Why Is Zscaler (ZS) Up 15.9% Since Last Earnings Report?
A month has gone by since the last earnings report for Zscaler (ZS). Shares have added about 15.9% 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 drivers.
Zscaler Q1 Earnings and Revenues Beat Estimates, Up Y/Y
Zscaler reported first-quarter 2024 non-GAAP earnings of 67 cents per share, which beat the Zacks Consensus Estimate by 36.7%. The company reported earnings of 29 cents per share in the year-ago quarter.
Zscaler’s first-quarter fiscal 2024 revenues were $496.7 million, which surpassed the Zacks Consensus Estimate by 4.91% and surged 39.7% year over year.
In the reported quarter, Zscaler strengthened its portfolio with the integration of innovative zero-trust features to Workloads Communications solution and announced that it has developed a solution in collaboration with CrowdStrike and Imprivata. In the fiscal first quarter, ZS added multiple large customers across all its offerings, including ZIA, ZPA, and ZDX. Its net dollar-based retention rate was 120% in the reported quarter, driven by strong upsells.
Remaining Performance Obligations (RPO), representing Zscaler’s committed non-cancelable future revenues, were $3.49 billion as of Oct 31, up 30% year over year with current RPO being approximately 51% of the total RPO.
At the end of the quarter, the company had 468 customers with $1 million or higher annualized recurring revenues (ARR). The company added 19 customers during the quarter with $1 million or more in ARR. The company’s customer count for ARR of more than $100,000 reached 2,708 at the end of the first quarter.
Operating Details
The non-GAAP gross profit increased 38.5% year over year to $401 million. However, the non-GAAP gross margin contracted 70 basis points (bps) on a year-over-year basis to 80.7%.
Total non-GAAP operating expenses, accounting for 62.7% of revenues, increased 26% year over year to $311 million. Sales and marketing, research and development, and general and administrative expenses increased 19.8%, 46.9% and 23.2%, respectively, on a year-over-year basis.
The non-GAAP operating income was $89.7 million compared with the year-ago quarter’s $42.1 million. The non-GAAP operating margin expanded 622 bps year over year to 18.1%.
Balance Sheet & Cash Flow
As of Oct 31, 2023, Zscaler had $2.32 billion in cash, cash equivalents and short-term investments compared with $2.1 billion as of Jul 31.
The company generated operating and free cash flows of $261 million and $224.7 million, respectively, during the first quarter. Zscaler generated operating and free cash flows of $128.5 million and $95.6 million, respectively, in the year-ago quarter.
Guidance Update
Zscaler revised its outlook for the fiscal 2024. The company forecasts revenues in the range of $2.09-$2.10 billion from the $2.050-$2.065 billion band as released previously.
Calculated billings are expected in the range of $2.52-$2.56 billion.
The non-GAAP operating income is estimated in the band of $360-$365 million compared with the previous guidance of $330-$340 million.
Non-GAAP earnings for fiscal 2024 are expected in the band of $2.45-$2.48 per share compared with the previous guidance of $2.20-$2.25 per share.
For the second quarter of fiscal 2024, Zscaler projects revenues between $505 million and $507 million.
The gross margin is expected to be 80%. The non-GAAP income from operations is estimated in the band of $84-$86 million. Non-GAAP earnings are projected between 57 cents and 58 cents per share.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review.
The consensus estimate has shifted 17.01% due to these changes.
VGM Scores
At this time, Zscaler has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. 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 looks promising. It comes with little surprise Zscaler has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
Performance of an Industry Player
Zscaler belongs to the Zacks Internet - Services industry. Another stock from the same industry, Sohu.com (SOHU), has gained 12.2% over the past month. More than a month has passed since the company reported results for the quarter ended September 2023.
Sohu.com reported revenues of $145.43 million in the last reported quarter, representing a year-over-year change of -21.5%. EPS of -$0.30 for the same period compares with -$0.50 a year ago.
Sohu.com is expected to post a loss of $0.40 per share for the current quarter, representing a year-over-year change of -566.7%. Over the last 30 days, the Zacks Consensus Estimate has changed -2.5%.
Sohu.com has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of C.
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