Zscaler Reports Q3 '22 - Raises Guidance

Investment Analysis Clubs Saul’s Investing Discussions
1

Zscaler Reports Third Quarter Fiscal 2022 Financial Results
May 26, 2022

Third Quarter Highlights

- Revenue grows 63% year-over-year to $286.8 million
- Calculated billings grows 54% year-over-year to $345.6 million
- Deferred revenue grows 65% year-over-year to $818.7 million
- GAAP net loss of $101.4 million compared to GAAP net loss of $58.5 million on a year-over-year basis
- Non-GAAP net income of $24.7 million compared to non-GAAP net income of $21.4 million on a year-over-year basis

"Enterprises continue to consolidate point products in favor of our integrated Zero Trust security platform, resulting in larger, multi-year commitments to Zscaler. We delivered 63% revenue growth and 54% billings growth, while also generating a strong free cash flow margin of 15% for the third quarter. As a result of increasing demand, we are also raising our fiscal year guidance on all financial metrics,”

said Jay Chaudhry, Chairman and CEO of Zscaler.

“Demanding enterprises look to Zscaler as their strategic partner of choice in their Zero Trust journey, as the world races towards network and security transformation.”

Consistent Deferred revenue growth:

This quarter Deferred revenue was $818.7M , an increase of 65% year-over-year.
Last quarter Deferred revenue was $759.9M , an increase of 70% year-over-year.

  • Net income (loss) per share: GAAP net loss per share was $0.72, compared to $0.43 in the third quarter of fiscal 2021. Non-GAAP net income per share was $0.17, compared to $0.15 in the third quarter of fiscal 2021.

  • As a founding member of the Cloud Security Alliance (CSA), Zscaler, along with alliance partners CrowdStrike and Okta, announced the formation of the Zero Trust Advancement Center to bring together existing research and education projects at CSA that will be disseminated online and through its global network chapters.

https://ir.zscaler.com/news-releases/news-release-details/zs…

They beat and raised their own guidance:

** Last quarter they guided for Total revenue of $270M to $272M and they beat that handily with revenues of $286.8M.

*** last quarter they guided for Non-GAAP income from operations of $19M to $20M and they delivered Non-GAAP net income of $24.7M.

**** Last quarter they guided for Non-GAAP net income per share of approximately $0.10 to $0.11, and they delivered Q3 Non-GAAP EPS of $0.17.

2022 Full year Guidance

They raised guidance for Total revenue to approximately $1.078B from
previous guidance of Total revenue of $1.045B to $1.05B.

They raised guidance for Calculated billings of $1.425B to $1.430B from
previous guidance of Calculated billings of $1.365B to $1.37B

They raise guidance for Non-GAAP income from operations to $106M to $108M from
previous guidance of Non-GAAP income from operations of $95M to $98M,

They raised guidance for Non-GAAP net income per share of $0.64 to $0.65 from
previous guidance for Non-GAAP net income per share of $0.54 to $0.56.

Nice report with new products contributing to new customers.

Fool on , kevin c
long of ZS
please click my screen name for disclosed holdings

48 Likes
2

Kevin,

Thanks for capturing those highlights. I would like to add a bit about capturing the US federal government market. The Executive memos signed by President Biden give a large swath of the federal government two years to become Zero Trust compliant. A massive component of this is the Department of Defense. Chaudhry mentioned DOD IL5 certification. This is huge and something I missed as I thought they were still at DOD IL4. DOD IL5 is the highest level certification for unclassified systems. This is huge as DOD CIO works with the service departments to ensure their compliance. Said simply, big DOD doesn’t contract for all the military. Each service (Army, Navy, Air Force) as well as Defense Agencies (DIA, DSCA, DTRA, etc) will individually contract with companies to meet the President’s Zero Trust order. If what Chaudhry said is correct, that ZS is the only DOD IL5 compliant ZT company, that could be huge for ZS. Cloud migration is on-going in the military as they move to MS365. Government contracting takes way too long, but can be a very significant component of growth once it kicks in. I think FY23 will see much more growth for ZS in the federal market.

Here is what Chaudhry said -
“Next, I am excited to highlight U.S. Federal government where we’re having considerable momentum. Driven in part by the President’s Executive Order, we are seeing increased interest in our Zero Trust Exchange across all levels of the government. We are excited to help our country dramatically improve our security posture while significantly reducing legacy IT costs. We have the highest level of FedRAMP certifications for ZIA and ZPA. In addition, ZPA is the only Zero Trust solution with DoD IL5 certification. There are only a select few cloud companies that have this level of certification, and there is no other cybersecurity company at this level. IL5 certification is an important differentiator for us.”

For more on DOD IL5 certification - https://docs.microsoft.com/en-us/azure/compliance/offerings/…

I am neither IT, nor acquisitions, but this seems like it will continue to benefit ZS. Once government acquisitions folks find a company that knows how to write the proposals that meet government requirements, they have a tendency to just stick with that company forever.

Good luck to all and hopefully the tide turns before too long. Keep the faith, cloud migration and thus cloud security will continue to grow.

jcb

46 Likes
3

Yes jcb,

Some exciting highlights that i just had to return and enjoy the report from, as you point out, this best in class company.

Our snapshots show impressive growth and guidance.

On the conference call, the CEO and Founder Jay Chaudhry was justifiably crowing as he described more developments for their ZIA and ZPA products,
“Now 40% of the Fortune 500 and 30% of Global 2000 companies trust Zscaler to secure their digital transformation. Approximately half of our Global 2000 customers have bought ZIA and ZPA, and I am excited to report that ZPA has surpassed over $200 million in annualized revenue.”

Zscaler products include ZIA, ZPA and ZDX:

  • Zscaler Internet Access (ZIA) helps secure your internet and SaaS connections by delivering a complete secure stack as a service from the cloud.

  • “Via a software-defined perimeter, ZPA Zscaler Private Access enforces authentication prior to access, making apps invisible to the internet.”

  • ZDX Zscaler Digital Experience provides end-to-end visibility and troubleshooting of end-user performance issues for any user or application, regardless of location.

Hey, did you know that 41.24% of Shares are Held by All Insiders !

Here is a comprehensive snapshot of the Zscaler Investor Data Sheet
on a handy 3x5 summary of key developments for the quarter including:

  • A Dollar-based Net Retention Rate over 125% for the past 6 quarters.
  • Remaining Performance Obligations (RPO) of 83% describing customers future payment obligations.
  • 288 Customers >$1M Annual Recurring Revenue (ARR) Representing 77% Growth Y/Y.
  • 1,891 Customers >$100K ARR representing 44% Growth Y/Y

https://ir.zscaler.com/static-files/945e5e89-15fa-4bb0-a264-…

i have been reading about the Golden Age For Cybersecurity and Data Reset

i am a visual learner so i appreciate this Corporate IR Presentation June 2022 building with informative visuals and even more detail:
https://ir.zscaler.com/static-files/38a3cc14-35c2-4a48-8538-…

  • Competitive advantage as you describe with DoD and a Pioneer and leader in cloud security
  • Growing TAM with $72B Serviceable market opportunity
  • Long-term secular tailwinds: Cloud shift, mobility, IoT, rising threats, legacy phase-out.
  • Sustainable competitive advantage as First mover at massive scale.
  • Attractive financial profile as we detail the earnings developments.
  • Experienced, founder-led team

Did i mention that 41.24% of Shares are Held by All Insiders so the management team is tenured with invested interest.
i see that they have been hiring, including building the management team:
‘Brendan Castle, Google’s former global head of talent acquisition, as our new chief people officer. Brendan has proven experience in building highly motivated and productive teams at scale with app transformation already mainstream.’

Finally, Zscaler offers such rich detail in their conference call as they brag about exceeding the Rule of 40 to the Rule of 70, sounding like Maverick in the new Top Gun movie!

Zscaler (ZS) Q3 2022 Earnings Call Transcript
Fool.com May 27, 2022

https://www.fool.com/earnings/call-transcripts/2022/05/27/zs…

i just got all excited reading more about the new growth and had to come back and celebrate a bit more.
Zscaler, a Top Gun in cloud security. ;^)

Best, kevin c

15 Likes
4

Yes there was a lot to like. I was expecting a little more revenue growth; unfortunately, the federal government pace of zero-trust implementation was not more than an “uptick from low single digits to mid single digits’ as a percent of new logos for Zscaler. Did I get that right?

My favorite part and why I’m looking to add back what I trimmed prior to earnings:

Chaudry-
“We enhanced our AI/ML engine for ZDX, our fastest growing new service, to leverage billions of telemetry points from millions of users to improve digital user experience. It can not only automatically figure out what and where performance issues are but can also provide information about the quality of voice, video and screen sharing due to our integration with Microsoft Teams and Zoom. We have also integrated ZDX with ServiceNow making customer end-user support far more efficient. ZDX also got certified and became available on our Federal cloud.
Our ThreatLabZ security research team is tracking over a dozen APT groups and getting better reconnaissance about their tools and behavioral patterns resulting in higher order threat intelligence. This specific threat intel coupled with our massive cloud effect from 240 billion transactions and 300 trillion signals per day enables Zscaler to deliver better threat protection than other vendors.
Moving beyond users and workloads, we are now bringing Zero Trust to IoT/OT systems, a large emerging opportunity. Today, Siemens and Zscaler announced the availability of an integrated all-in-one solution to accelerate secure access to OT systems. Our joint development with Siemens brings the benefits of Zscaler to factory and industrial control systems. We are thrilled to have Siemens, a long-standing customer, as a development and go-to-market partner.”

Given Zscaler is in niw near 50% of F500 and 25% of G2000, I’m most impressed by the ServiceNow endorsement and Siemens as a ‘go-to-market partner’. Thus is a big deal for me when thinking of Zscaler vs Cloudflare’s relative mindshare for decision making customers going forward.

What do you all think of that analysis?

Best

Jason

9 Likes
5

ZScaler thoughts on REVENUE and relevant documents for Q3 ER

On May 26th we have received Earnings for Q3 ending in April, 26 days into Q4. I am assuming the management almost got to see how the business is going for Q4 so we’ll see how close the guideline is.

On 2/24/22 they told us they would make 272M, guiding for 6.4% quarterly growth, and 54% YoY.
They delivered 286.8M, a beat of 5.4%, resulting in quarterly growth of 12%, and 63% YoY.
They made 31.2M more than last Q
This was a typical beat over the last few quarters.


OUTLOOK FOR THE Q

        Q322    Q222    Q122    Q421    Q321

REV     272     242     212     187     164

QoQ %   6.4%    5.0%    7.6%    6.0%    4.5%
YoY %   54%     54%     49%     49%     48%

ACTUAL REV

BEAT%   5.4%    5.6%    8.7%    5.4%    7.6%
REV     286.8   255.6   230.5   197.1   176.4

QoQ %   12%     11%     17%     12%     12%
YoY %   63%     63%     62%     57%     60%

QoQ $   31.2    25.1    33.4    20.7    19.4
YoY $   110.4   98.6    87.9    71.2    65.9

I view the health of ZScaler business by looking at their DEFERRED REVENUE growth from prev quarter, which then is used to CALCULATE BILLINGS


        Q322    Q222    Q122    Q421    Q321

DEFFERED
REV     818.7   759.9   647.8   630.6   495.4
QoQ     8%      17%     3%      27%     11%
YoY     65%     70%     74%     71%     65%

QoQ $   58.8    112.1   17.2    135.2   48.6

CALCULATED
BILLINGS

        345.6   367.7   247.7   332.3   225.0
QoQ     -6%     48%     -25%    48%    -3%
YoY     54%     59%     71%     70%    71%

DEFFERRED REV change was increase of 58.8 plus REV of 286.8 resulting with CALCULATED BILINGS of 345.6M, 54% YoY

I watch the growth in DEFERRED REV, it should be greater than REV and it is.

CUSTOMERS

Those with 100K+ ARR increased by 140 to 1891, for a 8% QoQ growth, we need more of them.

Those with 1M+ ARR increased by 35, 15% QoQ, we need more of those too.


CUSTOMERS

        Q322    Q222    Q122    Q421    Q321

1M+ARR  288     251     224     202     163
QoQ %   15%     12%     11%     24%     20%
YoY %   77%     85%     87%     87%     79%
QoQ #   37      27      22      39      27

100K+   1891    1751    1616    1480    163
QoQ %   8%      8%      9%      13%     11%
YoY %   44%     48%     53%     52%     51%
QoQ #   140     135     136     166     132

So far so good.

Moving to guidance

They told us they will make up-to 306M in Q4, guiding to for 6.7% QoQ and 55% YoY. If they beat by 5% they might deliver 321M, for 12% growth QoQ, and 63% YoY.

Finally that would give us Full Year 2022 revenue of about 1040M, for 63% growth. They upgraded their guideline to finish the FY22 at 1078M, a 2.7% better number than previous Q (was 1050).

Finally the relevant documents for us to read

Press Release
https://ir.zscaler.com/static-files/6d858e25-67c1-4b74-8baf-…

Supplemental Info
https://ir.zscaler.com/static-files/3f0435a7-ec2d-433a-baa9-…

Earnings Call Transcript (has Transcribed Prepared Remarks)
https://ir.zscaler.com/static-files/d42f5448-9a31-4571-9f04-…

BUT this is better Prepared Remarks doc from ZS
https://ir.zscaler.com/static-files/85886781-6ad3-49eb-8166-…

Corporate IR Presentation for June
https://ir.zscaler.com/static-files/38a3cc14-35c2-4a48-8538-…

Good luck to all longs.

Baconski

28 Likes