Zscaler, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended January 31, 2022. The quarter’s comparative period is the three months ended January 31, 2021. Amounts below are in U.S. dollars; financial-statement figures are unaudited.
Business context
Zscaler sells subscriptions to its cloud security platform and related support, generally under one-to-three-year contracts, recognizing subscription revenue over time. Channel partners generated 93% of quarterly revenue and 94% of six-month revenue. Subscription and support represented approximately 97% of revenue.
Key financial results
| Metric | Three months ended Jan. 31, 2022 | Three months ended Jan. 31, 2021 | Six months ended Jan. 31, 2022 | Six months ended Jan. 31, 2021 |
|---|---|---|---|---|
| Revenue | $255.6 million | $157.0 million | $486.1 million | $299.6 million |
| Revenue growth | 63% | — | 62% | — |
| GAAP gross margin | 77% | 78% | 77% | 78% |
| GAAP operating loss | $83.9 million | $53.9 million | $158.3 million | $96.6 million |
| GAAP net loss | $100.4 million | $67.5 million | $191.2 million | $122.5 million |
| GAAP diluted net loss per share | $0.71 | $0.50 | $1.37 | $0.91 |
| Non-GAAP operating margin | 9% | 9% | 10% | 11% |
| Free cash flow | $29.4 million | $18.0 million | $112.8 million | $60.3 million |
Non-GAAP operating income was $22.3 million for the quarter and $46.3 million for the six months. The filing’s non-GAAP measures exclude specified items, notably stock-based compensation and related payroll taxes. Stock-based compensation expense was $99.0 million for the quarter and $188.9 million for the six months.
Liquidity, cash flow and debt
- At January 31, 2022, cash and cash equivalents were $409.8 million and short-term investments were $1.211 billion, totaling $1.621 billion. Current assets were $1.989 billion and current liabilities were $836.0 million.
- Operating cash flow was $141.5 million for the six months, up from $83.9 million. Free cash flow, a non-GAAP measure, was $112.8 million, versus $60.3 million.
- Cash flow benefited substantially from a $129.6 million increase in deferred revenue, reflecting advance customer billings. Capital expenditures and capitalized internal-use software totaled $28.7 million for the six months.
- Convertible notes had $1.150 billion principal outstanding and a $940.7 million net carrying amount. They bear 0.125% interest and mature July 1, 2025. The notes’ conditional conversion feature was triggered; holders could convert from February 1 through April 29, 2022. Conversion notices received through January 31 were not material.
Changes versus the prior comparable period
- Quarterly revenue increased $98.5 million; management attributed $58.2 million of the increase to more users and additional subscriptions from existing customers, with the remainder primarily from new customers. The customer base grew 23% year over year.
- For the six months, revenue increased $186.5 million; expansion of existing customer subscriptions contributed $119.1 million. Management reported customer-base growth of 23% year over year.
- Gross margin declined one percentage point, to 77%, in both comparison periods. Management cited higher employee-related costs, including stock compensation; six-month results also included additional hardware costs.
- Operating expenses grew faster than revenue in several areas: quarterly sales and marketing increased 59%, research and development 66%, and general and administrative 52%. Headcount growth and stock-based compensation were significant contributors.
- Deferred revenue rose to $759.9 million from $630.6 million at July 31, 2021. Remaining performance obligations were $1.949 billion; the company expected to recognize 50% within 12 months and 97% within three years.
Outlook, management commentary and risks
- The filing provides no numerical revenue or earnings guidance. Management expects operating expenses to increase in absolute dollars in the foreseeable future and says it expects continued net losses while investing in sales and marketing, research and development, and operations. It anticipates gross margin may increase slightly over the long term.
- Management stated that 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, while noting that actual needs depend on growth, investment, customer acceptance, economic conditions and the pandemic.
- Management reported no significant operational or financial disruption from COVID-19 to date, but warned that pandemic uncertainty, new variants, supply constraints and economic effects could affect demand, sales cycles and operations.
- Key disclosed risks include competition and customer adoption or renewal, dependence on channel partners, service availability and cybersecurity incidents, rapid growth and hiring, component supply and delivery delays, international and regulatory exposure, and the possibility that losses continue. The filing specifically notes geopolitical cyber risk related to the Russia-Ukraine crisis.
- Non-cancelable purchase commitments increased to $95.2 million from $58.3 million at July 31, 2021, primarily for hardware to expand the cloud platform; most hardware payments were due within 12 months. The company reported no pending or threatened legal proceeding it believed likely to have a material adverse effect, while noting litigation outcomes are unpredictable.
- A $2.1 million acquisition was completed during the quarter, with $0.4 million paid in cash and $1.7 million in shares; additional employee-service-based share awards are recognized as compensation. The company also reported that notes were convertible during the specified post-quarter period, which could affect liquidity or working capital depending on settlement and accounting.
Most important facts for investors to verify
- Whether revenue growth, customer additions and expansion within existing customers continue, and how the reported retention rate above 125% develops.
- Whether gross margin stabilizes as hosting, hardware and customer-support costs rise, and how much reported profitability depends on non-GAAP exclusions—especially stock-based compensation.
- Whether operating cash flow and free cash flow remain strong when deferred-revenue growth and advance billings vary.
- How holders’ conversion decisions and settlement terms for the $1.15 billion notes affect cash, share dilution and reported working capital.
- Whether increased hardware commitments, supply-chain conditions, cybersecurity or service disruptions, and channel-partner concentration affect execution or customer retention.