In the recent quarterly call the CFO repeatedly pointed analysts to billings as a very important metric for ZS. And the thing that analysts seemed to focus on was that this was lower qoq and yoy than the monster billings growth of the year before.
**Bill Q1 Q2 Q3 Q4**
2019 65 115 85 126
2020 88 135 131 195
2021 145 232 225 332
2022 248 368
**QoQ Q1 Q2 Q3 Q4**
2018 77% -26% 48%
2019 -30% 53% -3% 49%
2020 -26% **60%** -3% 48%
2021 -25% **49%**
**YoY Q1 Q2 Q3 Q4**
2019 35% 17% 54% 55%
2020 65% **72%** 72% 70%
2021 71% **59%**
The bolded numbers above in the qoq and yoy was what got the attention: billings growth this quarter was up “only” 59% yoy vs 72% the year before. This was very well explained by the CFO (tldr: government business was slow due to budget constraints and will pick up as budget gets made available), and is not what I would like to dwell on in this post.
Trying to unpack why the CFO continually points us to billings is what this post is about.
First, a couple of things relating to billings. The relationship between billings and revenue depends on how the amounts billed - typically billed in advance by our companies - actually get recognised as revenue. And the CFO gave us one important data point: the duration of billings is, and has been relatively constant for ZS at between 12 and 14 months over time (if it changed, the waters will be a bit more muddy). So if billings duration is constant and revenue is recognised ratably over time, we should be able to very accurately estimate revenue in advance by using billings.
So I tested that assumption, and it is indeed the case for ZS: billings almost perfectly predict revenue.
For ZS, the trailing 4 quarter average billings (the average of the prior 4 quarters) has a 99.78% correlation coefficient with the revenue of the current quarter and the best-fit regression line has an r2 of 99.6% over the last 10 quarters which is really quite remarkable.
Here are the numbers (spot the very obvious similarity between the numbers):
Prior 4q average billings:
2020 98 104 109 120
2021 137 152 176 199
2022 234 259
And Current quarter revenues:
2020 94 101 111 126
2021 143 157 176 197
2022 231 256
So what?
It means that we can be pretty damn sure of revenue for next quarter given that the CFO also said that not much changed in the duration of billings this quarter.
Applying the best fit regression line to the last 4 quarters, including this one, should give us an estimate of next quarter’s revenue which will be very, very close to where they will end up, barring something very atypical happening during the quarter.
So. Average Billings for the last 4 qaurters is $293m. And the best-fit regression based on the last 10 quarters (0.973*t4q billings+$4.7m) predicts that:
Revenue for next quarter will be $290m vs their guide of $272m.
Revenue of $290m in Q3 will be good for 13% qoq and 64% yoy, which will again be a new record yoy growth rate. Based on the current tailwinds, I suspect they may even end up a million or two above that.
-WSM
Long ZS