ZS's "Value" - playing with number

In the Q&A of the conference call Remo, their CFO, mentioned they are targeting operating profitability of 20-22% when they reach 800 million to 1 billion of revenue. They are guiding for 272 million of revenue in 2019, So revenue should look something like this assuming around a 50% growth rate.

2019 272 million
2020 408
2021 612
2022 918

Their share count is 122 million. We don’t have much history with ZS so this is a complete guess on my part so I’ll calculate a high and low range.

5% yearly 148 million shares.
15% yearly 213 million.

So if we use 20% operating profitability we would end up with 918*0.2 = 183 million of operating profit. Of somewhere in the range of 1.27 to 0.85 cents a share depending on how quickly they grow their share count. Now remember, this is operating profit so actual EPS is going to be lower after taxes etc. I’d guess half to a quarter of operating profit which would be 60 cents to 20 cents a share of earnings for a P/E of 61 to 180ish at current stock prices.

I’ll be the first person to say this is an exercise in false precision. No way we can predict how things will work out 4 years in the future. I do think this is helpful in thinking about how expensive ZS is. They are going to have to execute flawlessly for us to see price appreciation. I.E 60% growth gets them to 1.1 billion of revenue, 244 million of operating profit and more like 1.7 dollars of operating profit per share.

My take away is, I own lots of ZS, they are disruptive, their financials looks great, and I like how they are running the company. My reservations are ZS is very expensive and we don’t have much history with how they treat shareholders. I’ll be watching their share count closely. In 4 years if we are still growing at 40+ % then ZS should be a pretty profitable investment as ZS will command a high valuation. However if they hit the invisible growth wall…well, these prices are going to look expensive.




Nice summary. I finally had some time to look at one of my stocks after earnings. Had a look at ZS. I had limited my allocation because they were expensive. I still think that they are expensive. I looked at some of the numbers.

Share count: the fully diluted share count is reported at 133.8 million shares. The number is reported at the bottom fo the Q1 2019 press release:

Weighted-average shares used in computing pro forma non-GAAP net income (loss) per share attributable to common stockholders, diluted (2) 133,845 (Q1 2019) 103,293 (Q1 2018)

I like their CFFO. It was $11M last quarter and $32M for the past TTM. Their CapEx for the past 12 months was $16M so FCF was about $16M.

Gross margin is holding at about 80-82%.

Non-GAAP Operating Margin is now positive at 2% and was -4% last quarter, -6% 2 quarters ago, and -20% 5 quarters ago.

In calculating non-GAAP they have been adding back litigation expense which is about $2M per quarter. Personally, I don’t think that they should add this back since it seems to be an ongoing cost of their business.

I have a 7.4% position in ZS (6th largest holding). I love the growth in revenue, the competitive position, the margins, the improving operating leverage, the accelerating revenue growth, and the positive cashflow. The high valuation is what’s keep my position from being larger.

TTM revenue is $214M and the enterprise value (using 133.8M shares) is $5.4B giving it a TTM EV/S of 25.4 and a forward EV/S (assuming a 54% 1 year growth rate) of 16.5. I still need to run these calculation on my other companies, but I already know that my top 5 allocation companies (AYX, TWLO, MDB, SQ, and NTNX) which are all displaying accelerating revenue growth will have more attractive valuations.