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Zscaler Punished for Weak Outlook

Posted on Monday, Sep 16th 2019

According to a Grand View Research report published earlier this year, the global cyber security market is estimated to grow 10% annually to reach $300.32 billion by 2025 from $139.67 billion in 2017. Enterprise cloud security company Zscaler (NASDAQ: ZS) beat analyst estimates for the fourth quarter but its weak outlook for FY2020 sent its stock tumbling.

Zscaler’s Financials

Zscaler’s fourth quarter revenue grew 53% to $86.1 million. Calculated billings grew 32% to $125.8 million. Deferred revenue grew 53% to $251.2 million. GAAP net loss was $5.3 million or $0.04 per share, compared to $7 million or $0.06 per share a year ago. Non-GAAP net income per share was $0.07, compared to net loss per share of $0.01 a year ago. Analysts expected earnings of $0.01 per share on revenue of $82.8 million.

Cash provided by operations was $17.8 million, or 21% of revenue, compared to $14.7 million, or 26% of revenue in Q4 2018. Positive free cash flow was $7.6 million, or 9% of revenue, compared to $11.9 million, or 21% of revenue a year ago. Cash and cash equivalents were $364.4 million as of July 31, 2019.

For the full fiscal year 2019, Zscaler reported revenue of $302.8 million, up 59%. GAAP net loss was $28.7 million or $0.23 per share, compared to $33.6 million or $0.63 per share in fiscal 2018. Non-GAAP income from operations was $25.1 million, or 8% of total revenue, compared to loss from operations of $15.4 million in fiscal 2018, or 8% of total revenue. Non-GAAP net income per share was $0.22, compared to net loss per share of $0.13 in fiscal 2018.

For the first quarter, the company expects revenue of $89 to $90 million, or 41%-42% growth, in line with analyst estimates of $87.6 million. Non-GAAP earnings per share is expected to be $0.00 to $0.01, missing the analyst estimate of earnings of $0.03 per share.

For the fiscal year 2020, Zscaler expects revenue of $395 to $405 million, or a growth rate of 30%-34% compared to 59% in fiscal 2019. Calculated billings of $490 to $500 million, non-GAAP income from operations of $13 to $18 million, and non-GAAP earnings per share of $0.12 to $0.15. Analysts had expected earnings of $0.19 per share on revenue of $402.9 million.

Cloud computing stocks have slumped this month as large investors seem to be shifting their portfolio and Zscaler has been punished, perhaps a tad too severely, for its weak outlook. From a growth rate of 59%, Zscaler expects a growth rate of 30%-34%, which doesn’t sit well with investors. Its competitor Palo Alto swung to a loss in the quarter, sending its stock tumbling 9% in the after-hours session. Zscaler swung to a profit, but its stock tumbled 20% due to its weak outlook.

Following the earnings report, ten analysts cut their target prices for the stock with the average target price at $67.38. Early last week, Morgan Stanley cut its price target from $52 to $47; BMO cut the price target from $100 to $60, Wedbush reduced the price target from $90 to $80, and Piper Jaffray reduced the price target from $82 to $70.  

Since its IPO in March 2018 when it listed with a price of $16 per share and a valuation of $1.9 billion, Zscaler has steadily climbed to a high of $89.54 in July this year and a valuation of over $10 billion. It hit a 52-week low of $30.72 in October last year. Its stock is currently trading around $47.48 with a market cap of $5.97 billion.

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