Zscaler reports Q4 earnings and raises guidance

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Zscaler Zero Trust Exchange Platform is the worlds largest cloud security platform and is unique in that it primarily protects cloud workloads by controlling access. ( whereas some other platforms primarily protect these same workloads by detecting and then responding to threats.)

It makes sense that they have achieved FedRAMP’s High Authorization.

“Zscaler’s mission is to empower organizations to realize the full potential of the cloud and mobility by securely connecting users to applications from any device, anywhere.”

Zscaler is a Leader and positioned highest in “Ability to Execute” in the first Gartner Magic Quadrant for Security Service Edge. Palo Alto networks is a ‘Challenger’ in this quadrant category.

Today, Zscaler announced that they have achievedCarbon Neutral with Goal for Net Zero by 2025:

Zscaler Achieves Carbon Neutral Status and Establishes New Goal to Reach Net Zero by 2025
Sep 08, 2022
https://ir.zscaler.com/news-releases/news-release-details/zs…

So let’s look at the data from this evenings Q4’22 earnings report.

Zscaler Reports Fourth Quarter and Fiscal 2022 Financial Results
Sep 08, 2022

Fourth Quarter Highlights

  • Revenue grows 61% year-over-year to $318.1 million
    - Calculated billings grows 57% year-over-year to $520.4 million
    - Deferred revenue grows 62% year-over-year to $1,021.1 million

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

The above Revenue of $318.06M beats consensus.

“We delivered outstanding results for the fourth quarter with 61% revenue growth and 57% billings growth year over year, while driving operational efficiency across the company and delivering on Rule of 80 for the quarter and for the full year,”

said Jay Chaudhry, Chairman and CEO of Zscaler.

"Our customers are realizing immense value from the new, innovative services and advanced capabilities being integrated into our Zero Trust security platform. Despite the uncertain macroeconomic landscape which continues to evolve, we continue to see favorable demand for our Zero Trust Exchange platform because it makes businesses more secure, simplifies IT, and reduces cost.”

Revenue grew 63% last Q3’22 quarter and 61% this Q4’22.
Calculated billings grew 54% YoY last Q3’22 quarter and have grown 57% this Q4’22.

Deferred revenue growth:
This Q4’22 Deferred revs come in at $1,021.1M, an increase of 62% YoY
Q3’22 Deferred revenue was $818.7M , an increase of 65% YoY.
Q4’22 Deferred revenue was $759.9M , an increase of 70% YoY.

  • GAAP net loss of $97.7 million compared to GAAP net loss of $81.0 million on a year-over-year basis
    - Non-GAAP net income of $36.4 million compared to non-GAAP net income of $20.3 million on a year-over-year basis

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

  • Cash flow: Cash provided by operations was $103.1 million, or 32% of revenue, compared to $44.7 million, or 23% of revenue, in the fourth quarter of fiscal 2021. Free cash flow was $74.8 million, or 24% of revenue, compared to $27.7 million, or 14% of revenue, in the fourth quarter of fiscal 2021.

  • Net income (loss) per share: GAAP net loss per share was $0.69, compared to $0.59 in the fourth quarter of fiscal 2021. Non-GAAP net income per share was $0.25, compared to $0.14 in the fourth quarter of fiscal 2021.

*** This Non-GAAP EPS of $0.25 beats consensus.

Full Year Fiscal 2022 Financial Highlights

  • Revenue: $1,090.9 million, an increase of 62% year-over-year.
    - Net income (loss): GAAP net loss was $390.3 million, compared to $262.0 million in fiscal 2021. Non-GAAP net income was $101.3 million, compared to $75.7 million in fiscal 2021.

Supplemental Financial Information
https://ir.zscaler.com/static-files/af6e1f90-35b3-429d-ac4b-…

Recent Business Highlights

  • Announced our Posture Control™ solution…
  • Released innovations, including CNAPP and Zero Trust for Workloads…
  • Launched advanced AI/ML innovations…
  • Announced that Zscaler and Siemens are delivering an all-in-one solution…

These are the type of innovations and product improvement that i wanted along with FedRamp.

They beat and raised guidance Again:

Financial Outlook

For Q1’23 they raised guidance for total revenue of ~$340M from previous guidance of total revenue ~$305M

For Q1’23 they raised Non-GAAP income from operations of ~$37.5M from previous guidance of $33.5M.

For Q1’23 they raised guidance for Non-GAAP net income per share of ~$0.26, assuming ~155M common shares outstanding from previous guidance ~$0.20 per share assuming ~ 146.5M common shares outstanding.

For the full year fiscal 2023, we expect:

  • Total revenue of ~$1.49B
  • Calculated billings of $1.92B
  • Non-GAAP income from operations of $173M
  • Non-GAAP net income per share ~ $1.17 at mid-point

Here is a link to the Corporate IR Presentation
September 2022
With an informative timeline from their Founding in 2007, their IPO in 2018 to present.
Zscaler is Driving transition from ‘legacy on premises’ to cloud / mobile standard
Includes Zscaler Zero Trust platform offerings
Along with competition and the Ecosystem of best-of-breed platforms
Tailwinds driving the company forward and competitive advantages
https://ir.zscaler.com/static-files/38a3cc14-35c2-4a48-8538-…

In the conference call they are announcing some new contracts from large Fed customer…
sounding positive and excited about the future even with headwinds from macro conditions.
Nice report with

  • growing innovations and platform development
  • beat expectations
  • raised guidance
  • growing global team and expanding globally
  • high customer retention from sticky platform

All the things i want to see for global growing security needs and FedRAMP.

Fool ommmmm , kevin c
long of Zscaler, Inc.
your Foolish neighborhood ZS ticker guide
please click my screenname for disclosed holding
Foolishly Follow any of your Fav Fools by clicking on the smiley Face above

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Nice writeup on earnings, CMFSircc. I’ll add a bit on the numbers side:

Q4 revenue grew 61% y/o/y, a slight slowdown from prior quarters, but strong. They beat midpoint of guidance for the quarter by 4.3%. The fiscal year total of $1,091B beat their guidance midpoint of $1,078 by 1.2%.

Gross margins improved by a percentage point from Q3 to 78.5%. Gross margin is up almost 6% from the year ago quarter.

Cash flow from operations was 103M, the highest ever that I can see, and the company generated 321M in cash over the whole year.

Share count increased 3% year-over-year, which is a bit less than the usual 4-ish percent.

Guidance at midpoint for Q1 at 340 revenue would imply 47% growth. However they beat their last Q1 number by 10%. Guidance at midpoint for the year is 1495, which would be 37% growth. However, last year they guided for 945M on the year when they reported Q4 and they delivered 1090M, so they beat that forecast by 15%. If you assume similar beat, they would finish at 1724, or 58% annual growth.

Regarding valuation, at close of market price, the company is valued at 20X trailing sales. Based upon midpoint of guidance they are valued at 14.6X forward sales.

Pretty much every operational metric in the business is growing around 60%, revenue, gross profit, cash flow, deferred revenue. It looks like they have the business model dialed in.

I am long ZS.

Thanks,

Rob

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Below are some excerpts from the CC that I found particularly insightful and reassuring:

  1. “My conversations with hundreds of IT executives confirm that cybersecurity remains the number one IT priority and a top Board level issue. Independent CIO surveys confirm Zero Trust security and SASE will continue to be a top priority.”

  2. “We believe periods of macro uncertainty can accelerate adoption of disruptive technologies like ours, which offer better security and user experience while substantially reducing cost and IT complexity.”

  3. “We address a $72 billion market, with significant new customer and upsell opportunities.”

  4. “Approximately 60% of our new business comes from existing customers, and our net retention rate has again exceeded 125%, now for seven consecutive quarters. Happy customers buy more, and our net promoter score continues to exceed 70, which is more than 2 times the average NPS for SaaS companies.”

  5. “In Q4, as we saw more deals getting scrutinized, we delivered more of these business value assessments (SC here: he’s talking about producing CFO-ready business cases with ROI and payback periods calculated in collaboration with their customers, as part of their consulting sales business, which enables them to maintain a high-level of engagement with their customers, especially at the C-level), which helped us close many large multi-year, multi-product pillar deals. We believe our adaptive sales process makes us resilient to changing business environment and will continue to drive our business.”

  6. “I am excited about fiscal ‘23 as we continue to win opportunities with new and existing customers.”

  7. “Let me discuss the progress we are making in Federal vertical. We now have FedRAMP High authorization for ZIA, which together with ZPA, makes us the only cloud security service to have two products at the highest level of FedRAMP certification. In Q4, we added over 25 new Federal customers and over half of them purchased ZIA and ZPA together. Now, we have landed 10 of the 15 Cabinet-level agencies as customers, with plenty of opportunities for upsell at these large organizations.”

  8. “As a point of clarification, the total contract value of the five-year, $46 million award from a U.S. Federal government agency […] is not included in our RPO. RPO for this contract will be recognized as the individual task orders are received, which are 12-months in term length as is typical for our federal customers.”

  9. “We are entering this fiscal year with a record pipeline and a large set of customer opportunities.”

  10. “While demand for the Zscaler platform remains very strong, if the business environment changes, our business model allows us to adapt quickly and to deliver on our operating profit and margin goals. In fiscal ‘23, in our guidance, we intend to deliver operating margin expansion of approximately 150 basis points.”

  11. “We will balance growth and profitability based on how our business is growing. If we continue to have high growth, we will prioritize investing in the business.”

  12. “If we are growing revenue faster than 30%, you can expect less than 300 basis points of margin expansion in the year. We remain confident of reaching 20% to 22% operating margins in the long-term. With a huge market opportunity and customers increasingly adopting the broader platform, we’re committed to investing aggressively in our company while balancing this with our operating profit goals. However, if we see a deteriorating global economic environment, we have the flexibility to place a higher priority on operating profitability.”

  13. “When you take a look at the last two years, our free cash flow has been above 20%. When you take a look at our guidance that we gave for fiscal '23, it’s the same. Basically, it should follow what have done in the last two years being over 20%. The value that Zscaler has, we’re a very efficient company. Take a look at our cloud. Typically, our cloud capital expenditure or expenses are high single digits in any one quarter, which is relatively low.”

  14. “Looking at the last two years, I wouldn’t expect anything different from a free cash flow margin perspective. And I would expect things to be similar, higher than 20%.”

  15. “We are expecting good and healthy results for federal business in Q1. But we do know that federal business takes time. It has taken us years to get the very high-level certification coming, probably more painful than any other certification I’ve seen, but they’re good ones.”

My comment: besides the strong numbers and guidance, I believe this is a company that has been doing (and will continue to do) the right things. With a gigantic market opportunity, it belongs to the rare breed of 50-60% growers with 20%+ FCF, while providing non-discretionary services for businesses.

SC

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great reports…

few points stood out to me:

  1. Billings growth seems to become steady - last two quarters show sharp deceleration from 71% in Oct’21 quarter to 59% and 54% in last two quarters… this quarter, its 57%…
    Why billings matter? Someone on this board in the past showed that for ZS, last 4 quarter’s average billings predict next quarter’s revenue fairly consistently… so this was very important to me…

2.Clarity that they have huge expand opportunity - for some reason, I always thought that ZS lands large and expand is smaller… because its an architecture decision (rip & replace)… and that was probably true but may be changed in last couple of years… they clarified that for fortune 100 class companies, they land may be one country or portion of the network and expand later… in fact, Jay clarified that their 60% of growth comes from expand and they have 6x (or something like that)opportunity to expand in current customer base…
This is a big difference in my understanding till last Q vs now…

  1. Progress with fed biz - ofcourse everyone was waiting for this…
    huge progress…

Overall, impressive progress… I bought a 4% position in after hours

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Just finished the call. Very happy & impressed!! Revenue & guide a tad lower than I expected but not by much.

Themes of the call:
UPSELL
No Macro impact
Big FED movement

UPSELL UPSELL UPSELL
“I think the upsell will go above the 60%,which it was this past year, just for the reasons Jay mentioned. We’ve got 6,700 customers. And when you take a look at we’ve talked about a six times opportunity to sell just the ZIA and ZPA at our last Analyst Day.”

“significant opportunity to upsell to customers.”

ZPA = 19% total revenue and growing 80% YoY

Emerging products - ZDX & ZScaler for Workloads = 14% total revenue
Expect high teens next year

“6x upsell opportunity with existing custs just on ZIA & ZPA”

FED
“In Q4, we added over 25 new Federal customers… landed 10 of the 15 Cabinet-level agencies as customers, with plenty of opportunities for UPSELL at these large organizations”

"Not much revenue in the Q or RPO for the big FED win. Entire 46M NOT in RPO but is in Billings. All obvious names were all competing for this deal. The architecture won at the end of the day. "

FF - I’m sure FedRAMP high didn’t hurt

"It has taken us years to get the very high-level certification coming, probably more PAINFUL than any other certification I’ve seen, but they’re good ones. "

FED deals in general… “smaller deal, and there’s a lot of opportunity to expand. For example, 10 of the 15 cabinet-level agencies we talked about, they have – mostly, they’ve started small, plan give opportunity for us to expand.”

Coselling with Hyperscalers. CREATIVE with selling team to get to already allocated budgets; allocated to Hyperscalers.

FF Question, what do the hyperscalers get from this?

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I am pleased that they added over $202M in Deferred Revenue this Q4.
In Q3 they added $59M which made Calculated Billings a bit weaker in QoQ growth.

ZScaler definition: "Calculated Billings. We define calculated billings as total revenue plus the change in deferred revenue in a period. Calculated billings in any
particular period aims to reflect amounts invoiced for subscriptions to access our cloud platform, together with related support services for our new and existing
customers. We typically invoice our customers annually in advance, and to a lesser extent quarterly in advance, monthly in advance or multi-year in advance"

In Q4 the Calculated Billings is $520M ($318M revenue plus $202M additional deferred revenue added), which was 57% YoY AND 51% over last Q3 which was $345M (286M revenue plus 59M in deferred rev added)

For the Full Year 2022 Calculated Billings is almost $1.5B, 59% YoY growth.

(From Q to Q Calculated Billings may be choppy so I look at TTM, last 4 Quarters)

Source of data Supplemental Info Doc:
https://ir.zscaler.com/static-files/af6e1f90-35b3-429d-ac4b-…

Also From Transcript: https://app.quartr.com/document/27754/transcript

Our total calculated billings in Q4 grew 57% year-over-year to $520 million, with billing duration comparable to a year ago and slightly above the midpoint of our normal 10 to 14 months range

On Billings Expectations:

… For the full year fiscal 2023 … calculated billings in the range of $1.92 billion to $1.94 billion or year-over-year growth of 30% to 31%. While we don’t normally guide to quarterly billings, I want to remind you that we will have a difficult year-over-year comparison in Q1. In the year ago quarter, we had a one-off deal and multiyear invoices that resulted in billings duration at the high end of our normal 10- to 14-month range.
With that in mind, we expect Q1 ’23 billings to grow [ approximately ] 30% year-over-year.
We also expect our first half mix to be approximately 42% to 43% of our full year billings
guide, which is higher than the first half mix in the last few years"

So… in a year ago Q4 they grew Deferred Rev $135M (Q3 before that was 48M), the next Q1 they added 17M to Deferred Revenue, so I see that the Q4 was an outsized add.

Using this expectation from the transcript do I assume their Calculated Billings will only have expected revenue $341 and negative Deferred Revenue??? (to make the YoY 30% between Q1 23 and Q1 22)

Cheers ! Baconski.

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After observing ZS’s run today, I was considering, how does the valuation stack up against peer companies?

Here is the answer:

Ticker PS (TTM)
BILL 27.4
SNOW 36.8
DDOG 23.3
CRWD 24.3
ZS 24.4
NET 26.5
TTD 23.5
ZI 19.6

I would rate DDOG and CRWD as reasonably comparable peers. Growth rates similar, all are prodigiously generating cash. SNOW (faster growing), NET (not generating much cash), TTD (slower growing), and ZI (slower growing) are not as comparable for different reasons, but are interesting datapoints.

My conclusion: ZS deserved its run-up today. But it has closed the valuation gap, for now.

Rob

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Hi Silviocast

Nice job on the notes.

5) “In Q4, as we saw more deals getting scrutinized, we delivered more of these business value assessments (SC here: he’s talking about producing CFO-ready business cases with ROI and payback periods calculated in collaboration with their customers, as part of their consulting sales business, which enables them to maintain a high-level of engagement with their customers, especially at the C-level), which helped us close many large multi-year, multi-product pillar deals. We believe our adaptive sales process makes us resilient to changing business environment and will continue to drive our business.”…

7) “Let me discuss the progress we are making in Federal vertical. We now have FedRAMP High authorization for ZIA, which together with ZPA, makes us the only cloud security service to have two products at the highest level of FedRAMP certification. In Q4, we added over 25 new Federal customers and over half of them purchased ZIA and ZPA together. Now, we have landed 10 of the 15 Cabinet-level agencies as customers, with plenty of opportunities for upsell at these large organizations.”

8) “As a point of clarification, the total contract value of the five-year, $46 million award from a U.S. Federal government agency […] is not included in our RPO. RPO for this contract will be recognized as the individual task orders are received, which are 12-months in term length as is typical for our federal customers.”

Whilst all the points are excellently distilled and summarised, there are 3 (5, 7 and 8), that I feel get to the heart of the most strategic criticisms investors have made about ZScaler, namely:

  1. They have a long and inefficient implementation phase that takes months and quarters rather than hours for ZScaler vs some competitor installation timelines. Here they turn that negative into a positive by illustrating how much it builds trust and engagement amongst the organisation to the very top - having a consultative approach.

  2. That they have had nothing to show for their Federal / Government ambitions - well they laid that to rest completely and all of the FedRamp Govt contracts that they have already landed is all upside in the numbers as it hasn’t been recognised yet and doesn’t sit in the RPO count.

  3. That they don’t innovate and fail to cross sell across a product range vs the likes of Crowdstrike or Palo Alto. Again they have illustrated their cross portfolio expansion nicely here.

Overall not only was this a strong report, they have really acquitted themselves well on the major issues of concern.

Ant

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Hi Silviocast,

I don’t post here often, but I feel this is important:

12) “If we are growing revenue faster than 30%, you can expect less than 300 basis points of margin expansion in the year. We remain confident of reaching 20% to 22% operating margins in the long-term. With a huge market opportunity and customers increasingly adopting the broader platform, we’re committed to investing aggressively in our company while balancing this with our operating profit goals. However, if we see a deteriorating global economic environment, we have the flexibility to place a higher priority on operating profitability.”

This is so important to gain investor confidence in today’s macroeconomic environment, for all of our companies. Especially, the part that I put in bold.

Enjoy,
Brian

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Hi anthonyms,
Regarding #1, long implementation cycles are almost inevitable in the cybersecurity realm. You can’t compare endpoint security (crowdstrike) with network and application security. As a reminder, any mid-sized and larger customer will have at least a dozen security products that zscaler aims to replace, and often managed by different teams in the customer IT organization, and they commonly never talk to each other. No stone can be left unturned, otherwise you will have holes in the security (and it won’t replace those products).
I lead a consulting team that implements heavy IT infrastructure software like zscaler (not a competitor) and, although, like ZS, our main goal is to shorten the implementation cycle, it will never be as quick as an antivirus rip and replace (crwd). And that’s ok. The focus on a highly consultative approach is the right thing to do. So, before bashing zscaler implementation inefficiency, an understanding of the products and industry is necessary. With that said, it’s good they admit this difficulty, and use it to build trust (consultants on the field are the ones making the magic happens, not just buying the product).
The cycle is something like this:
Assess what’s in place 15%
Digest all business and technical objectives 10%
Design solution 20%
Implement solution 30%
Pilot 10%
Roll-out 15%

Then after rollout, ramp up adoption (nrr) and stabilize operations for long term stickiness.

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Hi Anthonyms–
I agree. These points were particularly interesting in trying to tackle the recent criticisms on the business. Frankly, I’m not worried about the long sales cycle (apparently necessary, as someone else rightly pointed out), as long as those sales take place. And I think what they’ve been able to obtain in terms of certifications for the Fed business sounds like something they were working on for a long time that further strengthens their position going forward.
Thank you.
SC

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Hi Brian-
Yes, this is key, as it speaks to the flexibility they were able to achieve in their business model. This highlights the point that for companies like this profitability is a choice that depends on how much they want/need to grow.
Thank you.
SC

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