Cloud security platform Zscaler (NASDAQ:ZS) reported Q3 FY2023 results that beat analyst expectations, with revenue up 46% year on year to $418.8 million. The company expects that next quarter's revenue would be around $430 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. Zscaler made a GAAP loss of $46 million, improving on its loss of $101.4 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) Q3 FY2023 Highlights:
- Revenue: $418.8 million vs analyst estimates of $411.7 million (1.71% beat)
- EPS (non-GAAP): $0.48 vs analyst estimates of $0.43 (12.7% beat)
- Revenue guidance for Q4 2023 is $430 million at the midpoint, above analyst estimates of $426.9 million
- Free cash flow of $73.9 million, up 17.6% from previous quarter
- Gross Margin (GAAP): 77.1%, in line with same quarter last year
"The business value delivered by our Zero Trust security platform is continuing to drive customer adoption across all sectors globally, leading to another quarter of strong growth. On a year-over-year basis, we delivered 46% revenue growth, 40% billings growth, and 135% operating profit growth, all exceeding our guidance from last quarter”, 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 $176.4 million in Q3 FY2021, to $418.8 million.
And unsurprisingly, this was another great quarter for Zscaler with revenue up 46% year on year. Quarter on quarter the revenue increased by $31.2 million in Q3, which was in line with Q2 2023. This steady quarter-on-quarter growth shows the company is able to maintain a strong growth trajectory.
Guidance for the next quarter indicates Zscaler is expecting revenue to grow 35.2% year on year to $430 million, slowing down from the 61.4% 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 28.5% 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.
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 77.1% 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 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 Q3 Results
Sporting a market capitalization of $19.7 billion, more than $1.97 billion in cash and with positive free cash flow over the last twelve months, we're confident that Zscaler has the resources it needs to pursue a high growth business strategy.
Zscaler topped analysts’ revenue expectations this quarter, even if just narrowly. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations and free cash flow looked strong. Zooming out, we think this was a decent quarter, showing the company is staying on target. But the market was likely expecting more and the company is down 3.41% on the results and currently trades at $130.5 per share.
Should you invest in Zscaler 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.