Zscaler's (NASDAQ:ZS) Q2 Sales Top Estimates, Next Quarter Growth Looks Optimistic

Full Report / February 29, 2024

Cloud security platform Zscaler (NASDAQ:ZS) beat analysts' expectations in Q2 FY2024, with revenue up 35.4% year on year to $525 million. The company expects next quarter's revenue to be around $535 million, in line with analysts' estimates. It made a non-GAAP profit of $0.76 per share, improving from its profit of $0.37 per share in the same quarter last year.

Zscaler (ZS) Q2 FY2024 Highlights:

  • Revenue: $525 million vs analyst estimates of $506.8 million (3.6% beat)
  • EPS (non-GAAP): $0.76 vs analyst estimates of $0.58 (30.5% beat)
  • Revenue Guidance for Q3 2024 is $535 million at the midpoint, roughly in line with what analysts were expecting
  • The company lifted its revenue guidance for the full year from $2.10 billion to $2.12 billion at the midpoint, a 1.2% increase (billings guidance was also lifted and came in in line with Wall Street's expectations)
  • Free Cash Flow of $100.8 million, down 55.1% from the previous quarter
  • Gross Margin (GAAP): 77.7%, in line with the same quarter last year
  • Market Capitalization: $35.2 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 two years, growing from $255.6 million in Q2 FY2022 to $525 million this quarter.

Zscaler Total Revenue

Unsurprisingly, this was another great quarter for Zscaler with revenue up 35.4% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $28.3 million in Q2 compared to $41.7 million in Q1 2024. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.

Next quarter's guidance suggests that Zscaler is expecting revenue to grow 27.7% year on year to $535 million, slowing down from the 46% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 23.7% 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 77.7% in Q2.

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 $100.8 million in Q2, up 60.4% year on year.

Zscaler Free Cash Flow

Zscaler has generated $500.7 million in free cash flow over the last 12 months, an eye-popping 26.4% 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 Q2 Results

We were glad its revenue and profitability outperformed Wall Street's estimates. Guidance was solid, but given the recent stock action and valuation, the market was likely expecting full year guidance for billings and revenue more convincingly above Wall Street estimates. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The stock is down 4.1% after reporting, trading at $231.75 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. Additionally, its customers are increasing their spending quite quickly, suggesting they love the product, and its bountiful generation of free cash flow empowers it to invest in growth initiatives.

Zscaler's price-to-sales ratio based on the next 12 months of 15.4x indicates that the market is definitely optimistic about its growth prospects. And looking at the tech landscape today, Zscaler's qualities stand out, we think that the multiple is justified and we still like it at this price.

Wall Street analysts covering the company had a one-year price target of $253.72 per share right before these results (compared to the current share price of $231.75), implying they saw upside in buying Zscaler in the short term.

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