Zscaler, Inc. Form 10-K Summary
Reporting period: Fiscal year ended July 31, 2022. Although the request references “2022 Q4,” this filing reports full-year results, not standalone fourth-quarter results. Amounts are U.S. dollars.
Business context
Zscaler sells subscriptions to its cloud-based Zero Trust Exchange security platform, principally through channel partners. Subscription and support services generated about 97% of revenue; the company operated as one reportable segment. At fiscal year-end, it reported more than 6,700 customers, including more than 600 Forbes Global 2000 companies. About 51% of revenue came from outside the United States.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $1,090.9 million | $673.1 million |
| Revenue growth | 62% | 56% |
| Gross profit / gross margin | $848.7 million / 78% | $522.8 million / 78% |
| Operating loss / operating margin | $327.4 million / (30%) | $207.8 million / (31%) |
| Net loss | $390.3 million | $262.0 million |
| Operating cash flow | $321.9 million | $202.0 million |
| Free cash flow, non-GAAP | $231.3 million | $143.7 million |
GAAP gross margin was unchanged. Non-GAAP operating income was $111.6 million, with a 10% margin, compared with $78.0 million and 12% in FY2021. The filing reports substantial stock-based compensation: $409.6 million in the cash-flow reconciliation for FY2022; the income statement included $430.0 million of stock-based compensation expense and related payroll taxes. Non-GAAP measures exclude specified items and should be considered alongside GAAP results.
Cash, cash equivalents and short-term investments totaled $1.731 billion at July 31, 2022. Current assets were $2.257 billion and current liabilities $1.134 billion. Deferred revenue was $1.021 billion, including $923.7 million current. Operating cash flow benefited significantly from $391.2 million of increased deferred revenue, while accounts receivable and deferred contract acquisition costs used cash.
The company had $1.150 billion principal amount of 0.125% convertible senior notes due 2025; their net carrying amount was $968.7 million. Interest expense was $56.6 million, largely non-cash debt-discount and issuance-cost amortization. The company said it intended to settle note principal in cash and reported that conversion conditions were not met during the final quarter of FY2022.
Changes versus prior year
- Revenue rose $417.8 million, or 62%. Expansion in existing customers contributed $337.6 million of the increase; the remainder was attributed to new customers. Customer count increased 20% year over year.
- Operating expenses increased 61%, to $1.176 billion, as the company expanded hiring and investment. Sales and marketing rose 60%, research and development 66%, and general and administrative expense 57%.
- Net loss widened by $128.2 million, while operating cash flow increased by $119.9 million and free cash flow by $87.6 million.
- Calculated billings, a non-GAAP metric, increased 59% to $1.481 billion. Remaining performance obligations were $2.607 billion; management expected to recognize 49% within 12 months and 96% within three years.
- Unrealized losses on available-for-sale investments and cash-flow hedges contributed to a $25.2 million other comprehensive loss.
Outlook, commentary, risks and unusual items
Management provided no specific numerical revenue or earnings guidance in the supplied filing text. It expects operating expenses to rise in absolute dollars as it invests in sales and marketing, research and development, international expansion, infrastructure and public-company requirements. It expects continued net losses for the foreseeable future, while aiming to balance growth investment with expense management. Management stated existing cash, cash equivalents and short-term investments should fund operating and capital needs for at least 12 months from issuance of the financial statements.
- Key risks: sustained losses and uncertain path to profitability; competition and customer adoption; renewals and expansion; reliance on channel partners (93% of FY2022 revenue was attributed to channel partners); service availability and cybersecurity; hiring and retention; macroeconomic conditions, inflation and reduced IT spending; privacy and regulatory compliance; and international operations.
- Debt and accounting: ASU 2020-06 was adopted on August 1, 2022. The adoption increased the notes’ carrying amount by $169.9 million, reduced additional paid-in capital by $273.7 million and reduced accumulated deficit by $103.8 million. This is an accounting change, not a reported FY2022 cash event.
- Commitments: non-cancelable purchase obligations with terms of at least 12 months were $126.8 million, including $96.0 million for third-party cloud infrastructure. Operating lease liabilities totaled $77.0 million.
- Acquisitions and legal matters: Zscaler acquired ShiftRight in June 2022 for approximately $25.6 million in cash and completed another small acquisition. The filing disclosed no pending or threatened legal proceeding expected, in management’s opinion, to have a material adverse effect; it noted litigation outcomes remain unpredictable.
- COVID-19 and operations: management said it had not experienced significant business or financial disruption from the pandemic to date, but the impact remained uncertain. It also cited increased costs and potential infrastructure expense if public-cloud capacity is needed again.
Important facts for investors to verify
- Whether customer growth, renewals, expansion and remaining performance obligations continue to support revenue growth as the company scales.
- How operating losses, cash flow and margins evolve, including the scale and dilution impact of stock-based compensation.
- Liquidity and cash-flow quality, especially reliance on advance customer billings and changes in receivables and deferred contract acquisition costs.
- Convertible-note settlement terms, potential conversion dilution or cash requirements, and the effects of the FY2023 accounting change.
- Execution and cost implications of channel reliance, cloud infrastructure commitments, cybersecurity risks and international expansion.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor reported controls effective as of July 31, 2022.