Zscaler Q4 2023 Earnings Review
$ZS Q4'23 Results:
Financial Results:
⬆️$525.0M rev (+35.4% YoY, +39.7% LQ) beat est by 3.5%
⬆️GM* (80.8%, +0.3%pp YoY)
⬆️Operating Margin* (19.6%, +7.1%pp YoY)🟢
⬆️FCF Margin 19.2%, +3.0%pp YoY)
⬆️EPS* $0.76 beat est by 31.0%🟢
*non-GAAP
Key Metrics
↘️DBNR 117% (120% LQ)
➡️RPO $3.61B (+29.0% YoY)🟡
➡️Billings $628M (+27.0% YoY)🟡
Customers
➡️2,820 >$100k+ customers (+21.0% YoY, +112)
➡️497 $1M+ customers (+31.0% YoY, +29)
Operating expenses
↘️S&M*/Revenue 40.1% (41.9% LQ)
⬆️R&D*/Revenue 14.8% (14.6% LQ)
⬆️G&A*/Revenue 6.2% (6.2% LQ)
↘️Net New ARR $113M ($167 LQ)
⬆️CAC* Payback Period 27.3 Months (17.2 LQ)
Dilution
⬆️SBC/rev 28%, +1.0%pp QoQ
⬆️Dilution at 3.1% YoY, +0.2%pp QoQ
Guidance
⬆️Q1'24 $536.0M guide (+28.0% YoY) beat est by 0.9%
⬆️$2,122M FY guide (+31.2% YoY) raised by 1.0%
Key points from Zscaler Fourth Quarter 2023 Earnings Call:
Strong Q2 2024 FY Performance:
Zscaler reported a strong performance in Q2, exceeding guidance for both the top and bottom lines. Revenue grew by 35% year-over-year, and billings grew by 27%. Operating profit more than doubled year-over-year, and free cash flow margin reached a record for Q2.
Innovation and Product Expansion:
Zscaler continues to expand its platform and introduce new solutions, such as Zero Trust for Workloads, Zero Trust for Branch, and AI/ML-powered solutions. The company is also working on Breach Predictor, an innovative product aimed at predicting breaches before they occur.
ZPA and ZDX Products:
Zscaler's Zero Trust Access (ZPA) and Zscaler Digital Experience (ZDX) continue to be pivotal in their product offerings, with mentions of strong customer uptake and expansion.
Breach Predictor:
Predictive Security Measures: The concept of a Breach Predictor highlights the innovative use of AI to forecast potential security breaches before they occur. This proactive stance allows organizations to prevent incidents rather than responding to them post-factum, significantly enhancing their security posture.
Cloud Security:
Adopt Zero Trust Architecture: Moving away from traditional firewall and VPN-based security models to a Zero Trust architecture is critical for enhancing security posture. This approach assumes no entity within or outside the network is trusted by default, thereby minimizing the attack surface.
Risk360 and Business Insights:
Employ AI-powered tools like Risk360 for automating risk quantification and proactive cyber risk reduction, and Business Insights for optimizing the cost and performance of SaaS applications and network infrastructure.
FedRAMP and Federal Market:
Zscaler's products have achieved high levels of FedRAMP certification, positioning the company well within the federal market. Jay Chaudhry highlighted the company's success in the federal sector, particularly with cabinet level agencies, as an area of strength and opportunity for further growth.
Increased Customer Engagement:
Zscaler is evolving from an opportunity-centric to an account-centric sales motion. This strategy includes focusing on large enterprise customers and expanding the top accounts pilot program. The company also plans to increase its focus on vertical selling.
Demand for Zero Trust Security:
Despite a challenging macro environment, demand for Zero Trust security remains robust, with expected budget increases for Zero Trust solutions, especially in light of high-profile breaches.
While overall IT budgets may be tightening, cybersecurity remains a priority for investment. Zscaler benefits from its ability to replace multiple point products and reduce costs while enhancing security.
Competitors:
Jay Chaudhry, CEO, notes that despite the increasing competition in the SASE and cybersecurity market, Zscaler's focus on Zero Trust architecture differentiates them. He argues that cybersecurity is mission-critical, leading customers to prefer leading solutions over bundled or cheaper alternatives offered by competitors.
Expansion and Leadership Changes:
Zscaler is scaling its go-to-market engine to reach its goal of $5 billion and beyond in ARR. This includes adding more experienced leaders to the sales team. Mike Rich has been appointed as Chief Revenue Officer to drive this next phase of growth. Bill Choi, Senior Vice President of Investor Relations and Strategic Finance, will be leaving Zscaler.
Management comments on the earnings call.
ZPA and ZDX:
"We are seeing continued success in selling our broader platform, including ZPA, Data Protection, CDX, Zero Trust for Workloads, Zero Trust for Branch, and AI-powered solutions." - Jay Chaudhry
Risk360 and Product Innovations:
"Moving to our AI cloud, within this portfolio, our newest products Risk360 and Business Insights are growing rapidly... We have already delivered several AI innovations, including ML-based data classification, ML-based policy recommendations, Risk360, Business Insights, and more." - Jay Chaudhry
Competitors and Customers:
"Cyber is so mission critical that customers will invest in the industry-leading solutions rather than rely on cheaper or less effective products that are included as part of their ELAs. They want best-of-breed platforms with the best functionality that integrate with other platforms, thus eliminating dozens of point products." - Jay Chaudhry
Billings Growth:
"Strong customer interest in our platform drove a record first-half total bookings with nearly half of net new bookings coming from new logo customers." - Jay Chaudhry
FedRAMP and Federal Market:
"With the highest levels of FedRAMP certifications for both ZIA and ZPA, we are very well positioned to benefit from continued growth with our federal customers." - Jay Chaudhry
Zero Trust for Workloads:
"Zero Trust for Workloads continues to gain wider adoption. For example, in an upsell win, a financial technology company purchased Zero Trust for Workloads for 25,000 workloads, which contributed to nearly doubling their annual spend with us to over $1 million." - Jay Chaudhry
Breach Predictor:
"One of the AI products I’m particularly excited about is Breach Predictor. Breach Predictor is our vision to leverage the power of our platform to predict breaches before customers get breached." - Jay Chaudhry
Leadership:
"Considering these leadership changes, I am particularly proud of our field sales execution this quarter... To capture this demand and scale our business to $5 billion ARR and beyond, we appointed Mike Rich as our Chief Revenue Officer last quarter." - Jay Chaudhry
Thoughts on Zscaler ER ZS 0.00%↑ :
🟢Pros:
+ Revenue rose by +35.4% YoY.
+ DBNR at 117%.
+ Strong customer growth with $1M+ ARR added: +29.
+ Company increasing margins and profitability.
+ Beat Q4 revenue guidance by 3.6%.
+ Raised FY guidance by 1.0%.
+ RPO growth is stabilizing.
+ Introduced a new product, Breach Predictor, which will contribute to future revenue growth.
+ The management team is strengthened by the experienced Mike Rich, Chief Revenue Officer, to improve the go-to-market strategy and achieve the goal of $5 billion ARR.
🟡Neutral:
+- SBC/rev at 28%, dilution at 3.1% YoY.
+- Weak Net New ARR added: (+113, -12% YoY).
+- Q1 guide: +2.1% QoQ, revenue growth is still slowing down.
+- RPO and billings are growing slower than revenue.