Zscaler, Inc. Q2 FY2023 earnings

Zscaler reported fiscal 2023 second-quarter revenue of $387.6 million, up 51.7% from the prior-year quarter. GAAP net loss narrowed to $57.5 million, and diluted loss per share was -$0.40. Operating cash flow rose 85.4% to $89.5 million. Deferred revenue reached $1,111.9 million, up 46.3%, and remaining performance obligations were $2.81 billion, up 44.1%. Calculated billings, a non-GAAP measure, grew 34% to $493.8 million. The quarter showed a business still expanding at a rapid clip even as GAAP profitability remained negative. Revenue growth came from more users and additional subscriptions to existing customers, along with new customer additions. The company also continued to generate large deferred revenue, which supports future reported revenue.

The profit picture was mixed. Non-GAAP net income was $57.6 million, compared with $19.2 million in the prior-year quarter. Non-GAAP income from operations was $48.8 million, compared with $22.3 million. GAAP gross margin was 77.4%, flat with the prior-year quarter. GAAP operating margin was -16.8%, up 16.0 percentage points from the prior-year quarter. Free cash flow, a non-GAAP measure, was $62.8 million, compared with $29.4 million. The company also reported non-GAAP gross margin of 80%, compared with 80%. The GAAP loss shows that stock-based compensation and other costs still weigh on reported results, even though non-GAAP income has turned positive. The gap between GAAP and non-GAAP results remains wide.

Operationally, Zscaler cited several items. The customer base increased 16% from January 31, 2022 to January 31, 2023. The dollar-based net retention rate was above 125% for the trailing 12 months ended January 31, 2023. Zscaler Private Access received FedRAMP Moderate authorization. The company released integrations with Zoom Video Communications and published its annual State of Encrypted Attacks Report, which analyzed more than 24 billion threats. It also introduced Zscaler Resilience for SSE, joined the Joint Cyber Defense Collaborative, and achieved an AA rating in the MSCI ESG Ratings assessment. In February 2023, it acquired Canonic Security, adding SaaS application security capabilities. These moves aim to broaden the Zero Trust Exchange platform and deepen its data protection offerings.

Guidance points to continued growth. For the third quarter of fiscal 2023, Zscaler expects non-GAAP income from operations of $55 million to $56 million and non-GAAP net income per share of approximately $0.39. For the full year fiscal 2023, the company expects calculated billings of $1.935 billion to $1.945 billion, non-GAAP income from operations of $213 million to $215 million, and non-GAAP net income per share of $1.52 to $1.53. The guidance excludes stock-based compensation expense and related employer payroll taxes, amortization of acquired intangible assets, and amortization of debt discount and issuance costs. The company adopted ASU 2020-06 on August 1, 2022, which changed the accounting for its convertible notes and added roughly 7.63 million shares to non-GAAP diluted share counts.

Risks remain. Management noted high inflation and potential recessionary environments, which have led to increased scrutiny and a longer approval process for transactions, especially larger deals. Potential new customers are taking longer to make purchasing decisions, and Zscaler expects customer cautiousness to continue in the near term, elongating sales cycles and the timing of large deals. The company has incurred net losses since inception and expects to continue incurring net losses for the foreseeable future. Other risks include limited operating history, execution challenges, rapid growth, new product introductions, software bugs, customer acquisition, market acceptance, competition, and long sales cycles. Macroeconomic conditions, including inflation and continued uncertainty, may also impact future demand for subscriptions to its cloud platform.