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Zscaler (NASDAQ:ZS) Q2: Strong Sales But Stock Drops 16.6%


Radek Strnad /
2022/02/24 4:20 pm EST
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Cloud security platform Zscaler (NASDAQ:ZS) beat analyst expectations in Q2 FY2022 quarter, with revenue up 62.7% year on year to $255.5 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $271 million at the midpoint, 5.3% above what analysts were expecting. Zscaler made a GAAP loss of $100.4 million, down on its loss of $67.5 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) Q2 FY2022 Highlights:

  • Revenue: $255.5 million vs analyst estimates of $241.8 million (5.66% beat)
  • EPS (non-GAAP): $0.13 vs analyst estimates of $0.11 (16.3% beat)
  • Revenue guidance for Q3 2022 is $271 million at the midpoint, above analyst estimates of $257.4 million
  • The company lifted revenue guidance for the full year, from $1 billion to $1.04 billion at the midpoint, a 4.22% increase
  • Free cash flow of $29.4 million, down 64.6% from previous quarter
  • Gross Margin (GAAP): 77.3%, down from 78.2% same quarter last year

"Driven by continued demand for our Zero Trust security platform, we delivered strong results for the second quarter, with our year-over-year revenue growth rate reaching its highest level in three years, even as we surpassed $1 billion in annualized revenue,” 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 incredible over the last year, growing from quarterly revenue of $157 million, to $255.5 million.

Zscaler Total Revenue

This was another standout quarter with the revenue up a splendid 62.7% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $25 million in Q2, compared to $33.4 million in Q1 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Zscaler is expecting revenue to grow 53.6% year on year to $271 million, slowing down only slightly from the 59.6% 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 37.2% over the next twelve months.

There are others doing even better than Zscaler. Founded by ex-Google engineers, a small company making software for banks has been growing revenue 90% year on year and is already up more than 150% since the IPO last December. 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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 77.3% in Q2.

Zscaler Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.77 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 Q2 Results

With a market capitalization of $33.5 billion, more than $1.62 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. Zooming out, we think this was a great quarter and shareholders will likely feel excited about the results. But the market might have been expecting more from this high-valuation stock and the company is down 16.6% on the results and currently trades at $219.73 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.