# ZS revenue predictor

On the old board, there was a poster who predicted ZS’s earnings based upon an analysis of trailing billings or RPO, I can’t remember which. If that poster is till around, can you share your methodology again?

I am predicting great things this quarter (based upon the fact that ZS has typically outperformed CRWD and PANW and those companies had good quarters). Hopefully I’ll not be disappointed! We will see in a bit more than an hour!

Thanks,
Rob

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Hey @rhill0123 I’m still around.

The relationship is based on the fact the the CFO keeps on pointing analysts to Billings and away from other indicators like RPO whenever they ask a modeling question.

It’s also based on an expectation (and historically that has been the case) that billings duration remains relatively constant and that the business doesn’t (and cannot, really) accelerate revenue that much in any single quarter. Anyhow, that’s the preamble and caveat as well.

My argument was that in ZS’s case each of the four prior quarter’s billings will have a big bearing on the revenue number of the following quarter (given the billings duration). So enough blah. Here’s the relationship: The average of the past 4 quarters’ billings predict the following quarters’ revenue with an r2 of 0.999 (or 99.9%) based on the last 14 quarters, which is remarkably high, and the equation is 0.964x +5.82. where x is the prior 4 quarters’ average billings.

Popping that in yields 0.964 x \$459.8m + \$5.82m = \$448.3m expected Revenue this Q.

So that’s the prediction based on billings (which is where the CFO keeps on pointing us, so who are we to disagree, right?).

We’ll see in an hour

-wsm

p.s. I think the more important number to watch will be the billings in the quarter, as well as guidance for next year. I’m also hoping for big things.

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WSM,

Thanks for sharing this again and I will write it in my notes. I agree with you that billings and guidance will be vital!

All that said, 482 sounds pretty good to me !!

Thanks,
Rob

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Hi wsm.

Perhaps I’m missing something… Isn’t the current average of the previous 4 q’s 459.2? Perhaps I have the numbers wrong. Here’s my calculated billings the past 4 quarters:

\$520.4, \$340.1, 493.8, 482.3

(.964 * 459.2) + 5.82 = 448.4. Isn’t that the prediction from this formula?

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@FinallyFoolin you’re right. That’s what happens if you do these things last-minute…I made a copy paste error; corrected now.

The equation was right, the numbers were wrong. I was expecting \$448m and they came in at \$455m.

Sorry.

-wsm

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I also use a similar billings model, inspired by @wsm007. So, how did Zscaler do versus my expectation? (Laid out here: Ben’s Portfolio update end of July 2023)

• Reporting Fiscal Q4 2023 on 9/5/23.
• Revenue expectation: \$454M (8.3% QoQ, 43% YoY), expectation from billings model and 5.5% beat.

—> They managed \$455M (8.6% QoQ, 43% YoY), exceeding my expectation by a hair.

• Q1 new revenue guide: \$477M (5% QoQ, 34% YoY) which I would interpret as \$501M (10.3% QoQ, 41% YoY) as my expectation from billings model.

—> They guided for \$473M (4% QoQ, 33% YoY), slightly below my expectation.

• I would like to see ~\$711M in billings.

—> They managed \$719M, exceeding my expectation.

• I would like to see >=6% large customer growth.

—> They grew large customers by 7.3% QoQ, significantly exceeding my expectation. (They also grew \$1M customers by an astonishing 12.3% QoQ, adding a record 49 this Q - amazing!

• I would like to see ~20% FCF margin.

—> They managed 22%, exceeding my expectation.

• I would like to see 17-18% Operating income margin (~\$79M), confirming new profitability trend hypothesis.

—> They managed 19% (\$86M), exceeding my expectation and confirming what I saw coming already a few quarters ago: That they are strongly breaking out of their profitability trends as discussed here: https://discussion.fool.com/t/ben-s-portfolio-update-end-of-june-2023/93997#zscaler-7

• I would like to see a strong first FY24 guide.

—> I’ll have to think about this one a bit more, but given their expected beat and raises to come I think this is a healthy start. Need some more color though first before a final judgement.

Overall, amazing amazing numbers! I am really happy with how this company is developing!

Just FYI, here is the updated fit with the latest numbers, @wsm007 was referring to:

Ben

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Nice job Ben and WSM, I thought the results were outstanding. Yet again they delivered growth durability that is ~ 1 quarter and a month ahead of Crowdstrike in the ongoing hyper growth decay story.

Revenue growth was outstanding at 43%, (versus Crowdstrike’s 37% and 41% in their 2 latest quarterly releases), and the customer growth numbers absolutely superb! Reaching \$2bn ARR was a milestone and the top and bottom line margin and cash flow progression towards their long term goals was impressive.

The only numbers that took the shine off the ER for me were the next Q and FY 24 guidance. They guided to the same growth as Crowdstrike at 33% for Q1, (Crowdstrike’s Q3), which of course they will beat by a larger margin and potentially still come in at Crowdstrike’s 37% just delivered for Q2 but even with sandbagging next year’s 27-28% guide doesn’t seem as strong durability as I might have hoped given the 48% they filed for FY 23.

I will say this for them, for all the talk of platformisation from Palo Alto and Crowdstrike, ZS is the one company with a focused portfolio that is still fast growing at scale.

Looking forward to the earnings call.

Ant

26 Likes

I also thought the results were excellent. And the investor materials have gotten a lot better of late (vs the overly technical and unreadable stuff of years past).

A couple of highlights that haven’t been touched on by the other posters. I concur with the strength of customer adds and especially \$1m+ customers , and billings. Here are some others:

• First, revenue of \$455m - this ticked up sequentially to 8.6% from 8.0% last quarter. That hasn’t happened in the last two years (qoq growth ticked down in both prior years). And they grew 43% yoy. No other company of this scale that we track has managed that I don’t think.

• RPO showed a marked uptick to \$3.51bn - a 16% qoq uptick vs 3%, 5% and 8% in Q1, 2 and 3.

• NRR dropped to 121% but the reason for that was actually a good thing. The CFO explained that that is happening because customers are simply buying more and bigger bundles upfront, leaving less expand motion. And he said this was going to happen a quarter ago. This is great imo. They are getting jam today. Not being promised jam tomorrow.

• Operating margin expansion. Yes this is good, but I want to highlight that this is the biggestimprovement in their recent history. Operating margin improved 7% points vs a year ago and 4% points vs the prior quarter.

The Q&A session also highlighted their particular competitive strength in very large customers vs all the different competitors that the analysts asked about including Microsoft.

Just about every analyst on the call offered their congratulations, focusing on different things as there were quite a bit to choose from: revenue, record customers, billings.

And in terms of guidance I thought it was strong. Q1 revenue guidance came in above consensus and it would seem that compared to guides of the past, at least one analyst - Joshua Tilton of Wolfe Research - thought it was stronger than the last two years:

[…]if you look at the guidance, the implied new billings kind of looks like a little bit more aggressive, I would say, than the last two years. So maybe just, level set for us or set some guardrails or expectations around kind of the puts and takes on what it would take for you guys to kind of outperform what you laid out for the next 12 months for us, please?

And I thought Jay’s answer was also worth taking note of. He highlighted the opportunity left in G2000 (they are still in only 30%), the breadth of their portfolio, their success in public sector, record pipeline and lots of sales momentum and emerging products. It still sounds like the sales team have got their tails up and they are very confident in their ability to keep on beating and raising. Even against this guide which is “a little bit more aggressive” compared to the prior two years.

-wsm

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I also noted Chaudhry saying “12 of the 15 cabinet-level agencies are our customers, and we are starting to see larger awards from these agencies.” He has used the 12 or 15 before, but the “larger awards” comment grabbed my attention. I know the two-year planning window from the 2021 US Executive Order mandating Zero Trust security ends within the next few months. I’ll be curious to see if Zscaler (and other cybersecurity firms) start referencing more government wins as we get into calendar 2024. Something to watch.

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