I have followed the recent discussion on ZS quite a bit and am really interested in the business and its prospects. Unfortunately I can’t really add to the technical discussion about their product. However, I haven’t seen a „Saul-style“ tabulation of ZS results on the board yet, so I went through the prospectus, quarterly report and supplemental information from the Investor Relations website to gather the info. Here is what I got:
Revenue Q1 Q2 Q3 Q4 2016 17.1 18.9 20.8 23.6 2017 26.8 29.4 33 36.5 2018 39.9 45 49.2 51 (exp)
As you can see YoY growth has been very fast. In 2017 the growth rates were between 55% on the low end in Q4 to 59% on the high end in Q3. According to guidance growth for Q4 should be at only 39.7%. Sequential growth has been hovering around 10%. In the recent quarter (Q3) it was at 9.33%. Guidance calls for only 3.66% sequential growth, which would be a severe deceleration of growth. They should really beat this guidance substantially, otherwise it could be reason for concern.
Billings Q1 Q2 Q3 Q4 2016 33.5 2017 25.2 44.2 31.6 55.4 2018 41.5 66 54.7 N/A
Billings growth seems to be even faster than revenue growth. Unfortunately I didn’t get my hands on the billings numbers for Q1-Q3 2016, so it’s harder to spot trends. In the Sequential Growth we can see some kind of seasonality: Q1 and Q3 tend to be weaker (20%+ negative sequ. growth) and Q2 and Q4 seem to be very strong sequentially (75% in 17’ and 59% in 18’ so far).
Gross Profit Q1 Q2 Q3 Q4 2016 12.6 14.1 15.4 18 2017 20.9 22.9 26 28.5 2018 31.6 36.3 39.7 N/A
Gross Profits are increasing at a rapid pace too. As can also be seen in the Gross Margin section below, they are actually outpacing Revenue growth. Unfortunately no guidance numbers from management, but I would expect Gross Profit growth to continue outpacing Revenue growth for the foreseeable future.
Deferred Revenue Q1 Q2 Q3 Q4 2016 65.9 2017 64.3 79.1 77.7 96.6 2018 98.3 119.3 124.8 N/A
We are also seeing great YoY-growth in this metric. Sequential growth patterns are similar to Revenue above. Unfortunately no guidance numbers from management and also no numbers for Q1-Q3 2016.
Gross Margin Q1 Q2 Q3 Q4 2016 74% 75% 74% 76% 2017 78% 78% 79% 78% 2018 79% 81% 81% N/A
Gross Margin has been steadily rising, which is obviously a great sign.
Net Income/loss (Non-GAAP, *Q1-Q3 2016 only GAAP numbers available) Q1 Q2 Q3 Q4 2016 -6.8* -6.1* -8.3* -4.9 2017 -4.2 -3.2 -4.9 -7.4 2018 -7.5 -2.8 -2.6 -6 (exp)
Non-GAAP net loss as a percentage of revenue dropped from 21% in Q4 2016 (first non-GAAP numbers I found) to 5,3% in the most recent quarter. According to guidance that metric will rise again to 11,8% in Q4, however, we saw a similar rise of about 5 percentage points from Q3 to Q4 2017, so nothing to worry about. We should expect this metric to improve further in the future and see some net income soon.
Operating CF Q1 Q2 Q3 Q4 2016 -5.4 2017 -2 -0.6 0.2 -3.7 2018 -4.4 -1.1 8.1 N/A
Operating Cash Flow was positive for the first time in Q3 2017 and again in Q3 2018. There is no guidance for Q4, but we should probably expect the number to go down a bit from Q3 (as in 2017).
FCF Q1 Q2 Q3 Q4 2016 -6.5 2017 -4.9 -2.1 -1.8 -5.4 2018 -8.9 -4.6 3.7 N/A
Free Cash Flow was positive for the first time in the recent quarter. We should probably expect it to swing back in the negative for the next quarter based on seasonality patterns.
For the fun of it, I also looked at the short checklist Saul provided to us recently:
- Recommendation by a trusted source?
- Rapid revenue growth (above 35%)?
Yes, 49% last quarter, Billings Growth 73%!
- Special niche, moat, big future?
Yes, disrupting IT-security; competitors: Symantec (Blue Coat), Cisco (OpenDNS)
- Recurrent Revenue, not capital intensive, high gross margins
Yes, yes, yes - It’s a SaaS business, GM at 80% and rising
- Rapidly improving metrics
Yes, see the discussion of the numbers above. Especially billings growth looks promising.
- Net retention rate over 100% (better over 120%); high net promoter score
Yes, N/A – Dollar-based net retention rate was at 122%, up from 115% in 2016 and 2017. I only found info about employee net promoter score, which is high, but not so interesting. Maybe someone else found a number here about customer net promoter score?
- Lots of cash and no debt; founder let; no customer concentration
Yes, Yes, Yes, Yes - 288 Mio cash, no debt; Jay Chaudhry is founder and CEO; 60% Inside Ownership!!! no customer concentration as far as I saw.
It seems to check all the boxes.
Bottom line for me is that we have a great company at our hands, not only story wise (as discussed in other threads), but also from a numbers perspective. We should definitely look at Q4 very carefully – if they don’t blow past their own guidance (which they should easily), I would consider selling (although I didn’t even buy yet - hahaha - but I plan to today ).