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Zscaler (NASDAQ:ZS) Surprises With Strong Q1, Provides Optimistic Guidance For Next Quarter


Full Report / November 30, 2021
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Cloud security platform Zscaler (NASDAQ:ZS) announced better-than-expected results in the Q1 FY2022 quarter, with revenue up 61.6% year on year to $230.5 million. Guidance for next quarter's revenue was surprisingly good, being $241 million at the midpoint, 6.84% above what analysts were expecting. Zscaler made a GAAP loss of $90.8 million, down on its loss of $55 million, in the same quarter last year.

Zscaler (ZS) Q1 FY2022 Highlights:

  • Revenue: $230.5 million vs analyst estimates of $212.2 million (8.59% beat)
  • EPS (non-GAAP): $0.14 vs analyst estimates of $0.12 (15.3% beat)
  • Revenue guidance for Q2 2022 is $241 million at the midpoint, above analyst estimates of $225.5 million
  • The company lifted revenue guidance for the full year, from $945 million to $1 billion at the midpoint, a 6.34% increase
  • Free cash flow of $83.3 million, up from $27.7 million in previous quarter
  • Gross Margin (GAAP): 77.3%, in line with 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.

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 $142.5 million, to $230.5 million.

Zscaler Total Revenue

This was another standout quarter with the revenue up a splendid 61.6% year on year. On top of that, revenue increased $33.4 million quarter on quarter, a very strong improvement on the $20.6 million increase in Q4 2021, and a sign of re-acceleration of growth, which is very nice to see indeed.

Analysts covering the company are expecting the revenues to grow 35.8% over the next twelve months, although estimates are likely to change post earnings.

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 77.3% in Q1.

Zscaler Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.77 left to spend on developing new products, marketing & sales and the general administrative overhead. 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. It is good to see that the gross margin is staying stable which indicates that Zscaler is doing a good job controlling costs and is not under a pressure from competition to lower prices.

Key Takeaways from Zscaler's Q1 Results

Sporting a market capitalization of $49.3 billion, more than $1.58 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 very optimistic revenue guidance provided for the next quarter. And we were also excited to see the really strong revenue growth. Zooming out, we think this impressive quarter should have shareholders feeling very positive. The company is up 2.97% on the results and currently trades at $358 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 47.2x indicates that the market is definitely optimistic about its growth prospects. But looking at the tech landscape today, Zscaler's qualities stand out and we still like it at this price.

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