Zscaler, Inc. Q1 FY2023 earnings

Zscaler reported $355.5 million of revenue in the first quarter of fiscal 2023, up 54% from $230.5 million in the prior-year quarter. Calculated billings, a non-GAAP metric, rose 37% to $340.1 million, and deferred revenue grew 55% to $1,005.7 million. Total remaining performance obligations stood at $2.68 billion, up 57.2% year over year. Management credited demand for zero trust architecture, vendor consolidation, and an elevated threat environment. The customer base grew 18% from October 31, 2021 to October 31, 2022, and the dollar-based net retention rate was above 125% for the trailing twelve months ended October 31, 2022. That metric tracks expansion and attrition across the existing customer cohort.

Profitability improved, but the company stayed in the red. The GAAP net loss was $68.2 million, narrower than the $90.8 million loss a year earlier. The GAAP loss from operations narrowed to $69.1 million from $74.4 million. Operating margin was -19.4%, up from -32.3%, and gross margin rose to 78.4% from 77.4%. Diluted GAAP loss per share was $0.48, compared with $0.65 in the prior-year quarter. On a non-GAAP basis, net income was $44.0 million against $21.0 million, and income from operations was $42.1 million, or 12% of revenue, compared with $23.9 million, or 10% of revenue. Those non-GAAP figures exclude stock-based compensation and related payroll taxes and amortization of acquired intangibles. Research and development expense rose 15%, helped by a reversal of stock-based compensation tied to the October 2022 resignation of the company's President and the cancellation of unvested incentive equity awards.

Cash generation outpaced the prior year. Operating cash flow was $128.5 million, or 36% of revenue, up from $93.3 million, or 40% of revenue. Capital expenditures rose to $25.2 million from $6.45 million as the company expanded its cloud platform. Free cash flow, a non-GAAP measure, was $95.6 million, or 27% of revenue, compared with $83.4 million, or 36% of revenue. Purchases of property, equipment and other assets and capitalized internal-use software both pulled free cash flow below operating cash flow, and the spending was heavier than a year ago. Cash, cash equivalents, and short-term investments totaled $1,824.8 million as of October 31, 2022, an increase of $93.5 million from July 31, 2022.

Guidance covers the second quarter and the full fiscal year. For the second quarter of fiscal 2023, the company guided non-GAAP income from operations of $42 million to $43 million and non-GAAP net income per share of roughly $0.29 to $0.30 on about 156 million shares. For the full fiscal year 2023, it guided calculated billings of $1.930 billion to $1.940 billion, non-GAAP income from operations of $179 million to $183 million, and non-GAAP net income per share of $1.23 to $1.25 on about 157 million shares. The full-year billings plan assumes a first-half mix of roughly 43%. The company also said the non-GAAP guidance cannot be reconciled to GAAP without unreasonable effort.

Risks are mostly macroeconomic and competitive. Management said the quarter brought increased scrutiny and a longer approval process for transactions, particularly larger deals, amid high inflation and recessionary conditions. The 10-Q repeats standing concerns about a limited operating history, competition, sales-cycle length, and the uncertain path of the pandemic. Subscription and support revenue accounted for about 97% of revenue, and the company expects to keep reporting net losses for the foreseeable future as it invests in sales and marketing and research and development. Product news included FedRAMP High authorization for Zscaler Internet Access, the acquisition of ShiftRight for security workflow automation, and new data protection features. The adoption of ASU 2020-06 on August 1, 2022 changed how the company computes diluted share counts for the convertible notes.