ZS: Sales Compensation Plans

About a month ago after the big Zscaler selloff I read most of the posts about the company on this board. At the time I was unable to post as I was building a position in the stock and under MF trading guidelines I could not post on either side of a trade for two days - so now with my position in place here is something I noticed.

In general it appeared to me that the company beat the quarterly analyst expectations and was punished for weak guidance for the new fiscal year that it was about to enter. I remember reading a post from Austin saying that this is a similar scenario to what happened last year going into Q1. At the same time the company hired a new head of worldwide sales and made reference to wanting to give him some time to settle into his new role as it issued conservative forward looking guidance.

My guess is the company sets its sales compensation plans going into a new year. Many CFO’s want the sum total of all the quotas to at least approximate the forward looking guidance - this helps protect the company from claims of malfeasance, or pumping up the stock, by issuing guidance that does not correlate to the company’s internal targets.

From managing sales teams at various mid-level management positions for a large portion of my career I can attest to the fact that it is much easier to manage sales people who are overachieving as opposed to underachieving with regard to their compensation plan. As a result it would not surprise me to learn that under the circumstances of going into a new fiscal year and at the same time bringing on a new head of global sales that management decided to expect that quotas for sales people would be set conservatively and that conservative approach would extend to the company’s forward guidance.

Frank - long ZS, see profile for all holdings