Zscaler (NASDAQ:ZS) Surprises Positively With Q1 Results But Stock Drops

Full Report / November 27, 2023

Cloud security platform Zscaler (NASDAQ:ZS) announced better-than-expected results in Q1 FY2024, with revenue up 39.7% year on year to $496.7 million. Guidance for next quarter's revenue was also better than expected at $506 million at the midpoint, 1.7% above analysts' estimates. It made a non-GAAP profit of $0.67 per share, improving from its profit of $0.29 per share in the same quarter last year.

Zscaler (ZS) Q1 FY2024 Highlights:

  • Revenue: $496.7 million vs analyst estimates of $473.4 million (4.9% beat)
  • Billings: $456.6 million vs. analyst estimates of $442.1 million (3.3% beat)
  • EPS (non-GAAP): $0.67 vs analyst estimates of $0.49 (36.9% beat)
  • Revenue Guidance for Q2 2024 is $506 million at the midpoint, above analyst estimates of $497.3 million
  • The company lifted its revenue guidance for the full year from $2.06 billion to $2.10 billion at the midpoint, a 1.8% increase (non-GAAP income from operations guidance also raised, although billings guidance maintained)
  • Free Cash Flow of $224.7 million, up 122% from the previous quarter (beat)
  • Gross Margin (GAAP): 77.6%, down from 78.5% in the same quarter last year (miss)

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.

Network Security

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 exceptional over the last two years, growing from $230.5 million in Q1 FY2022 to $496.7 million this quarter.

Zscaler Total Revenue

Unsurprisingly, this was another great quarter for Zscaler with revenue up 39.7% year on year. On top of that, its revenue increased $41.7 million quarter on quarter, a solid improvement from the $36.21 million increase in Q4 2023. This is a sign of slight re-acceleration of growth.

Next quarter, Zscaler is guiding for a 23.4% year-on-year revenue decline to $506 million, a further deceleration from the 51.7% year-on-year decrease it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 24.2% over the next 12 months before the earnings results announcement.


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 77.6% in Q1.

Zscaler Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.78 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.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Zscaler's free cash flow came in at $224.7 million in Q1, up 135% year on year.

Zscaler Free Cash Flow

Zscaler has generated $462.7 million in free cash flow over the last 12 months, an impressive 25.3% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.

Key Takeaways from Zscaler's Q1 Results

With a market capitalization of $28.64 billion, a $2.32 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Zscaler has the resources needed to pursue a high-growth business strategy.

It was good to see Zscaler beat analysts' revenue and non-GAAP operating profit expectations this quarter. We were also glad next quarter's revenue guidance came in higher than Wall Street's estimates. Lastly, it was a major positive that Zscaler raised its full year revenue and non-GAAP operating profit guidance. Overall, we think this was a strong quarter that should satisfy most shareholders. The market was likely expecting more, however, and the stock is down 6.8% after reporting, trading at $178.83 per share. This could be due to some combination of a gross margin miss (and decline year on year), comments that the company plans on "scaling our go-to-market and R&D organizations" (which could hurt near-term margins), and high expectations. 

Is Now The Time?

Zscaler may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We think Zscaler is a good business. We'd expect growth rates to moderate from here, but 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 strong gross margins suggest it can operate profitably and sustainably.

Zscaler's price to sales ratio based on the next 12 months of 13.0x indicates that the market is certainly optimistic about its growth prospects. There's definitely a lot of things to like about Zscaler and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.

Wall Street analysts covering the company had a one-year price target of $194.8 per share right before these results, implying that they saw upside in buying Zscaler even in the short term.

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