Zscaler Q4 2020 Transcript Summary

Solid quarter - Zscaler is firing on all cylinders. They had a sales hiccough in Q4 of 2019, and a lot of us (including myself) wrote them off. I think this sales problem caused us to perceive their tech as being inferior, which does not appear to be the case at all. Zscaler is innovating. Their latest major cloud upgrade added over 100 new product enhancements, they can deploy their ZDX solution in minutes, and “every day, we are processing more than 150 billion transactions, while preventing up to seven billion security incidents and policy violations”. This is by no means a technically inferior company.

Regarding Zscaler’s business model: Previously my understanding about Zscaler (as well as Cloudflare) is that they both charge on a per person basis for pretty much all their products. This is true for most of Zscaler’s products, but Zscaler’s newest big product, ZCP (Zscaler Cloud Protection) protects workloads. In other words, it’s protecting servers, containers, applications and services! They talk about this a bit in one of their customer wins. This, in my opinion, is a big deal for the future of Zscaler. Their TAM is no longer limited to the number of employees their customers have - it now encompasses the number of employees plus the number of workloads their customers require. Additionally, the number of workloads in the world will for sure grow much faster than the number of people in the world. That said, it will take some time before this becomes Zscaler’s marquee product.

Third, the sunburst data breach is causing an increase in inbound conversations that potential customers and existing customers want to have with Zscaler. It also underscores the need for a zero trust approach, which Zscaler specializes in.

Lastly, DBNER rose from 122% in Q3 2020 to 127% in Q4 2020. This is the fourth quarter in a row that DBNER has risen. It was 119% in the comparable Q4 2019. A few things could be causing this - a) covid b) sunburst c) strength of Zscaler’s products or d) all the above. It was mentioned during the call that Zscaler estimates they have a 6x upsell opportunity within their customer base, which makes me think that DBNER can continue to stay at elevated levels for the long term.

CEO/Founder Jay Chaudry Opening Remarks
…Strong performance in Q2, which showed accelerating growth at scale and rapid innovation of our Zero Trust platform. We drove 55% growth in revenue and 71% growth in billings, while also generating growth in operating profits and free cash flow.

During the quarter, we achieved a milestone of over 5,000 customers, including over 500 of the Global 2000.

We drove increased wins in our enterprise segment, as we begin to pursue smaller enterprises with 2,000 to 6,000 employees.

We are helping our customers to securely accelerate their digital transformation journey, which remains their top priority. With our Zero Trust Exchange, Zscaler provides secure, any-to-any connectivity for users, applications, workloads and IoT and OT systems, regardless of their location.
OT= operational technology.
Workload = A cloud workload is a specific application, service, capability or a specific amount of work that can be run on a cloud resource. Virtual machines, databases, containers, Hadoop nodes and applications are all considered cloud workloads.

The recent SolarWinds security incident has further elevated the need for a true zero trust platform like Zscaler. During such sophisticated attacks, our proxy-based architecture would prevent loss of sensitive data and our application-level segmentation eliminates lateral threat movement. We provide users access to applications, not the network, which is fundamentally different from firewalls and legacy network security architecture. The CIO level awareness, engagements and inbound requests for our purpose-built zero trust platform have significantly increased, and we are viewed as a foundation of application, network and security transformation.

I’m proud of our speed of innovation, which is accelerating and further expanding our substantial technology lead. There are four pillars of our Zero Trust Exchange: ZIA (Zscaler Internet Access), ZPA (Zscaler Private Access) and ZDX (Zscaler Digital Exchange)for user protection and experience, and ZCP for workload protection.
Last quarter, we launched our fourth pillar called Zscaler Cloud Protection or ZCP, which extends our Zero Trust Exchange from users to workloads, and has an expanding portfolio of products including: CSPM to ensure proper configuration and compliance; Workload Communication to secure app-to-app and cloud-to-cloud secure communication; and Workload Segmentation to achieve app segmentation without legacy network segmentation.

In our latest major cloud upgrade, we added over 100 new product enhancements. Over the past 12 months, we have significantly increased the number of solutions delivered through our platform, including Zscaler Browser Isolation, Out-of-band CASB, Zscaler B2B and Zscaler Digital Experience or ZDX. All this innovation is making our cloud platform wider and deeper. For enterprises who want network and security modernization, we believe we are the only zero-trust, multitenant platform that meets their needs.

Many vendors have tried and failed to build a high performance, highly reliable proxy required for proper cybersecurity protection and data loss prevention. As a true SASE (secure access service edge) framework, we are deployed across 150 data centers, enforcing policy at the edge instead of a limited number of public cloud locations. Every day, we are processing more than 150 billion transactions, while preventing up to seven billion security incidents and policy violations.

Now, on to the customer wins. 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 that was using ZIA for a subset of its workforce, accelerated their zero-trust initiative by purchasing ZIA transformation, ZPA and ZDX for all 45,000 employees. In addition, they bought two of our recently announced ZCP solutions. They purchased Workload Communications to secure server traffic out to the Internet from 200 plants, and Workload Segmentation for 7,000 servers to secure east/west traffic in the public cloud and data center. I am excited to see wins like this where the customer is buying all four pillars of the Zscaler platform.

Moving on to ZPA. Our customers view ZPA as the foundation for their architectural shift to zero-trust access for private applications. ZPA is the clear market leader, with proven maturity and scalability, supporting millions of daily active users and nearly 40% of our global 2000 customers. Today, ZPA is delivering over million unique application segments without operational overhead of traditional network segmentation.

In an upsell deal, a Global 2000 bank with headquarters in EMEA started with ZIA and ZPA for 10,000 employees in July to expand their work-from-home capacity as a result of the pandemic. Within six months of the initial purchase, the customer bought ZIA and ZPA for the remaining 30,000 employees and CASB for all 40,000 employees.

Lastly, I would like to share another new customer win that highlights our continued ZIA success with large enterprises that are embracing direct to cloud architecture and migrating away from their complex, legacy onpremise appliances. A Fortune 100 professional services customer purchased our ZIA Transformation bundle plus CASB, advanced DLP and CSPM for Office 365 to protect 125,000 employees across 150 countries as they embraced work from anywhere. Zscaler eliminated the need for 30 different gateways and consolidated six different legacy point products, while meeting the customer’s environmental goals for their ESG program. With sensitive customer data at risk, security was a major requirement and the customer only considered solutions with a proxy architecture.

… This customer concluded that if a user connects to the network with a VPN, that is not zero trust. Based on this criteria, the legacy firewall and VPN providers were disqualified. An important consideration for our selection was ZPA’s position as the first and only cloud security service with FedRAMP certification for Zero Trust Remote Access. With the highest levels of FedRAMP certifications for both ZIA and ZPA, we are very well positioned to serve the Federal government.

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.

I believe we are on the right track to capture a material share of the $72 billion serviceable market that we outlined on our Analyst Day. We are also seeing opportunities in bringing zero trust to IoT and OT systems, and are excited about 5G, which pushes computing further to the edge and opens up additional opportunities for Zscaler. We are excited about our future.

Revenue for the quarter was a $157.0 million, up 10% sequentially and 55% year-over-year. ZPA product revenue was 14% of total revenue. From a geographic perspective, we had broad strength across our three major regions: Americas represented 51% of revenue, EMEA was 38% and APJ was 11%.

Turning to calculated billings, which we define as the change in deferred revenue for the quarter plus total revenue recognized in that quarter. Billings grew 71% year-over-year to $232.0 million, with billing duration around the mid-point of our 10-14 month range. As a reminder our contract terms are typically one to three years, and we primarily invoice our customers one year in advance.

Remaining performance obligations or RPO, which represents our total committed non-cancellable future revenue, exceeded $1 billion during the quarter and ended at $1.025 billion as of January 31.
RPO grew 68% from one year ago. The current RPO is 53% of the total RPO.

Our strong customer retention and ability to upsell have resulted in a consistently high dollar-based net retention rate, which was 127% compared to 122% last quarter and 116% a year ago.

While good for our business, our increased success selling bigger transformation bundles, selling both ZIA and ZPA from the start, and faster upsells within a year, can reduce our dollar-based net retention rate in the future. Considering these factors, we feel that 127% is outstanding.

Total gross margin of 81% was flat quarter-over-quarter and declined one percentage point year-over-year, but exceeded our expectations. The year-over-year decline was primarily driven by a higher mix of newly introduced products.

Turning to operating expenses. Our total operating expenses increased 18% sequentially and 60% year-over-year to $112.9 million. Operating expenses as a percentage of revenue increased by two percentage points from 70% a year ago to 72% in the quarter.
Sales and marketing expense increased 19% sequentially and 57% year-over-year to $76.5 million. The year-over-year increase was due to higher compensation expenses and investments in building our teams and go-to-market initiatives offset by lower T&E with our employees working from hom

R&D expenses increased 15% sequentially and 71% year-over-year to $24.0 million. The increase is primarily due to continued investments in our engineering teams.
G&A expenses increased 14% sequentially and 57% year-over-year to $12.5 million. The growth in G&A includes investments in building our teams, compensation-related expenses and professional fees.

Our second quarter operating margin was 9% compared to 12% in the same quarter last year. Net income in the quarter was $14 million or a non-GAAP earnings per share of $0.10. We ended the quarter with over $1.4 billion in cash, cash equivalents, and short-term investments. Free cash flow was positive $18 million in the quarter, which compares to negative $2 million during the same quarter last year. The strength in free cash flow was driven by strong receivable collections.

For the third quarter of fiscal 2021, we expect revenue in the range of $162 million to $164 million reflecting a year-over-year growth of 47% to 48%.
Operating profit of $11 million to $12 million, Other Income of $300,000, net of interest payments on our senior convertible notes. Income taxes of $1.5 million and earnings per share of approximately $0.07 assuming approximately 146 million common shares outstanding.

Due to better than expected first half performance and our strong pipeline, we are increasing our full year fiscal 2021 guidance for revenue, calculated billings and operating profit. For fiscal 2021 we now expect revenue in the range of $634 million to $638 million or year-over-year growth of 47% to 48%.
Calculated billings in the range of $820 million to $825 million or year-over-year growth of 49% to 50%. Operating profit in the range of $59 million to $61 million. Other income of $2.4 million, income taxes of $5.3 million, and earnings per share in the range of $0.39 to $0.40 assuming approximately 145 million to 146 million common shares outstanding.

For your modeling, we would like to remind investors that Q2 and Q4 have historically been our strongest billing quarters with declines in Q1 and Q3 quarters, respectively. The average sequential decline in billings during fiscal third quarters over the last five years was approximately 20%. We continue to see the market coming to us and we remain committed to investing aggressively in our company behind the growth in our business. We have a highly efficient business model and are making investments across the organization today in order to capitalize on the large opportunity ahead of us. While we will balance growth and profitability, growth will continue to take priority considering our strong business momentum.

Analyst Q&A

Jay, I wanted to ask you a high level question around the impact that the Sunburst Breach is having on the industry. At your Analyst Day in January, you’d mentioned that the impact is likely to be larger than the Target breach was in 2013. And if you can maybe parse out for us how the event has impacted your pipeline across your strategic accounts, maybe all the way down to smaller commercial accounts and how, if at all, you’ve changed the way you approach initial conversations with new prospects?

Jay Chaudhry
As we discussed during our Analyst Day, we are having increased conversations with our customers as well as prospects. So what is that causing? It is increasing engagements. I’m not sure I can quantify the impact on the pipeline, but we’re seeing that the customers who are already educated on Zero Trust quite a bit are making implementation of Zero Trust a bigger priority.
The number one question ends up being if people get compromised, how do make sure that the lateral movement doesn’t happen? The answer is simple. Don’t connect people to your network. Don’t build a moat with firewalls and VPNs, do Zero Trust implementation where you connect users to applications not to the network.

Unidentified Analyst
Hi guys. Good evening. This is Daniel on from Mike. Thanks for taking my question. So I know over the past quarters, you’ve been working on really improving your sales motion in the SMB and smaller enterprise area. Can you just provide some color on some of the investments you are making. And I guess, where you expect to be moving forward?

Jay Chaudhry
I will start and Remo going to add on. Yes, we talked about our expansion towards the enterprise segment that we defined as between 2,000 and 6,000 employees in a company. As you know, we have done extremely well in the higher end in large enterprises for the last several years. So in this segment, the progress we’ve made is ahead of our expectations. Our growth was faster in this segment. Well, it did come from a smaller base.

Having said that, our large enterprise segment is driving the overall strength of our business. We are doing three specific things to grow our business in this enterprise segment, one, adding more sales reps, more sales teams. And we had done a lot of good progress in the past two quarters and we’ll do more in the coming quarters. Secondly, adding and expanding channel partners who covered the segment. And third, we are directing our marketing programs to support the segment as well. So in summary, it’s a good opportunity to expand the segment and we are doing well. We’re pleased with the performance.

Alex Henderson
Thank you very much. I wamt to talk to one of the architectural issues that I think is fairly interesting differentiator, which is the argument that you guys have built a network based off per user policy implementation versus architectures from some of your – one of your competitors that are unable to differentiate the traffic flows on a per user basis, or have the policy implementations on a per user basis. Can you talk about that delta between what you’re doing and how that shows up in alternative competitors networks?

Jay Chaudhry
Yes. The fundamental difference is being a pass through on network security architecture when traffic is flowing over the network and a traditional device, like a firewall is trying to scan what kind of application is, guess it and trying to stop it or not. With our proxy architecture, where we terminate every connection, inspect and decide to connect to a particular user. So we have policies that are per user by design. There’s no – in fact, a user coming from company A or company B or company C each looks like an untrusted user. While in the traditional way, they are kind of batch based policies. The end result is – our architecture gives us two big benefits. One with proxy we can do far better inspection at a high scale high performance, including SSL. Two, it allows us to do Zero Trust where you don’t connect people to a network. You connect to a specific application. Zero Trust is probably the biggest thing to help you minimize the damage of lateral movement if something gets infected.

Andrew Nowinski
Great, thanks. And congrats on a great quarter. So I just wanted to follow up on Brad’s earlier question regarding SolarWinds. It sounds like that’s creating more pipeline but not necessarily contributing to revenue yet. But your billings growth is the strongest that we’ve seen in over two years. So I’m wondering if you could just comment on what the key drivers are that are contributing to that inflection in your billings growth. Now SolarWinds winds, it doesn’t look like it’s really had much of an impact yet.

Jay Chaudhry
Generally, in all these sessions, analysts like to pinpoint to particular event that may cause something, so COVID was viewed as maybe the catalyst. This is being viewed as a catalyst. As we have said before, the overall catalyst is that everyone is driving towards digital transformation, COVID maybe helping it SolarWinds maybe helping it. But customers are realizing that they believe that they need to accelerate their transformation. And we are the one who enabled the transformation. If you do your transformation without something like Zscaler, your risk goes up significantly. So where is our growth coming from? ZIA, which has been our work horse. Yes. Now we’ve got over 25% of global 2000 companies, but we have 75% more to go. It is generating pretty good sales, ZPA, which was relatively young product two or three years ago now is actually contributing significantly about 40% of our global 2000 customers already have our ZPA.
So these two are the biggest contributors of our billings growth. And then the new pillars ZDX is picking up quite well. And also is that the new pillar off cloud protection? I think I’m very pleased that our customers are buying more and more bigger bundles together. I talked about ZIA, ZPA and ZDX being bought together by our customers during our in my prepared remarks. So across the board, we’re seeing strength from product side of it
ExponentialDave: Great question and answer here. Jay gives us a very honest answer - it’s not clear if Covid was the catalyst, or sunburst, or a more general need for digital transformation. And also that Zscaler still has much of the global 2K to penetrate, even with its more established product such as ZIA.

…In addition when we talked at the Analyst Day that for companies of 5,000 employees on the user side, we’d expect, we’re seeing ARPUs in that $145 range. I can say that in the quarter, we’ve had deals with customers at the 5,000 employee range in that range at $145. So what’s happening basically is that there’s a huge need in the market. Legacy architecture is not the answer. And so with Zscaler with the breadth of platform – in the increasing platform that we’ve created and we’ll continue to create is really perfectly set to go forward into this market.

Fatima Boolani
Good afternoon, thank you for taking my questions. Remo question for you, Jay, in his prepared remarks alluded to a number of very large sort of wall-to-wall transactions that were also multi-product. So, I’m wondering if you could comment on the large deal activity that you saw in the quarter and if it was maybe outsized in any particular regions? It would be really helpful if you can give us some quantification of that?
Jay Chaudhry
Yes. A good question. So large deal activity was strong in the quarter, it was comparable to Q1. It was significantly higher than last year. From a geographic perspective, all regions did well. I mean, we are investing in all regions, pretty much the same, same level. APJ, probably a little bit faster than the other regions, but all regions have done well and we continue to invest.
Related to the comment I made before, when companies see – with the breadth of the platform that we have and companies see the value of Zscaler. And the ease of implementation, the increased security and also the ROI. The value proposition is resonating with our customers. And so, we’re seeing that. And so, by adding ZDX and ZCP and broadening the platform, it actually increases the value of what we are – of Zscaler.
If I may add a couple of points to it, we have truly expanded the platform. We haven’t gone on a buying spree and throw them in there and call it a platform because those – these unintegrated products don’t add a lot of value, our customers see the value. For example, to turn on ZDX, it’s literally a few minutes. It hardly takes anything because the traffic is already flowing through everything is happening.
The second one, I like to make is, yes, we did have what you call wall-to-wall deals. I guess that meant all teller deals. But there are no mega deals in the quarter. Okay. And there’s no one time kind of special deal that artificially increased our billings numbers. It was properly distributed various pillars, and across all geos.

Matt Swanson
Yes, thank you. This is Matt Swanson on for Matt. Jay, kind of going back on some of those large deals, it seemed like you had a lot of success upselling the, ZPA [ph]. I know at the Analyst Day, we talked about maybe six times (6x) upsell opportunity within your base. When it comes to kind of realizing that opportunity is it more just a matter of time and as the customer see the value they are coming back, or are there steps you can take to kind of more aggressively pursue that expansion?

Remo Canessa
And going forward, we think a good mix, for Zscaler is fifty-fifty (new vs up sell) . In the reasons, the point that you brought up, I mean the 6x, ability to upsell into existing customers, just for ZIA and ZPA. And so, it is significant.
ExponentialDave: Transcription of the call was a bit poor here, but I think the question stands nicely by itself to point out that Zscaler has a massive upselling opportunity right at their doorstep.

Tal Liani
Hi guys. My question is about the comps for 2021. Do you feel, or do you have any data to think that some of the growth this year was related to COVID an increase in license take rate because of COVID. And if that’s the case, we might have an issue second half 2021 with the comps. I know that this is on investors’ mind, and I’m wondering if you have any data to support the view one way or another?
Jay Chaudhry
Yes, let me start with the general comments Remo, you can be more specific. I give you the hard part.
Remo Canessa
I will have to give numbers.
Jay Chaudhry
Look we do believe that work from anywhere has had to stay, I guess, COVID became a catalyst to shake off inertia. It actually changed the mindset and it really not just gave momentum, but also brought to light the limitations of legacy network and security. So, we are seeing our customers saying we are implementing zero trust, which means any ZIA ZPA top on deployments even after everything gets back to normal. If that was not the case, they would be doing short term ZPA deal and saying, I’m going back to the office, I no longer need to renewal of ZPA, beyond seeing that.
So, we think the world is changing. So, going back to the office should not be impacting our momentum of the business. That’s how I look at it overall. Remo?
Remo Canessa
Pipeline is strong and interest is high in Zscaler, and engagement is significant.


Is it fair to say that they had easy beats across the board since Q4 2019 was horrible?

I like some of the things Zscaler does but the constant bragging is unreal. Their architecture didn’t improve over night and deployment is not easy, their speed is not ideal and there plenty of unhappy users with their platform. Not sure if that has changed in a way, but releasing 100 features, what are those exactly?

Protecting workloads is Crowdstrike territory, not sure how they plan on competing with them on that end, but Crowdstrike has 16 modules and focus on end point protection. You don’t become overnight expert in the field.

Also, the 6x possible upsale, sure it’s possible but the way it’s being presented is misleading. Also their naming convention is so cryptic, they need a new marketing team.

Zscaler will be facing stiff competition from Palo Alto, Cloudflare and Crowdstrike. The 75% to go comment about Global2000 is also misleading, one can not assume that Palo Alro SASE, Cloudflare are not already in place.

Maybe I just dislike the bragging, but overall my security plays are Cloudflare, Crowdstrike and Okta.


As someone who “uses” Zscaler, all I can say is that I don’t like it. My employer deployed it on everyone’s computer in the last year or so. From a users perspective, it just appears to be net-nanny service that prevents me from reading articles about poker on my work computer (on my own time). It also has caused all kinds of havok with my Disney Circle enabled internet router—Zscaler causes the internet to regularly get blocked on my work computer.

All in all, not impressed, don’t see the value, and not interested in encouraging big brother.



Is it fair to say that they had easy beats across the boards since Q4 2019 was horrible?

I think you’re referring to Q2 FY2020 which was last year’s compare, so let’s test your hypothesis. I’ll use “calendar year” to normalize the distinctions between fiscal year timings.

Revenue growth (CAGR) from calendar year Q4 2018 to Q4 2020:
Cloudfare: 50.6% (from $55.5M to $125.9M), or +$70.4M
ZScaler: 45.4% (from $74.3M to $157.0M), or +$82.7M
Okta: 42.5% (from $115.5M to $234.7M), or $119.2M

Free cash flow (CAGR) from calendar year Q4 2018 to Q4 2020:
Cloudfare: ($13.5M)* to ($23.5M)
ZScaler: $12.0M to $18.0M
Okta: $4.8M to $32.5M

Even though a two-metric comparison is myopic, ZScaler doesn’t look out of place compared to Cloudfare and Okta erasing its bad quarter (or year). We can also use a QoQ comparison.

Revenue QoQ:
Cloudfare: 10.2% or $11.7M
ZScaler: 10.1% or +$14.4M
Okta: 8.0% or $17.3M

Cloudfare: 12.0% or +$42.0M
ZScaler: 18.6% or +$161M
Okta: 13.9% or +220M

Here, ZScaler looks attractive with very encouraging signs of acceleration. So while some of the comparisons might have been soft, it’s also evident that ZScaler is learning from its mistakes and doing something right. That applies both in regards to its technology, with added focus on innovation (2x spend in R&D YoY) – and also a renewed sales tactics with Dali Rajic leading as Chief Revenue Officer. Several events recently have highlighted the importance of cybersecurity as a priority, and ZScaler’s top-down sales approach appear to be an “easy” solution for C-suite’s to outsource this headache.

*Assumed from their “six month ended 2018” figures reported in their S1

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As someone who “uses” Zscaler, all I can say is that I don’t like it. My employer deployed it on everyone’s computer in the last year or so. From a users perspective, it just appears to be net-nanny service that prevents me from reading articles about poker on my work computer (on my own time). It also has caused all kinds of havok with my Disney Circle enabled internet router—Zscaler causes the internet to regularly get blocked on my work computer.

Hmm, sounds like your employer (who is paying for Zscaler) may have a different perspective.




You are correct, I was referring to to calendar year Q4 2019, since I sold my stock after I heard their CEO struggling to turn things around. They got very lucky with the pandemic, I am not convinced how much was the new head of sales or whatever his position is, contributing or was it just the pandemic that boosted their sales and their pipeline. There is a chance that momentum here is purely pandemic driven, not based on improved or superior tech, of superior sales process.

Cloudflare launched their Teams/Gateway product beginning of 2020, but haven’t even charged anyone for its use until September of 2020 and even then they are still allowing struggling businesses to use it for free. So comparing previous revenues with Cloudflare is not comparing orange to orange. My reference about Okta was more in terms of their value and longevity of their growth, they have experienced head and tail winds during the pandemic, and reduced sales investments as per their CFO during 2020, which was noted in their last earning call.

The top down approach certainly works for bigger corporations, however opposite works too, especially for the mid size business that Zscaler is going after.

Cloudflare has covered both ends, bottom up and top down. With the acquisition of Auth0, Okta has achieved the same. So while Zscaler can preach to C level positions, which is where they got stuck in 2019, lengthy sales process, complicated tech, long implementation cycle, etc- both Cloudflare and Okta will be able to approach Dev /Sec / SysOps, and C level as part of their target groups.

I have studied Cloudflare and Okta extensively, as well as Zscaler. Of course investing has its risks, and Zscaler may have benefited long term from the pandemic, but I’m skeptical personally about their tech and long term growth, mostly due to low conviction in their CEO. I do believe that both Mathew Prince and Todd McKinnon are superior, visionary CEOs that will continue to lead their organizations and grow their TAM by launching new products or acquiring new entities.


Also responding to “Is it fair to say that they had easy beats across the boards since Q4 2019 was horrible?”

Clearly rdgyy meant Q2-’20 which ended Jan 30, 2020 (don’t you just hate the off-set FYs?).
While that quarter was certainly not optimal, I would not go so far as calling it horrible.

Putting Q2-FY20 in perspective:

  1. the $101.3M was slightly above the guidance from the previous quarter of $97M-$100M. “Horrible” to me means that they fall short of guidance, which they didn’t do.
  2. Q2-FY19 had an unusual non-recurring $2.3M revenue event that if had not occurred, then the Q2-20 growth would have been over 41%.
  3. if revenue growth that quarter has been in line with other quarters of around 45%, then the growth in this quarter would still have been ~48% - a very solid YoY growth number, even for stocks on this board.

Yes, Q2-’20 bothered me – They stumbled in Q1 and Q2 with Q1 showing a slight dip in deferred revenue and Q2 a sub 40% revenue growth rate. This stumble combined with the decline of revenue growth from 2019 is why I didn’t pull the trigger in ZS in early 2020. My mistake.

And digging a little deeper, I think it is possible the two are related – the growth of deferred revenue in Q1 is low each year which implies that they are possibly pulling a little revenue into Q4. This pull forward can have a short term detrimental effect on revenue in the quarter after – depending on how the contracts were implemented. But I am bordering on speculation, so will leave that aside for now.

But it is clear that they recognized they had a scaling issue in 2019 and began addressing it near the end of Q1-’20 when they brought Dali Rajic on board and began changing infrastructure. I thought it was lip service back then – and again I was wrong. Rdgyy, you appear to think it still is a bit of a smoke screen, you may be right though I think the data shows that some progress has been made.

While they certainly got a pandemic uplift, I believe the scaling issue was identified and addressed in advance of the pandemic and the growth was accelerating prior to pandemic kicking in. The situation has helped them and I think they are taking advantage of that by staffing up in the right areas and pushing for continued growth at rates we expect here.

Looking at the numbers, I see a company that had a small blip and has gotten back on track - and is continuing to grow revenues at a solid 45% - 55% YoY most quarters. On top of that they have solid growth of the deferred revenue every quarter (with the above mentioned low Q1 rev growth).

I believe the data below shows this. Note that in the data below, I have extrapolated the Q3&Q4-FY21 numbers based on the outlook provided. I also note that they have beaten the provided outlook almost (if not every) quarter. So I personally believe that the full year guidance (and thus the implied Q4 number) is low and expect that to be raised when they announce Q3 earnings. They did the same thing in FY19 and FY20. It would not surprise me to see Q4 guidance come in at $185M and the full year midrange to be raised to $650M at that time – given their history of this.
ZS Revenues by Quarter with YoY growth

Revenue	 Q1    YoY    Q2    YoY    Q3    YoY	  Q4  YoY    Year	
2018				   49.2	        56.2	     190.2	
2019	 63.3	      74.4	   79.1  61%    86.1  53%    303.5  60%
2020	 93.6  48%   101.3  36%   110.5  40%   125.9  46%    432.5  42%
2021	142.6  52%   157.0  55%   163*   47%   172**  37%    636*   47%*

  • Q3FY21 & FY21 Annual - Guidance mid-range from Q2 earnings call
    ** Q4FY21 = FY21 annual guidance mid-range - Q3FY21 mid-range guidance

ZS Deferred Revenue Reported by Quarter

Year     Q1     Q2     Q3     Q4
2018			     164.0
2019	165.0  205.7  211.8  251.5
2020	245.9  279.2  300.8  369.8
2021	371.9  446.8		

Also of note is that that ZS has been non-Gaap profitable for the past 10 quarters. And I know this board tends to set aside profitability for growth, I give a couple extra points to companies that can have high growth and generate a positive cash flow.

So I think the future looks good for ZS, though maybe not as good as for others in this space. I take edgyy’s comments seriously as similar ones have been stated by others here on the board and elsewhere. But I also think this is not a winner take all area and several companies can do well here. So while it adds the work to my quarterly analysis, I have all 3 companies which rdgyy references in my portfolio.

Long ZS with a 4% “Saul Portfolio” position – this is a smaller position than NET and similar to OKTA.



Hey @rdgyy, can you provide a source for your comments on:
“deployment is not easy, their speed is not ideal and there plenty of unhappy users with their platform”?

Their website mentions that they can deploy within minutes, which sounds pretty easy to me.

Do you have evidence that customers are unhappy, speed is not ideal, or deployment is hard? If customers are unhappy, why is DBNER accelerating? And why would 25% of Global 2k companies choose Zscaler? These are not little no name customers - these are customers with a track record of success who have the power to hire top talent who can make very informed decisions about which security provider to choose.

“Also, the 6x possible upsale, sure it’s possible but the way it’s being presented is misleading”.

Can you explain this further? Why is it misleading?

“Zscaler will be facing stiff competition from Palo Alto, Cloudflare and Crowdstrike. The 75% to go comment about Global2000 is also misleading, one can not assume that Palo Alro SASE, Cloudflare are not already in place.”

This is a comment from Zscaler’s Q3 conference call which explains that competition is not as big a factor as some people around here might think:

Analyst: Jay, maybe for you, the question is do you have any statistics or just general thoughts on how many of your engagements are competitive? Meaning, a competitive breakup process versus perhaps being brought in by a service provider where there really isn’t a competitive process. Does that makes sense?

Jay Chaudhry
Yes. Saket, thank you. Your question reminds me of my days at AirDefense and CipherTrust when I used to sell security appliances and we used to have lots of bake-offs, which box is faster, which big box is cheaper. At Zscaler, we are all driven by transformation. Transformation is not a box you sell. It actually starts with CIO level discussion to help them enable their applications to network, to security, all of them together. So, most of our deals at the higher end, at the large enterprise level aren’t really competitive much at all.
When you come to lower end, we do see some of the competition, but bake-offs are rare. In fact, I highlighted a win in my prepared remarks where even though there was an RFP that we won with a managed services partners, all six SI and SPs bid Zscaler, okay. I am very proud of it. That’s because the customers and the SI/SP channel understands that you can take typical legacy boxes and try to make them do cloud transformation. So when it comes to competition, I think we got some big, big lead



First, I am simply giving you the my bearish stance on the company, and why. This is not in any way to challenge you or offend you. As I said my conviction on the CEO is low, and I have explained and that is my personal opinion only, everyone needs to do their own DD and decide in which business they want to invest.

Most of my conclusions on their performance/issues, were based on DD I did end of 2019, beginning of 2020. That’s why I asked what are the 100 features they launched exactly. There were even competitors taking a jab at their latency issues by running ads along their keywords.

I do remember reading in one of their earning transcripts from 2020 that they had to use 3rd party VMs/container to run their platform (due to running out of resources), which has impacted their profit margins and also has contradicted their previous CEO statements (in previous earning reports) that their platform is so good because it does not run on 3rd parties cloud infrastructure, and other competitors are simply spinning virtual machines at cloud providers and that’s now how you do SASE.

Sources? Here is one:



“After spending months fighting frequent issues that came up, I finally threw my hands in the air and left my company.”

“Unhelpful and wastes a lot of time. I really can’t emphasize enough how frustrating the support was.”

“Adds latency, which can make profiling network operations difficult. Sometimes you run into websites randomly blocking you or asking for CAPTCHA due to routing through ZScaler gateways.”

“Zscaler can be a bit of a problem with product support. Even if there are late turns, the problem is solved.”

On the 6x times upside, how is that exactly happening? Are there any evidences that every customer will spend 6 times their current spent due to extra products or simply because they migrate more offices/users over? Maybe I am missing something, never the less its a bold statement.

On your question about DBNER, and 25% of Global2000 market. Its normal that the DBNER expands since I believe most companies can not simply deploy their solution in 1 phase, and launch of some of their additional products, will add to the DBNER expansion. Obviously they are converting clients, and did not have many competitors in the past, so market was available for grabs.

Palo Alto, Cloudflare (and Cisco umbrella) have now competing products, which I am sure will put pressure on Zscaler ambitions to capture mid size market, and 75% of the remaining Global2000 customers.