Summary
Zscaler's first quarter of fiscal 2021, ended October 31, 2020, showed strong demand but wider GAAP losses. Revenue rose 52.3% year over year to $142.6 million. Gross profit rose 49.7% to $110.9 million. Gross margin was 77.7%, down 1.4 percentage points. The company still reported an operating loss of $42.7 million, and that loss widened. Net loss was $55.0 million, also wider. Diluted GAAP EPS was -$0.41. Operating margin was -29.9%, down 10.4 percentage points.
Non-GAAP results looked different. Non-GAAP income from operations was $19.7 million, compared with $3.7 million a year earlier. Non-GAAP net income was $20.0 million, compared with $4.9 million. Operating cash flow was $53.5 million, up 149.8%. Free cash flow was $42.2 million, or 30% of revenue, compared with $9.4 million, or 10% of revenue, a year earlier. Capital expenditures were $8.9 million, down 12.8%.
Calculated billings grew 64% year over year to $144.7 million. Current deferred revenue was $340.0 million, up 55.8%. Remaining performance obligations were $864.0 million, up 55.8%. Dollar-based net retention rate was 122% for the trailing 12 months ended October 31, 2020, compared with 120% for the trailing 12 months ended October 31, 2019. The customer base increased 18% from October 31, 2019 to October 31, 2020. Zscaler expanded sales and marketing headcount by 68%, research and development headcount by 50%, and general and administrative headcount by 27% over that same period. Management pointed to digital transformation and Zero Trust adoption as demand drivers. The company announced a partnership with VMware and a virtual Zenith Live event, among other business updates.
Gross margin pressure came from higher use of public cloud infrastructure to handle increased ZPA traffic after customers shifted to work from home in March 2020. That public cloud capacity is more expensive than the company's own data centers. Stock-based compensation and acquired intangible amortization also weighed on gross margin. The broader cost structure remains heavy. The company reported a net loss and expects to continue incurring net losses for the foreseeable future. It also faces risks from the COVID-19 pandemic, including the duration of the outbreak, the effect on sales cycles and customer demand, rapid growth execution, competition, and legal matters. The June 2020 convertible notes added interest expense and non-cash debt discount amortization, which contributed to the wider net loss.
Guidance points to continued growth. For the second quarter of fiscal 2021, Zscaler guides to non-GAAP income from operations of $11 million to $12 million and non-GAAP earnings per share of approximately $0.07 to $0.08, assuming approximately 144 million common shares outstanding. For the full year fiscal 2021, the company guides to calculated billings of $755 million to $765 million, non-GAAP income from operations of $55 million to $57 million, and non-GAAP earnings per share of $0.37 to $0.38, assuming approximately 145 million common shares outstanding. Management said calculated billings growth should trend down over time as the absolute base grows. The quarter showed healthy top-line and billings momentum, but GAAP profitability remained deeply negative and the loss widened significantly.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q1 FY2021 | Q4 FY2020 | QoQ | Q1 FY2020 | YoY |
|---|---|---|---|---|---|
| Revenue | $142.6M | $125.9M | +13.3% | $93.6M | +52.3% |
| Gross profit | $110.9M | $94.5M | +17.3% | $74.0M | +49.7% |
| Gross margin | 77.8% | 75.1% | +2.7 pp | 79.1% | -1.3 pp |
| Research & development | $35.8M | $32.8M | +9.1% | $20.3M | +76.5% |
| Sales & marketing | $96.9M | $89.2M | +8.6% | $59.4M | +63.1% |
| General & administrative | $20.9M | $17.4M | +19.8% | $12.6M | +65.2% |
| Total operating expenses | $153.5M | $139.4M | +10.1% | $92.3M | +66.3% |
| Operating income (loss) | -$42.7M | -$44.9M | +4.9% | -$18.3M | -133.5% |
| Operating margin | -29.9% | -35.7% | +5.7 pp | -19.5% | -10.4 pp |
| Net income (loss) | -$55.0M | -$49.5M | -11.0% | -$17.1M | -222.1% |
| Net margin | -38.6% | -39.4% | +0.8 pp | -18.3% | -20.3 pp |
| Customers | 4,500 | 4,500 | ±0.0% | 3,900 | +15.4% |
| Net retention rate | 122.0% | 120.0% | +2.0 pp | 120.0% | +2.0 pp |
Risks
The ongoing COVID-19 pandemic is highly uncertain and difficult to predict. Management says it is unable to accurately predict the full impact on its sales cycle, sales execution and marketing efforts, and on customers, vendors and partners, though it has not experienced significant disruptions to date.
Gross margin declined to 77.7% in FY2021 Q1 from 79.1% in FY2020 Q1, down 1.4 percentage points. MD&A attributes part of the decline to increased use of public cloud infrastructure, which is substantially more expensive than Zscaler's own data centers, to handle higher ZPA traffic from customers' employees working from home.
Sales through Zscaler's top five channel partners and their affiliates represented 36% of revenue for the three months ended October 31, 2020 and 40% for the three months ended October 31, 2019. These partners are generally non-exclusive and may promote competitors' products or cease reselling with limited notice.
Zscaler issued convertible senior notes in June 2020. The notes create debt servicing obligations and include a conditional conversion feature that could affect liquidity and reported financial results.
The network security market is intensely competitive and Zscaler faces established appliance-based and cloud-based rivals with greater resources, broader product suites and the ability to bundle or sell at zero or negative margins. Competitive pressure could cause price reductions, reduced revenue and gross margins, and loss of market share.
Sales cycles for Zscaler's cloud platform, particularly with large organizations and government entities, are long and unpredictable and require considerable time and expense. The ongoing COVID-19 pandemic may further extend sales cycles for some products and services.
Zscaler is highly dependent on CEO Jay Chaudhry and other key personnel, and competition for cybersecurity and sales talent is intense. COVID-19 restrictions have made hiring more difficult, and sales and marketing headcount grew 68% year over year, leaving a large percentage of that team new and potentially less effective.
An actual or perceived breach of Zscaler's cloud platform or internal networks could be especially detrimental given its security brand. The company notes that remote work during the COVID-19 pandemic may pose additional data security risks.
SaaS KPIs
All quarters →Free Cash Flow Margin
Free Cash Flow
Non-GAAP Operating Margin
Calculated Billings
Non-GAAP Gross Margin
Customer Base Growth (YoY)
Deferred Revenue
Summary, forecast, risks and KPIs are extracted from Zscaler, Inc.'s SEC filings for Q1 FY2021 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 6, 2026.