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Zscaler Posts Rapid Growth and Improving Profitability

By Timothy Green - Updated Apr 10, 2019 at 10:21AM

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The bottom line is on the rise for this cloud security company.

Cloud security company Zscaler (ZS -9.66%) reported its fiscal second-quarter results after the market closed on Feb. 28. Revenue growth accelerated and adjusted profits were pushed into positive territory, with costs rising more slowly than the top line. The company's approach to security seems to be resonating with its customers, and it sees multiple tailwinds that should drive long-term growth.

Zscaler results: The raw numbers

Metric

Q2 2019

Q2 2018

Year-Over-Year Change

Revenue

$74.3 million

$45.0 million

65.2%

Net income (loss)

($3.6 million)

($9.1 million)

N/A

Non-GAAP earnings per share

$0.09

($0.03)

N/A

Data source: Zscaler.

What happened with Zscaler this quarter?

  • Calculated billings rose 74% year over year to $115 million, while deferred revenue jumped 73% to $206 million.
  • Operating cash flow was $15.7 million, up from a loss of $1.1 million in the prior-year period. Free cash flow was $12 million, up from a loss of $4.6 million in the prior-year period.
  • Cash, cash equivalents, and short-term investments totaled $339.9 million at the end of the quarter, up from $314 million at the end of the previous quarter.
  • Zscaler's dollar-based net retention rate was 118%, flat from the first quarter and down from 122% in the prior-year period.
  • 53% of revenue came from the Americas; 40% came from Europe, the Middle East, and Africa; and 7% from the Asia-Pacific region.
  • Gross margin was 80%, down 2% from the first quarter and down 1% year over year. The company's near-to-medium-term gross margin target is 80%.
  • GAAP operating expenses increased by 50.4% year over year, a rate slower than revenue growth.

Check out the latest earnings call transcript for Zscaler.

A cloud.

Image source: Getty Images.

What management has to say

CEO Jay Chaudhry explained the company's advantage during the earnings call:

Imagine 80% of luggage passing through airport security unchecked. You can't, because that would be unacceptable. But this is exactly what happens when organizations attempt to use next-gen firewalls to protect users. Zscaler is natively designed as a full SSL proxy, which means our customers can inspect encrypted traffic without impacting user experience, leading to better security and renewed businesses.

Chaudhry also talked about the company's competition and growth opportunities: "These imitators can't scale, leave gaps in security, are expensive, and deliver poor user experience. With multiple tailwinds, such as SaaS adoption, SD-WAN and app migration to public clouds, we believe the market is coming to us."

Looking forward

Zscaler provided the following guidance for the third quarter and for the full year:

  • Third-quarter revenue between $74 million and $75 million.
  • Third-quarter non-GAAP operating income between $0 and $1 million.
  • Third-quarter non-GAAP earnings per share of $0.01.
  • Full-year revenue between $289 million and $291 million.
  • Full-year calculated billings between $365 million and $370 million.
  • Full-year non-GAAP operating income between $11 million and $13 million.
  • Full-year non-GAAP earnings per share between $0.11 and $0.13.

With rapid revenue growth and improving profitability, the company has a strategy that is clearly working. The cybersecurity market should provide plenty of growth opportunities in the coming years, giving Zscaler a long runway.

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