After the close last night, recent IPO Zscaler (ZS 38.545, +7.895, +25.76%)
delivered its first quarterly report as a public company, and it did not
disappoint. Not only did the company comfortably beat analysts' EPS and revenue
expectations, but it also provided upside guidance for the upcoming quarter. As
a result, shares flew higher in pre-market trading and opened with gains over
17%, which put the stock at new post-IPO highs.
Looking at the headline numbers, ZS reported a loss per share of ($0.02), exceeding the ($0.08) consensus, with revenue climbing by 49.5% to $49.2 mln, also ahead of the $46.0 mln projection. Results were driven by a combination of new customer wins, increased spending from existing customers, and a notable improvement in gross margin.
Before diving into its results in more detail, here is some background on the company:
ZS is the developer of a security cloud platform which is distributed to more than 100 data centers, helping them to accelerate their IT migration to the cloud. This includes the migration of applications from a corporate data center to the cloud and from a legacy "hub-and-spoke" system (WANs) to an updated direct-to-cloud network. ZS' platform allows traffic to be routed locally and securely to the internet via broadband and cellular connections.
The company's two core services are:
- ZScaler Internet Access (ZIA): This solution securely connects users to externally managed apps, including SaaS applications, and internet destinations, regardless of device, location, or network. It is designed to ensure that malware does not reach the user and that valuable corporate data remains safe.
- ZScaler Private Access (ZPA): This service offers authorized users secure and reliable access to internally managed applications hosted in enterprise data centers or the cloud. The ZPA product connects a specific user to specific applications without bringing the user onto the network. This results in better security and is different from traditional remote access solutions like VPNs.
Now, with some context about its operations, here is a
closer look at its 3Q18 results and guidance. Aside from the headline numbers,
the most important metric for ZS is billings, which provide a good measure of
the current demand environment. And the performance in billings was
exceptional, growing 73% year/year to $54.7 mln. It is worth nothing that during
the conference call last night, management commented that the company benefited
from some strong upfront billings of multi-year deals during the quarter.
However, even after excluding the upfront billings from this year and the year
ago period, billings still would have grown over 60%.
Another key metric for ZS is dollar-based retention rate, and that too came in very strong at 120% for the trailing 12 months ended April 30. That is up from 115% in the year ago period. This demonstrates that not only is ZS successfully retaining its customers, but it is also able to up-sell new products to its existing customers. Management highlighted one such up-sell last night, stating that a Fortune 500 tech company purchased its transformation bundle for 20,000 employees. Contractors then purchased an additional 25,000 seats and now have all 45,000 employees on the ZS platform.
Gross margin also improved, up 2% year/year to 81%. This was driven by an increased mix of higher-priced bundles, which carry higher ASPs.
To top it off, ZS also issued upside guidance for Q4, forecasting a loss per share of ($0.06)-($0.05) versus the ($0.09) consensus on revenue of $50-$51 mln versus the $48.4 mln consensus.
Wrapping up, it's difficult to find a blemish in ZS' report, other than the fact the company is not yet profitable. But it is certainly moving in the right direction in that regard, as the business seems to be firing on all cylinders.