Zscaler, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended October 31, 2023; comparative period is the three months ended October 31, 2022. Financial statements are unaudited. Zscaler provides cloud-based security through a subscription SaaS model, primarily via channel partners.
Financial performance and liquidity
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Revenue | $496.7 million | $355.5 million | +40% |
| Gross profit / GAAP gross margin | $385.3 million / 78% | $278.9 million / 78% | Gross profit +38% |
| Operating loss / margin | $46.1 million / (9%) | $69.1 million / (19%) | Loss narrowed |
| Net loss / diluted loss per share | $33.5 million / $0.23 | $68.2 million / $0.48 | Loss narrowed |
| Operating cash flow | $260.8 million | $128.5 million | +103% |
| Free cash flow (non-GAAP) | $224.7 million | $95.6 million | +135% |
| Calculated billings (non-GAAP) | $456.6 million | $340.1 million | +34% |
Non-GAAP operating income was $89.7 million, or 18% of revenue, versus $42.1 million, or 12%, in the prior-year quarter. The filing’s non-GAAP measures exclude specified items, including stock-based compensation and acquired-intangible amortization for operating income.
At October 31, 2023, cash and cash equivalents were $1.362 billion and short-term investments were $962.7 million, totaling $2.324 billion. Current assets were $2.892 billion and current liabilities were $1.474 billion. Convertible notes had a net carrying value of $1.134 billion and principal of approximately $1.150 billion, due July 2025, bearing 0.125% interest. Management said existing cash, equivalents and short-term investments should fund operating and capital needs for at least 12 months.
Material changes and business indicators
- Revenue growth was driven by expansion among existing customers, contributing $95.7 million of additional revenue, and new customers; the customer base grew 14% year over year. Subscription and support revenue represented about 97% of revenue.
- Operating cash flow improved, supported in part by a $215.1 million cash inflow from accounts receivable changes and substantial non-cash expenses. Deferred revenue declined by $40.2 million during the quarter; ending deferred revenue was $1.400 billion.
- Remaining performance obligations were $3.487 billion; the company expected to recognize 51% within 12 months and 95% within three years.
- Dollar-based net retention was 120%, down from above 125% a year earlier.
- Stock-based compensation expense was $129.1 million, up from $105.2 million. Weighted-average shares increased to 147.6 million from 143.5 million.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expects continued investment in sales and marketing, research and development, infrastructure and international operations, with operating expenses expected to rise in absolute dollars. It anticipates continued operating losses for the foreseeable future.
- Management described increased customer scrutiny and longer approval cycles, particularly for larger deals, amid inflation, potential recessionary conditions and geopolitical uncertainty. These factors could weigh on demand and extend sales cycles.
- In August 2023, Zscaler extended the estimated useful lives of servers and networking equipment from four to five years. The change reduced depreciation expense by $3.1 million in the quarter.
- The August 2023 acquisition of Securelyshare involved $5.3 million of cash consideration and added $2.8 million of developed technology and $3.2 million of goodwill. The filing also reports $3.3 million of tax expense associated with integrating a business acquisition.
- Key stated risks include competition, customer retention and expansion, reliance on channel partners, cloud-platform availability and cybersecurity, regulatory and privacy compliance, international and India operations, and the ability to achieve profitability. The company reported no pending or threatened legal proceeding it considered likely to have a material adverse effect, while noting litigation outcomes are unpredictable.
Important facts for investors to verify
- Whether the 120% dollar-based net retention rate stabilizes or continues to decline, and whether customer expansion sustains reported revenue growth.
- How much operating cash flow and free cash flow reflect durable operating performance versus working-capital timing, non-cash stock compensation and advance customer billings.
- The scale and effects of stock-based compensation, including potential dilution, and the assumptions behind non-GAAP adjustments.
- Progress toward profitability and the effect of continued spending, longer sales cycles and macroeconomic conditions on margins and growth.
- Cash availability and the company’s plan for the $1.150 billion notes due in July 2025, including potential conversion or settlement impacts.