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The Raw Numbers

^^ = Accelerating, !! = highlight
Revenue 110.5M +40%
  - Americas 51%, EMEA 40%, APJ 9%
Calculated Billings 131.3M +55%
Deferred Rev 300.8M +42%
RPO 654M +31%
Gross Margin 80%
Adj Op Inc 8.3M (vs 6.1M) +36%
... margin 8% (vs 8%)
Adj Inc 9.0M (vs 7.4M) +22%
Opex 79.6M +35%
CFFO 20.8M +54%
... margin 19% (vs 17%)
FCF 9.1M +97%
... margin 8% (vs 6%)
$NER 119% +100bps

My Notes

  • offered free 3mo of ZPA to Japan and China
  • ZPA usage growth grew 10x
  • Zscaler Cloud now securing 100B tx per day
  • augmented this surge w/ AWS & Azure, lowering margins a bit
  • 43% of new lands was ZPA vs 20% past few Qs
  • acquired Cloudneeti - prevents and fixes IaaS app misconfigurations cloud, to stop breaches and prove compliance
  • acquired Edgewise Networks - uses AI/ML to do zero trust for machine-to-machine within same network
  • launched new Zscaler Summit Partner Program to tighten relationship w/ partners

Reminder: 4 new products that are supposed to release as GA in coming quarter (Q4):

  • ZScaler B2B = Zero Trust based micro-networks between groups (extending ZPA across groups of customers)
  • ZScaler Digital Experience (ZDX) = user experience monitoring (akin to Datadog's new RUM product)
  • Cloud Access Security Broker (CASB) = monitor and control access to external SaaS tools
  • Cloud Browser Isolation [from Appsulate acquisition, May 2019] = cloud browser that acts as protection buffer between user’s browser and SaaS services being called (only pixels delivered to end user’s browser, to render the content the cloud browser loaded)

My Stance

The rapidly dropping growth rate has stabilized, and has slightly risen from last Q's +36%. But the op inc growth is well below that, while cash flow margins are ticking up ever so slightly.

Yet after that pretty meh performance, the market got extremely excited. It was possibly due to statements like how "ZPA usage grew 10x" -- but ZPA was a newer product line that was a smaller portion of revenue (unknown what %, but so small that sales only ticked up +200bps from last Q after that burst!).

So I don't see what the fuss is about, yet they have gone on to triple off their March low. This company touched 65% revenue growth 6Q ago then plummeted over the past year on a faltering sales force. Margins are standing still, which isn't showing me much operational leverage at the moment. Likely due to all the hiring/training as they completely revamp their sales org.

New competition in Cloudflare for Teams has just cropped up, who stated they have a 1000 customers since debuting in January. One negative I always had with Zscaler is how complex implementing their solution seems, as it typically has to be done by system integrators. CloudFlare for Teams installs software and claims it can be set up in an hour. Here is a blog post from one of their new acquired companies in how long it took them to get hooked up to Cloudflare's network by using Cloudflare for Teams.

Several new products are finally going GA soon. The most exciting is Zscaler B2B, which allows secure private groups of users to access a shared pool of services which can be widely distributed. Great for partnership or B2B networks, and a product I thought was finally going to the spark for ZPA (until COVID-19 came along first, and gave it that spark finally).

I don't see what the market is excited about here. They are a leader in a very exciting next-gen cybersecurity & networking concept, but the execution has been weak. Looking their their website, their marketing REALLY SUCKS. This page for the new B2B product is really horrible and does nothing to explain the service, and their graphics person needs to be fired.

Zscaler is on great trends (Zero Trust and SASE over their edge network) but I cannot ignore the signs in the financial execution. It's a very top-down sales process that involves C-suite decision to engage. New CRO in place will hopefully turn things around. Short term they might be interesting -- guidance is for 38% at high end, and I could see them landing a few accelerated deals due to so much work-from-home going on. And long term this is a sticky service and will remain successful -- but I do not see this growth rate getting anywhere near its former glory.

They had so much traffic that they had to use public cloud IaaS (AWS & Azure) to handle the extra load. Read another way - their edge network, being hardware based, DOES NOT SCALE, so it had to use outside cloud resources to do so. I don’t find that a comforting view into their networking architecture. Just another data point on top of the many others (a faltering sales force being rebuilt, obtuse marketing, a heavy top-down sales process, and a complex implementation process).

-muji