads:
CMF_muji has a blog that is must reading for any one subscribed to SaaS companies.
https://hhhypergrowth.com/
He posted his thoughts on ZScaler after Q3 2020 but hasn’t updated since. He had a lot of good observations on what to watch for:
https://hhhypergrowth.com/zscaler-q320-recap/
CMF_muji posted a deep dive into ZS. These posts are absolutely required reading for all ZS shareholders!
https://discussion.fool.com/4056/zscaler-deep-dive-34346710.aspx…
https://discussion.fool.com/flavors-of-security-zscaler-34336437…
What ZScaler does:
ZS basically is providing enterprise-wide security at the cloud level, as opposed to installing security packages on each device or hardware appliances. Their approach is scalable and adapts well as workforces untether from the traditional workspace. They are disruptors in the sense that traditional security solutions build moats around a company’s network and data center. However, as workforces evolve, a new scalable and elastic solution is needed, and that is where ZS is providing innovative solutions.
Reasons to be invested in ZScaler:
• As computing migrates to the cloud and the workforce evolves away from traditional workspaces, ZS is a disruptor and spearheading a new paradigm in network security.
• Partnership with Microsoft for their Office 365 and Azure cloud computing platforms, the standard business software for many companies
• Total addressable market is around $72B (this is updated from $20B that was quoted a while ago).
• Continuing adoption from private and public, domestic and international companies. By 2024, it is estimated that 40% of companies will adopt Security as a Service solutions as they migrate to the cloud
• Led by Founder, Jay Chaudhry. Tom G. has pounded the table on founder-led businesses. His thesis is that if you find the right Founder CEO, his interests are aligned with the shareholders, and his success will create value for all the stakeholders
• Strong balance sheet; large growing cash hoard
• Gross margins are consistently around 80%
• Strong customer retention rate and upsell potential
• After concerns about slowing revenue growth, the combination of Chief Revenue Officer and the WFH environment pulled forward years of revenue as the company capitalized on the shift in the way major corporations conducted business. Revenue started accelerating. Backlog, a sign of committed revenue to be recognized, is accelerating.
Concerns:
• Structural Cash Flow (SFCF), or Tom G.’s “Owner Earnings,” is a metric that Tom introduced way back when he was running Hidden Gems. It is basically EBITDA with CapEx backed out, and he said that it is his favorite metric. In my last few write-ups, I was concerned about the negative and deepening SFCF.
• Stock based compensation impacts earnings
What to watch for:
• Stock based compensation and share dilution. Currently around 5% YoY, which is on the high end, but acceptable for a young growing tech company in Silicon Valley.
• Dollar Based Net Retention: Still very high at 127% and grew from previous years. >120% is considered best in class for the industry.
• Gross margins and cost of revenue • with the surge in demand during the pandemic, it overwhelmed ZS cloud capabilities, and they had to use AWS and Azure. These increased costs hit the Gross Margin in Q3 Q4 2020, although it is now starting to come back up with the increase in revenue. Muji pointed out that this may signify that Zscaler’s hardware based edge computing solution may not scale, so we will keep an eye on the Gross Margins and in the earnings calls for any mention of scalability.
• Muji also pointed out confusing marketing, heavy top-down sales process and complex implementation process. Being so far from this industry, I don’t know how to tell if things are getting better, but it is something to watch out for.
TG Take on Q3 2021 Earnings Updated
Things to like:
Wow. For the earnings call, the word of the day is “acceleration.” I think they want us to know that uptake and sales are accelerating. Zscaler benefitted last year from the pandemic and work from home. Enterprises had to quickly pivot to a cybersecurity solution that allowed employees to access sensitive data and applications from anywhere. Then, as Zscaler was in place, this new threat of increased hacker and ransomware attacks acted as a stronger tailwind from organizations wanting to secure themselves from attacks like the Colonial Pipeline. We’ll see how long this lasts, but for now, enjoy the ride!
• TTM revenue growth continues to accelerate, with 12.3% QoQ and 53.7% YoY. It has been accelerating since Q3 2020. ZS increased their guidance for FY2021, and it looks like they will end the year with record sales. We need to keep an eye on the accelerating revenue and as soon as it starts to plateau, the stock may pull back as before. I’m not sure if this is going to happen any time soon because….
• Calculated billings, RPO and Backlog all accelerating. Incredible numbers here. While they report Calculated Billings, if we look at RPO and calculate Backlog, you can see that these two latter numbers grew nearly 100% YoY. Moreover, if we look at the TTM values of Calculated billings, RPO and Backlog, they’ve been accelerating every quarter since Q3 2020.
• Gross Margins are holding steady at around 78% after a temporary drop due to increased usage costs of the cloud services in Q4 2020. CMF_muji cited this as a number to watch, and whether they are becoming increasingly reliant on the cloud services AWS and Azure, as a sign of whether their solution is scalable. I can’t really tell or comment, and it would be nice if someone who is better versed in cybersecurity could comment.
• Cash continues to grow
• TTM FCF is growing
• DBNR is at 126%
• Understandably, the recent hacker attacks were brought up multiple times during the earnings call, either in the prepared remarks or in the Q&A. Just putting together the bits of information, we are hearing how government and businesses are turning to implementing Zero Trust cybersecurity. His comments from the call imply that recent ransomware attacks were contributing to the acceleration in sales, particularly in the big-ticket enterprise space.
• Integration with CrowdStrike products. It’s great to see these two Foolish favorites collaborating with their cybersecurity solutions to provide a multi-layered defense. When Chaudhry was asked how the two products work with each other, he answered:
“…yet to come across a serious large enterprise who doesn’t believe in layered security approach, but endpoint serves as an important layer and cloud serves as a second layer. That’s the most common thing I’ll do. So when you bind to that notion, which is what we do and most customers do, it’s natural for customers say, endpoint from CrowdStrike and cloud security from Zscaler.
And what’s exciting for customers is for the two to be able to work together with proper API-based integration, CrowdStrike and Zscaler had done this product integration over the past 12 to 18 months, and that integration keeps on going to the next level where we can help each other and customers get the benefit of it. So driven by product integration that customers wanted and then our joint sales engagements on field, where our teams are working together because we complement each other. It’s a great win-win partnership for both of us, CrowdStrike and us. “
Concerns:
• Still showing GAAP Losses, but it is improved over last quarter. Much of this is due to stock based compensation. Backing out the SBC, Non-GAAP is positive and growing.
• Share dilution is 5% YoY. It spent last year contracting, but will probably start growing with the SBC. Need to watch and hopefully they will cap it at 5% YoY
• In Q4 2020, they took on debt in the form of Convertible notes. This mainly added to their cash balance, so we will see how they use it.
• Structural FCF, or one of Tom’s ways to measure cash flow, also called Owner Earnings. It is deeply negative because it is based on GAAP Earnings.
Best wishes
Ted
Fiscal Year 2021
2021 Q1 2021 Q2 2021 Q3
12/2/2020 2/25/2021 5/25/2021
In Thousands
TMF1000 Page Stats
Revenue 142,578 157,044 176,404
TTM Revenue 480,257 536,033 601,913
TTM Revenue Growth, QoQ 11.4% 11.6% 12.3%
TTM Revenue Growth, YoY 44.2% 48.9% 53.7%
Calculated Billings 144,711 231,961 225,021
TTM Calculated Billings 606,288 702,828 796,556
TTM Calculated Billings Growth, Yo 46.5% 61.9% 65.7%
RPO 864,000 1,025,000 1,200,000
TTM RPO 2,910,000 3,326,000 3,872,000
TTM RPO Growth, YoY 40.8% 50.2% 63.2%
Deferred Revenue 371,900 446,817 495,434
TTM Deferred Revenue 1,322,480 1,489,275 1,683,918
TTM Deferred Revenue Growth, YoY 44.6% 50.6% 56.2%
Backlog 492,100 578,183 704,566
TTM Backlog 1,587,520 1,836,725 2,188,082
TTM Backlog Growth, YoY 37.8% 49.8% 69.1%
Earnings -55,006 -67,541 -58,459
TTM Earnings -153,046 -191,433 -230,555
Gross Margin 77.7% 78.3% 77.9%
Diluted Share count 133,452 135,024 136,385
Share Dilution, YoY -2.5% 5.15% 5.17%
Cash 1,415,954 1,444,749 1,467,609
Debt 874,359 887,186 900,263
FCF (quarter) 44,628 19,905 58,556
FCF (TTM) 69,654 89,017 136,445
SFCF (quarter) -58,338 -71,266 -65,718
SFCF (TTM) -176,211 -218,076 -259,421
Price (high) 158.74 230.88 224.08
Price (low) 120.34 143.4 157.03
Cash flow yield 0.37% 0.35% 0.53%
Dollar based net retention 122% 127% 126%
PE (high) --- --- ---
PE (low) --- --- ---
PS (high) 44.1 58.2 50.8
PS (low) 33.4 36.1 35.6
PSG (high) 0.96 1.14 0.84
PSG (low) 0.86 0.98 0.73
PSG Calculated Billings Growth (hi 0.91 0.9 0.68
PSG Calculated Billings Growth (lo 0.82 0.77 0.60
Fiscal Year 2020
2020 Q1 2020 Q2 2020 Q3 2020 Q4
12/3/2019 2/20/2020 4/30/2020 9/9/2020
In Thousands
TMF1000 Page Stats
Revenue 93,590 101,268 110,524 125,887
TTM Revenue 333,128 360,094 391,490 431,269
TTM Revenue Growth, QoQ 10.0% 8.1% 8.7% 10.2%
TTM Revenue Growth, YoY 56.0% 48.2% 43.5% 42.4%
Calculated Billings 88,257 135,421 131,293 194,863
TTM Calculated Billings 413,718 434,096 480,739 549,834
TTM Calculated Billings Growth, Yo 47.2% 31.6% 33.7% 41.0%
RPO 555,000 609,000 654,000 783,000
TTM RPO 2,067,000 2,215,000 2,372,000 2,601,000
TTM RPO Growth, YoY 49.0% 40.6% 34.2% 35.3%
Deferred Revenue 245,869 280,022 300,791 369,767
TTM Deferred Revenue 914,633 988,635 1,077,884 1,196,449
TTM Deferred Revenue Growth, YoY 59.6% 49.8% 44.3% 43.5%
Backlog 309,131 328,978 353,209 413,233
TTM Backlog 1,152,367 1,226,365 1,294,116 1,404,551
TTM Backlog Growth, YoY 41.6% 34.0% 26.9% 29.0%
Earnings -17,076 -29,154 -19,337 -49,549
TTM Earnings -38,143 -63,742 -70,843 -115,116
Gross Margin 79.1% 80.0% 77.8% 75.1%
Diluted Share count 136,860 128,408 129,682 131,660
Share Dilution, YoY 2.3% -4.3% -5.0% -4.3%
Cash 377,631 384,914 391,314 1,370,573
Debt --- --- --- 861,615
FCF (quarter) 11,219 542 11,128 13,356
FCF (TTM) 43,726 31,754 31,890 36,245
SFCF (quarter) -23,753 -29,401 -24,373 -64,099
SFCF (TTM) -63,504 -88,649 -89,950 -141,626
Price (high) 64.49 65.81 73.6 163.8
Price (low) 40.05 44.54 35 65.51
Cash flow yield 0.61% 0.45% 0.45% 0.24%
Dollar based net retention 120% 116% 119% 120%
PE (high) --- --- --- ---
PE (low) --- --- --- ---
PS (high) 26.5 23.5 24.4 50.0
PS (low) 16.5 15.9 11.6 20.0
PSG (high) 0.38 0.45 0.52 1.04
PSG (low) 0.32 0.36 0.39 0.68
PSG Calculated Billings Growth (hi 0.45 0.67 0.77 1.02
PSG Calculated Billings Growth (lo 0.39 0.54 0.57 0.67
Fiscal Year 2019
2019 Q1 2019 Q2 2019 Q3 2019 Q4
12/4/2018 2/28/2019 5/30/2019 9/10/2019
In Thousands
TMF1000 Page Stats
Revenue 63,289 74,302 79,128 86,108
TTM Revenue 213,602 242,928 272,893 302,827
TTM Revenue Growth, QoQ 12.3% 13.7% 12.3% 11.0%
TTM Revenue Growth, YoY --- 57.4% 60.0% 59.2%
Calculated Billings 64,545 115,043 84,650 125,768
TTM Calculated Billings 280,995 329,948 359,629 390,006
TTM Calculated Billings Growth, Yo --- 69.6% 65.0% 51.2%
RPO 411,000 461,000 497,000 554,000
TTM RPO 1,387,000 1,575,000 1,767,000 1,923,000
TTM RPO Growth, YoY --- 117.2% 71.6% 59.2%
Deferred Revenue 165,279 206,020 211,542 251,202
TTM Deferred Revenue 573,108 660,128 746,864 834,043
TTM Deferred Revenue Growth, YoY --- 44.5% 48.1% 45.9%
Backlog 245,721 254,980 285,458 302,798
TTM Backlog 813,892 914,872 1,020,136 1,088,957
TTM Backlog Growth, YoY --- 164.8% 94.0% 71.2%
Earnings -7,588 -3,555 -12,236 -5,276
TTM Earnings -29,836 -26,876 -30,341 -28,655
Gross Margin 80.9% 79.4% 81.1% 79.9%
Diluted Share count 133,845 134,246 136,538 137,545
Share Dilution, YoY 334.7% 327.1% 85.0% 15.4%
Cash 314,040 339,943 352,736 364,646
Debt --- --- --- ---
FCF (quarter) 5,600 12,514 10,992 9,001
FCF (TTM) 17,872 34,537 41,375 38,107
SFCF (quarter) -10,832 -4,256 -23,072 -12,423
SFCF (TTM) -36,400 -33,095 -45,365 -50,583
Price (high) 47.79 51.36 80.38 89.54
Price (low) 30.72 34.21 49.08 60.56
Cash flow yield 0.34% 0.60% 0.47% 0.37%
Dollar based net retention 118% 118% 118% 118%
PE (high) --- --- --- ---
PE (low) --- --- --- ---
PS (high) 29.9 28.4 40.2 40.7
PS (low) 19.2 18.9 24.6 27.5
PSG (high) --- 0.47 0.62 0.65
PSG (low) --- 0.40 0.53 0.56
PSG Calculated Billings Growth (hi --- 0.39 0.64 0.76
PSG Calculated Billings Growth (lo --- 0.33 0.3 0.65
Fiscal Year 2018
2018 Q1 2018 Q2 2018 Q3 2018 Q4
6/6/2018 9/5/2018
In Thousands
TMF1000 Page Stats
Revenue 39,861 44,976 49,163 56,174
TTM Revenue --- 154,345 170,544 190,174
TTM Revenue Growth, QoQ --- --- 10.5% 11.5%
TTM Revenue Growth, YoY --- --- --- ---
Calculated Billings 41,410 66,090 54,969 95,391
TTM Calculated Billings --- 194,590 217,939 257,860
TTM Calculated Billings Growth, Yo --- --- --- ---
RPO 232,000 273,000 305,000 398,000
TTM RPO --- 725,000 1,030,000 1,208,000
TTM RPO Growth, YoY --- --- --- ---
Deferred Revenue 164,000 119,000 124,806 164,023
TTM Deferred Revenue --- 456,970 504,276 571,829
TTM Deferred Revenue Growth, YoY --- --- --- ---
Backlog 68,000 154,000 180,194 233,977
TTM Backlog --- 345,530 525,724 636,171
TTM Backlog Growth, YoY --- --- --- ---
Earnings -11,398 -6,515 -8,771 -6,962
TTM Earnings --- -38,744 -39,953 -33,646
Gross Margin 79.3% 80.7% 80.8% 79.5%
Diluted Share count 30,793 31,434 73,818 119,204
Share Dilution, YoY --- --- 149.5% 296.0%
Cash 75,760.00 71,569.00 287,443 298,539
Debt --- --- --- ---
FCF (quarter) -8,362 -4,151 4,154 12,269
FCF (TTM) --- -19,348 -13,559 3,910
SFCF (quarter) -13,487 -7,561 -10,802 -7,205
SFCF (TTM) --- -41,680 -44,778 -39,055
Price (high) --- --- --- 48.24
Price (low) --- --- --- 29.86
Cash flow yield --- --- --- 0.08%
Dollar based net retention 116% 122% 120% 117%
PE (high) --- --- --- ---
PE (low) --- --- --- ---
PS (high) --- --- --- 30.2
PS (low) --- --- --- 18.7
PSG (high) --- --- --- ---
PSG (low) --- --- --- ---
PSG Calculated Billings Growth (hi --- --- --- ---
PSG Calculated Billings Growth (lo --- --- --- ---
Fiscal Year 2017
2017 Q3 2017 Q4
In Thousands
TMF1000 Page Stats
Revenue 32,964 36,544
TTM Revenue --- ---
TTM Revenue Growth, QoQ --- ---
TTM Revenue Growth, YoY --- ---
Calculated Billings 31,620 55,470
TTM Calculated Billings --- ---
TTM Calculated Billings Growth, Yo --- ---
RPO --- 220,000
TTM RPO --- ---
TTM RPO Growth, YoY --- ---
Deferred Revenue 77,500 96,470
TTM Deferred Revenue --- ---
TTM Deferred Revenue Growth, YoY --- ---
Backlog --- 123,530
TTM Backlog --- ---
TTM Backlog Growth, YoY --- ---
Earnings -7,562 -13,269
TTM Earnings --- ---
Gross Margin 78.8% 78.0%
Diluted Share count 29,583 30,102
Share Dilution, YoY --- ---
Cash 87,365.00 87,978.00
Debt --- ---
FCF (quarter) -1,635 -5,200
FCF (TTM) --- ---
SFCF (quarter) -7,704 -12,928
SFCF (TTM) --- ---
Price (high) --- ---
Price (low) --- ---
Cash flow yield --- ---
Dollar based net retention 115% 115%
PE (high) --- ---
PE (low) --- ---
PS (high) --- ---
PS (low) --- ---
PSG (high) --- ---
PSG (low) --- ---
PSG Calculated Billings Growth (hi --- ---
PSG Calculated Billings Growth (lo --- ---