Cloud security provider Zscaler (NASDAQ:ZS) reported its fiscal third-quarter results after the market closed on May 30. Revenue continued to grow quickly, with the growth rate topping 60%, but the company's GAAP net loss also expanded. Zscaler faces a tough comparison in the fourth quarter, and increased spending to spur growth will negatively affect the bottom line. Here's what investors need to know.

Zscaler results: The raw numbers

Metric

Q3 2019

Q3 2018

Year-Over-Year Change

Revenue

$79.1 million

$49.2 million

61%

Net income (loss)

($12.2 million)

($10.0 million)

N/A

Non-GAAP earnings per share

$0.05

($0.04)

N/A

Data source: Zscaler.

What happened with Zscaler this quarter?

  • Calculated billings rose 55% year over year to $84.7 million, while deferred revenue grew 69% year over year to $211.5 million.
  • Zscaler generated $13.5 million of operating cash flow in the quarter, up from $8.1 million in the prior-year period. Free cash flow was $4.6 million, up from $3.7 million.
  • Cash, cash equivalents, and short-term investments totaled $352.7 million at the end of the third quarter, up from $339.9 million at the end of the second quarter.
  • Zscaler's dollar-based net retention rate was 118% during the quarter, flat from the previous quarter and down from 120% in the prior-year period.
  • The Americas accounted for 51% of total revenue. Europe, the Middle East, and Africa accounted for 41% of revenue, and the Asia-Pacific region accounted for 8% of revenue.
  • The company believes its total addressable market is $20.3 billion in calendar 2019.
An illustration of a cloud, illuminated at its center.

Image source: Getty Images.

What management had to say

Zscaler CFO Remo Canessa discussed the dynamics of the company's net retention rate during the earnings call: "Our increased success selling bigger deals upfront, which start with the transformation bundle and faster sales 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 118% is outstanding and will vary quarter to quarter."

Canessa also warned that the company will face a tough comparison in the fiscal fourth quarter: "Please keep in mind that next quarter we'll have a difficult comparison with a large public sector deal that closed in Q4 2018. This deal added $16.5 million to billings and $26 million the backlog in the July quarter, which will pose a difficult year-over-year comparison in Q4."

Looking forward

Zscaler provided the following guidance for the fourth quarter of fiscal 2019:

  • Revenue between $81 million and $83 million, up 45.9% year over year at the midpoint.
  • Non-GAAP operating income between zero and $2 million, and non-GAAP earnings per share between $0.01 and $0.02. The company reported a non-GAAP net loss of $0.01 per share in the fourth quarter of fiscal 2018.

For the full fiscal year, Zscaler expects:

  • Revenue between $298 million and $300 million, up 57% from fiscal 2018 at the midpoint.
  • Calculated billings between $379 million and $381 million.
  • Non-GAAP operating income between $17 million and $19 million, and non-GAAP earnings per share between $0.16 and $0.18. The company reported a non-GAAP net loss of $0.23 per share in fiscal 2018.

Canessa emphasized that the company is focused on growth, not profits: "As reflected in our guidance, I would emphasize that our plans are not to maximize profitability or generate additional operating leverage in the near term, but to invest aggressively in our business to pursue our significant market opportunity. We plan to continue to invest in our sales organization and marketing programs as well as increased investments in our technology platform and cloud infrastructure."

Zscaler's spending will knock down the bottom line in the fourth quarter, but it will help the company maintain its robust revenue growth rate.