Zscaler - a disappointing report?

I’m thinking about my ZS position since the last quarterly report… there are things that I don’t like in the last two releases. But I feel the majority is very pleased with the numbers - so, what am I missing?

After the Q2 report I thought about the declining RPO the first time, but as the metric is sometimes lumpy it concerned me only a little. In the current numbers, I expected to see RPO steady or accelerating again. Given the current tailwinds from the war situation + the numbers from the competitors like Palo Alto (which had reaccelerating RPO from 36% → to 40% this quarter) I was disappointed about the deceleration from 59% to 54% in RPO. Especially as they always mention in their CC this should be the most important metric for future models.

But there is more. Bottom line is not improving as I would like to see. Let’s take EBITDA margin, just for fun:

Last 6 quarters:
ZS: -24% -28% -28% -32% -20% -28%
DDOG: +5% +3% +1% -2% -4% - 3%

(Fascinating that a hypergrower as DDOG even has a positive EBITDA margin, what a company!)

So I don’t even have to describe which ones are the most recent quarters, the trend is pretty obvious when looking at DDOG’s margin improvements, not so much with ZS. Then you could say, of course margin is not improving - they want to get as much of the cake as fast as possible. But DDOG is growing even faster AND improving bottom line and FCF margin. On top of that, ZS has general selling expenses increasing in proportion to revenues.

My gut tells me I should be cautious here - if I have concerns about growth and profitability with this huge economical tailwinds, I assume it will not get easier in the future. Would be happy if someone could give me other thoughts or a contrarian view. Thanks!



If your question is should you buy DDOG or ZS, I think you know the answer. If you want any other stocks in your portfolio, comparisons to DDOG will keep you on the sidelines.

With that said, ZS has one of the highest FCF margins of the fast growers (DDOG, CRWD, ZI are higher). They presumably see lots of growth opportunities as they are spending a lot on S&M right now. Efficiency on that spend is currently questionable.

The real tailwind comes when the FedRamp really starts to kick in, probably 2H22. ZS is well positioned for Gov’t adoption.

At the end of the day, you see a lot of people here with as much DDOG in their portfolio as they will allow. That doesn’t make all the others bad investments at these prices.


Hi Hannes,

Your numbers are quite far off from what I have that I can’t really follow it:

  1. Where did you get RPO declining or even decelerating from 59% to 54%? its RPO grew 83.5% yoy in the last ER; and cRPO grew 76.3% yoy.

  2. they also never said that the RPO is the most important metric. They have always said it’s billings.

  3. Also where do you get those shocking -28% EBITDA margins from? They did 9.5% non-gaap operating margin in the last ER; and guided to +11% in the next Q (their highest ever guide for operating margin).

Are you using GAAP numbers? I don’t think that’s fair because SBC fluctuates a lot in each quarter based on the prevailing stock price and how many shares/options issued/exercised.

The way that I take into account SBC is to that, in my valuation, I count all the outstanding options and RSUs etc. to arrive at the maximum diluted share count.

As an aside, I have not held ZS for many months prior to this ER but added a bit in the last few days. I am still thinking about it but IMHO the ER actually tilts positive although it’s still kinda mixed (may write about it later).

Best regards,


Hi cats,

Thanks for your reply. To number 1 and 2 - Yes, of course you are right! Just replace RPO with billings and it looks right again ;). Thats the metric which decelerated as stated and which they always point to in the CC’s. It was deep at night here, so excuse that faux pas.

Yes, I use gaap numbers here for both. I think it’s sufficient for seeing where the trend goes.

Too MFChips: Im surprised too see a pretty clear impact in the earnings of Palo Alto then… this shouldn’t be a comparison btw, I just had the feeling we are maybe overlooking some signs and wanted to start a discussion. I made my decision already and as I read Bears Portfolio a few minutes ago I saw someone with similar concerns. Time will tell…

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Maybe ZScaler’s billings slow down is only a yellow flag, and maybe it will stabilize or even rebound a little, but their spending hasn’t given me ANY confidence at all. They aren’t showing any signs of improving leverage. FCF is rising because they’re paying people more and more through SBC, which is all well and good from a cash flow perspective, but it doesn’t mean the business is being efficient. I just don’t like this trend at all.

Here’s a chart I put together that shows our other companies are simply doing way better:


…namely, revenue should grow faster than expenses. All our other companies are doing that. ZScaler is not.

I’m down to less than 3% ZScaler, and I’m not sure I see any reason to keep it. Maybe this is the bottom, maybe they curtail spending and they’re fine. Probably they’ll be ok. But until they prove it, I’ve got better places for my money.



Make sense Bear, I have been thinking about it as well. Would also love to hear what @saul think about this.

Why am I seeing such a concern for FCF and SBC lately? I never saw any of this being an issue for the companies discussed here before. Why is it all the sudden an issue? Is it because most (all?) of our companies have slowing growth?

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With all the ramping up and accrediting necessary for the huge market that is federal (and state) gov’t, which requires lots of expenses upfront, might this not be too hasty a sell on your part?

We know these sales and accreditation processes are long and tedious, but Z and its scales are perfectly positioned to land huge clients.

Not as nimble as our other companies at the moment, true, but isn’t that because of the scale of the projects Z is trying to, umm, scale? And aren’t the forward-looking benefits of huge contracts all but guaranteed, because of the costs Zscaler was willing to pay upfront?

Monkey does appreciate the multi-colored flags you’re raising, but wants to stop making the egregious error of jumping out of stocks at problems that are speedbumps on a long and winding journey for decades to come.

Remaining very open to hearing why I’m nonetheless too drunk on my own ZScaler stash, and why basically DDOG is the only reasonable stock to hold anymore because everything else has problems: too lumpy (UPST), too big (GOOG) too much competition (MNDY), too expensive (NET, SNOW), too much deceleration (CRWD), too much SBC and not enough free cash flow (S), not SaaSy enough (UPST again), too complicated (TTD), too exposed to macro (UPST, BILL), etc. Are we in fact lower-case fools for not just buying an index fund given that all companies have problems they have to deal with and inevitably things go sideways until they don’t and the upwards trajectory continues and who are we to buy and sell at the exactly correct moments? But and are not some problems much more dire and thesis-busting than others? Is this one about increased spending a thesis-buster through and through?

With immense respect and a genuine case of hard-ass confusion at the moment about what to keep (DDOG) and what to sell (everything else, apparently),

Monkey of little brain (long ZS)


2 things:

  1. I could be wrong

  2. My post wasn’t about SBC. It was about efficiency and scaling. DDOG, CRWD, SNOW, and NET are doing this well. ZS is not. It’s as simple as that. It’s not like ZS is growing faster. Why should we give them a pass?



Why should we give them a pass?

One theory, as suggested up thread, is that they are currently investing in what will be highly productive sales channels which have not yet started producing significant revenue. I like this kind of investment, but admit that it requires taking their future success on faith.



This is an interesting metric to keep track. I appreciate your post and have added this to my spreadsheets to follow.

Looking at DDOG, I do see their total operating expenses grew YoY faster than their revenue YoY growth during Q3 2020 through Q2 2021.
Let me know if my numbers are wrong, but this is what I got:

**DDOG**       Q3-20  Q4-20  Q1-21  Q2-21
YoY rev    61%    56%    51%    67%
YoY opex   69%    62%    63%    69%

Does this mean DDOG should have been a ‘sell’ during that time period???

On DDOG versus ZS, what I’m trying to point out is that although DDOG is certainly exceptional and top dog at demonstrating operating leverage over time, DDOG also had a period where they didn’t appear to grow revenue faster than operating expenses for an entire year straight. In fact, they also did this for a year straight from Q3-2018 to Q2-2019 as well where total op ex growth exceeded revenue growth YoY. But, note that DDOG was doing 233.5M in revenue in Q2-2021, so it’s not like this was happening at a tiny scale.

Similarly, I don’t think we can completely rule out ZS on this metric alone (yet). Maybe I’m wrong, but ZS likely has a different business model for winning zero trust over time that requires faster expenses up front for now, and a different go to market cadence than the observability space for DDOG.

Also, I looked at MDB, and noticed their total op ex grew faster than revenue YoY from Q3-2021 through Q2-2022. During this one year (four quarter) period, it’s when their revenue growth began to accelerate (and has continued to do so since).
But, does this mean MDB should have been avoided/sold even during a time period of revenue growth acceleration?

Finally, while I don’t own BILL at all due to other concerns I’ve posted about before, according to this perspective, BILL should be a definite sell for your portfolio too, right?
(I would think so! the numbers look very ugly)

**BILL**      Q4-21  Q1-22  Q2-22  Q3-22 
YoY rev   86%    152%   190%   180% 
YoY opex  205%   240%   265%   256%


Good thoughts. A few responses come to mind:

  1. With ZS it’s not just a year or a quarter — it’s at least the last 2 years and my guess is it’s been always (although I didn’t look further than last fiscal).

  2. DDOG I believe had a much lower OpEx as a percentage of revenue (the first column in my little chart) than ZS, even when revenue grew slower than OpEx for a little while. ZS’s has been consistently high.

  3. ZS (as I believe you pointed out) is closer to maturity than any of your examples were/are. I wouldn’t hold BILL to this standard until growth slows at least to less than 150% YoY, haha.

Lastly, the primary question isn’t what’s an acceptable level of “spending for future growth” or whatever. The question in my mind is why. Why has ZS been increasing their spend even as Billings are slowing? Are they seeing more competition or other issues?

As I said, I could be wrong in the way I’m reading these tea leaves. Maybe I’ll even keep my remaining 2.5%. I don’t think they’re dead or anything. But I worry growth is slowing, and I worry their spending won’t change that. They just don’t show signs that they’re scaling well. At least not like others in what I consider a similar stage of their company life cycles.




With all the ramping up and accrediting necessary for the huge market that is federal (and state) gov’t, which requires lots of expenses upfront, might this not be too hasty a sell on your part?

It might. And you might be rewarded for waiting and seeing. But you might not. What if we’d done that with Zoom? Upstart? Fastly? Docusign? Etc.

Are we in fact lower-case fools for not just buying an index fund given that all companies have problems they have to deal with and inevitably things go sideways until they don’t and the upwards trajectory continues

That’s not the way I see it. I don’t think things go “sideways until they don’t and the upwards trajectory continues.” Again… Zoom? Upstart? Fastly? Docusign? Etc. I don’t se that things go “sideways” at all. Sometimes they go straight down and never come back. Nutanix…Talend…

who are we to buy and sell at the exactly correct moments?

Well, Saul has an average return of something like 30% per year over like 30 years, I think. And I’m up more than 1,000% since Jan 2017. Was over 2,000% at some point several months ago, but I’m not complaining (too much). But more importantly, I don’t think this proves I’m amazing – I think it proves you don’t have to be. I certainly don’t always buy and sell at the exactly correct moments.

But and are not some problems much more dire and thesis-busting than others? Is this one about increased spending a thesis-buster through and through?

That’s what it comes down to with every decision (and every company). And we each have to decide for ourselves.



Looking at YoY Operating margin vs revenue growth can be very deceiving over a single year (or even two) with low capex companies.


Because when demand is high, revenue growth can accelerate without the company needing to increase opex.

Fast forward a year, the company’s YoY comparable is now significantly higher for revenue because of that previous acceleration and basically the same/on trend for opex.

So naturally, revenue growth is lower and opex stays on trend.

Not saying ZS is or isn’t a hold, but because of the craziness of the last 2 years, YoY comps can be misleading


first line should say YoY operating expense growth not operating margin

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Lol I’m on fire… low opex companies not low capex companies.

My point was that for companies that sell software, revenue can increase WITHOUT the need to increase opex because they don’t need to higher more employees, build/rent new factories, etc.

Eventually yes, rev growth needs to outweigh opex by a wider margin…but anomalies that accelerate demand can throw the ratios out of whack for a bit.


Not that it matters, lol, but I am with the ZS supporters. There is nothing in the context, numbers, or content of the calls to make me worry.

There is nothing to support analogies with ZM, FSLY, and so on.

I think that a lot of well-respected members here have a well-documented history of misreading company trends over the last 8-12 months which to me simply proves that quarter-to-quarter trading is a lost cause.

Citing exorbitant returns in the years prior to 2022 is misleading because they were a function of monetary backdrop first, sector specific realities second, and stock picking only comes third.

FSLY was a superstar in 2020, then UPST could do no wrong in August 2021 now DDOG could do no wrong.

The 30% over like 30 years record is Saul’s alone. And from what I have seen it did not happen by constantly hopping around every quarter.

There is a huge difference between obvious tsunamis coming (ZM) or obvious issues (FSLY) and someone’s mild disappointment in a footnote (ZS, SNOW).


I think it’s not about hopping around or changing mind every quarter. It seems most of the companies here are held much, much longer. But as I learned from the knowledge base, it’s important to watch out for any signs that could point in the wrong direction. Especially when having a very concentrated portfolio. And even more in uncertain times like this.

Zscaler is for sure a great company with a promising future, and this is criticism on a high level.
But there are a few question marks here - doesn’t mean to sell immediately. But thinking about position sizing is never a bad thing. Thank you for all the opinions and replies.


I’ve been lurking for more than a year now, and learned a lot since. But I’m fully prepared to still have it all wrong, and learn even more when being shot down :slight_smile:

Bear introduced the metric of Rev/OpEx. That is an interesting metric, but it also implies that Revenue and OpEx are closely linked. So any increase in OpEx must show in Revenue in the very same quarter, or the metric will go down. (I think XMFALieberman made that point as well)

I don’t think that assumption fairly represents the ZS business model.

Let’s take again DDOG as a comparison. They have a go-to-market that targets the developers and project teams, so it’s much like a self-service checkout without need for sales staff. Also new customers generate revenue quickly once subscribed. And they can add new modules with the click of a button - again no extra sales staff required.

ZS, as I understand it, goes for the big enterprise. Sales decisions are made far higher up the chain, perhaps CxO level, and usually for large parts of the company in one swoop. So sales take a lot longer, but contracts also have a larger volume, and longer duration. With ramping up sales for federal, they need even more sales people. And with such long sales cycles those OpEx increases cannot show up immediately.

Now, with that in mind, I changed the metric. Let’s assume an increase in OpEx takes one year (4 quarters) to actually show up in revenue. So we compare the OpEx from 4 quarters ago, with each quarter’s Revenue, and we get this:

Q2-21: 44.9%
Q3-21: 44.4%
Q4-21: 43.9%
Q1-22: 41.6%
Q2-22: 44.2%
Q3-22: 41.7%

Now the overall trend is definitely going down, with a lapse in Q2-22. Increase in OpEx does generate more and more revenue, but not immediately.

One could still argue that this makes it harder to have visibility into the company’s future, because you don’t see the benefit from increased OpEx for another 3 quarters. You basically have to trust management. And perhaps that is why Bear doesn’t want to hold it. But one could also argue, as Monkey did, that this could be a leading indication of future revenue growth.

To me, this opens up a key question: how much insight can we have into our companies. We don’t get all the data, and we aren’t management.

So to some degree we have to trust management until real red flags show up.

Or we can only invest in businesses with full visibility into the next quarter - every quarter. There aren’t that many of those around. And maybe they are the worst investments anyway, because the market prices them always just right, with no upside, and only downside if they slip.

(long DDOG and ZS)

Allow me a personal statement in closing:

I’ve understood Saul’s method and the knowledge base to trust management to run the business well. To stay invested long term, and let management run the business. Until the numbers indicate a real problem, and then get out immediately and ruthlessly. It’s Foolish investing with an added exit clause.

In those past months in which I’ve been reading this board, I often wondered if I got that wrong. So much talk about “taking companies to the woodshed”, and “XYZ has no place in my best of the best portfolio”, and “I’m out” after not delivering on unreal expectations. I didn’t get that spirit from Saul’s posts or knowledge base. His approach seems more lenient. More like a gardener who gets rid of weeds and deadwood, but also gives every plant a chance to flourish before he replaces it with a new specimen.

So, for what it’s worth, I have decided for myself that I did get it right. But then I have only losses to show for, so what do I know :slight_smile:


At first glance, I thought the strange period we’re in now made it a bad time to consider Op/Ex:Rev as a factor for our companies because of the pandemic, work from home, etc. (I still do, but I also don’t argue with someone with Bear’s track record.) Still, these are not exactly normal times by anyone’s standards. How that might skew the stats for OpEx, I’m not quite sure, but I think there are things we know, and some that are safe to assume, given proper care.

• Tech employees are in high demand. Almost all tech companies have unfilled job openings.
• For many software companies, the big variable in OpEx is often employee count and employee expense, especially while in hyper-growth mode.
• Macro factors: with the cloud buildout, the pandemic, and worker shortages (especially tech), this would be a poor time to be less than aggressive in hiring new personnel.
• Smart tech companies that are hyper-growing revenue will surely be aggressive in increasing head count, likely aiming considerably above the bare minimum needed.
• For the reasons above, I would personally be concerned about a fast-growing tech company that had a considerable drop right now in Op-EX. (If they know they will have a near-term need for an increasing number of employees, and employees are hard to find, it’s time to hire. If they don’t think they will have the need, we need to know why.)
• I have wondered for some time, if SaaS companies that have large cash positions, aren’t “padding” their tech employee head-count a) for near-term future needs, and b) to keep competitors from scooping up the best talent. Yes, it would be expensive, but the eventual rewards should be huge if the shortage continues or increases.

All this made me wonder if Bear was on the wrong track, so I decided to check out a simple stat for several companies, that is to see how much revenue they were generating per employee. What I found was pretty surprising, and it doesn’t come close to disagreeing with the Bear, but many companies I own are also near the bottom. For further meaning in the numbers, I leave it up to each to decide.

It’s hard not to notice that many board fav’s are near the bottom of the list. Does this mean they’re hiring “extra” employees, or are they somehow inefficient? If we have to wait to find out, it could be an expensive waiting period.

What I’m seeing for sure:
• NFLX isn’t dead yet.
• It’s no wonder AAPL keeps on setting records.
• Never argue with a bear.

**REVENUE (ttm) PER EMPLOYEE (Mil)  Descending Order**

**Ticker	HeadCt	Rev/Emp**
NFLX	11300	2.69
AAPL	154000	2.51
CELH	225	1.77
GOOGL	163906	1.65
NVDA	22473	1.31
AMD	15500	1.22
MSFT	181000	1.06
ANET	2993	1.05
INTU	13500	0.95
UNH	350000	0.85
SNAP	5661	0.78
BRK.A	372000	0.76
MRVL	6729	0.75
ZM	7155	0.72
ENPH	2260	0.67
UPST	1497	0.67
TTD	1967	0.66
TSLA	99290	0.63
ISRG	9793	0.60
MGNI	876	0.60
SHOP	10000	0.48
AEHR	79	0.48
DOCS	887	0.47
TEAM	6433	0.40
TWLO	8199	0.38
BILL	1384	0.38
DDOG	3200	0.37
MNDY	1064	0.34
SNOW	3992	0.31
ZI	2742	0.30
CRWD	4965	0.29
ZS	3153	0.27
NET	2751	0.27
MDB	3544	0.25
ASAN	1666	0.23
S	1400	0.18