Zscaler (NYSE:ZS) Surprises With Strong Q4, Provides Optimistic Guidance For Next Quarter

Full Report / September 09, 2021
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Cloud security platform Zscaler (NYSE:ZS) reported Q4 FY2021 results that beat analyst expectations, with revenue up 56.5% year on year to $197 million. Zscaler made a GAAP loss of $81 million, down on its loss of $49.5 million, in the same quarter last year.

Zscaler (ZS) Q4 FY2021 Highlights:

  • Revenue: $197 million vs analyst estimates of $187.4 million (5.13% beat)
  • EPS (non-GAAP): $0.14 vs analyst estimates of $0.09 ($0.05 beat)
  • Revenue guidance for Q1 2022 is $211 million at the midpoint, above analyst estimates of $199.8 million
  • Management's revenue guidance for upcoming financial year 2022 is $945 million at the midpoint, predicting 40.3% growth (vs 49.1% in FY2021)
  • Free cash flow of $27.7 million, down 50.3% from previous quarter
  • Gross Margin (GAAP): 76.9%, down from 77.9% previous quarter

Founded in 2007 by Jay Chaudhry, Zscaler (NYSE: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.

Companies are moving to cloud-based solutions like Zscaler because they offer better performance and are typically cheaper than maintaining the traditional on-premise solutions, which often include buying specialized hardware. But the biggest advantage of using cloud-based solutions is that they work on any device, in any location, which is becoming more important as the workforce becomes more distributed and employees don’t only work from their office anymore.

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 year, growing from quarterly revenue of $125.8 million, to $197 million.

Zscaler Total Revenue

This was another standout quarter with the revenue up a splendid 56.5% year on year. On top of that, revenue increased $20.6 million quarter on quarter, a solid improvement on the $19.3 million increase in Q3 2021, and happily, a slight re-acceleration of growth.

Analysts covering the company are expecting the revenues to grow 34.5% over the next twelve months, although we would expect them to review their estimates once they get to read these results.


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, licences, technical support and other necessary running expenses was at 76.9% in Q4.

Zscaler Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.76 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop, this is still 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.

Key Takeaways from Zscaler's Q4 Results

With a market capitalization of $38.4 billion, more than $1.5 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

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, there was a deterioration in gross margin. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is up 1.85% on the results and currently trades at $285.5 per share.

Is Now The Time?

Zscaler may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. 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 of 42.8x indicates that the market is definitely optimistic about its growth prospects. Looking at the tech landscape today, Zscaler's qualities stand out and there's no doubt that it is a bit of a market darling. We'd argue that its often wise to hold on to quality businesses long term, but we do want to mention that there seems to be a lot optimism priced in at the moment.

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