Zscaler, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended January 31, 2021. Unaudited results; fiscal year ends July 31. Zscaler sells cloud security subscriptions and related support through a SaaS model.
Key financial results
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Three months ended Jan. 31, 2021 | Prior-year quarter | Six months ended Jan. 31, 2021 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $157.0; up 55% | $101.3 | $299.6; up 54% | $194.9 |
| Gross profit / margin | $122.9 / 78% | $81.0 / 80% | $233.8 / 78% | $155.1 / 80% |
| Operating loss | $(53.9); (34)% of revenue | $(30.3); (30)% | $(96.6); (32)% | $(48.6); (25)% |
| Net loss | $(67.5); $(0.50) per share | $(29.2); $(0.23) per share | $(122.5); $(0.91) per share | $(46.2); $(0.36) per share |
| Operating cash flow | $30.4 | $5.4 | $83.9 | $26.9 |
| Free cash flow (non-GAAP) | $18.0 | $(1.9) | $60.3 | $7.5 |
- Expenses and margins: Quarterly sales and marketing expense rose 79% to $110.4 million and research and development rose 102% to $41.8 million. Higher cloud infrastructure costs, particularly public-cloud use supporting increased ZPA traffic, contributed to the two-point gross-margin decline. Non-GAAP operating margin was 9% for the quarter versus 12% a year earlier; six-month margin was 11% versus 8%.
- Cash and liquidity: At January 31, cash and cash equivalents were $95.3 million and short-term investments were $1,349.4 million, totaling $1,444.7 million. Management said these resources should fund operating and capital needs for at least 12 months from issuance of the statements.
- Debt: The company had $1.15 billion principal amount of 0.125% convertible senior notes due 2025; carrying value was $887.2 million. Their disclosed fair value was $1.7135 billion. The notes generated $13.2 million of quarterly interest expense, mostly non-cash discount and issuance-cost amortization.
- Other balance-sheet indicators: Deferred revenue was $446.8 million, including $406.2 million current. Remaining performance obligations were $1,024.8 million; management expected to recognize 53% within 12 months and 98% within three years. Accumulated deficit was $462.1 million.
Changes and operating trends
- Growth reflected customer expansion and new subscriptions: dollar-based net retention rate was 127%, up from 116% a year earlier. The company reported its customer base grew 20% year over year.
- Calculated billings, a non-GAAP measure, increased 71% to $232.0 million for the quarter and 68% to $376.7 million for the six-month period. Management cautioned that growth rates are expected to trend down over time and billings are affected by seasonality and invoice timing.
- Stock-based compensation expense was $61.4 million for the quarter and $118.6 million for six months. The six-month figure was substantially above the prior-year $42.2 million.
- Operating cash flow benefited from a $78.9 million increase in deferred revenue, while cash was used for deferred contract acquisition costs and receivables. Free cash flow is a company-defined non-GAAP measure.
- Sales through channel partners accounted for 94% of quarterly revenue, down from 97%. The five largest channel partners and affiliates represented 36% of six-month revenue.
Outlook, risks and unusual items
- No specific numeric revenue, earnings or margin guidance is provided in the supplied filing text. Management expects continued operating losses and higher absolute operating expenses as it invests in sales and marketing, research and development, infrastructure and public-company operations; it anticipates gross profit growth and a slight long-term increase in gross margin, while noting margins may fluctuate.
- COVID-19 had not caused significant business disruption to date, according to management, but its impact remained uncertain. Remote work increased ZPA traffic and led to more expensive public-cloud infrastructure usage. Risks include customer spending and renewal changes, sales-cycle effects, and operational or staffing challenges.
- The notes’ conversion condition was triggered. Holders could convert some or all notes from February 1 through April 30, 2021; none had converted as of January 31. Cash settlement of principal is management’s stated intent, but conversion could affect liquidity and accounting classification. Capped calls are intended to reduce dilution or offset certain cash payments, subject to a cap.
- The prior-year quarter included a $15.0 million Broadcom patent-settlement expense, recorded in general and administrative expense; no litigation-related expense was reported for the current quarter or six-month period. The company remains subject to ordinary-course claims and litigation, whose outcomes are described as unpredictable.
- Principal risks include continued losses, competition and adoption uncertainty, platform security and availability, reliance on channel partners, data-center capacity and costs, international and regulatory exposure, and servicing or settling convertible debt. The filing reports disclosure controls were effective and no material change in internal control occurred during the period.
Investor verification points
- Track whether revenue growth, retention, new-customer additions and calculated billings remain strong as billings growth moderates.
- Assess whether public-cloud and data-center costs stabilize and gross margin recovers from 78%, while monitoring operating-expense growth and stock-based compensation.
- Reconcile operating cash flow and free cash flow with deferred-revenue growth, deferred acquisition costs, receivables and capital spending.
- Review note conversion activity, potential cash-settlement needs, dilution exposure and the operation and counterparty risk of the capped calls.
- Monitor channel-partner concentration, customer renewals, COVID-19-related effects, and any material developments in litigation or other contingencies.