Zscaler (NASDAQ:ZS) Delivers Strong Q1 Numbers But Stock Drops 11.8%

Petr Huřťák /
2022/12/01 4:14 pm EST

Cloud security platform Zscaler (NASDAQ:ZS) reported results ahead of analyst expectations in the Q1 FY2023 quarter, with revenue up 54.2% year on year to $355.5 million. Guidance for next quarter's revenue was $365 million at the midpoint, 2.7% above the average of analyst estimates. Zscaler made a GAAP loss of $68.1 million, improving on its loss of $90.8 million, in the same quarter last year.

Is now the time to buy Zscaler? Access our full analysis of the earnings results here, it's free.

Zscaler (ZS) Q1 FY2023 Highlights:

  • Revenue: $355.5 million vs analyst estimates of $340.7 million (4.33% beat)
  • EPS (non-GAAP): $0.29 vs analyst estimates of $0.26 (11.4% beat)
  • Revenue guidance for Q2 2023 is $365 million at the midpoint, above analyst estimates of $355.3 million
  • The company lifted revenue guidance for the full year, from $1.49 billion to $1.52 billion at the midpoint, a 2.17% increase
  • Free cash flow of $95.6 million, up 27.8% from previous quarter
  • Gross Margin (GAAP): 78.4%, up from 77.5% same quarter last year

"We delivered strong top line growth with improved operating profitability and increased free cash flow, once again performing at the Rule-of-80. We are seeing customers committing to our broader platform, driven by vendor consolidation and an elevated threat environment," said Jay Chaudhry, Chairman and CEO of Zscaler.

After successfully selling all four of his previous cybersecurity companies, Jay Chaudhry's fifth venture, Zscaler (NASDAQ:ZS) offers software as a service that helps companies securely connect to applications and networks in the cloud.

Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks. The migration of businesses to the cloud and employees working remotely in insecure environments is increasing demand modern cloud-based network security software, which offers better performance at lower cost than maintaining the traditional on-premise solutions, such as expensive specialized firewall hardware.

Sales Growth

As you can see below, Zscaler's revenue growth has been exceptional over the last two years, growing from quarterly revenue of $142.5 million in Q1 FY2021, to $355.5 million.

Zscaler Total Revenue

This was another standout quarter with the revenue up a splendid 54.2% year on year. On top of that, revenue increased $37.4 million quarter on quarter, a solid improvement on the $31.2 million increase in Q4 2022, and happily, a slight re-acceleration of growth.

Guidance for the next quarter indicates Zscaler is expecting revenue to grow 42.8% year on year to $365 million, slowing down from the 62.7% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 32.3% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Zscaler's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 78.4% in Q1.

Zscaler Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.78 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a good gross margin that allows companies like Zscaler to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that Zscaler is doing a good job controlling costs and is not under pressure from competition to lower prices.

Key Takeaways from Zscaler's Q1 Results

With a market capitalization of $19.2 billion, more than $1.82 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We were impressed by the exceptional revenue growth Zscaler delivered this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. Overall, we think this was a strong quarter, that should leave shareholders feeling positive. But as ZS still trades at a very high multiple, market was likely expecting more and the company is down 11.8% on the results and currently trades at $127.5 per share.

Zscaler may have had a good quarter, so should you invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.

The author has no position in any of the stocks mentioned.