Zscaler Billables

Investment Analysis Clubs Saul’s Investing Discussions
1

This keyboard does not have functioning question marks, quote marks, and who know what else, but the letters work so bear with me in regard.

There is a FUD scenario that often arises and that is increasing competition. Stated against Nvidia, and nope it appears. Stated against Alteryx, and nope. Against SHOP, and over and over again. Netflix has been through it so many times, etc. If the company truly has high CAP, then it becomes an opportunity. Goes back to Microsoft when IBM brought out their own operating system that would take down Microsoft and I am sure it is not a new phenomenon.

This is being stated about Zscaler. Increased competition. I have looked high and low because this kind of thing interests me and pecuniary interests of course. Despite what insider IT guys say, consultants, Palo Alto sales people, and the like, there is not another company on planet Earth with any revenues worth discussing that does what Zscaler does. When I say does, I am not talking technology, platform, or such, but I am talking about customer benefit. No, Palo Alto does not offer a product that fixes the pain points of current state of the art appliance based next generation firewalls perimeter security.

What Palo Alto offers is a virtual firewall that you can use at branch offices and as replacement for VPNs for off site employees. The result of all these virtual firewalls is more traffic, and this increase in traffic requires the purchase of more appliances to deal with it all in the network perimeter. It is as I said, Prism is a product to enable Palo Alto to sell more appliances. Prism provides remote security better than pre-existing alternatives of VPNs, but it is far from perfect or pain free from multiple perspectives. The details are beyond my point here, only Zscaler, at enterprise scale, can provide the customer benefits that Zscaler does. If not for Zscaler the world would live with products like Prism and the like from Palo Alto because they would not know any different, and would not know how many pain points could be resolved if there just was a true all cloud system.

So this said, why is Zscaler sales slowing materially. Yes, revenue guidance is the same as last year. De ja vu without doubt. That is not what concerns me. My issue is guidance on billables. The guidance is 26-28%, and adjusts up to about 32% if you take out front loaded sales. Either way, if billables are a precursor to revenue, you can see why this type of guidance does point to a real revenue slow down. Not Nutanix like in scale, and definitely not Nvidia like in scale, and Zscaler deserves credit for seeing it upfront and not being surprised after the fact like those prior two companies but it is a real slow down.

So my question is, is this something to concern ourselves with or just noise in the scheme of things.

Tinker

32 Likes
2

Zscaler deserves credit for seeing it upfront and not being surprised after the fact like those prior two companies but it is a real slow down.

So my question is, is this something to concern ourselves with or just noise in the scheme of things.

Ferret out the reason for the slowdown. Is it IT obstructionism as Saul posits? Longer time to close sales as the company reports? Something else? There are dozens of stocks competing for our investment dollars, why not go for less uncertainty?

Denny Schlesinger

4 Likes
3

There are dozens of stocks competing for our investment dollars, why not go for less uncertainty?

That is what I have done, moving more money into bottom up viral sales models like Alteryx.

Tinker

4

That is what I have done, moving more money into bottom up viral sales models like Alteryx.

Tinker, I suppose I should be more familiar with various companies’ sales models, but would you mind identifying those companies with bottom up viral sales models like Alteryx? Thank you in advance.

Speedy

5 Likes
5

Speedy,

There are a lot of them and I am not gonna list them all. The grand daddy is TEAM. Product totally sold itself. Mongo, DataDog, Elastic, Twilio. If you are invested you should understand the sales model.

Zscaler is mostly top down. It does have evangelists from management who worked with Zscaler at a prior company when they move to a new company. But Zscaler does not usually start out with a small sale and then virally move through the enterprise.

Tinker

5 Likes
6

Thank you, Tinker, for your response.

7

I think we’ll know soon if this is a short term issue with ZS or not.

Regarding companies with less uncertainty; it seems something like this can happen at any time to any company. The only thing about ZS is some of that uncertainty has come to fruition. The risks with ZS’ sales model have now become a reality causing a drop in share price. Things either get better or worse from here. Which is more likely? Meanwhile the reward potential has gone up significantly due to the drop in the share price.

It’s certainly not a good idea to hold stock in a company that has worsening fundamentals but in ZS’ case I’m not sure if this is a 1-2 quarter blip that is caused by being a victim of their own success and addressed by the new hire. Meanwhile the damage has already been done with the share price so I plan on holding until I have more information. I don’t expect ZS shares to rally with the market until this is resolved though.

It really comes down to whether management can be trusted or if they are lying. You can’t tell me Jensen Huang has no clue how big an impact crypto had on GPU sales.

The thing that I still don’t get with NVDA is why every single product category had sales fall off in the same exact quarter. Commercial GPU used for bitcoin demand falls off at the exact same time data center demand falls off. So I want more evidence when it comes to their data center/ai business rebound before buying since that’s the only business segment I’d be interested in anyways.

3 Likes
8

Speedy, basically any software where a mid or lower level management can purchase the software is bottom up and viral.

If it requires a completely different way of running a company’s system it is considered top down and it’s possible that closing a deal could take more time or not happen at all. Switching from Symantec to Crowdstrike for endpoint does not require in depth review by a CEO. Nor does it require much planning between departments in case it affects how they operate.

Docu blamed systems of agreement for lengthening the sales cycle because suddenly you’re not just dealing with legal and then buying e-signature but operations, sales and other departments on how they process and store documents within an organization. Then the very next quarter both Billings and revenue shot up.

4 Likes
9

Tinker,
Earlier I posted my impression of what the expectations for the new CRO at Zscaler are and how I anticipate he will make his presence at the company be realized with respect to billables/revenues.

https://discussion.fool.com/saul-just-a-little-possibly-stale-in…

My observations are based on no specific knowledge about this gentleman, so take them for WIF. Nevertheless, if I’m correct we should see a couple of not very good quarters as he reorganizes, on-boards staff, etc.

The second half of the year should begin to show some turn around and continued improvements into next year. Obviously, no guarantees on that.

6 Likes
10

That does fit the turnaround pattern. From the outside it seems so obvious, outsource your security to the experts, just like you do (to an extent) when using a public cloud.

However, that no brainer is an easier sell to small and mid-sized businesses w out person power and expertise.

Zscaler, however, claims this as part of their CAP because only they are focused on C Suite sales. Security is a C Suite priority but the sales process w firewalls is not.

True enough, not only does Zscaler provide unique value proposition, it also is focused on perfecting the top down sales process that its competitors don’t necessarily focus on {I’m sure other large vendors are not strangers to the C suite, it just is not where their bread and butter is made. A huge chunk of Palo Alto’s business is the upgrade cycle, as an example}.

So unique value proposition and sale focus. When numbers and narrative don’t match I have issues. But sometimes I overthink things. The long term narrative here remains exceptional. Zscaler will probably material beat is “prudent” guidance. Not to materially beat would point to a real issue w the narrative.

We will have to wait and find out. Yes, the present valuation is compelling (while remaining “grossly overvalued” by textbook folk - a very good thing).

I am trying to understand if there is some reason billable number should be less important for Zscaler.

Thanks for discussion guys.

Tinker

11

Tinker,

Thank you for your in-depth responses to questions on this board.

The key barrier and restraint on ZS winning new business:
*The System Integrators can win more dollars elsewhere,
*the IT department proposed the current hardware, and like for all of us job retention is key
*the CEOs may not be not want to overrule their own team. Winning in top-down selling is difficult.

What if a partner wins a significant contract and they have internal experience to the strength and features of your product. So to the news.

After the stock market close on Friday, it was announced that Microsoft had won the lucrative JEDI Pentagon contract. Microsoft made a presentation of Office365 implementation success using ZS at the ZenithLive event. They covered the simplification of implementation and security using Zscaler. While this win is not an office win, this functionality and the new ZB2B working with partners could bring agility and security to utilizing Microsoft Azure in a very complex environment.

I am hoping MS’s victory could open doors for ZS via this new contract vehicle.

32 Likes