Zscaler (NYSE:ZS) Delivers Strong Q3 Numbers, Provides Optimistic Guidance For Next Quarter

Jabin Bastian /
2021/05/25 4:09 pm EDT

Cloud security platform Zscaler (NYSE:ZS) reported Q3 FY2021 results topping analyst expectations, with revenue up 59.6% year on year to $176.4 million. Zscaler made a GAAP loss of $58.4 million, down on its loss of $19.3 million, in the same quarter last year.

What do these results signal for the future of Zscaler? Get early access our full analysis here

Zscaler (NYSE:ZS) Q3 FY2021 Highlights:

  • Revenue: $176.4 million vs analyst estimates of $163.7 million (7.73% beat)
  • EPS (non-GAAP): $0.15 vs analyst estimates of $0.07 ($0.08 beat)
  • Revenue guidance for Q4 2021 is $186 million at the midpoint, above analyst estimates of $174.2 million
  • Free cash flow of $55.7 million, up from $18 million in previous quarter
  • Gross Margin (GAAP): 77.9%, in line with previous quarter
  • Updated valuation: Zscaler is up at $182.25 and now trades at 39.2x price-to-sales (LTM), compared to 43.5x just before the results
  • Zscaler has entered into a definitive agreement to acquire Smokescreen Technologies

"We delivered outstanding results for the third quarter, with revenue growth accelerating to 60% year over year and free cash flow reaching a new record. Our Zero Trust Exchange platform is helping customers realize their digital transformation goals and architect for the new normal of the work-from-anywhere economy," said Jay Chaudhry, Chairman and CEO of Zscaler.

Trust No One On the Internet

Zscaler (NYSE:ZS) offers software as a service that helps companies securely connect to applications and networks in the cloud. The Zscaler Internet Access platform works as a door to the internet through which their customers route all their web traffic and Zscaler ensures malware and viruses doesn’t get in and internal data doesn’t get out. Their Private Access product creates a secure tunnel between a user and an internal application so the data transferred is never put on the public internet.

Companies are moving to cloud-based solutions like Zscaler because they offer better performance and are typically cheaper than maintaining the traditional on-premise solutions which often include buying specialized hardware. But the biggest advantage of using cloud-based solutions provided by companies like Zscaler or Palo ALto Networks (NYSE:PANW) is that they work on any device, in any location, which is becoming more important as work force becomes more distributed and employees don’t only work from their office anymore.

As you can see below, Zscaler's revenue growth has been impressive over the last twelve months, growing from $110.5 million to $176.4 million.

Zscaler Total Revenue

This was another standout quarter with the revenue up a splendid 59.6% year on year. On top of that, revenue increased $19.3 million quarter on quarter, a very strong improvement on the $14.4 million increase in Q2 2021, and a sign of acceleration of growth, which is very nice to see indeed.

There are others doing even better. 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 400% since the IPO in December. 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 Gross Margin (GAAP)

Zscaler's gross profit margin, an important metric measuring how much money there is left after paying for servers, licences, technical support and other necessary running expenses was at 77.9% in Q3. 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 will allow Zscaler to fund large investments in product and sales during periods of rapid growth and be profitable when it reaches 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 a pressure from competition to lower prices.

Key Takeaways from Zscaler's Q3 Results

Sporting a market capitalisation of $23.7 billion, more than $1.46 billion in cash and operating free cash flow positive over the last twelve months, we're confident that Zscaler has the resources it needs to pursue a high growth business strategy.

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 impressive quarter should have shareholders feeling very positive. While the market has high expectations of Zscaler we think it will continue to stand out as one of the best quality SaaS stocks, even more so than before.

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