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Zscaler (NASDAQ:ZS) Beats Q4 Sales Targets, Stock Soars


Full Report / September 21, 2022
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Cloud security platform Zscaler (NASDAQ:ZS) reported Q4 FY2022 results topping analyst expectations, with revenue up 61.3% year on year to $318 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $340 million at the midpoint, 4.24% above what analysts were expecting. Zscaler made a GAAP loss of $97.6 million, down on its loss of $81 million, in the same quarter last year.

Zscaler (ZS) Q4 FY2022 Highlights:

  • Revenue: $318 million vs analyst estimates of $305.5 million (4.09% beat)
  • EPS (non-GAAP): $0.25 vs analyst estimates of $0.21 (21.5% beat)
  • Revenue guidance for Q1 2023 is $340 million at the midpoint, above analyst estimates of $326.1 million
  • Management's revenue guidance for upcoming financial year 2023 is $1.49 billion at the midpoint, beating analyst estimates by 1.51% and predicting 37% growth (vs 62% in FY2022)
  • Free cash flow of $74.7 million, up 70.9% from previous quarter
  • Gross Margin (GAAP): 78.5%, up from 76.9% same quarter last year

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.

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.

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.

Cybersecurity is a competitive space and Zscaler is competing with companies like Palo Alto Networks (NYSE:PANW) and Cisco (NASDAQ:CSCO)

Sales Growth

As you can see below, Zscaler's revenue growth has been incredible over the last year, growing from quarterly revenue of $197 million, to $318 million.

Zscaler Total Revenue

This was another standout quarter with the revenue up a splendid 61.3% year on year. Quarter on quarter the revenue increased by $31.2 million in Q4, which was roughly in line with the Q3 2022 increase. 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 47.4% year on year to $340 million, slowing down from the 61.6% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $1.49 billion at the midpoint, growing 37% compared to 62% increase in FY2022.

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 78.5% in Q4.

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. Significantly up from the last quarter, 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.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Zscaler's free cash flow came in at $74.7 million in Q4, up 169% year on year.

Zscaler Free Cash Flow

Zscaler has generated $231.3 million in free cash flow over the last twelve months, an impressive 21.2% of revenues. This extremely high FCF margin is a result of Zscaler asset lite business model and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.

Key Takeaways from Zscaler's Q4 Results

Sporting a market capitalization of $20.9 billion, more than $1.73 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.

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. On the other hand, the revenue guidance for next year indicates a significant slowdown. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company currently trades at $172.5 per share.

Is Now The Time?

When considering Zscaler, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There are a number of reasons why we think Zscaler is a great business. While we would expect growth rates to moderate from here, its revenue growth has been exceptional, over the last two years. On top of that, its bountiful generation of free cash flow empowers it to invest in growth initiatives, and its impressive gross margins are indicative of excellent business economics.

Zscaler's price to sales ratio based on the next twelve months is 14.9x, suggesting that the market is expecting more measured growth, relative to the hottest tech stocks. Looking at the tech landscape today, Zscaler's qualities as a business really stand out and we still like it at this price.

The Wall St analysts covering the company had a one year price target of $206.7 per share right before these results, implying that they saw upside in buying Zscaler even in the short term.

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