ZScaler billings musings

Investment Analysis Clubs Saul’s Investing Discussions
1

Hi all,

I’m posting this to the board after a query from MoneySpin, who prompted me to pick up my ZScaler billings musings.

ZScaler have repeatedly encouraged investors to judge the company by their billings numbers, rather than revenue, RPO etc. So I found their billings guidance in the last call a bit underwhelming.

Recap (for me!)

Q2 21 billings = Q2 21 revenue + Q2 21 deferred revenue - Q1 21 deferred revenue

$232m = $157m + $447m - $372m
= $157m + $75m

Q2 22 billings = Q2-22 revenue + Q2 22 deferred revenue - Q1 22 deferred revenue

$367m = $256m + $759m - $648m
= $256m + $111m

Billings: 58%
Revenue: 63%
𝛅 deferred revenue = 48%

So the “change in deferred revenue” was the biggest drag, which is why billings growth is lower. They only added $36m in deferred vs the year ago quarter which somewhat negates the “re-acceleration” story at least yoy.

The guide

The billings guide for the full year is $1.37b, of which they have already billed $615m. That implies the remains will be billed in the next 2 quarters, ie $755m/2 = $377.5m per quarter, ie F 22 billings looks like:

Q1: $247,732 +71% yoy
Q2: $367,678 +59%
Q3: $377,295 +68% <— I’m guessing this will actually be lower, perhaps even under Q2.
Q4: $377,295 +14% <— This is what I believe the market didn’t like. Am guessing it will be higher, and the FY will be about $1.4b.

= $1370m

Which implies that the change in deferred revenue for Q3 is $377.295m - $272m (high revenue guide) = $105.3m. That’s a pretty good number historically and could be more depending on beating their revenue guide.

So what does all that mean?

  1. Q2 wasn’t fantastic from a billings perspective, a marked deceleration from the previous quarters and expectations.
  2. Implied billings in Q3 +68% is a good number.
  3. Q4 comparison is tough given how good Q4 21 was (an anomalous or possibly super seasonal $332,241m) and the implied growth % was very low. Even generously, those 70% numbers seem to be gone for good as comps get tough, and billings will increase at most in the ~low 30s%~ (this was my original response to MoneySpin, which is probably a bit harsh, but definitely trending that way).

It tends to be a less-than-rosy picture to me and I’m a big believer in the longer-term tailwinds… so a bit conflicted!

How does this look to everyone else? Am I too caught up in the weeds?

cheers
Greg

7 Likes
2

The billings guide for the full year is $1.37b, of which they have already billed $615m. That implies the remains will be billed in the next 2 quarters, ie $755m/2 = $377.5m per quarter

In Q2’21, they guided for $825M in billings and ended the year with $934M (a 13% beat). A similar beat would imply FY’22 billings to total ~$1,551M. That implies the remains to be billed in the two quarters is ~$936M. Even if the beat is not as strong as last year, it is fair to expect billings to total >$100M higher than your estimate.

Q3: $377,295 +68% <— I’m guessing this will actually be lower, perhaps even under Q2.

Billings have predictably been lower sequentially every Q3 in ZScaler’s history. As with most peers, end of calendar year is when the most $ value in contracts are signed.

Q4: $377,295 +14% <— This is what I believe the market didn’t like. Am guessing it will be higher, and the FY will be about $1.4b.

Q4’21 billings were 48% greater than Q3’21 billings. Similarly, Q4’20 billings were 49% greater than Q3’20 billings. Again, Q4’19 billings were 48% greater than Q3’19. So now we have:

Assumption #1: FY’22 Billings of $1,551M. Therefore, we can approximate $936M remaining to be billed.

Assumption #2: Q4’22 Billings 48% higher than Q3’22. Therefore, we can approximate Q3’22 billings of $378M (68% YoY) and Q4’22 billings of $558M (68% YoY).

An important caveat – the purpose of this post is not to ascertain a prediction that ZScaler will grow its billings ~68% YoY for the next two quarters. As they reach a larger size, naturally they might run into the law of large numbers at some point; or face continued resistance with government contracts. Point #1 is that we can use past data to better inform our musings. But Point #2 is that we must not evaluate these figures in isolation. What matters is how the business is performing as a whole, as it’s been highlighted by the board leaders several times.

Coming back to ZScaler, it is fair to pay closer attention to billings given that it was an important topic on the last earnings call. But currently, I don’t see any red flags with – and that would remain the case for me even if Q3’s figures come in lower sequentially next quarter, as we know that is a common pattern. If there is a radical unexpected decline, then that would be another story.

-RMTZP
Visit https://discussion.fool.com/rules-of-the-board-revised-edition-3… to maximize your learning of the board before posting

26 Likes