Summary
Zscaler closed fiscal 2021 second quarter with revenue of $157.0 million, up 55.1% from the prior-year quarter. Calculated billings, a non-GAAP measure, grew 71% to $232.0 million. Current deferred revenue was $406.2 million, up 61.7%. Remaining performance obligations reached $1.02 billion, up 68.4%. The company said existing customers buying additional subscriptions contributed to the revenue increase, and its customer base grew 20% from January 31, 2020 to January 31, 2021. Dollar-based net retention rate was 127% for the trailing 12 months ended January 31, 2021, compared with 116% for the prior trailing period. Zscaler surpassed 5,000 customers during the quarter, including 500 of the Global 2000.
The top line grew quickly, but the loss grew faster. Gross profit rose 51.7% to $122.9 million, while gross margin slipped to 78.3%, down 1.8 percentage points. GAAP operating loss widened to $53.9 million, and operating margin was negative 34.3%, down 4.4 percentage points. GAAP net loss widened to $67.5 million, and diluted EPS was negative $0.50. On a non-GAAP basis, income from operations was $14.8 million, or 9% of revenue, compared with $12.4 million, or 12% of revenue, in the prior-year quarter. Non-GAAP net income was $14.0 million, compared with $13.5 million, and non-GAAP diluted EPS was $0.10 in both quarters. The gap between the GAAP and non-GAAP results comes largely from stock-based compensation, amortization of acquired intangibles, and debt-related costs that the company excludes. Headcount kept climbing, with sales and marketing up 73%, research and development up 54%, and general and administrative up 27% from January 31, 2020 to January 31, 2021.
Cash generation improved sharply. Operating cash flow was $30.4 million, up 459.8% from the prior-year quarter. Free cash flow, a separate non-GAAP measure, was $18.0 million, or 11% of revenue, compared with negative $1.9 million, or negative 2% of revenue, in the prior-year quarter. The prior-year free cash flow included a $15.0 million legal settlement payment; excluding that payment, it would have been $13.1 million, or 13% of revenue. Capital expenditures were $10.5 million, up 114.7%. For the first six months of fiscal 2021, revenue was $299.6 million, up 53.8%, and operating cash flow was $83.9 million, up 212.5%.
Guidance points to continued growth. For the third quarter of fiscal 2021, management expects non-GAAP income from operations of $11 million to $12 million and non-GAAP earnings per share of approximately $0.07, assuming approximately 146 million common shares outstanding. For full year fiscal 2021, the company expects calculated billings of $820 million to $825 million, non-GAAP income from operations of $59 million to $61 million, and non-GAAP net income per share of $0.39 to $0.40, assuming approximately 145 million to 146 million common shares outstanding. Management said it will keep investing aggressively to pursue its market opportunity. The company also pointed to a security assessment program tied to the SolarWinds supply-chain attack, a Leader position in the Gartner Magic Quadrant for Secure Web Gateways for the 10th consecutive year, and the introduction of the Zscaler Cloud Platform for cloud workload security.
Risks remain substantial. Zscaler competes in a fast-moving security market and expects to keep posting net losses for the foreseeable future. Gross margin has been pressured by heavier use of public cloud infrastructure to handle increased ZPA traffic from customers whose employees work from home, and that infrastructure costs significantly more than the company's own data centers. COVID-19 still clouds the outlook, since the duration of the pandemic could affect the sales cycle, sales execution, marketing, and the health of customers, vendors, and partners. Legal matters and related accruals can swing results from period to period, and the convertible notes issued in June 2020 added interest expense. Zscaler also flagged its limited operating history and the risk that new products and subscriptions may not gain market acceptance.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2021 | Q1 FY2021 | QoQ | Q2 FY2020 | YoY |
|---|---|---|---|---|---|
| Revenue | $157.0M | $142.6M | +10.1% | $101.3M | +55.1% |
| Gross profit | $122.9M | $110.9M | +10.9% | $81.0M | +51.7% |
| Gross margin | 78.3% | 77.8% | +0.5 pp | 80.0% | -1.8 pp |
| Research & development | $41.8M | $35.8M | +16.7% | $20.7M | +101.6% |
| Sales & marketing | $110.4M | $96.9M | +13.9% | $61.6M | +79.2% |
| General & administrative | $24.7M | $20.9M | +18.2% | $29.0M | -14.9% |
| Total operating expenses | $176.8M | $153.5M | +15.2% | $111.3M | +58.8% |
| Operating income (loss) | -$53.9M | -$42.7M | -26.3% | -$30.3M | -78.0% |
| Operating margin | -34.3% | -29.9% | -4.4 pp | -29.9% | -4.4 pp |
| Net income (loss) | -$67.5M | -$55.0M | -22.8% | -$29.2M | -131.7% |
| Net margin | -43.0% | -38.6% | -4.4 pp | -28.8% | -14.2 pp |
| Customers | 4,500 | 4,500 | ±0.0% | 3,900 | +15.4% |
| Net retention rate | 127.0% | 122.0% | +5.0 pp | 116.0% | +11.0 pp |
Risks
The ongoing COVID-19 pandemic remains highly uncertain and may materially adversely affect demand, customer spending, renewals, collection periods, and sales cycles. MD&A states it may further extend sales cycles for some products and services, even though Zscaler has not experienced significant disruptions to date.
Zscaler has incurred net losses in all periods since inception and expects to continue incurring net losses. Net loss widened to $67.5 million in FY2021 Q2 from $29.2 million in FY2020 Q2, and the accumulated deficit was $462.1 million as of January 31, 2021; operating loss also widened to $53.9 million from $30.3 million.
The network security market is intensely competitive, with established appliance vendors and larger cloud entrants that can bundle, discount, or sell at zero or negative margins. Competitive pressure could cause price reductions, reduced revenue and gross margins, increased net losses, and loss of market share.
Cloud security adoption remains relatively new, and potential customers, particularly large enterprises, may retain entrenched on-premises appliance security. Failure to achieve broad market acceptance of the Zscaler cloud platform would adversely affect revenue growth and operating results.
Gross margin decreased to 78.3% in FY2021 Q2 from 80.0% in FY2020 Q2, partly due to increased use of public cloud infrastructure for ZPA traffic from customers working from home, which is substantially more expensive than Zscaler's own data centers. If public cloud use must increase again, results of operations could be negatively impacted.
As a security provider, an actual or perceived breach of Zscaler's cloud platform or internal systems could be especially detrimental to reputation and customer confidence. Remote work during COVID-19 may pose additional data security risks, and failure to detect or prevent threats could lead to lost customers, legal claims, and regulatory investigations.
Sales cycles are long and unpredictable, especially for large enterprises and government entities, and require considerable time and expense. COVID-19 may further extend sales cycles for some products and services, and larger customers often have more purchasing leverage and stringent support requirements.
Most revenue is derived through channel partners, and sales through the top five channel partners represented 36% of revenue for the six months ended January 31, 2021. Agreements are generally non-exclusive, so partners may promote competitors' products or cease marketing Zscaler's platform with limited notice.
The conditional conversion feature of the $1.15 billion convertible notes was triggered in the quarter ended January 31, 2021, allowing holders to convert from February 1, 2021 through April 30, 2021. Cash settlement could affect liquidity, and reclassifying the notes to current liabilities could materially reduce net working capital; interest expense increased $13.2 million in the quarter due to the notes.
Zscaler relies on key technical, sales, and management personnel, and rapid growth strains its organization. Sales and marketing headcount increased 73% from January 31, 2020 to January 31, 2021, and remote onboarding during COVID-19 may make new hires less effective and slow their productivity.
SaaS KPIs
All quarters →Free Cash Flow Margin
Free Cash Flow
Non-GAAP Operating Margin
Calculated Billings
Non-GAAP Gross Margin
Deferred Revenue
Summary, forecast, risks and KPIs are extracted from Zscaler, Inc.'s SEC filings for Q2 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.