Zscaler: A look at the numbers

Hello there!

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:

	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.

	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).

	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:

  1. Recommendation by a trusted source?

Yes, Bert.

  1. Rapid revenue growth (above 35%)?

Yes, 49% last quarter, Billings Growth 73%!

  1. Special niche, moat, big future?

Yes, disrupting IT-security; competitors: Symantec (Blue Coat), Cisco (OpenDNS)

  1. Recurrent Revenue, not capital intensive, high gross margins

Yes, yes, yes :slight_smile: - It’s a SaaS business, GM at 80% and rising

  1. Rapidly improving metrics

Yes, see the discussion of the numbers above. Especially billings growth looks promising.

  1. 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?

  1. Lots of cash and no debt; founder let; no customer concentration

Yes, Yes, Yes, Yes :slight_smile: - 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 :wink: ).

Fool on!


Everything seems to look good…except for the valuation.

They went IPO so the total shares in the last financial statement are off (since they are a weighted average). The Q4 guidance calls for 110 million shares outstanding. The TTM sales is $171M and the enterprise value using 110 million shares are the current price (less the new cash) is $4.5B less $287M cash. This means the EV/TTM sales multiple is 24.7. Yikes, that’s expensive. The full year revenue growth was 51% so even in one year the EV/Sales multiple will only drop to 16.4 (assuming 51% revenue growth continues.

Let’s compare that so some of the other companies:

      EV/Sales   EV/Sales (forward)
ZS    24.7       16.4
NTNX   8.0        5.5
AYX   16.7       11.0
SHOP  21.3       12.5
TWLO  12.1        8.4

Now these ratios are not exactly apples to apples. The growth rate matters…a higher growth rate means that the multiple could be higher. The other thing that I like to look at is the gross margins. These 2 metrics can be used to make adjustments to give a more apples to apples comparison. I’ve been intending to post on valuation, the metrics, and how I would make these adjustments. Coming soon…

Now here are the growth rates and the gross margins:

      EV/Sales   EV/Sales(for) Growth   GM
ZS    24.7       16.4          51%      81%
NTNX   8.0        5.5          45%      68% (rising)
AYX   16.7       11.0          52%      88%
SHOP  21.3       12.5          71%      77%/41%
TWLO  12.1        8.4          46%/60%  54%  (60% non-Uber growth)

While I do have a very small position in ZS, I’ve kept it small (1.4%) because of the valuation. For me to increase ZS, I’d need to see the growth rate increase or the price to come down. My positions sizes in the others (including adjusting for my options positions) are:

NTNX: 18.4% (13.5% without options)
SHOP: 16.6% (13.4% without options)
AYX: 15.4% no options
TWLO: 10.2% (8.6% without options)

TWLO is my 5th largest position after SQ.



I agree Chris, it’s definitely not cheap… Ok, it’s very expensive! I have to admit that I was a bit skeptical when I first read about the company. As far as I remember Saul introduced this stock by his month end summary, before it was really discussed on the board. Cyber security at first didn’t sound well to my ear. I still remembered the FEYE recommendation from TMF during a time when cyber security was extremely hyped. That didn’t turn out well (at least for now)… I didn’t buy FEYE fortunately, but it kind of stuck to be skeptical about the cyber security space in general. I still looked into ZS though (especially Bert’s seeking alpha article), didn’t really understand what the disruption was all about (still struggling) and also found the valuation to be very stretched. So I passed on it until it got discussed on the board a bit more.

What got me interested again were the videos that Robear1020 linked (btw: How can Robear, who actually found and shared the video with us, have fewer recommendations than Saul, who basically wrote “thanks for the great find”? Better rec Saul! :stuck_out_tongue: ). I know these videos are kind of an advertisement. I mean, they won’t put anything but spectacular reviews on their investor relations page. However, it was still very impressive and seems very credible. At least it made me take a closer at the numbers again and after doing the work I was really impressed. Putting it all together it really makes for a compelling stock – which also maybe explains the high valuation. Anyways, I opened a starter position today at market open (at just under 2%) to follow this business a bit more seriously. I’m looking forward to their next report. I think it should be around September, 5th (not announced yet).



Niki - I understand the reticence on cyber security given your observation of the Fire Eye (FEYE) case study however I’d urge you to look past that in the sector. I have held 5 other cyber security companies and all of them have made handsome profits for me, (formerly: Check Point, Qualys and Imperva and currently: Cyber Ark, Palo Alto and Fortinet). FEYE is the exception to the rule not the rule itself.

BTW the great thing about ZS is that it makes me feel a whole lot better about my Shopify and Nutanix valuations!