Zscaler, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended January 31, 2019 (fiscal 2019). The unaudited filing describes Zscaler’s cloud-security SaaS business; subscription and support revenue is recognized over contract terms, typically one to three years. Comparisons are with the prior-year periods.
Financial performance
| Metric | Three months ended Jan. 31, 2019 | Six months ended Jan. 31, 2019 | Prior-year comparison |
|---|---|---|---|
| Revenue | $74.3 million | $137.6 million | Up 65% and 62%, respectively |
| Gross profit / margin | $59.0 million / 79% | $110.2 million / 80% | Quarter margin down from 81%; six-month margin flat |
| Operating loss | $5.2 million | $13.8 million | Prior-year losses were $6.4 million and $17.7 million |
| Net loss | $3.6 million | $11.1 million | Prior-year losses were $6.5 million and $17.9 million |
| Operating cash flow | $15.7 million | $26.7 million | Six-month prior-year cash use was $5.5 million |
| Free cash flow (non-GAAP) | $12.0 million | $17.2 million | Six-month prior-year free cash flow was negative $13.5 million |
At January 31, 2019, cash and cash equivalents were $67.5 million and short-term investments were $272.5 million, totaling $339.9 million. Current assets were $446.0 million and current liabilities were $210.2 million. Deferred revenue was $206.0 million, including $176.3 million current. The balance sheet lists no borrowings or other debt. Accumulated deficit was $206.9 million.
Changes and operating indicators
- Revenue growth reflected new customers and increased usage and additional subscriptions from existing customers. New customers contributed $18.9 million of quarterly growth and $26.3 million of six-month growth.
- Dollar-based net retention was 118% for the trailing 12 months, versus 122% in the comparable prior-year period.
- Calculated billings were $115.0 million for the quarter, up 74%, and $179.6 million for six months, up 67%. Management expects billings growth to trend down as billings scale and notes seasonality and invoicing mix affect the metric.
- Remaining performance obligations were $461.0 million; the company expected to recognize 55% over the next 12 months and 98% over the next three years.
- Stock-based compensation rose to $13.2 million for the quarter and $20.8 million for six months, compared with $2.1 million and $3.8 million, respectively. Management attributed much of the increase to RSU awards following the IPO.
Outlook, risks and contingencies
- No specific revenue, earnings or margin guidance is provided. Management expects continued net losses and investment in sales and marketing, research and development, infrastructure, public-company costs and legal matters. It expects gross profit to rise in absolute dollars and gross margin to remain relatively unchanged over the long term, while acknowledging period-to-period fluctuation.
- Management said 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. Future needs depend on growth, spending and market adoption; additional financing may be required, and may not be available on acceptable terms.
- Operating cash generation benefited substantially from a $42.0 million increase in deferred revenue from advance customer invoicing. Investing cash use of $119.3 million mainly reflected purchases of short-term investments, partly offset by maturities; it should not be read as equivalent to operating cash burn.
- Competition, customer adoption and retention, reliance on channel partners, rapid growth, platform availability and cybersecurity, international operations and regulatory compliance are prominent business risks. Channel partners accounted for 95% of six-month revenue; the top five partners and affiliates accounted for 43%.
- Symantec patent litigation remained pending; the company said loss was not probable and recorded no liability for those cases. In Finjan litigation, the company reported a $3.2 million accrued liability related to past negotiations and said the potential lawsuit loss range could not be reasonably estimated.
- Non-cancelable commitments included $16.2 million for data-center contracts, $5.8 million for operating leases and $3.7 million of purchase obligations with terms of at least 12 months.
- The company recorded a full valuation allowance against U.S. federal and state deferred tax assets and, during the quarter, against U.K. deferred tax assets. Disclosure controls were reported effective as of January 31, 2019.
Investor verification priorities
- Assess whether revenue growth, customer additions and retention remain strong, particularly given the decline in net retention to 118%.
- Separate underlying operating performance from rising stock-based compensation and litigation-related costs; review the non-GAAP reconciliations alongside GAAP results.
- Track cash generation and the contribution of advance billings and deferred revenue, as well as investment purchases and maturities.
- Monitor gross-margin pressure from data-center costs, service expansion and one-time costs, and whether infrastructure scales efficiently.
- Follow developments in Symantec and Finjan litigation, including the existing Finjan accrual and any changes in estimated exposure.
- Review customer and accounts-receivable concentration, channel-partner dependence, contractual commitments and the assumptions behind management’s liquidity assessment.