Zscaler Q220

ZS - Q220

PR: https://ir.zscaler.com/node/8276/pdf
Fool recap: https://www.fool.com/premium/coverage/investing/2020/02/21/w…
CC transcript: https://www.fool.com/earnings/call-transcripts/2020/02/21/zs…
Tedyun take: https://discussion.fool.com/4056/zs-page-2-q2-2020-earnings-8211…
Sarksnz summary: https://discussion.fool.com/zs-q2-2020-cc-notes-34419551.aspx
Texmex on sales restructuring: https://discussion.fool.com/i-also-have-a-35-position-to-add-to-…
Tinker is out: https://discussion.fool.com/not-so-tough-if-you-use-volatility-a…

Revenue 101.3M +36%
… adj w/o special sale last yr +41%
Billings 135.4M +18%, -1900bps seq
… adj w/o special sale last yr +30%
Deferred Rev 280M +36%
RPO 609M +32%
Adj Op Income 10.9M +11%
… margin 10.8% (vs 13.4%)
Adj Income 12M -3.4%
Adj EPS 0.09
Gross Margins 82% +200bps
Opex 71.9M +44%
CFFO 5.4M (vs 15.7M)
FCF -1.9M (vs 12M)
… swung neg due to 15M legal settlement w/ Symantec to end all lawsuits
Cash 385M
$NER 116% -200bps

  • new products coming, releasing as GA in Q4
  • New sales initiatives
  • New Global 2000 customers coming from Crowdstrike partnership, using combined sales teams
  • Microsoft Partnership for Office 365 and Azure

My stance: Ugh. From a high of +65% 5Q ago, rev growth has gone from +61% to +53% to +48% to now +36% over TTM. Billings is sub 20%. Saul identified the trend pretty quickly, and has been scaling down since it went under 50%. I decided to see it out given their platform stickiness. But their sales to NEW customers has dropped off quite drastically, so it seems their sales issues were larger than I anticipated. I put part of the blame on the fact their platform is so difficult to on-board new customers onto, requiring a host of system integrators to assist.

But beyond the souring growth, I have also identified a major new competitive threat (besides Okta Access Gateway) - Cloudflare has a new product, Cloudflare for Teams, that is a carbon copy of Zscaler. And it is not only a copy of ZIA+ZPA (to protect outgoing and incoming app traffic) but also their selling point of being a global gatekeeper (having data centers covering the globe to make the edge local to users).

One positive is their new product lines coming in Q4 (July). B2B is the reason I have stayed in ZS since the last Q’s poor showing. Another new product coming, ZDX, is user experience monitoring akin to Datadog’s new RUM product. But I don’t trust ZS on new products until their numbers show it. Zscaler really talked up ZPA but they never seemed to have it gain much traction with customers outside of those already using ZIA. It became mostly a complimentary product instead of a separately sold one. IF Zscaler adapts, and learns to sell ZPA and B2B independently of ZIA — while also making it possible to self-install it — I could see sales ramping back up quickly. Only then would I be intrigued enough to get back in.

However, with today’s realities, I’m out, for the reasons I outlined above and summarized again here: https://discussion.fool.com/i-often-feel-that-the-best-thing-to-… . As-is, Zscaler is “hard to sell” AND “hard to integrate”. Those facts aren’t going to change fast, and that’s a problem when there is direct competition already here (Okta and Cloudflare) that is easier to purchase and easier to install.

no position