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Zscaler (ZS) Up 12.7% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Zscaler (ZS - Free Report) . Shares have added about 12.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Zscaler due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Zscaler Q3 Earnings Beat, Outlook Raised

Zscaler reported better-than-expected fiscal third-quarter results and raised outlook for fiscal 2021. The company’s fiscal third-quarter adjusted earnings jumped more than two-fold to 15 cents per share from the 7 cents reported in the year-ago period. Moreover, quarterly earnings beat the Zacks Consensus Estimate of 7 cents per share.

Top-Line Performance

Revenues of $176.4 million jumped 60% year over year on rise in adoption of the company’s cloud platform security solutions by global enterprises. The figure surpassed the consensus mark of $164.4 million.

Americas accounted for 51% of revenues, while the EMEA contributed 38%. The remaining 11% came in from the Asia Pacific and Japan.

Calculated billings surged 71% year over year to $225 million during the reported quarter.

Zscaler’s quarterly results benefited from continued solid demand for its products, given the healthy environment of the global security market.

Also, a huge global workforce is working remotely in an effort to contain the spread of coronavirus. However, an increasing number of people logging into employers' networks has been prompting a greater need for security. This trend spurred demand for Zscaler’s products during the fiscal third quarter.

Customer Details

Zscaler continued to win customers and its net dollar retention rate was outstanding at 126% compared with the previous quarter’s 127% and the year-ago quarter’s 119%.

Remaining Performance Obligations (RPO), which represent Zscaler’s committed non-cancelable future revenues, were $1.2 billion as of Apr 30, significantly up 85% year over year.

Operating Details

In the reported quarter, non-GAAP gross margin expanded 100 basis points (bps) year over year to 81%. Sequentially, non-GAAP gross margin remained flat. The company noted that gross margin remained under pressure during the second half of fiscal 2021 due to the increased use of public cloud to meet the ten time surge in ZPA traffic as pandemic lockdowns began.

Non-GAAP research & development (R&D), sales & marketing (S&M) and general & administrative (G&A) expenses flared up 55%, 56% and 33% to $25.9 million, $80.9 million and $12.9 million, respectively.

Total non-GAAP operating expenses shot up 53% to $119.7 million year over year. However, as a percentage of revenues, operating expenses shrunk 300 bps to 68% mainly due to lower T&E, partially offset by increased hiring and M&A expenses.

As a result of higher gross margin and lower operating expenses as a percentage of sales, non-GAAP operating margin improved 400 bps to 13%. Non-GAAP operating income was $22.9 million in the fiscal third quarter compared with the year-ago quarter’s $9.7 million.

Balance Sheet & Cash Flow

As of Apr 30, Zscaler had $1.47 billion in cash, cash equivalents and short-term investments compared with the previous quarter’s $1.44 billion. Notably, the company had issued convertible senior notes worth $1.15 billion in June 2020.

In the reported quarter, the company generated operating cash flow of $73.4 million and $55.8 million of free cash flow. In the first nine months of fiscal 2021, it generated operating and free cash flows of $157.3 million and $116 million, respectively.

Deferred revenues surged 65% year on year to $495.4 million.

Guidance

For fiscal 2021, Zscaler raised the revenue guidance to $660-$664 million from the $634-$638 million projected earlier.

Non-GAAP income from operations is now expected to be $71-$72 million, up from the previous forecast of $59-$61 million. The non-GAAP earnings estimate has been revised upward to 47 cents per share from the earlier range of 39-40 cents per share.

The company’s fiscal 2021 calculated billings are estimated now between $878 million and $880 million, up from the prior projection of $820-$825 million.

For fourth-quarter fiscal 2021, Zscaler projects revenues between $185 million and $187 million. Non-GAAP income from operations is estimated between $13.5 million and $14.5 million. Non-GAAP earnings are projected in the range of 8-9 cents per share.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 7.3% due to these changes.

VGM Scores

At this time, Zscaler has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions has been net zero. Notably, Zscaler has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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