Zscaler, Inc. — FY2023 Form 10-K Summary
Reporting period: Fiscal year ended July 31, 2023. This is an annual report; the filing does not provide a standalone fiscal fourth-quarter results summary in the supplied text.
Business context
Zscaler sells subscriptions to its cloud-based Zero Trust Exchange security platform, primarily through channel partners. Subscription and support services accounted for about 97% of revenue; contracts are typically one to three years, with revenue recognized ratably. The company reported one operating segment, more than 7,700 customers, and operations in 185 countries. Approximately 50% of FY2023 revenue came from outside the United States.
Financial performance and liquidity
| Metric | FY2023 | FY2022 | Change / context |
|---|---|---|---|
| Revenue | $1,617.0 million | $1,090.9 million | Up 48%; growth was driven by existing-customer expansion and new customers. |
| Gross profit / gross margin | $1,254.1 million / 78% | $848.7 million / 78% | Margin unchanged. |
| Operating loss / margin | $234.6 million / (15%) | $327.4 million / (30%) | Loss narrowed; operating expenses remained above gross profit. |
| Net loss | $202.3 million; $1.40 per share | $390.3 million; $2.77 per share | Loss narrowed year over year; Zscaler says it expects losses for the foreseeable future. |
| Operating cash flow | $462.3 million | $321.9 million | Increased; included a $418.6 million inflow from higher deferred revenue. |
| Free cash flow (non-GAAP) | $333.6 million; 21% margin | $231.3 million; 21% margin | Calculated as operating cash flow less property/equipment and other asset purchases and capitalized software. |
| Calculated billings (non-GAAP) | $2,035.5 million | $1,481.5 million | Up 37%; management expects billings growth to trend down as the base grows. |
| Cash, cash equivalents and short-term investments | $2,100.2 million | — | Available for working capital and general corporate purposes. |
| Convertible notes | $1,150.0 million principal; $1,134.2 million net carrying amount | $1,149.995 million principal; $968.7 million net carrying amount | 0.125% notes mature July 2025; accounting adoption affected carrying value. |
At July 31, 2023, deferred revenue was $1,439.7 million, including $1,281.1 million expected to be recognized in the following 12 months. Remaining performance obligations were $3,513.6 million; the company expected to recognize 49% within 12 months and 95% within three years. Stock-based compensation expense, including related payroll taxes, was $457.8 million, a material non-cash expense.
Material changes versus FY2022
- Revenue growth slowed to 48% from 62% in FY2022. Existing-customer user expansion and additional subscriptions contributed $440.6 million of FY2023 revenue growth; the customer base grew 14%.
- Dollar-based net retention declined to 121% from above 125%. Management said it had not seen a material increase in customer attrition.
- Gross margin remained 78%. Sales and marketing expense rose 30% to $953.9 million; research and development rose 21% to $349.7 million; general and administrative expense rose 17% to $177.5 million.
- Cash from operations increased, while investing activities used $259.3 million, including capital expenditures and purchases of short-term investments.
- Adoption of ASU 2020-06 effective August 1, 2022 changed convertible-note accounting. It increased the notes’ carrying amount by $169.9 million and reduced additional paid-in capital by $273.7 million, with a $103.8 million cumulative adjustment to accumulated deficit. Prior-year results were not restated.
Outlook, commentary, risks and unusual items
- Management expects continued investment in sales and marketing, research and development, platform capacity and international expansion. It expects operating expenses to rise in absolute dollars, while anticipating long-term declines in operating expenses as a percentage of revenue and a slight long-term increase in gross margin. No quantified revenue or earnings guidance is provided in the supplied filing text.
- Management reported longer approval processes and greater customer scrutiny, particularly for large transactions, amid macroeconomic uncertainty. It expects customer cautiousness and elongated sales cycles to continue in the near term.
- The company expects existing cash, cash equivalents and short-term investments to fund operating and capital needs for at least 12 months from issuance of the financial statements, while noting that future financing needs and access to financing remain uncertain.
- Key risks include continued losses, competition, customer renewals and expansion, channel-partner dependence, service availability and cybersecurity incidents, privacy and regulatory compliance, macroeconomic conditions, and hiring and retention. The top five channel partners and affiliates represented 26% of FY2023 revenue.
- A March 2023 restructuring reduced worldwide headcount by approximately 3% and resulted in $7.6 million of charges. Zscaler acquired Canonic Security for approximately $16.5 million in cash. Its former president resigned in October 2022 but remained on the board; cancellation of unvested awards generated a $9.9 million stock-compensation reversal.
- The notes’ conversion conditions were not met in the three months ended July 31, 2023. Zscaler stated its current intent is to settle the notes’ principal in cash; conversion or refinancing could affect liquidity. The filing disclosed no pending or threatened legal proceeding that management believed likely to have a material adverse effect, while noting litigation outcomes are inherently unpredictable.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Revenue recognition, particularly identifying and evaluating contract terms, was identified as a critical audit matter.
Important facts for investors to verify
- Whether retention and customer expansion stabilize, and how renewal rates, deal size and sales-cycle length develop after the reported decline in dollar-based net retention.
- Whether revenue and billings growth can remain strong as growth rates moderate, and how deferred revenue and remaining performance obligations convert into recognized revenue and cash.
- How much of operating cash flow and free cash flow is sustained by customer prepayments, and how capital spending and deferred commission costs evolve.
- The trajectory of GAAP operating losses and stock-based compensation, including potential dilution from equity awards and the 2025 convertible notes.
- Whether the company can meet its cash-settlement intentions for the notes at maturity and how conversion, interest-rate hedges and capped calls may affect cash needs or dilution.
- Whether cybersecurity, service continuity, channel-partner concentration, international operations and regulatory or litigation exposures create material changes to results or customer confidence.