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Zscaler Reports First Quarter Fiscal 2021 Financial Results

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Zscaler, Inc.
·22 min read
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First Quarter Highlights

  • Revenue grows 52% year-over-year to $142.6 million

  • Calculated billings grows 64% year-over-year to $144.7 million

  • Deferred revenue grows 51% year-over-year to $371.9 million

  • GAAP net loss of $55.0 million compared to GAAP net loss of $17.1 million on a year-over-year basis

  • Non-GAAP net income of $20.0 million compared to non-GAAP net income of $4.9 million on a year-over-year basis

SAN JOSE, Calif., Dec. 02, 2020 (GLOBE NEWSWIRE) -- Zscaler, Inc. (Nasdaq: ZS), the leader in cloud security, today announced financial results for its first quarter of fiscal year 2021, ended October 31, 2020.

"Our customers are accelerating their digital transformation, and this drove our strong first quarter results," said Jay Chaudhry, Chairman and CEO of Zscaler. "Organizations are turning to the Zscaler™ Zero Trust Exchange platform for the right security architecture, which can be implemented easily and rapidly. Our visibility and business momentum remain strong, and we are pleased to increase our fiscal year guidance."

First Quarter Fiscal 2021 Financial Highlights

  • Revenue: $142.6 million, an increase of 52% year-over-year.

  • Income (loss) from operations: GAAP loss from operations was $42.7 million, or 30% of total revenue, compared to $18.3 million, or 20% of total revenue, in the first quarter of fiscal 2020. Non-GAAP income from operations was $19.7 million, or 14% of total revenue, compared to $3.7 million, or 4% of total revenue, in the first quarter of fiscal 2020.

  • Net income (loss): GAAP net loss was $55.0 million, compared to $17.1 million in the first quarter of fiscal 2020. Non-GAAP net income was $20.0 million, compared to $4.9 million in the first quarter of fiscal 2020.

  • Net income (loss) per share: GAAP net loss per share was $0.41, compared to $0.13 in the first quarter of fiscal 2020. Non-GAAP net income per share was $0.14, compared to $0.04 in the first quarter of fiscal 2020.

  • Cash flow: Cash provided by operations was $53.5 million, or 38% of revenue, compared to $21.4 million, or 23% of revenue, in the first quarter of fiscal 2020. Free cash flow was $42.2 million, or 30% of revenue, compared to $9.4 million, or 10% of revenue, in the first quarter of fiscal 2020.

  • Deferred revenue: $371.9 million as of October 31, 2020, an increase of 51% year-over-year.

  • Cash, cash equivalents and short-term investments: $1,416.0 million as of October 31, 2020, an increase of $45.4 million from July 31, 2020.

Recent Business Highlights

  • Appointed Chris Kozup as Chief Marketing Officer. Kozup is responsible for global marketing strategy and expansion for the next phase of Zscaler growth. Kozup has more than 20 years of industry experience and was most recently CMO at Aruba, a Hewlett Packard Enterprise company.

  • Announced a strategic partnership with VMware, Inc. to help organizations simplify the adoption of a complete Secure Access Service Edge (SASE) architecture and more effectively implement Zero Trust security.

  • Announced our virtual Zenith Live 2020, a gathering of IT and security visionaries who are leading the mobile and cloud-first future. Zenith Live is planned to take place on December 8-9 in the Americas, December 9-10 in Europe, and December 15-16 in Asia Pacific. The event is free to register.

  • Released the Zscaler 2020 State of Encrypted Attacks Report. The threat research revealed the emerging techniques and impacted industries behind a 260-percent spike in attacks using encrypted channels to bypass legacy security controls.

  • Announced a partnership with New York University Tandon School of Engineering and their prestigious Master of Science in Cybersecurity Risk and Strategy. The partnership will allow Masters candidates to gain practical, first-hand knowledge of SASE and zero trust best practices through courses that teach Zscaler Internet Access™ and Zscaler Private Access™.

Change in Non-GAAP Measures Presentation

Effective August 1, 2020, the beginning of our fiscal year ending July 31, 2021, we have presented employer payroll taxes related to employee equity award transactions, which is a cash expense, as part of stock-based compensation expense in our non-GAAP results. These payroll taxes have been excluded from our non-GAAP results as these are tied to the timing and size of the exercise or vesting of the underlying equity awards and the price of our common stock at the time of vesting or exercise, which may vary from period to period independent of the operating performance of our business. Prior period amounts have been recasted to conform with the current period presentation.

Financial Outlook

For the second quarter of fiscal 2021, we expect:

  • Total revenue of $146 million to $148 million

  • Non-GAAP income from operations of $11 million to $12 million

  • Non-GAAP earnings per share of approximately $0.07 to $0.08, assuming approximately 144 million common shares outstanding

For the full year fiscal 2021, we expect:

  • Total revenue of $608 million to $612 million

  • Calculated billings of $755 million to $765 million

  • Non-GAAP income from operations of $55 million to $57 million

  • Non-GAAP earnings per share of $0.37 to $0.38, assuming approximately 145 million common shares outstanding

These statements are forward-looking and actual results may differ materially. Refer to the Forward-Looking Statements safe harbor below for information on the factors that could cause our actual results to differ materially from these forward-looking statements.

Guidance for non-GAAP financial measures excludes stock-based compensation expense and related payroll taxes, amortization expense of acquired intangible assets, asset impairment related to facility exit, certain litigation-related expenses, amortization of debt discount and issuance costs and income tax effects generated by intangible assets acquired in business acquisitions. We have not reconciled our expectations to non-GAAP income from operations and non-GAAP net income per share to their most directly comparable GAAP measures because certain items are out of our control or cannot be reasonably predicted. Accordingly, a reconciliation for the guidance for non-GAAP income from operations and non-GAAP net income per share is not available without unreasonable effort.

Conference Call and Webcast Information

Zscaler will host a conference call for analysts and investors to discuss its first quarter fiscal 2021 earnings results and outlook for its second quarter of fiscal 2021 and full year fiscal 2021 today at 1:30 p.m. Pacific time (4:30 p.m. Eastern time).

Date:

Wednesday, December 2, 2020

Time:

1:30 p.m. PT

Webcast:

https://ir.zscaler.com/

Dial-in number:

918-922-3018

Upcoming Conferences

First Quarter of Fiscal 2021 Virtual Investor Conference Participation Schedule:

  • Credit Suisse Technology Conference
    Thursday, December 3, 2020

  • UBS Global TMT Conference
    Monday, December 7, 2020

  • Barclays Global Technology, Media and Telecommunications Conference
    Thursday, December 10, 2020

Zscaler's conference presentations are expected to be available via webcast on the Investor Relations section of the company's website. To hear these presentations and to access the most updated information, please visit the Investor Relations section of Zscaler’s website at https://ir.zscaler.com.

Forward-Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties, including statements regarding our future financial and operating performance, including our financial outlook for the second quarter of fiscal 2021 and full year fiscal 2021. There are a significant number of factors that could cause actual results to differ materially from statements made in this press release, including but not limited to: the duration and global impact of COVID-19 on our business, operations and financial results and the economy in general; our ability as an organization to acquire and integrate other companies, products or technologies in a successful manner; our limited operating history; our ability to identify and effectively implement the necessary changes to address execution challenges; risks associated with managing our rapid growth, including fluctuations from period to period; our limited experience with new product and subscription and support introductions and the risks associated with new products and subscription and support offerings, including the discovery of software bugs; our ability to attract and retain new customers; the failure to timely develop and achieve market acceptance of new products and subscriptions as well as existing products and subscription and support; rapidly evolving technological developments in the market for network security products and subscription and support offerings and our ability to remain competitive; length of sales cycles; and general market, political, economic and business conditions.

Additional risks and uncertainties that could affect our financial results are included under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth from time to time in our filings and reports with the Security Exchange Commission (SEC), including our Annual Report on Form 10-K for the fiscal year ended July 31, 2020 filed on September 17, 2020, as well as future filings and reports by us, copies of which are available on our website at ir.zscaler.com and on the SEC’s website at www.sec.gov. You should not rely on these forward-looking statements, as actual outcomes and results may differ materially from those contemplated by these forward-looking statements as a result of such risks and uncertainties. Additional information will also be set forth in other filings that we make with the SEC from time to time. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we do not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made.

Use of Non-GAAP Financial Information

We believe that the presentation of non-GAAP financial information provides important supplemental information to management and investors regarding financial and business trends relating to our financial condition and results of operations. For further information regarding why we believe that these non-GAAP measures provide useful information to investors, the specific manner in which management uses these measures, and some of the limitations associated with the use of these measures, please refer to the “Explanation of Non-GAAP Financial Measures" section of this press release.

About Zscaler

Zscaler (Nasdaq: ZS) accelerates digital transformation so customers can be more agile, efficient, resilient, and secure. The Zscaler Zero Trust Exchange protects thousands of customers from cyberattacks and data loss by securely connecting users, devices, and applications in any location. Distributed across more than 150 data centers globally, the SASE-based Zero Trust Exchange is the world’s largest in-line cloud security platform.

Zscaler™ and the other trademarks listed at https://www.zscaler.com/legal/trademarks are either (i) registered trademarks or service marks or (ii) trademarks or service marks of Zscaler, Inc. in the United States and/or other countries. Any other trademarks are the properties of their respective owners.

Investor Relations Contacts:

Bill Choi, CFA
Senior Vice President, Investor Relations
(408) 816-1478
ir@zscaler.com

Tom Stilwell
Media Contact
press@zscaler.com



ZSCALER, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

Three Months Ended

October 31,

2020

2019

Revenue

$

142,578

$

93,590

Cost of revenue (1) (2)

31,727

19,558

Gross profit

110,851

74,032

Operating expenses:

Sales and marketing (1) (2)

96,889

59,411

Research and development (1) (2)

35,770

20,271

General and administrative (1) (3) (4)

20,859

12,625

Total operating expenses

153,518

92,307

Loss from operations

(42,667

)

(18,275

)

Interest income

940

2,022

Interest expense (5)

(13,049

)

Other income (expense), net

268

(29

)

Loss before income taxes

(54,508

)

(16,282

)

Provision for income taxes

498

794

Net loss

$

(55,006

)

$

(17,076

)

Net loss per share, basic and diluted

$

(0.41

)

$

(0.13

)

Weighted-average shares used in computing net loss per share, basic and diluted

133,452

127,548

(1) Includes stock-based compensation expense and related payroll taxes as follows:

Cost of revenue

$

3,266

$

1,414

Sales and marketing

32,654

10,586

Research and development

14,900

5,054

General and administrative

9,509

2,167

Total

$

60,329

$

19,221

(2) Includes amortization expense of acquired intangible assets as follows:

Cost of revenue

$

1,504

$

205

Sales and marketing

73

8

Research and development

566

Total

$

1,577

$

779


(3) Includes asset impairment related to facility exit as follows:

$

416

$


(4) Includes litigation-related expenses as follows:

$

$

2,007


(5) Includes amortization of debt discount and issuance costs as follows:

$

12,690

$



ZSCALER, INC.

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

October 31,

July 31,

2020

2020

Assets

Current assets:

Cash and cash equivalents

$

102,016

$

141,851

Short-term investments

1,313,938

1,228,722

Accounts receivable, net

105,942

147,584

Deferred contract acquisition costs

35,589

32,240

Prepaid expenses and other current assets

22,040

31,396

Total current assets

1,579,525

1,581,793

Property and equipment, net

83,976

75,734

Operating lease right-of-use assets

45,586

36,119

Deferred contract acquisition costs, noncurrent

83,690

77,675

Acquired intangible assets, net

22,447

24,024

Goodwill

30,059

30,059

Other noncurrent assets

7,664

8,054

Total assets

$

1,852,947

$

1,833,458

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

$

7,663

$

5,233

Accrued expenses and other current liabilities

13,871

16,361

Accrued compensation

37,097

49,444

Deferred revenue

340,035

337,263

Operating lease liabilities

17,796

15,600

Total current liabilities

416,462

423,901

Convertible senior notes, net

874,359

861,615

Deferred revenue, noncurrent

31,865

32,504

Operating lease liabilities, noncurrent

35,266

28,023

Other noncurrent liabilities

2,890

2,586

Total liabilities

1,360,842

1,348,629

Stockholders’ Equity

Common stock

134

133

Additional paid-in capital

886,815

823,804

Accumulated other comprehensive income (loss)

(267

)

463

Accumulated deficit

(394,577

)

(339,571

)

Total stockholders’ equity

492,105

484,829

Total liabilities and stockholders’ equity

$

1,852,947

$

1,833,458



ZSCALER, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

Three Months Ended

October 31,

2020

2019

Cash Flows From Operating Activities

Net loss

$

(55,006

)

$

(17,076

)

Adjustments to reconcile net loss to cash provided by operating activities:

Depreciation and amortization expense

6,092

3,582

Amortization expense of acquired intangible assets

1,577

779

Amortization of deferred contract acquisition costs

8,678

5,535

Amortization of debt discount and issuance costs

12,690

Noncash operating lease costs

4,513

2,596

Stock-based compensation expense

57,185

18,376

Amortization (accretion) of investments purchased at a premium (discount)

2,605

(300

)

Deferred income taxes

(520

)

(49

)

Impairment of assets

416

Other

29

223

Changes in operating assets and liabilities:

Accounts receivable

41,634

22,859

Deferred contract acquisition costs

(18,042

)

(6,176

)

Prepaid expenses, other current and noncurrent assets

7,883

(2,471

)

Accounts payable

76

(38

)

Accrued expenses, other current and noncurrent liabilities

(1,243

)

(466

)

Accrued compensation

(12,347

)

1,382

Deferred revenue

2,133

(5,333

)

Operating lease liabilities

(4,821

)

(1,994

)

Net cash provided by operating activities

53,532

21,429

Cash Flows From Investing Activities

Purchases of property, equipment and other assets

(8,904

)

(10,210

)

Capitalized internal-use software

(2,401

)

(1,802

)

Purchases of short-term investments

(174,663

)

(88,410

)

Proceeds from maturities of short-term investments

76,582

66,796

Proceeds from sale of short-term investments

11,500

Net cash used in investing activities

(97,886

)

(33,626

)

Cash Flows From Financing Activities

Proceeds from issuance of common stock upon exercise of stock options

4,519

3,059

Net cash provided by financing activities

4,519

3,059

Net decrease in cash, cash equivalents and restricted cash

(39,835

)

(9,138

)

Cash, cash equivalents and restricted cash at beginning of period

141,851

78,484

Cash, cash equivalents and restricted cash at end of period

$

102,016

$

69,346

Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets:

Cash and cash equivalents

$

102,016

$

69,346

Restricted cash, current and non-current

Total cash, cash equivalents and restricted cash

$

102,016

$

69,346



ZSCALER, INC.

Reconciliation of GAAP to Non-GAAP Financial Measures

(in thousands)

(unaudited)

Three Months Ended

October 31,

2020

2019

Revenue

$

142,578

$

93,590

Non-GAAP Gross Profit and Non-GAAP Gross Margin

GAAP gross profit

$

110,851

$

74,032

Add:

Stock-based compensation expense and related payroll taxes

3,266

1,414

Amortization expense of acquired intangible assets

1,504

205

Non-GAAP gross profit

$

115,621

$

75,651

GAAP gross margin

78

%

79

%

Non-GAAP gross margin

81

%

81

%

Non-GAAP Income from Operations and Non-GAAP Operating Margin

GAAP loss from operations

$

(42,667

)

$

(18,275

)

Add:

Stock-based compensation expense and related payroll taxes

60,329

19,221

Litigation-related expenses

2,007

Amortization expense of acquired intangible assets

1,577

779

Asset impairment related to facility exit (1)

416

Non-GAAP income from operations

$

19,655

$

3,732

GAAP operating margin

(30

)

%

(20

)

%

Non-GAAP operating margin

14

%

4

%

___________

(1) Consists of asset impairment charges related to the relocation of our corporate headquarters.



ZSCALER, INC.

Reconciliation of GAAP to Non-GAAP Financial Measures

(in thousands, except per share amounts)

(unaudited)

Three Months Ended

October 31,

2020

2019

Non-GAAP Net Income per Share, Diluted

GAAP net loss

$

(55,006

)

$

(17,076

)

Stock-based compensation expense and related payroll taxes

60,329

19,221

Litigation-related expenses

2,007

Amortization expense of acquired intangible assets

1,577

779

Asset impairment related to facility exit (1)

416

Amortization of debt discount and issuance costs

12,690

Provision for income taxes (2)

Non-GAAP net income

$

20,006

$

4,931

GAAP net loss per share, diluted

$

(0.41

)

$

(0.13

)

Stock-based compensation expense and related payroll taxes

0.42

0.14

Litigation-related expenses

0.01

Amortization expense of acquired intangible assets

0.01

0.01

Asset impairment related to facility exit (1)

Amortization of debt discount and issuance costs

0.09

Provision for income taxes (2)

Adjustment to total fully diluted earnings per share (3)

0.03

0.01

Non-GAAP net income per share, diluted

$

0.14

$

0.04

Weighted-average shares used in computing non-GAAP net income per share, diluted

143,372

136,860

___________

(1) Consists of asset impairment charges related to the relocation of our corporate headquarters.

(2) We use our GAAP provision for income taxes for purposes of determining our non-GAAP income tax expense. The difference between our GAAP and non-GAAP income tax expense represents the effects of stock-based compensation expense recognized in foreign jurisdictions and any income tax benefits associated with business combinations. The income tax benefit related to stock-based compensation expense included in the GAAP provision for income taxes was not material for all periods presented.

(3) The sum of the fully diluted earnings per share impact of individual reconciling items may not total to fully diluted Non-GAAP net income per share due to the basic share counts used to calculate the GAAP net loss per share as compared to fully diluted share count used for Non-GAAP net income per share and due to rounding of the individual reconciling items. The GAAP net loss per share calculation uses a lower share count as it excludes potentially dilutive shares, which are included in calculating the non-GAAP income per share.



ZSCALER, INC.

Reconciliation of GAAP to Non-GAAP Financial Measures

(in thousands)

(unaudited)

Three Months Ended

October 31,

2020

2019

Calculated Billings

Revenue

$

142,578

$

93,590

Add: Total deferred revenue, end of period

371,900

245,869

Less: Total deferred revenue, beginning of period

(369,767

)

(251,202

)

Calculated billings

$

144,711

$

88,257

Free Cash Flow

Net cash provided by operating activities

$

53,532

$

21,429

Less: Purchases of property, equipment and other assets

(8,904

)

(10,210

)

Less: Capitalized internal-use software

(2,401

)

(1,802

)

Free cash flow

$

42,227

$

9,417

As a percentage of revenue:

Net cash provided by operating activities

38

%

23

%

Less: Purchases of property, equipment and other assets

(6

)

%

(11

)

%

Less: Capitalized internal-use software

(2

)

%

(2

)

%

Free cash flow margin

30

%

10

%


ZSCALER, INC.
Explanation of Non-GAAP Financial Measures

In addition to our results determined in accordance with generally accepted accounting principles in the United States of America (GAAP), we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In particular, free cash flow is not a substitute for cash used in operating activities. Additionally, the utility of free cash flow as a measure of our liquidity is further limited as it does not represent the total increase or decrease in our cash balance for a given period. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation of our historical non-GAAP financial measures to their most directly comparable financial measure stated in accordance with GAAP has been included in this press release. Investors are cautioned that there are a number of limitations associated with the use of non-GAAP financial measures and key metrics as analytical tools. Investors are encouraged to review these reconciliations, and not to rely on any single financial measure to evaluate our business.

Expenses Excluded from Non-GAAP Measures

Stock-based compensation expense is excluded primarily because they are non-cash expenses that management believes are not reflective of our ongoing operational performance. Effective August 1, 2020, the beginning of our fiscal year ending July 31, 2021, we have presented employer payroll taxes related to employee equity award transactions, which is a cash expense, as part of stock-based compensation expense in our non-GAAP results. These payroll taxes have been excluded from our non-GAAP results as these are tied to the timing and size of the exercise or vesting of the underlying equity awards and the price of our common stock at the time of vesting or exercise, which may vary from period to period independent of the operating performance of our business. Prior period amounts have been recasted to conform with the current period presentation. Amortization expense of acquired intangible assets is excluded because these are considered by management to be outside of our core business operating performance. Asset impairments related to facility exit costs are excluded because such charges are not reflective of our ongoing operational performance. Amortization of debt discount and issuance costs from the convertible senior notes is excluded because they are non-cash expenses and are not reflective of our ongoing operational performance. We also exclude certain litigation-related expenses consisting of professional fees and related costs incurred by us in defending against significant claims that we deem not to be in the ordinary course of our business and, if applicable, actual losses and accruals related to estimated losses in connection with these claims. There are many uncertainties and potential outcomes associated with any litigation, including the expense of litigation, timing of such expenses, court rulings, unforeseen developments, complications and delays, each of which may affect our results of operations from period to period, as well as the unknown magnitude of the potential loss relating to any lawsuit, all of which are inherently subject to change, difficult to predict and could adversely affect our results of operations. We estimate the tax effect of these items on our non-GAAP results and may adjust our GAAP provision for income taxes, if such effects have a material impact to our non-GAAP results.

Non-GAAP Financial Measures

Non-GAAP Gross Profit and Non-GAAP Gross Margin. We define non-GAAP gross profit as GAAP gross profit excluding stock-based compensation expense and related payroll taxes and amortization expense of acquired intangible assets. We define non-GAAP gross margin as non-GAAP gross profit as a percentage of revenue.

Non-GAAP Income from Operations and Non-GAAP Operating Margin. We define non-GAAP income from operations as GAAP loss from operations excluding stock-based compensation expense and related payroll taxes, amortization expense of acquired intangible assets, asset impairment related to facility exit and certain litigation-related expenses. We defined non-GAAP operating margin as non-GAAP income from operations as a percentage of revenue.

Non-GAAP Net Income per Share, Diluted. We define non-GAAP net income as GAAP net loss plus stock-based compensation expense and related payroll taxes, amortization expense of acquired intangible assets, asset impairment related to facility exit, amortization of debt discount and issuance costs, certain litigation-related expenses, income tax effects generated by the effects of stock-based compensation expense recognized in foreign jurisdictions and any income tax benefits associated with business combinations. We define non-GAAP net income per share, diluted, as non-GAAP net income divided by the weighted-average diluted shares outstanding, which includes the dilutive effect of potentially diluted common stock equivalents outstanding during the period.

Free Cash Flow and Free Cash Flow Margin. We define free cash flow as net cash provided by operating activities less purchases of property, equipment and other assets and capitalized internal-use software. We define free cash flow margin as free cash flow divided by revenue. We believe that free cash flow and free cash flow margin are meaningful indicators of liquidity information to management and investors about the amount of cash generated from our operations that, after the investments in property, equipment and other assets and capitalized internal-use software, can be used for strategic initiatives.

Calculated Billings. We define calculated billings as total revenue plus the change in deferred revenue in a period. Calculated billings in any particular period aims to reflect amounts invoiced for subscriptions to access our cloud platform, together with related support services related to our new and existing customers. We typically invoice our customers annually in advance, and to a lesser extent quarterly in advance, monthly in advance or multi-year in advance.