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Zscaler (ZS) to Report Q1 Earnings: What's in the Cards?

Zacks Equity Research

Zscaler ZS is set to report first-quarter fiscal 2020 results on Dec 3.

For the quarter, the company projects total revenues between $89 million and $90 million. Moreover, management expects billings to have declined as historical trends suggest sequential dip in the first and third quarters, after strong second and fourth quarters, respectively.

The Zacks Consensus Estimate for revenues is pegged at $89.3 million, indicating an increase of 41.1% from the year-ago quarter’s reported figure.

Moreover, Zscaler expects non-GAAP net loss between breakeven and a cent. The consensus mark for earnings was unchanged at a cent over the past 30 days.

Notably, the company’s earnings beat the Zacks Consensus Estimate in the trailing four quarters, the average positive surprise being 530%.

In fourth-quarter fiscal 2019, the company reported adjusted earnings of 5 cents per share, crushing the Zacks Consensus Estimate by 400%. Revenues of $79.1 million surged 61% year over year, comfortably surpassing the consensus estimate by 5.5%.

Let’s see how things are shaping up for this announcement.

Zscaler, Inc. Price and EPS Surprise

Zscaler, Inc. Price and EPS Surprise

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

Factors to Watch

Zscaler’s expanding portfolio strengthens its competitive position and boosts user base. Additionally, growing adoption of the company’s cloud platform security solutions by enterprises is expected to have boosted revenues in the first quarter fiscal 2020.

Zscaler cloud’s capability to effectively handle web traffic and block any unnecessary interference on Microsoft's MSFT Office 365 is noteworthy. The company is also helping enterprises mitigate a number of encrypted SSL-based threats.

The company’s unique offerings include four architectural advantages that firewalls cannot add-on. These include Edge cloud for policy enforcement, multi-tenancy, proxy for SSL or TLS inspection, and zero trust network access.

Moreover, continued momentum in high customer win rates, coupled with a strong net dollar retention rate, is likely to have benefited the company’s revenues in the fiscal first quarter. Zscaler has more than 100 of the Fortune 500 companies as its customers.

Notably, customer churn rate had declined quarter over quarter and year on year in the previous quarter. The company had ended fiscal 2019 with more than 3,900 customers.

Additionally, strengthening channel partnerships with large system integrators and global service providers, which contribute more than 50% of revenues, is a major growth driver.

The company’s ability to provide cloud-based security solutions irrespective of the users’ “device or location” is a key catalyst. This is anticipated to have helped the company win customers in the to-be-reported quarter.

Notably, total global 2,000 customers increased to more than 400 as of Jul 31, up from the more than 300 witnessed in the year-ago period. Moreover, Zscaler Private Access (ZPA) had contributed 14% to the company’s new business in the previous quarter.

However, the company’s guidance reflects its plans to invest aggressively in sales and marketing, which might have dampened profitability.

Operating expenses in the quarter to be reported will include $6 million in expenses for three major market events, including Zenith Live Americas and Zenith Live Europe.

Additionally, increased investments in cloud infrastructure and new product innovation are expected to have strained margins in the period under consideration.

What Our Model Says

According to the Zacks model, the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — increases the odds of a positive earnings surprise.

Zynga has an Earnings ESP of 0.00% and a Zacks Rank #3, which makes surprise prediction difficult. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks to Consider

Here are some companies, which, per our model, have the right combination of elements to post an earnings beat in their upcoming release.

Canadian Imperial Bank of Commerce CM has an Earnings ESP of +0.61% and carries a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here

Dollar General Corp. DG has an Earnings ESP of +0.65% and holds a Zacks Rank of 2.

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