Zscaler’s (ZS) Billing Growth Accelerates After Another Excellent Earnings Report

Stock (Symbol)

Zscaler (ZS)

Stock Price


Data is as of
July 5, 2023
Expected to Report
September 6
Company Description
Zscaler, Inc. (Zscaler) is a cloud security company that has developed a platform incorporating security functionalities needed to enable access to cloud resources based on identity, context, and organization policies.

Its solution is a multi-tenant, distributed cloud platform that secures user-to-app, app-to-app, and machine-to-machine communications over various networks and locations.

The Company delivers its solutions using a software-as-a-service (SaaS) business model and sells subscriptions to customers to access its cloud platform, together with related support services.

Its Zero Trust Exchange is a cloud-native security platform that protects various customers from cyberattacks and data loss by connecting users, devices, and applications in any location.

The Company’s cloud services include Zscaler Internet Access (ZIA), Zscaler Private Access (ZPA), and Zscaler Digital Experience (ZDX). Source: Refinitiv

Sharek’s Take
David Sharek

Zscaler’s (ZS) billings grew 40%, finally breaking a downward trend where growth had been going down by 57%, 37%, and 34% in the previous qtrs. This was a solid statement, as investors had been fearing “slower growth” in the cybersecurity space. The company delivered 182% profit growth last quarter and beat estimates of 129%. Revenue growth was solid at 46% against expectations of 39%, but still down from 52% the prior qtr. This company is really one of the fastest growers in the large cap space. What’s not a big storyline is ZS has a fiscal year-end on July 31st, which is less than a month away. Soon investors will be focused on 2024 estimates, which gives the stock greater than 40% upside in my opinion.

Zscaler is the largest in-line cloud security platform in the world, securing 40 millions users from the largest global brands, and processing more than 300 billion transactions daily, while working with 40 million users from some of thelargest global brands. The company is also delivering strong growth within US government agencies. One reason for this is Zscaler is the only cloud security service to have 2 products at the highest level of FedRAMP certification, Zscaler Internet Access (ZIA) and Zscaler Private Access (ZPA). Also, ZPA is the only zero trust solution with Department of Defense (DoD) Impact Level 5 (IL5) certification. Management stated these certifications have been driving the federal business. The company recently landed 12 of the 15 federal cabinet-level agencies. And as of June 2023, Zscaler served 8 out of the 10 largest financial services and indurance companies in the world outisde of China

Here are some other facts about the company:

  • Zscaler was built on the cloud, for companies using the cloud, and securely connects users to apps regardless of device, location, or network.
  • The company connects users to applications and not the network, and that eliminates lateral threat movement.
  • Management says its the clear market leader in zero trust applications and that no one comes close to the capabilities of its platform.
  • Zscaler has the highest level of FedRAMP certifications to help the U.S. government keep its data secure, and has well over 100 government agencies and federal integrators as customer, including the U.S. Defense Department.
  • When compared to Crowdstrike, Zscaler protects traffic that’s flowing while Crowdstrike is about endpoint protection (computers, phones). Zscaler has integrations with Crowdstrike to deliver end-to-end security protection.
  • Around 60% of Zscaler’s revenue growth comes from upselling current customers with another service or “transformational bundle.”
  • Around 40% of Fortune 500 and 30% of Global 2000 companies are using Zscaler products to help them secure their digital transformation.
  • The company serves 8 out of the 10 largest financial services and diversified insurance companies in the world outside of China.

ZS’s 4 pillars of security are:

  • Zscaler Internet Access (ZIA) securely connects users to software as a service applications and internet destinations on any device, regardless of location. ZIA focuses on:
    1. Access Control including a cloud firewall and prevents users from visiting unauthorized websites.
    2. Threat Prevention from cyberattacks utilizing anti-virus technology as well as DNS security.
    3. Data Protection which prevents unauthorized sharing of confidential information.
    4. Achieved the highest FedRAMP authorization for high security requirements.
  • Zscaler Private Access (ZPA) provides secure access to internally managed applications that are hosted either in data centers or on the cloud. ZPA revenue was up 66% and represented 20% of total revenue.
    1. ZPA connects users to apps without bringing them on the network, never exposes apps to the internet, and provides remote access over the internet without virtual private networks (VPNs).
    2. Basically, Zscaler Private Access replaces VPNs.
    3. ZPA is the only zero trust solution with Department of Defense Impact Level 5 certification.
  • Zscaler Digital Experience (ZDX) allows a company to isolate where the issue is occurring in the network, and determine whether it is caused by the user’s device, WiFi, the local internet provider or the app itself. Using ZDX, the organization can know if the issue is single case or a broader issue. The company recently launched new AI-powered insights for ZDX to help accelerate the troubleshooting process and cut down remediation time.
  • Workload Segmentation secures apps and workloads by identifying cloud misconfigurations and segments workloads to prevent malware and ransomware from spreading. This is done through two products:
    1. Zscaler Cloud Security Posture Management (CSPM) automatically identifies and remediates application misconfigurations in SaaS, IaaS, and PaaS to reduce risk.
    2. Zscaler Cloud Workload Segmentation (CWS) secures application-to-application communications inside public clouds and data centers to stop lateral threat movement, reducing the risk of data breaches.

Zscaler’s is more focused on time-to-market and growth rate than optimizing for gross margins. Thus, the company is “spending to grow” and the stock has a high P/E of 70. Still, operating margin rose last qtr, to 15.3% from 9.3% a year ago following optimizations efforts. Management thinks margins will reach 20% to 22% eventually. Meanwhile, revenue is expected to grow from $1.1 billion in Fiscal 2022 to $1.6 billion this year (2023), then $2.1 billion next year (2024). And management has a goal of $5 billion in annual recurring revenue. The stock’s Estimated Long-Term Growth Rate of 61% a year is outstanding. ZS is part of the Aggressive Growth Portfolio. On a price-to-sales basis, ZS sells for 13x 2023 revenue or $147 a share. I think it should sell for 15x 2024 revenue estimates, or $212, giving the stock 44% upside. Therefore, I will add ZS to the Growth Portfolio.

One Year Chart

This stock had quite the dip from February through April. Then management issued updated guidance for the quarter, stating billings were set to accelerate. Investors jumped into the stock, sending it from $89 to $108 that day.

The P/E of 70 is rich, but investors look at this company on a price-to-sales basis, and the stock currently sells for a reasonable (in my opinion) 13x annual revenue estimates. This P/E is calculated using 2024 profit estimates.

The Estimated Long-Term Growth Rate of 61% is exceptional. This number was 60% last qtr.

Qtrly profit growth continues to look marvelous. ZS beat the street by 9 cents last quarter. If it does so again it would mean 132% profit growth this quarter.

Earnings Table

Last qtr, Zscaler delivered 182% profit growth and surpassed expectations of 129%. Revenue increased 46% against expectations of 39%. Billings grew 40% while the net retention rate exceeded 125% again. Notice in this table how profits have grown sequentially the past 7 quarters, from $0.11 to $0.48. Here are the regional highlights:

  • Americas: 54% of company sales.
  • Europe, Middle East, and Africa: 31% of total sales.
  • Asia Pacific and Japan: 15% of total revenue.

Around 60% of new business came from existing customers. Revenue growth was driven by the business value of the company’s Zero Trust security platform which continues to drive customer adoption despite macro environment uncertainties. The company sees deals getting larger as customers consolidate their cyber security infrastructure around the company’s products.

Annual Profit Estimates increased for the 6th straight qtr. For Fiscal 2023, management expects sales to grow 46% and billings to climb 33% to 34%.

Qtrly Profit Estimates for the next 4 qtrs are 96%, 59%, 35%, and 17%. For next qtr, management expects revenue to grow 35% to 36%, in line with analysts’ estimates of 35%. The company is entering this qtr with a record pipeline, but deals for new business might take longer to close due to macroeconomic conditions.

Fair Value

ZS sells for 13x 2023 revenue estimates. My Fair Value is 15x revenue. Here are my Fair Values prices for next year and the year after:

13 x $1.6 billion revenue est. = $21 billion market cap
$21 billion market cap / 145 million sales = $147

2023 Fair Value:
15 x $2.1 billion revenue est. = $31 billion market cap
$31 billion / 145 million shares = $212
Upside/Downside: +44%

2024 Fair Value:
15 x $2.6 billion = $39 billion market cap
$39 billion / 145 million shares = $268
Upside/Downside: +82%

Bottom Line
Zscaler (ZS) is one of the world’s best cybersecurity companies, but the stock got overheated last year, and came tumbling down during this Bear Market. In my ZS 2021 Q3 report, the stock sold for 51x 2022 revenue estimates. In retrospect that was WAY too high of a multiple.

Once again, this quarter was great. The growth figures are fabulous. I really like the increase in profit margins. Cybersecuity conatinues to be a top priority for large organizations. And the upside for this stock seems huge as it enters Fiscal 2024.

ZS jumps from 17th to 5th in the Aggressive Growth Portfolio Power Rankings. I will add ZS to the Growth Portfolio tomorrow and it will rank 12th in the Power Rankings.

Power Rankings
Growth Stock Portfolio

12 of 30

Aggressive Growth Portfolio

5 of 18

Conservative Stock Portfolio


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