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A Year Since IPO, Zscaler Delivers Through Acquisitions and Partnerships

Posted on Thursday, Jun 20th 2019

Nearly a year ago, security services provider Zscaler (Nasdaq: ZS) went public. And what a year it has been. Since then, Zscaler’s valuation has grown almost five times, and a slowdown does not appear to be coming soon.

Zscaler’s Financials

San Jose-based Zscaler was founded by serial entrepreneur Jay Chaudhury with the idea of creating a cloud security company that featured a network of checkposts within data centers so that traffic could get directed to the nearest data center for inspection and security. I had met with Jay a few years ago when he talked of establishing Zscaler to want to build something significant that had a lasting impact in the market.

Zscaler realized that enterprise applications were moving to the cloud, and with more organizations relying on the internet and the cloud for their business activities, providing security services focused on these cloud platforms was essential. It pioneered an approach to security that connects the right user to the right application, regardless of network. Its cloud platform delivers Security as a Service and eliminates the need for traditional on-premises security appliances.

Its services saw rapid adoption and the company saw revenues grow from $53.7 million in 2015 to $125.7 million by 2017. During the same period, losses increased from $12.8 million to $35.5 million.

More recently, its fiscal third quarter revenues grew 61% to $79.1 million and adjusted EPS was $0.05 compared with a loss of $0.02 per share a year ago. The market was looking for revenues of $74.9 million for the quarter and EPS of $0.01.

Among key metrics, Calculated billings grew 55% to $84.7 million and deferred revenue grew 69% to $211.5 million.

Zscaler expects to end the current quarter with revenues of $82 million and EPS of $0.01-$0.02 compared with the market’s forecast of revenues of $79 million and EPS of $0.01. The company expects to end the year with revenues of $298-$300 million and EPS of $0.16-$0.18.

Zscaler’s Product Expansion

Zscaler has been expanding its market reach through partnerships. It recently entered into a global alliance partnership agreement with NTT Communications Corporation to deliver cloud-based internet and web security to all users, regardless of location, enabling enterprises to adapt to the cloud. According to IDC, the public cloud market in Japan is expected to grow 20% annually over the period 2018 to 2023. Zscaler is looking to capture this market through its latest alliance. As part of the alliance, the two companies will integrate their services to offer a global communication infrastructure that is strengthened by Zscaler’s managed security services.

Recently, Zscaler also announced the acquisition of Appsulate, a pre-revenue browser isolation company. Boston-based Appsulate was founded in 2016 and is a next generation web isolation platform that renders content in the cloud and sends safe pixels to the local browser. Browser isolation is very useful for security sensitive verticals such as financial services and defense and is most effective where the internet or application content should not be downloaded to the end point due to security or data protection concerns. Zscaler plans to integrate Appsulate’s technology into its extensible platform. Appsulate’s funding and financial details are not known. Zscaler did not divulge the acquisition price for Appsulate either.

Zscaler is not new to the small startup world. It was founded in 2008 and was initially bootstrapped for four years. It raised the first of its three funding rounds in 2012. Till a year ago, Zscaler had raised $148 million in funding from investors including EMC, Google Capital, Lightspeed Ventures Partners, and TPG Growth. In September 2015, it raised $110 million at a valuation of over $1 billion. In March 2018, the company went public and raised $192 million at a valuation of $1.9 billion. It listed its stock at $16 apiece. Currently, its stock is trading at $78 with a market capitalization of $9.8 billion. It had climbed to a 52-week high of $80.38 earlier last month. The stock has recovered from the 52-week low of $30.72 that it had fallen to in October last year.

Zscaler is becoming one of the key Cyber Security players that is positioned to acquire a lot of smaller players around its core value proposition. The Cyber Security market is one of the most active areas of startup and venture capital activity. The pool of startups to acquire from is very large. Thus, a hot company like Zscaler with a solid market cap stands to benefit from its valuable acquisition currency. Expect many acquisitions to bolster an already strong product portfolio.

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