Cloud security platform Zscaler (NASDAQ:ZS) reported Q4 FY2023 results topping analysts' expectations, with revenue up 43.1% year on year to $455 million. Guidance for next quarter's revenue was also better than expected at $473 million at the midpoint, 1.72% above analysts' estimates. Turning to EPS, Zscaler made a non-GAAP profit of $0.64 per share, improving from its profit of $0.25 per share in the same quarter last year.
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Zscaler (ZS) Q4 FY2023 Highlights:
- Revenue: $455 million vs analyst estimates of $430.6 million (5.67% beat)
- EPS (non-GAAP): $0.64 vs analyst estimates of $0.49 (30.1% beat)
- Revenue Guidance for Q1 2024 is $473 million at the midpoint, above analyst estimates of $465 million
- Management's revenue guidance for the upcoming financial year 2024 is $2.06 billion at the midpoint, in line with analyst expectations and implying 27.2% growth (vs 48.7% in FY2023)
- Free Cash Flow of $101.3 million, up 37.1% from the previous quarter
- Gross Margin (GAAP): 77.4%, down from 78.6% in the same quarter last year
"We concluded our fiscal year with strong top line growth and record operating profits. In less than two years, we doubled our annual recurring revenue, surpassing the $2 billion milestone. With cyber security as a high priority, IT executives are modernizing their legacy network security with our zero-trust architecture," 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 $197.1 million in Q4 FY2021 to $455 million this quarter.
Unsurprisingly, this was another great quarter for Zscaler with revenue up 43.1% year on year. On top of that, its revenue increased $36.2 million quarter on quarter, a solid improvement from the $31.2 million increase in Q3 2023. This is a sign of slight acceleration of growth.
Next quarter's guidance suggests that Zscaler is expecting revenue to grow 33% year on year to $473 million, slowing down from the 54.2% year-on-year increase it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to be $2.06 billion at the midpoint, growing 27.2% year on year compared to the 48.2% increase in FY2023.
While most things went back to how they were before the pandemic, a few consumer habits fundamentally changed. One founder-led company is benefiting massively from this shift and is set to beat the market for years to come. The business has grown astonishingly fast, with 40%+ free cash flow margins, and its fundamentals are undoubtedly best-in-class. Still, its total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.
Profitability
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 77.4% in Q4.
That means that for every $1 in revenue the company had $0.77 left to spend on developing new products, sales and marketing, and general administrative overhead. Zscaler's impressive gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity. It's also comforting to see its gross margin remain stable, indicating that Zscaler is controlling its costs and not under pressure from its competitors to lower prices.
Key Takeaways from Zscaler's Q4 Results
Sporting a market capitalization of $23.1 billion, more than $2.1 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that Zscaler is attractively positioned to invest in growth.
This was an awesome "beat and raise" quarter with a lot to like and not a lot to pick on. We enjoyed seeing Zscaler exceed analysts' billings, revenue, non-GAAP operating profit, and free cash flow expectations this quarter. We were also glad that next quarter's revenue and non-GAAP operating profit guidance both came in higher than Wall Street's estimates. The one thing to potentially pick on is that its revenue guidance for next year suggests a deceleration in revenue, although profit margins are increasing. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The stock is up 5.1% after reporting and currently trades at $171.1 per share.
So should you invest in Zscaler right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research 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 50% 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 in this report.