ZScaler - FY21, Q2 Earnings

Strong earnings from Zscaler today - its share price is up ~4.2% after-hours. Please feel free to add color where necessary - both from a technical or a financial standpoint. This is my first quarterly summary, so I’m looking forward to the rich conversation to follow from the many diverse perspectives we have here.

Revenue: Up 55% YoY, reaching $157M. This represents 10.1% QoQ, as shown below.

FY     Jul'19     Jul'20     Jul'21
Q1     $63.3M     $93.6M     $142.6M
Q2     $74.3M     $101.3M    $157M
Q3     $79.1M     $110.5M
Q4     $86.1M     $125.9M

QoQ Revenue Growth Rates:

FY     Jul'19     Jul'20     Jul'21
Q1     12.6%      8.7%       13.3%
Q2     17.4%      8.2%       10.1%
Q3     6.5%       9.1%
Q4     8.8%       13.9%

Billings: Up 71% YoY, reaching $232M. There seems to be quite a bit of cyclicality into their billings, as seen below.

FY     Jul'19     Jul'20     Jul'21
Q1     $64.6M     $88.3M     $144.7M
Q2     $115.0M    $135.4M    $232.0M
Q3     $84.7M     $131.3M
Q4     $125.8M    $194.9M

Deferred revenue: Up 60% YoY, reaching $446.8M. Again, quite cyclical although it is +20% QoQ.

FY     Jul'19     Jul'20     Jul'21
Q1     $164.6M    $245.9M    $371.9M
Q2     $106.0M    $280.9M    $446.8M
Q3     $211.5M    $300.8M
Q4     $251.2M    $369.8M

Remaining Performance Obligations:
-Up 68% YoY, reaching $1.025. “As a reminder, our contract terms are typically 1-3 years, and we primarily invoice our customers 1 year in advance”

Cash Flow
-Free cash flow was $18M (11% of revenue), compared to -1.9% (-2% of revenue) Q2,2020. Had it not been for a legal settlement agreement, free cash flow Q2,2020 would have been $13.1 (13% of revenue)
-Cash flow from operations was $30.4M (19% of revenue), compared to $5.4M (5% of revenue) Q2,2020

-Expecting $163M midpoint, which would represent 48% YoY growth
-Assuming they beat by their average(+5.7%), that would be $172M, which would represent 56% YoY growth

Business Highlights
-Launches security assessment programmed to help organizations assess the consequences of the SolarWinds attack
-Recognized as the only leader in Gartner’s Magic Quadrant for Secure Web Gateways (highest in both “completeness of vision” and “ability to execute”
-Introduced ZScaler Cloud Protection to automate security policies across multi-cloud footprints
-Achieved milestone of 5,000 customers. Emphasized prioritizing smaller enterprises (2,000 - 6,000 employees)
-Added 100+ new product enhancements. Highlighted how over the past 12 months, number of solutions has increased through: Zscaler Browser Isolation, out-of-band CASB, ZScaler B2B, ZScaler Digital Experience
-Platform uses 75% renewable energy (goal is for 90%)

Additional Highlights
-Dollar-based net retention rate: 127% (122% last quarter, 116% last year)
-Gross margins: 81% (flat QoQ, down 1% YoY). Expecting to finish the year with 80%
-Operating margin: 9% (down from 12% same quarter last year)
-Operating expenses: increased 18% sequentially
+++Sales and marketing: up 57% YoY (19% QoQ)
+++R&D: up 71% YoY (15% QoQ)
+++G&A: up 57% YoY (14% QoQ)

Key Quotes
“There is an accelerated market shift towards work from anywhere which is the world ZScaler was built for”
“In an upsell win, a Fortune 500 chemical company was using ZRA for a subset of its workforce and accelerated the Zero Trust initiative by purchasing ZIA Transformation, ZPA, and ZDX for all 45,000 employees”
“At our Analyst Day in January, we laid out our audacious goal of serving 200 million users and 100 million workloads on our Zero Trust exchange. To achieve that, our entire organization is focused on attracting and retaining talent and creating a culture of excellence”
"We have demonstrated over the last 12 months that we have built a sophisticated sales machine to sell value and deliver measurable outcomes at the CXO level
“Large deal activity was comparable to Q1, and significantly higher than last year. All regions did well and we will continue to invest”

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Accelerating revenue with 71% billings growth (!!!) this company is killing it and the billings show further acceleration is likely. It would be up 15-20% today if the high growth stocks weren’t in a strong correction right now due the bond market implosion. This should be one of the strongest stocks when this group inevitably recovers eventually. I regret selling when they had their sales troubles a few years ago, but that seems to have been completely turned around with the new CRO. I doubled my shares this morning under $200 and am happy with the purchase.