Cloud security expert Zscaler (NASDAQ:ZS) delivered revenue and earnings growth in excess of Wall Street's forecast and its own guidance in the 2020 fiscal first quarter. The rate of growth was somewhat below last year's performance, but the results indicate so far that business isn't being undermined by the competition as much as feared.
Zscaler is enjoying greater adoption of its cloud platform security solutions by global enterprises, and chairman and CEO Jay Chaudhry says the company is "scaling all elements of our go-to-market strategy, as we see enterprises increasingly transforming their network and security to realize the benefits of the cloud."
An immense growth opportunity
Global cybersecurity spending is expected to hit $103 billion in 2019, a 9% increase over the year before, with much of it going toward cloud-based solutions. Zscaler's cloud-based web security gateways channel customer data traffic to data centers, where its security software looks for malware embedded within.
Some analysts estimate the cybersecurity market that has been growing at a 35 times annual rate is poised to kick it into hyperdrive, and by 2021 spending on combined products and services could exceed $1 trillion.
That sort of massive market expansion indicates there are plenty of opportunities for Zscaler and others to profit, but what the cybersecurity specialist needed to show this quarter was whether it could fend off the competition and maintain its industry-leading position. It seems to have done so, at least so far.
Customers hang tight
Zscaler reported revenue grew 48% from the first quarter of 2019, hitting $93.6 million. That easily beat analyst expectations of $87 million, but also was well ahead of its own guidance range that predicted revenue at the high end of $90 million.
On a GAAP basis, Zscaler operating losses widened to $18.3 million from $8.7 million last year, while it also reported net losses of $17.1 million compared to the $7.6 million loss a year ago. However, when adjusted for stock-based compensation and one-off events, Zscaler was able to notch a profit of $0.03 per share, exceeding Wall Street's guess of $0.02 per share.
The cybersecurity leader was able to notch these gains because it continues to win new customers while not seeing any defecting to the competition. Zscaler said its net dollar retention rate was strong at 120%, which is greater than the 118% it saw in last year's first quarter as well as the previous fourth quarter.
A more muted outlook
It ended the quarter with more than 3,900 customers, including over 400 of the Forbes Global 2000. Business looks strong going forward, too, as total committed noncancelable future revenue was $555 million on Oct. 31, a 35% increase from $411 million one year ago.
For the second fiscal quarter of 2020, Zscaler says it expects revenue to be in a range of $97 million to $100 million, as much as a 34% increase over the second quarter of 2019. That is a significant slowdown from the 65% increase it enjoyed last year. Management has said it expects revenue growth to not be as heady as it's been in the past and forecasts full-year revenue will only increase between 31% and 34% over last year.
Adjusted earnings, though, are expected to be $0.03 per share next quarter, a big drop from the $0.09 per-share adjusted profit it reported. Zscaler's stock dropped almost 8% in early-morning trading.
But incredible potential on the horizon
That could be a mistake, as Zscaler still has substantial runway before it with new products rolling out and new opportunities coming its way, such as with Microsoft, whether through its Office 360 products or the Azure web services public cloud.
Moreover, it is the only vendor with the federal government that's FedRAMP certified with cloud security gateway -- the FedRAMP Connect program allows for providing security solutions across U.S. government agencies -- and it's looking to use its relationship with Microsoft to get more deals, as it recently won a big contract with the Defense Department.
As more companies enter the space, Zscaler's growth rates may scale back some, but for the long term the cybersecurity specialist looks like it will still be growing by leaps and bounds.