It wasn’t too long ago that Zscaler was one of my largest positions at about 18% plus. I had gradually reduced the size to about 7%. In the aftermarket yesterday, after earnings, I had sold another 15% of my remaining position at $49.62, but after going through the numbers and the conference call, I reconsidered a bit and bought back half of what I had just sold, at $47.95. Added to CRWD, COUP, and dibbling a little more into my very large position in DDOG.
Okay, you may ask, why did I buy some back in this weak stock? Here are some factoids from the press release and conference call.
Mind you, I only bought back half of what I sold, and while I wouldn’t want an 18% position, I’m willing to ride with my current 6.7% position.
Revenue up 48% to $94 million (not a disaster)
Op cash flow was $21.4 million, or 23% of revenue, up from $11.0 million, or 17% of revenue, a year ago (more like it!)
Free cash flow was $9.4 million, or 10% of revenue, compared to $5.2 million, or 8% of revenue, a year ago.
Dollar based net retention rate, was 120%, up from 118% yoy and sequentially (Good). (Note: Our increased success selling bigger deals starting immediately with our Transformation bundle and faster upsell within a year, while good for our business, can reduce our dollar based net retention rate.)
Total operating expenses were 78% of revenue, improved from 80% yoy
Microsoft named Zscaler the first and only cloud security provider to be a certified partner in the Microsoft Networking Partner Program (NPP) for Office 365, which has stringent requirements for user performance. Microsoft only recommends NPP partners for Office 365 connectivity. We have a deep and wide partnership with Microsoft Office 365 and Azure public cloud.
• Zscaler was named a Leader in the Gartner Magic Quadrant for Secure Web Gateways for the ninth year in a row. The report positioned Zscaler furthest in completeness of vision and highest in ability to execute.
• Zscaler achieved significant milestones in the U.S. Federal business. Zscaler Private Access (ZPA), a ZTNA service, earned FedRAMP Ready status at the High Impact level. Zscaler was also added to the Dept of Homeland Security Continuous Diagnostics and Mitigation Program Approved Products List.
"Some of you have asked about competition from next-gen firewall vendors. Over the last 10 years we have faced various competitors starting with large legacy secured web gateway vendors who claimed to offer a cloud security service. Legacy firewall vendors are now making similar noise. Next-gen firewalls are designed to build a moat around the castle, to secure the network and the data center. They are the wrong architecture.
The next question is why they can’t build a platform like Zscaler? Well the answer lies in the architecture. Architecture is like the foundation of a building. You can’t change the foundation unless you start all over which is hard and takes a long time. Start-ups like Salesforce and Workday competed and won against much larger on-premise incumbent vendors, because of their cloud native architecture. We believe we are doing the same in the network security space.
We don’t really think the firewall vendors making noise has impacted us so far. I think it’s the architecture that we have so much better that’s giving us an edge, and I think it’s a long-term edge.
Jay Chaudhry - let me state four key points that make me excited.
Number one architecture matters, especially for a cloud security platform that must inspect all traffic for policy enforcement. We have the best architecture with 10 years of operational experience to run a massive cloud and enormous barrier to entry.
Number two, with multiple tailwinds such as Office 365 SaaS adoption, SD-WAN and app migration to public clouds, we believe the market is coming to us.
Number three, we are in early innings of the cloud journey we’re disrupting a $20 billion TAM with ZIA and ZPA. In addition, we recently announced our B2B and ZDX, which we believe will expand our TAM significantly.
Number four with new go-to-market leadership on board, we are building a sales machine that can deliver world-class execution and sustainable long-term growth. What I see Dali (new CRO) is doing, he’s putting structured, disciplined leadership and has a passion for what he’s doing. Quite frankly, I don’t know when he sleeps. It’s going very quickly, but it is going to take time."
Saul here: So it’s not at all perfect, but I have just a third of the position I started with, but after reading all of that, it just doesn’t sound like a totally “Sell out of that!” kind of situation, and I feel it’s worth sticking with for now.