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Zscaler (ZS) Q4 Earnings Beat, Shares Down on Weak Guidance

Zacks Equity Research

Zscaler ZS reported fourth-quarter fiscal 2019 adjusted earnings of 7 cents per share that beat the Zacks Consensus Estimate by 6 cents. The company had reported an adjusted loss of a cent in the year-ago quarter.

Revenues of $86.1 million surged 53.3% year over year and comfortably surpassed the consensus mark of $82 million. Americas accounted for 51% of revenues, while EMEA contributed 41%. The rest came from APJ.

Calculated billings increased 32% year over year to $125.8 million in the reported quarter.

However, Zscaler declined 19.4% to close at $49.67 on Sep 11, primarily due to weak guidance amid increasing competition. The company’s fiscal 2020 calculated billings are expected between $490 million and $500 million, indicating growth of 27% (at mid-point), down from 51.4% year-over-year growth in fiscal 2019.

Management also stated that some large deals are taking time to close, which might hurt the top line in the near term.

Notably, Zscaler’s shares have returned 26.7% compared with the industry’s growth of 2.3% on a year-to-date basis.

Year-to-date Performance

 



 

Customer Details

Zscaler continued to win customers and its net dollar retention rate was strong at 118%, better than 117% in the year-ago quarter. Moreover, customer churn rate declined both sequentially and on a year-over-year basis.

The company ended fiscal 2019 with more than 3,900 customers. Total global 2,000 customers increased to more than 400 as of Jul 31, up from more than 300 a year ago. Moreover, 100 of the Fortune 500 companies are Zscaler’s customers.

Remaining Performance Obligations were $554 million on Jul 31, up 39% year over year.

Operating Details

In the reported quarter, gross margin expanded130 basis points (bps) to 81.4%.

Sales & marketing (S&M), research & development (R&D) and general & administrative (G&A)     expenses jumped 51.8%, 49.9% and 5.5% to $49.3 million, $17.2 million and $10.2 million, respectively.

However, as a percentage of revenues, S&M, R&D and G&A expenses declined 50 bps, 40 bps and 530 bps, respectively.

Zscaler raised its headcount in the fourth quarter by more than 130 employees. The company had more than 1480 employees at the end of the fiscal.

Operating income was $7.9 million in the reported quarter, while operating loss was $2.4 million in the year-ago quarter.

Balance Sheet & Cash Flow

As of Jul 31, Zscaler had $364.6 million in cash, cash equivalents and short-term investments.

In the reported quarter, the company used $17.8 million of cash in operations. Free cash flow was $7.6 million.

Deferred revenues soared 53% year over year to $251.2 million.

Guidance

For first-quarter fiscal 2020, Zscaler expects revenues between $89 million and $90 million.

Non-GAAP loss from operations is expected between breakeven and $1 million. Non-GAAP net loss is projected between breakeven and a cent.

For fiscal 2020, Zscaler expects revenues between $395 million and $405 million.

Non-GAAP income from operations is expected to be $13-$18 million. Non-GAAP earnings are expected between 12 cents and 15 cents per share.

Zacks Rank & Stocks to Consider

Currently, Zscaler carries a Zacks Rank #3 (Hold).

Chegg CHGG, NIC EGOV and Paylocity Holding PCTY are stocks worth considering in the same industry. All three stocks sport a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rates for Chegg, NIC and Paylocity Holding are currently pegged at 30%, 14% and 20%, respectively.

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