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Zscaler (ZS) Q3 Earnings and Revenues Beat Estimates, Up Y/Y

Zscaler ZS delivered better-than-anticipated third-quarter fiscal 2022 performance.

The company reported non-GAAP earnings of 17 cents per share, which beat the Zacks Consensus Estimate of 11 cents per share. The bottom line increased 13.3% year over year.

Zscaler’s third-quarter fiscal 2022 revenues were $286.8 million, surpassing the Zacks Consensus Estimate of $271.8 million. The top line improved 63% from the prior-year reported figure.

Zscaler, Inc. Price, Consensus and EPS Surprise

Zscaler, Inc. Price, Consensus and EPS Surprise
Zscaler, Inc. Price, Consensus and EPS Surprise

Zscaler, Inc. price-consensus-eps-surprise-chart | Zscaler, Inc. Quote

Top-Line Details

During the third quarter of fiscal 2022, Zscaler’s calculated billings increased 54% year over year to $345.6 million.

Geographically, the Americas accounted for 52% of revenues, while the EMEA contributed 33%. The Asia Pacific and Japan made up the remaining 15%.

Zscaler's Zero Trust Exchange platform acted as a key catalyst in the third quarter. The company benefited from sustained demand for its products, given the healthy environment of the global security market. Increased cyber and ransomware risks, coupled with accelerated digital transformation, contributed significantly to growth.

Customer Details

In the third quarter, Zscaler continued to win multiple customers in each of its three market segments: financial services, enterprise market and federal. Its net dollar-based retention rate was over 125%.

Remaining Performance Obligations (RPO) representing Zscaler’s committed non-cancellable future revenues were $2.22 billion as of Apr 30, significantly up 83% year over year.

During the third quarter, Zscaler had 288 customers with $1 million or higher annualized recurring revenues (“ARR”). The figure, which is the highest so far, surged 76.7% year over year.

The company had 1,891 customers with $100,000 or higher ARR. The figure reflected year-over-year growth of 43.9%.

Operating Details

In the third quarter, non-GAAP gross profit was $231.3 million. Non-GAAP gross margin remained flat at 81% on a year-over-year basis and expanded 100 basis points (bps) on a quarter-over-quarter basis.

Non-GAAP research & development (16% of revenues), sales & marketing (48% of revenues), and general & administrative (7% of total revenues) expenses flared up 74.1%, 71.1% and 59.7% to $45.1 million, $138.4 million and $20.6 million, respectively.

Total non-GAAP operating expenses, accounting for 71% of revenues, climbed 70.5% to $204.1 million. Operating expenses as a percentage of revenues expanded 300 bps year over year due to higher travel-related expenses.

Non-GAAP operating income was $27.2 million compared with the previous quarter’s $22.3 million and the year-ago quarter’s $22.9 million. Non-GAAP operating margin contracted 400 bps year over year at 9%. Sequentially, the margin remained flat.

Balance Sheet & Cash Flow

As of Apr 30, 2022, Zscaler had $1.66 billion in cash, cash equivalents and short-term investments compared with the previous quarter’s $1.62 billion.

Cash flow generated through operating activities was $77.2 million, up from the previous quarter’s $48.3 million. Consequently, free cash flow stood at $43.7 million, significantly higher than $29.4 million in the second quarter of fiscal 2022.

However, free cash flow margin contracted 1700 bps to 15% in the quarter reported. Deferred revenues were $818.7 million, up 65% year over year.

During the first nine months of fiscal 2022, Zscaler generated $218.8 million worth of cash through operating activities and $156.6 worth of free cash flow. Free cash flow margin contracted 400 bps to 20% during the same time frame.

Guidance

For the fourth quarter of fiscal 2022, Zscaler projects revenues between $304 million and $306 million. Non-GAAP earnings are projected to be 20-21 cents per share.

Non-GAAP income from operations is estimated to be $33-$34 million.

Zscaler updated its fiscal 2022 guidance. It anticipates revenues of approximately $1.078 billion, up from the previous guidance of $1.045-$1.05 billion.

Calculated billings are anticipated in the range of $1.425 billion to $1.430 billion, up from the previously guided range of $1.365-$1.37 billion.

Non-GAAP earnings for fiscal 2022 are expected to be 64-65 cents per share, up from the previous forecast of 54-56 cents.

Non-GAAP operating income is estimated to be $106-$108 million, up from previous guidance of $95-$98 million.

Zacks Rank & Key Picks

Zscaler currently carries a Zacks Rank #3 (Hold). Shares of ZS have declined 26.8% in the past year.

Some better-ranked stocks from the broader Computer and Technology sector are Avnet AVT, Analog Devices ADI and Axcelis Technologies ACLS. While Avnet and Analog Devices sport a Zacks Rank #1 (Strong Buy), Axcelis carries a Zacks Rank of 2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Avnet's fourth-quarter fiscal 2022 earnings has been revised 55 cents northward to $1.96 per share over the past 30 days. For 2022, earnings estimates have moved 20.5% north to $6.83 per share in the past 30 days.

Avnet's earnings beat the Zacks Consensus Estimate in each of the preceding four quarters, the average surprise being 21.2%. Shares of AVT have gained 7% in the past year.

The Zacks Consensus Estimate for Analog Devices' third-quarter fiscal 2022 earnings has been revised 5 cents upward to $2.42 per share over the past seven days. For fiscal 2022, earnings estimates have moved 16 cents north to $9.24 per share in the past seven days.

Analog Devices' earnings beat the Zacks Consensus Estimate in each of the preceding four quarters, the average surprise being 7.7%. Shares of ADI have increased 0.5% in the past year.

The Zacks Consensus Estimate for Axcelis' second-quarter 2022 earnings has been revised 3 cents upward to 99 cents per share over the past 30 days. For 2022, ACLS' earnings estimates have moved 41 cents north to $4.40 per share in the past 30 days.

Axcelis' earnings beat the Zacks Consensus Estimate in each of the preceding four quarters, the average surprise being 23.5%. Shares of ACLS have jumped 46.4% in the past year.


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