Zscaler, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended October 31, 2021; comparative period is the three months ended October 31, 2020. Financial statements are unaudited. Zscaler sells cloud security subscriptions and related support through a SaaS model.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $230.5 million | $142.6 million | +62% |
| Gross profit / margin | $178.3 million / 77% | $110.9 million / 78% | Margin down 1 point |
| Operating expenses | $252.7 million | $153.5 million | +65% |
| Operating loss / margin | $(74.4) million / (32)% | $(42.7) million / (30)% | Loss widened |
| Net loss / diluted loss per share | $(90.8) million / $(0.65) | $(55.0) million / $(0.41) | Loss widened |
| Operating cash flow | $93.3 million | $53.5 million | Increased |
| Free cash flow | $83.4 million | $42.2 million | Margin 36% vs. 30% |
| Calculated billings | $247.7 million | $144.7 million | +71% |
Subscription and support revenue represented approximately 97% of revenue in both periods. Revenue growth reflected increased usage and additional subscriptions from existing customers, plus new customer additions; the company reported its customer base grew 23% year over year. Dollar-based net retention was above 125%, versus 122% a year earlier.
Balance sheet and liquidity
- Cash, cash equivalents and short-term investments totaled $1.585 billion at October 31, 2021. Current assets were $1.855 billion and current liabilities were $715.3 million.
- Convertible senior notes had $1.150 billion principal outstanding and a $927.0 million net carrying amount. The notes bear 0.125% annual interest and mature in July 2025.
- Deferred revenue was $647.8 million. Remaining performance obligations were $1.706 billion; the company expected to recognize 50% within 12 months and 97% within three years.
- Operating cash flow benefited from noncash expenses and working-capital movements, including $84.9 million of cash inflow from accounts receivable changes and $17.4 million from increased deferred revenue. Capital expenditures and capitalized internal-use software totaled $9.9 million.
Material changes and management commentary
- Revenue rose 62%, while cost of revenue increased 64%; gross margin declined from 78% to 77%, primarily due to additional hardware costs and platform operating costs.
- Sales and marketing expense increased 59%, research and development increased 82%, and general and administrative expense increased 62%, with higher headcount and stock-based compensation key contributors. Stock-based compensation expense was $89.9 million, compared with $57.2 million.
- Non-GAAP operating income was $23.9 million, versus $19.7 million; non-GAAP operating margin fell to 10% from 14%. These non-GAAP measures exclude specified items, notably stock-based compensation and acquired-intangible amortization.
- Management expects continued operating losses and higher operating expenses in absolute dollars as it invests in sales and marketing, research and development, infrastructure and international operations. It expects existing liquidity to fund operating and capital needs for at least 12 months, while noting that actual requirements could differ. No specific quarterly or annual revenue guidance is provided in the supplied filing text.
Risks, contingencies and unusual items
- The notes’ conditional conversion feature was triggered. Holders could elect conversion from November 1, 2021 through January 31, 2022; cash settlement could affect liquidity, and current-liability reclassification could reduce reported working capital. Conversion notices received through October 31 were not material.
- Non-cancelable purchase commitments increased to $84.2 million from $58.3 million at July 31, mainly for hardware to expand the cloud platform; payments for hardware orders are primarily due within 12 months.
- The company cited ongoing uncertainty from COVID-19, including possible impacts on demand, sales cycles, operations and supply chains. Other highlighted risks include competition, service availability and cybersecurity, channel-partner dependence, talent retention, international operations, and foreign-exchange exposure.
- The filing reports no pending or threatened legal proceeding that management believes is likely to have a material adverse effect, while noting litigation outcomes are unpredictable. Management concluded disclosure controls were effective at the reasonable-assurance level, with no material change in internal control over financial reporting reported for the quarter.
Investor verification priorities
- Track whether 62% revenue growth and retention above 125% persist, and how much growth comes from existing customers versus new customers.
- Assess whether rising operating expenses, stock-based compensation and the decline in non-GAAP operating margin are consistent with the company’s growth investments.
- Verify operating cash flow and free cash flow quality, particularly the effects of advance billings, receivables timing and noncash compensation.
- Monitor noteholder conversion activity and any resulting cash-settlement, dilution or balance-sheet classification effects.
- Review hardware purchase commitments, infrastructure costs, supply availability and any changes in liquidity needs or management’s 12-month funding assessment.