Zscaler, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the three months ended October 31, 2022. The interim financial statements are unaudited. Zscaler provides cloud-delivered security subscriptions and related support on a SaaS basis.
Financial performance and liquidity
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Revenue | $355.5 million | $230.5 million |
| Gross profit / margin | $278.9 million / 78% | $178.3 million / 77% |
| Operating loss / margin | $69.1 million / (19%) | $74.4 million / (32%) |
| Net loss | $68.2 million | $90.8 million |
| Operating cash flow | $128.5 million | $93.3 million |
| Free cash flow, non-GAAP | $95.6 million; 27% margin | $83.4 million; 36% margin |
| Calculated billings, non-GAAP | $340.1 million | $247.7 million |
- Revenue grew 54% year over year, driven by additional users and subscriptions from existing customers, contributing $83.3 million of the increase, and an 18% increase in the customer base.
- Operating expenses rose 38% to $347.9 million, including sales and marketing expense up 49%, R&D up 15%, and general and administrative expense up 31%. The company continued investing in growth.
- Cash, cash equivalents and short-term investments totaled $1.825 billion at October 31, 2022. Current assets were $2.233 billion and current liabilities were $1.111 billion.
- Convertible notes had $1.150 billion principal and a $1.140 billion net carrying amount. The unsecured notes bear 0.125% interest and mature July 1, 2025. Holders’ conversion conditions were not met during the quarter.
- Deferred revenue was $1.006 billion, down from $1.021 billion at July 31, 2022. Remaining performance obligations were $2.682 billion; the company expected to recognize 50% within 12 months and 96% within three years.
Material changes and unusual items
- Adoption of ASU 2020-06 effective August 1, 2022 changed convertible-note accounting. The transition increased the notes’ carrying amount by $169.9 million, reduced additional paid-in capital by $273.7 million, and increased accumulated deficit by $103.8 million. It also substantially reduced reported interest expense year over year; prior-period figures were not restated.
- Stock-based compensation expense was $105.2 million, versus $89.9 million a year earlier. The company recorded a $9.9 million reversal of compensation expense after its President resigned in October and unvested awards were canceled; it also recorded $5.6 million of expense related to employee award modifications.
- Other comprehensive loss was $12.0 million, including a $14.0 million unrealized loss on cash-flow hedges, partly offset by reclassification of realized hedge losses into earnings.
- Calculated billings grew 37%, below revenue growth. Free cash flow increased in dollars, while free cash flow margin declined from 36% to 27%.
Outlook, management commentary and risks
- The filing gives no numerical revenue or earnings guidance. Management expects operating expenses to increase in absolute dollars as it invests in sales and marketing, R&D, infrastructure and public-company requirements. It expects gross margin to increase slightly over the long term, while acknowledging period-to-period variability.
- Management reported continued revenue growth but increased customer scrutiny and longer approval processes, particularly for larger deals, amid inflation and economic uncertainty. It warned that weaker IT spending could reduce demand, extend sales cycles or pressure pricing.
- The company reported a net loss in every period since inception and expects further losses for the foreseeable future. It stated that current cash, cash equivalents and investments should fund operating and capital needs for at least 12 months from issuance of the statements, while noting future funding needs could vary and additional financing may not be available on acceptable terms.
- Key risks include competition, customer adoption and renewal/expansion, reliance on channel partners, service availability and cybersecurity incidents, hiring and retention, international and regulatory exposure, and the effects of macroeconomic conditions and COVID-19. No pending or threatened legal proceeding was identified as likely, in management’s opinion, to have a material adverse effect, though litigation outcomes and costs remain uncertain.
- Management concluded disclosure controls and procedures were effective at the reasonable assurance level as of October 31, 2022; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether customer demand, renewals, large-deal approvals and calculated billings sustain growth as macroeconomic conditions evolve.
- How operating expenses, stock-based compensation and infrastructure costs affect GAAP profitability and free cash flow margin.
- The composition, maturity profile and valuation of the $1.825 billion liquidity pool, including unrealized investment losses and interest-rate sensitivity.
- The notes’ conversion, cash-settlement and potential dilution terms, and the effects of the ASU 2020-06 accounting change on reported results.
- Progress against the $2.682 billion remaining performance obligations and the timing of revenue recognition and customer invoicing.