Zscaler's results, my thoughts

Sorry to be a bit delayed but we’ve been recovering from a major trip on Wednesday and have been in a jet-lagged fog. Zscaler, Mongo and Okta all reported on Wednesday and Thursday, but Mongo and Okta were up hugely after earnings and I felt that they could take care of themselves, but Zscaler was down marginally so I thought I’d look at it first. I ended up agreeing with the conclusions of what Bert wrote to his subscribers: Zscaler reported one of the strongest quarters that is likely to be seen in the enterprise software space for some time. He felt that Zscaler shares are priced to perfection, but that the quarter was perfection, and it gave him the confidence to suggest that you either establish positions or increase your holdings. (By the way, if you don’t already subscribe to his newsletter, you are out of your mind.). I, personally, feel that we’ve had a number of great results by our companies so I think Bert was exaggerating a bit, but it was a heck of a good quarter. Here’s my take on the results:

Revenue up 54%, and up 14% sequentially, to $56 million.

Billings up 72% to $95 million. By the way, $95 million was a real outlier, as the previous high quarter was $66 million Here’s what billings have looked like (in millions):

**Fiscal 2016:   13   29   21   33** 
**Fiscal 2017:   25   44   32   55**
**Fiscal 2018:   42   66   55   95**

Just look at that $95 million sitting there!

Cash of $298.5 million and no debt

Adj operating loss was $2.4 million, or 4% of revenue, improved from $7.2 million, or

20% of revenue.

Adj net loss was $1.4 million, improved from $7.4 million

Adj net loss per share was 1 cent, improved from 7 cents a year ago

Operating cash flow was positive $14.7 million, up from negative $3.7 million.

Free cash flow was positive $11.9 million, or 21% of revenue, up from negative free cash flow of $5.4 million, or 15% of total revenue, a year ago.

Deferred revenue up 70% to $164 million.

Cash was $298 million .

Fiscal Year Results

Revenue was $190 million, up 51% .

Adj operating loss was $15.4 million, or 8% of revenue, improved from $19.3 million, or

15% of revenue.

Adj net loss was $14.4 million, improved from $19.7 million

Adj net per share was a loss of 13 cents, improved from a loss of 19 cents

Operating cash flow was positive $17.3 million, up from negative $6.0 million.

Free cash flow was positive $2.1 million, or 1% of revenue, up from negative free cash flow of $14.2 million, or 11% of total revenue, a year ago.

Raised $205 million in our IPO in March.

Conference Call
Operating margins improved 16% yoy, and generated positive FCF. We ended fiscal 2018 with over 3,250 customers. Total Global 2000 customers increased to 300, up from over 200 a year ago, which reflects strong traction among large enterprises.

Zscaler acts as a policy engine deployed across 100 plus datacenters to securely connect the right user to the right applications. ZIA for Internet and SaaS, and ZPA for internal applications in your data center or the cloud. We believe we have the right architecture and are the best choice for securing the cloud world. We are going after a $70.7 billion TAM

Total backlog, or remaining performance obligations, was $398 million, up 81% from $220 million yoy, and up 30% from $305 million sequentially.

In addition, ZPA which was released last fiscal year is additive as a cross-sell to our existing customers. Our strong ability to up-sell has resulted in a consistently high dollar based net retention rate, which was 117%. This compares to 115% a year ago and 120% last quarter. Our increased success selling bigger deals up front, which start with the transformation bundle, and faster up-sells within a year, while good for our business can reduce our net dollar retention rate which is calculated on a year-over-year ARR basis. Considering these factors, we feel 117% is outstanding and it will vary quarter-to-quarter.

Total gross margin was 80%, up 2% yoy and down 1% sequentially. The year-over-year increase was driven by an increased mix of higher priced bundles with more functionality, as well as operational efficiencies. We feel 80% is a very strong gross margin and our focus is not to maximize our gross margins at this stage. We feel it is important to continue to invest in our platform and to drive customer satisfaction to drive top-line revenue growth.

Turning to operating expenses. Our total operating expenses grew 11% sequentially and 32% yoy to $47.4 million, but decreased as a percentage of sales.
Our quarterly operating margin was a negative 4%, improved from negative 20% yoy.

We expect ZPA to gain, to grow at a faster rate than ZIA. But ZIA is growing very fast too. It’ll be very hard for ZPA to catch up with ZIA even though the market TAM of both platforms is essentially the same. In terms of sale cycle, it depends. We have two types of use cases in ZPA:
One is what I call transactional. The customer saying I hate my VPN could you replace it? That’s quick, that’s faster…

The second is more transformational. I want to eliminate the old way of going to cloud. My applications are going to Azure, AWS, and Google. I want to go direct through Zscalar ZPA. Those things take a little bit longer because we have to educate the customer with architectural transformation. And we expect ZPA market share to grow as a part of the overall product mix.