Zscaler, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended July 31, 2021. The filing also reports fiscal Q4 results for the three months ended July 31, 2021.
Business context
Zscaler sells subscriptions and support for its cloud-based Zero Trust Exchange security platform, including internet and SaaS security (ZIA), private application access (ZPA), digital experience monitoring (ZDX), and public cloud protection (ZCP). Subscription revenue is generally recognized ratably over contracts of one to three years. The company had over 5,600 customers, including over 500 Forbes Global 2000 companies, and operated in one reportable segment.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $673.1 million | $431.3 million |
| Gross profit / gross margin | $522.8 million / 78% | $335.5 million / 78% |
| Operating loss / operating margin | $207.8 million / (31%) | $114.0 million / (26%) |
| Net loss | $262.0 million | $115.1 million |
| Operating cash flow | $202.0 million | $79.3 million |
| Free cash flow | $143.7 million | $27.5 million |
Revenue grew 56%. GAAP net loss per share was $1.93, compared with $0.89. Non-GAAP operating income was $78.0 million (12% margin), versus $38.2 million (9% margin); this measure excludes items including stock-based compensation and should be considered alongside GAAP results. Stock-based compensation expense was $258.5 million in FY2021.
Cash, cash equivalents and short-term investments totaled $1.503 billion at year-end; working capital was $1.128 billion. Deferred revenue was $630.6 million, and remaining performance obligations were $1.554 billion. The company reported $1.150 billion principal amount of 0.125% convertible notes due 2025, with a net carrying value of $913.5 million. FY2021 interest expense was $53.4 million, primarily noncash amortization of the debt discount and issuance costs.
For fiscal Q4, revenue was $197.1 million, gross margin 77%, operating loss $67.4 million and net loss $81.0 million.
Changes versus prior periods
- Revenue increased 56%, compared with 42% growth in FY2020. Existing-customer expansion contributed $179.5 million of the FY2021 revenue increase; customer count rose 23% year over year. Dollar-based net retention was 128%, up from 120%.
- Gross margin held at 78% year over year, after falling from 80% in FY2019. Management attributed the earlier decline partly to higher-cost public cloud infrastructure used to accommodate increased ZPA traffic.
- Operating expenses rose 63% to $730.6 million, led by sales and marketing, which increased 65%; research and development increased 78%. The company cited hiring and investment in growth, with stock-based compensation a significant expense.
- Operating cash flow rose to $202.0 million, supported in part by a $262.4 million increase in deferred revenue from advance billings. Accounts receivable and deferred contract acquisition costs also increased.
- Calculated billings increased 70% to $933.9 million. This is a non-GAAP measure, not recognized revenue, and can be affected by billing schedules and seasonality.
Outlook, risks and unusual items
- Management expects net losses for the foreseeable future and continued increases in operating expenses in absolute dollars, particularly for sales and marketing, research and development, and public-company and legal costs. It expects gross margin to increase slightly over the long term, while acknowledging period-to-period variability.
- Management said existing cash, cash equivalents and short-term investments were expected to fund working capital and capital needs for at least 12 months from issuance of the financial statements. This is a forward-looking assessment, not a guarantee.
- The notes’ conditional conversion feature was triggered at year-end; holders could convert from August 1 through October 31, 2021. The company intended to settle note principal in cash, but conversion could affect liquidity, working capital presentation or dilution. Capped calls are intended to offset some dilution, subject to a cap.
- FY2021 included acquisitions of Trustdome and Smokescreen for approximately $31.1 million and $11.7 million, respectively. The prior-year comparison included a $15.0 million Broadcom settlement payment resolving Symantec patent litigation. Zscaler reported no pending or threatened proceeding it believed likely to materially adversely affect future results or operations.
- Key risks include cybersecurity incidents or service outages, intense competition, dependence on channel partners (94% of FY2021 revenue was through channel partners; the top five partners and affiliates represented 34%), rapid growth and execution, international and privacy regulation, COVID-19 uncertainty, and continued operating losses. The auditor gave an unqualified opinion and reported effective internal control over financial reporting.
Investor facts to verify
- Track customer retention, renewals, expansion and billings against recognized revenue; deferred revenue and billings do not equal revenue or cash generation on a one-for-one basis.
- Assess the sustainability of cash flow and liquidity, including receivables, advance billing, capital investment and the potential cash settlement of convertible notes.
- Review the scale and trend of stock-based compensation and its effect on GAAP losses, share dilution and non-GAAP comparisons.
- Monitor gross margin and cloud infrastructure costs, particularly any renewed reliance on more expensive public cloud capacity.
- Review subsequent filings for note conversions, legal or regulatory developments, acquisition integration, and changes in COVID-19 or operating outlook.