Zscaler (ZS) Research Report: Q1 CY2024 Update

Full Report / May 30, 2024

Cloud security platform Zscaler (NASDAQ:ZS) reported Q1 CY2024 results beating Wall Street analysts' expectations, with revenue up 32.1% year on year to $553.2 million. The company expects next quarter's revenue to be around $566 million, in line with analysts' estimates. It made a non-GAAP profit of $0.88 per share, improving from its loss of $0.30 per share in the same quarter last year.

Zscaler (ZS) Q1 CY2024 Highlights:

  • Revenue: $553.2 million vs analyst estimates of $536.1 million (3.2% beat)
  • Billings: $628.0 million up 30.2% year on year and vs analyst estimates of $584.3 million (7.5% beat)
  • EPS (non-GAAP): $0.88 vs analyst estimates of $0.65 (35.9% beat)
  • Revenue Guidance for Q2 CY2024 is $566 million at the midpoint, roughly in line with what analysts were expecting
  • Billings, Revenue, non-GAAP operating income guidance for the full year all raised
  • Gross Margin (GAAP): 78.6%, up from 77.2% in the same quarter last year
  • Free Cash Flow of $123.1 million, up 22.2% from the previous quarter
  • Market Capitalization: $24.63 billion

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 impressive over the last three years, growing from $176.4 million in Q3 2021 to $553.2 million this quarter.

Zscaler Total Revenue

Unsurprisingly, this was another great quarter for Zscaler with revenue up 32.1% year on year. Quarter on quarter, its revenue increased by $28.2 million in Q1, which was roughly in line with the Q4 CY2023 increase. This steady growth shows that the company can maintain a strong growth trajectory.

Next quarter's guidance suggests that Zscaler is expecting revenue to grow 24.4% year on year to $566 million, slowing down from the 43.1% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 23.1% 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 78.6% in Q1.

Zscaler Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.79 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, 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.

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 $123.1 million in Q1, up 66.6% year on year.

Zscaler Free Cash Flow

Zscaler has generated $549.9 million in free cash flow over the last 12 months, an eye-popping 27.1% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from Zscaler's Q1 Results

This was a beat and raise quarter. We were impressed by how strongly Zscaler blew past analysts' billings expectations this quarter. We were also glad its revenue outperformed Wall Street's estimates while also exhibiting better profitability. Lastly, the company raised its full year guidance across the board for billings, revenue, and non-GAAP operating profit. Overall, we think this was a strong quarter that should satisfy shareholders. The stock is up 7.9% after reporting and currently trades at $167.80 per share.

Is Now The Time?

When considering an investment in Zscaler, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

There are several reasons why we think Zscaler is a great business. While we'd expect growth rates to moderate from here, its revenue growth has been exceptional over the last three years. Additionally, its bountiful generation of free cash flow empowers it to invest in growth initiatives, and its customers are increasing their spending quite quickly, suggesting they love the product.

The market is certainly expecting long-term growth from Zscaler given its price-to-sales ratio based on the next 12 months is 9.6x. But looking at the tech landscape today, Zscaler's qualities as one of the best businesses really stand out, and we think that the multiple is justified. We still like the stock at this price.

Wall Street analysts covering the company had a one-year price target of $244.39 right before these results (compared to the current share price of $167.80), implying they see short-term upside potential in Zscaler.

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