Summary
Zscaler's FY2021 Q3 revenue rose 59.6% to $176.4 million. Year-to-date revenue rose 55.9% to $476.0 million. Gross profit rose 59.9% to $137.4 million in the quarter. Gross margin was 77.9%, up 0.1 percentage point from the prior-year quarter. Year-to-date gross margin was 78.0%, down 0.9 percentage point. The top line grew faster than profitability. GAAP operating loss widened to $43.9 million, and operating margin was -24.9%, down 6.3 percentage points. Net loss widened to $58.5 million. Diluted EPS was -$0.43. Year-to-date net loss widened to $181.0 million, and year-to-date operating margin was -29.5%, down 6.9 percentage points.
Cash and backlog metrics were strong. Operating cash flow rose 252.4% to $73.4 million. Year-to-date operating cash flow rose 229.9% to $157.3 million. Capital expenditures rose 52.8% to $14.8 million. Free cash flow was $55.8 million, and free cash flow margin was 32%. Year-to-date free cash flow was $116.0 million, with a 24% margin. Calculated billings were $225.0 million, up 71%. Year-to-date calculated billings were $601.7 million, up 70%. Current deferred revenue was $445.8 million, up 62.3%. Remaining performance obligations were $1.21 billion, up 84.8%. Dollar-based net retention rate was 126%, compared with 119% for the trailing 12 months ended April 30, 2020. The customer base increased 21% from April 30, 2020 to April 30, 2021.
Non-GAAP profitability also improved. Non-GAAP gross profit was $142.6 million for the quarter, and non-GAAP gross margin was 81%, compared with 80% in the prior-year quarter. Non-GAAP income from operations was $22.9 million, and non-GAAP operating margin was 13%, compared with $9.7 million and 9% in the prior-year quarter. Year-to-date non-GAAP income from operations was $57.3 million, and year-to-date non-GAAP operating margin was 12%, compared with 8% in the prior-year period. These figures exclude stock-based compensation, litigation-related expenses, amortization of acquired intangible assets, and asset impairment related to a facility exit. The company continues to invest heavily in sales and marketing, research and development, and general and administrative functions. Headcount increased 65% in sales and marketing, 53% in research and development, and 36% in general and administrative from April 30, 2020 to April 30, 2021.
Risks remain significant. Management expects to continue incurring net losses for the foreseeable future. Gross margin faces pressure from the use of public cloud infrastructure to manage increased ZPA traffic, which is significantly more expensive than using company data centers. The COVID-19 pandemic continues to create uncertainty around the duration of the outbreak, vaccine distribution, and customer buying behavior. Litigation matters and related accruals may cause fluctuations in general and administrative expenses. The company maintains a full valuation allowance on its U.S. federal, state, and U.K. deferred tax assets. It also has convertible notes issued in June 2020, which may affect dilution or cash requirements. The company had over 4,500 customers as of July 31, 2020 and more than 450 of the Forbes Global 2000.
The quarter shows a business scaling rapidly on revenue and billings, but GAAP losses are widening as spending grows. Operating cash flow and free cash flow are positive and rising. The balance between growth investment and profitability remains the central question. Management's plans to invest in sales, research and development, and infrastructure are expected to keep operating expenses elevated in absolute dollars. Sales and marketing is expected to remain the largest operating expense category for the foreseeable future. The company also expects calculated billings growth to trend down over time as the absolute base grows. The company's cash generation gives it flexibility, but the widening net loss and public cloud cost pressure are worth watching.
Forecast
No forward guidance in this quarter's filings.
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2021 | Q2 FY2021 | QoQ | Q3 FY2020 | YoY |
|---|---|---|---|---|---|
| Revenue | $176.4M | $157.0M | +12.3% | $110.5M | +59.6% |
| Gross profit | $137.4M | $122.9M | +11.8% | $85.9M | +59.9% |
| Gross margin | 77.9% | 78.3% | -0.4 pp | 77.8% | +0.1 pp |
| Research & development | $41.0M | $41.8M | -1.9% | $24.1M | +69.8% |
| Sales & marketing | $115.7M | $110.4M | +4.8% | $67.7M | +70.9% |
| General & administrative | $24.6M | $24.7M | -0.2% | $14.6M | +68.3% |
| Total operating expenses | $181.3M | $176.8M | +2.5% | $106.5M | +70.3% |
| Operating income (loss) | -$43.9M | -$53.9M | +18.6% | -$20.5M | -113.8% |
| Operating margin | -24.9% | -34.3% | +9.5 pp | -18.6% | -6.3 pp |
| Net income (loss) | -$58.5M | -$67.5M | +13.4% | -$19.3M | -202.3% |
| Net margin | -33.1% | -43.0% | +9.9 pp | -17.5% | -15.6 pp |
| Customers | 4,500 | 4,500 | ±0.0% | 3,900 | +15.4% |
| Net retention rate | 126.0% | 127.0% | -1.0 pp | 119.0% | +7.0 pp |
Risks
The June 2020 convertible Notes' conditional conversion feature was triggered for the quarter ended January 31, 2021, permitting holder conversion from February 1, 2021 through April 30, 2021; conversion could require cash settlement or reclassify principal as a current liability and reduce net working capital. Interest expense increased $13.4M in FY2021 Q3 and $39.7M for the nine months ended April 30, 2021 due to the Notes.
As a security provider, any actual or perceived breach of its cloud platform or internal networks, systems, or data could be especially detrimental to reputation and customer confidence and could result in lost customers, legal claims, and regulatory inquiries. Remote work during COVID-19 may pose additional data security risks.
The ongoing COVID-19 pandemic and resulting global economic uncertainty could reduce customer IT spending, lengthen sales cycles, and cause customers to fail to renew, reduce, shorten, terminate, or renegotiate subscriptions. MD&A states the full impact cannot be accurately predicted and cites uncertainty around sales cycle, sales execution, and marketing efforts, though no significant disruptions occurred to date.
The sales cycle for the cloud platform is long and unpredictable, especially with large enterprises and government entities, and COVID-19 may extend it further; sales efforts require considerable time and expense before any sale is completed. MD&A notes sales and marketing expenses increased 71% in FY2021 Q3 as the company invests significantly in its sales force.
Rapid headcount growth has left a large percentage of the sales and marketing team new to the company, and remote onboarding during COVID-19 may reduce their productivity; the company recently hired a new president go-to-market and chief revenue officer. Sales and marketing headcount increased 65% from April 30, 2020 to April 30, 2021.
Sales through the top five channel partners and affiliates represented 35% of revenue for the nine months ended April 30, 2021 and 40% for the nine months ended April 30, 2020. Partners are generally non-exclusive and may promote competitors' products or cease marketing with limited notice.
The company temporarily increased use of public cloud infrastructure, which is substantially more expensive than its own data centers, to handle increased ZPA traffic from customers' employees working from home. Gross margin decreased from 79% for the nine months ended April 30, 2020 to 78% for the nine months ended April 30, 2021.
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)
Summary, forecast, risks and KPIs are extracted from Zscaler, Inc.'s SEC filings for Q3 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.