Zscaler (ZS) Q1 Earnings And Revenues Surpass Estimates

Zscaler, Inc. (NASDAQ:ZS) reported first-quarter fiscal 2019 non-GAAP earnings of 1 cent per share against the Zacks Consensus Estimate of a loss of 5 cents and the year-ago quarter loss of 24 cents.

Revenues surged 58.6% year over year to $63.3 million and surpassed the Zacks Consensus Estimate of $59 million. The increase in revenues was driven by noteworthy customer wins, expanding international presence and product enhancements.

Quarter in Details

America and EMEA constituted 49% and 43% of Zscaler’s revenues, respectively, in the reported quarter. The company continues to expand its global sales force and expects the momentum in sales to boost growth in the near term.

The company recorded dollar based net retention rate of 118%, primarily driven by its portfolio strength. However, management stated that it expects net retention rate, which is calculated on a year-over-year annual recurring revenue (ARR) basis, to decline in the near term as it continues to sell bigger deals upfront.

Zscaler recorded total backlog, representing remaining performance obligations (RPO), of $411 million, up 77% year over year. The company also noted a surge in sales of the transformation bundle, which gained traction among new as well as existing customers in the reported quarter.

Zscaler witnessed a surge in billings of 56% year over year to $64.6 million. However, the figure declined sequentially due to a large upfront deal in the previous quarter. The company expects billings to decline in the third quarter of fiscal 2019 as well.

Moreover, the company’s system integrators (SI) and system providers (SP) constituted 50% of the revenues in the reported quarter and are the fastest growing segments for Zscaler. This traction in SP’s can be attributed to customers recognizing increased revenue opportunities with the company.

Notably, in the reported quarter, Zscaler Private Access (ZPA) also achieved Amazon (NASDAQ:AMZN) Web Service (AWS) Security Competency status. This is expected to boost customer and partner confidence and drive its top line in the near term.

Zscaler, Inc. Price, Consensus and EPS Surprise

Operating Details

Non-GAAP gross margin increased 220 basis points (bps) from the year-ago quarter to 81.7%. The increase was primarily driven by an increased mix of higher priced bundles and operational efficiencies.

Operating expenses surged 39.7% year over year to $59.8 million. Research & development (R&D), general & administrative (G&A) and sales & marketing (S&M) expenses increased significantly year over year.

The increase in R&D expenses was primarily driven by Zscaler’s continued investments to enhance the product’s functionality while increase in S&M was due to the company’s brand marketing campaigns and increase in headcount in the sales team.

Zscaler recorded a significant increase in litigation expenses from $1.4 million in the fourth quarter to $2.2 million in the reported quarter, which contributed to increased G&A expenses in the reported quarter.

However, R&D, G&A and S&M expenses, as percentage of revenues, declined 120 bps,180 bps and 980 bps year over year, respectively.

Non-GAAP operating income was $1.2 million in the reported quarter against a loss of $7.4 million in the year-ago quarter.

Balance Sheet & Cash Flow

Zscaler exited the quarter with a cash and cash equivalents (including short-term investments) of $314.0 million as of Oct 31, 2018, an increase of $15.5 million from Jul 31, 2018.

The company recorded cash flow from operations of $11 million in the reported quarter compared with cash flow from operations of $14.7 million in the fourth quarter. Free cash flow totaled positive $5.2 million at the end of the reported quarter compared with positive free cash flow of $11.9 million at the end of the fourth quarter.

Guidance

For second-quarter fiscal 2019, Zscaler expects revenues betweem $65 and $67 million. Non-GAAP operating loss is expected between $1 and $3 million.

For fiscal 2019, the company anticipates revenues of $268 and 272 million and expects non-GAAP operating loss between $4 and $6 million.

Total billings for fiscal 2019 are expected to be in the range of 340 million to 345 million.

Zacks Rank & Stocks to Consider

Currently, Zscaler has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader computer and technology sector include Generac Holdings Inc. (NYSE:GNRC) , SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) and Symantec Corporation (NASDAQ:SYMC) . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Expected long-term earnings growth rate for Generac, SS&C and Symantec is 6.5%, 13.5% and 7.9%, respectively.

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