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Zscaler’s Third-Quarter Forecast Raises Eyebrows: Should You Buy Now?

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Zscaler is a leading player in the cloud security market, with a solid growth outlook and a strong competitive position. With accelerating revenue growth, robust billings numbers, and improving margins, the company’s business model is reaching new levels of efficiency and scale.

Zscaler’s scalable and differentiated platform, large and loyal customer base, high retention and expansion rates, and ability to innovate and extend its product line are strong competitive advantages. Additionally, the company’s leadership position in the cloud security market and increasing demand for its solutions make it well-positioned for continued growth and success.

Overall, Zscaler has meaningfully improved its capabilities, services, and partnerships over the past year. By relentlessly enhancing its offerings and collaborating with other organizations, Zscaler is making progress in its mission to enable secure digital transformation.

Earnings Insights & Expectations : Zscaler Inc (NASDAQ:ZS)

Zscaler’s impressive growth continued into the second quarter of fiscal 2023, with revenue growing 52% year-over-year to $387.6 million, , beating estimates by $22.84M. The company beat both non-GAAP and GAAP EPS estimates by $0.08 and $0.06, respectively. Calculated billings also saw significant growth, jumping 34% compared to the same period last year, hitting $493.8 million. This momentum fueled a 46% year-over-year increase in deferred revenue to $1.11 billion, demonstrating customers’ growing trust and reliance on Zscaler’s zero trust platform. Despite ongoing growth, Zscaler was able to narrow its losses this quarter, with a GAAP net loss of $57.5 million compared to a net loss of $100.4 million on a year-over-year basis. Excluding one-time items, Zscaler delivered non-GAAP net income of $57.6 million, more than tripling last year’s figure of $19.2 million.

During the second quarter of 2023, Zscaler’s cash and cash equivalents were at $1.9B, an increase of $174 million from previous quarter ending July 2022. During the second quarter of fiscal 2022, cash flow from operations increased to $89.5 million, or 23% of revenue, from $48.3 million, or 19% of revenue, in the second quarter of fiscal 2022. In comparison to the second quarter of fiscal 2022, free cash flow increased to $62.8 million, or 16% of revenue, from $29.4 million, or 12% of revenue.

Expectations:

Looking ahead to the next quarter, the revenue estimate for the upcoming quarter is $413.21M, which would be a significant increase from the previous quarter’s actual revenue of $387.6M. Zscaler recently raised its guidance for the third quarter of fiscal 2023, with sales expected to be between $415 million and $419 million, and adjusted income from operations forecasted to be between $60 million and $64 million. The company also expects calculated billings to rise between 38% and 39% year-over-year to range from $478 million to $482 million. Zscaler has raised its fiscal 2023 outlook as well, with sales expected to fall within a range of $1.587 billion and $1.591 billion, calculated billings forecasted to be between $1.97 billion and $1.974 billion, and adjusted income from operations expected to be between $220 million and $224 million. The EPS estimate for the next quarter is $0.42 on a non-GAAP basis and -$0.34 on a GAAP basis.

Technical Business Updates from Second Quarter:

Zscaler has strengthened its security offerings and relationships over the past year.

  • The company earned an AA rating for managing environmental and social risks, compared to others in the tech industry. This is a notable achievement and shows Zscaler’s commitment to responsible business practices.
  • Zscaler also launched new integrations with Zoomto provide IT teams detailed performance data and analytics so they can quickly fix any issues impacting how employees communicate and work together through video. Making it easier for companies to troubleshoot and resolve problems will likely lead to improved productivity and collaboration.
  • In more good news, Zscaler Private Access received approval from the FedRAMP, the US government’s program for assessing and authorizing cloud services. Zscaler is now the only security company authorized at the highest levels. This means government agencies can use Zscaler to protect their most sensitive systems and data.
  • Zscaler’s annual report on encrypted threats analyzed over 24 billion cyberattacks to identify trends in HTTPS-based hacking attempts. By leveraging data from its security platform, which processes an immense 300 trillion signals and 270 billion transactions daily, Zscaler can gain unparalleled insights into how hackers operate and what businesses need to defend against.
  • Demonstrating its commitment to a safer digital world, Zscaler joined the Joint Cyber Defense Collaborative, a public-private group that develops coordinated plans to strengthen cyber defenses across sectors. Through partnerships with companies, federal and state governments, the group is working to make infrastructure and systems more resilient.
  • To ensure customers experience no disruptions in its security services, Zscaler launched Resilience, the industry’s first product to provide constant cloud protection. Resilience also allows security processes to continue operating even if there are issues with the cloud providers that host Zscaler’s platform.
  • Finally, Zscaler purchased Canonic Security, a company focused on protecting against threats stemming from third-party apps and services connected to a main system. Canonic’s technology will boost Zscaler’s ability to safeguard data accessed through enterprise software and vendors.

Source : https://ir.zscaler.com/static-files/b1084ff7-359b-4ae5-8c06-8b3f02c1ebb6

Discovering Growth Drivers : Zscaler Inc ($ZS)

  • AI driven Innovations: Zscaler is a cloud security company that optimises its security, productivity, and user experience using AI and ML. Zscaler offers a number of AI-driven innovations to its customers, including:
    • Artificial intelligence and machine learning in security: Zscaler employs AI and ML to improve its security capabilities and outcomes for its customers. Zscaler processes trillions of signals per day to feed and improve its machine learning (ML) models, allowing it to accurately detect threats, optimise policies, and more. Zscaler integrates AI into its cloud proxy architecture in order to analyse all traffic inline and enforce the results in real time.
    • AI-powered cloud browser isolation: Zscaler uses robust, proprietary AI models and one-click configuration to identify and isolate hazardous or suspicious websites. This safeguards the user’s browsing experience while preventing malware from accessing their device or network.
    • Advanced AI-based phishing detection: Zscaler detects and blocks patient-zero phishing pages inline using AI. Zscaler’s AI algorithms analyse various characteristics of web pages, including domain age, content similarity, visual layout, and user behaviour, in order to identify malicious pages that other tools miss.
    • AI-powered C2 detection: Zscaler identifies and prevents inline attacks from never-before-seen botnets, including highly sophisticated evasion methods. The AI models of Zscaler analyse network traffic patterns, such as frequency, duration, volume, and destination, to detect command-and-control (C2) communications that indicate a compromised device or network.
    • Zscaler continuously analyses user, device, application, and content data to fuel risk-based, dynamic policy that prevents active assaults and future-proofs defences. The AI models of Zscaler compute a risk score for each user session based on a variety of factors, including location, device posture, application sensitivity, and content type. Zscaler implements granular policies that restrict what users can do and see within applications based on their risk score.
    • Cyber risk assessment: Zscaler automatically identifies an organization’s risk by configuring its security posture with integrated best practise recommendations. AI models from Zscaler compare the current security configuration of an organisation to industry standards and best practises, such as the MITRE ATT&CK framework and the NIST Cybersecurity Framework. Zscaler provides a cyber risk score and actionable recommendations to resolve any gaps or vulnerabilities based on the comparison.
    • Contextual notifications: Zscaler offers contextualised and correlated alerts with threat score insights.
  • Billings growth of 34% year-over-year in Q2 2023: Zscaler reported billings of $493,8 million for the second fiscal quarter of 2023, which ended on January 31, 2023. Zscaler’s revenue also benefited from its high customer retention rate and ability to cross-sell and promote to existing customers.This represented a 34% increase in billings compared to the same quarter of the previous fiscal year, when $368.7 million was calculated. Calculated billings represent the entire value of contracts signed during a given period and are indicative of future revenue growth. Zscaler’s billings growth was driven by the expansion of its customer base, particularly among large enterprises, and its high dollar-based net retention rate, which represents the annualised recurring revenue from existing customers at the end of a period divided by the annualised recurring revenue from these same customers at the beginning of that period.

 

  • Partnership with Microsoft for the integration of Zscaler Cloud Protection and Microsoft Azure Sentinel: Zscaler and Microsoft announced a partnership to integrate Zscaler Cloud Protection with Microsoft Azure Sentinel, a cloud-native security information and event management (SIEM) solution, on March 7, 2023. By ingesting data from Zscaler Cloud Protection into Azure Sentinel, the integration will provide customers with greater visibility and threat detection across their cloud environments. Customers will also have access to Zscaler’s cloud-native security features, such as workload segmentation, application control, file integrity monitoring, and vulnerability management, as well as Azure Sentinel’s advanced analytics and automation capabilities. The partnership will enable customers to simplify and reduce the cost and complexity of their cloud security operations.

 

  • Retention Rate: Zscaler reported a dollar-based net retention rate of 125% for the second fiscal quarter of 2023, which ended on January 31, 2023. This indicates that Zscaler generated 25% more revenue from its existing customers in the second quarter of fiscal 2023 compared to the same period in fiscal 2022. This high retention rate demonstrates Zscaler’s ability to retain and expand its customer relationships by providing them with superior security solutions and services that meet their evolving requirements and challenges. Zscaler’s dollar-based net retention rate reflects its success in increasing its customers’ share of wallet by providing them with a comprehensive platform that incorporates multiple security functions and eliminates the need for multiple point products1.

 

  • Launch of new products and platforms in fiscal year 2022: Zscaler launched a number of new products and platforms in order to strengthen its competitive edge and address the evolving security requirements of enterprises.
    • Zscaler Zero Trust Exchange Platform: This cloud-native platform enables secure and speedy access to applications and data across any network, device, and location. It uses zero-trust principles to verify the identity and context of every user and device prior to granting access, and it employs granular policies to control what users can do and see within applications. Moreover, it encrypts all data in transit and at rest and offers real-time visibility and analytics into user behaviour and network performance.
    • Zscaler Cloud Protection is a cloud workload protection solution that secures applications and data across public cloud environments including Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform (GCP). It protects comprehensively against cyberattacks, data breaches, and compliance violations by applying consistent policies to all cloud assets, detecting and barring malicious activity, and automating remediation.
    • This is a digital experience monitoring solution that measures and optimises the end-user experience for cloud-based applications and services. It provides information regarding application performance, network quality, device health, and user satisfaction across multiple locations, networks, and devices. It also assists in identifying and resolving issues affecting user productivity and satisfaction.

 

  • Operating margin Improvement through economies of scale: Zscaler is attaining economies of scale and operational efficiency as it grows its revenue base and leverages its cloud-native platform, as indicated by the expected improvement in operating margin. Zscaler’s operating margin reflects its disciplined spending and investment in growth-driving areas, including research and development, sales and marketing, and customer support.

Valuation : Zsclaer Inc

Valuation Ratios Current 2023E 2024E 2025E
EV/ Sales 11.80 11.80 11.60 11.40

Company Description : Zscaler (Nasdaq:ZS)

Zscaler, Inc. (Zscaler) is a cloud security company that has created a platform with the security features required to facilitate access to cloud resources based on identity, context, and organisation policies. Its solution is a multi-tenant, distributed cloud platform that secures user-to-app, app-to-app, and machine-to-machine communications across multiple networks and geographical locations.

The Company delivers its solutions using a software-as-a-service (SaaS) business model and sells subscriptions to its cloud platform, as well as associated support services, to its customers. Zero Trust Exchange is a cloud-native security platform that protects clients from cyberattacks and data loss by connecting users, devices, and applications located anywhere. Zscaler Internet Access (ZIA), Zscaler Private Access (ZPA), and Zscaler Digital Experience (ZDX) are the cloud services offered by the company.

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