ZS • 10-K • FY 2020 • Positive

Zscaler Accelerates Cloud Security Dominance as Remote Work Drives 52% Growth

September 17, 2020 • 1 min read

TL;DR

Zscaler delivered exceptional growth in FY2020 with revenue surging 52% to $431.3M, driven by rapid enterprise adoption of zero-trust security architecture and accelerated digital transformation due to COVID-19. Customer count grew 28% to 4,500+ with notable expansion in Fortune 500 accounts. Gross margins improved 100bps to 81%, though operating losses widened to -$115.1M as the company invested heavily in sales capacity and R&D. The shift to remote work has dramatically expanded Zscaler's TAM,

Financial Performance Overview: Revenue growth accelerated to 52% YoY reaching $431.3M, with calculated billings growing 55% to $550M. Gross margins expanded 100bps to 81% while operating margins compressed 500bps to -27% due to aggressive sales force expansion and R&D investments. Dollar-based net retention rate remained strong at 120%+ despite COVID impacts. Deferred revenue grew 60% YoY to $369M, indicating strong forward visibility. The company maintains a robust balance sheet with $1.37B in cash and investments.
Strategic Initiatives and Operational Changes: Management significantly expanded go-to-market capacity, growing sales headcount 60% YoY to address $72B TAM opportunity. Launched Zscaler Cloud Protection to expand beyond core ZIA/ZPA products. Strategic partnerships with Microsoft, AWS and CrowdStrike enhanced enterprise appeal. R&D investments increased 45% to $97M (22.5% of revenue) focused on AI/ML capabilities and expanding platform functionality. Channel strategy evolved to target Global 2000 accounts.
Market Position and Competitive Dynamics: Zscaler strengthened its leadership position in cloud security, with Gartner positioning them furthest in vision and execution. Customer count grew 28% to 4,500+ including 450 of Global 2000. No customer represents >10% of revenue, though federal sector grew >200% YoY. Win rates vs legacy vendors remained >80%. Key competitive advantages include cloud-native architecture, network effect of 150B+ daily transactions, and zero-trust approach resonating with large enterprises.
Operational Efficiency and Profitability: Despite revenue scale benefits driving gross margin expansion, aggressive growth investments impacted operating leverage. Sales efficiency metrics declined slightly with CAC payback extending to 18 months from 15 months. Cloud infrastructure costs optimized through increased automation and workload optimization. Operating cash flow improved to $79.3M from $58.0M despite margin compression, demonstrating underlying unit economics strength.
Growth Catalysts and Material Risks: Remote work acceleration expected to drive sustained demand for zero-trust security. Federal opportunity expanding rapidly with FedRAMP certification. 5G rollout could accelerate branch transformation projects. Key risks include intensifying competition from legacy vendors and cloud providers, execution challenges in sales force ramp, and potential cybersecurity incidents affecting platform reputation. Customer concentration in financial services and technology sectors poses macro sensitivity.

Revenue

$431.3M ( YoY) with subscription revenue

↑ +52%

Rd Spend

$97M ( YoY) representing of revenue

↑ +45%

Net Income

-$115.1M ( margin) vs -$35.3M ( margin) YoY

↓ -27%

Gross Margin

(+100bps YoY) driven by automation and scale

↑ 81%

Free Cash Flow

$79.3M ( YoY) with conversion rate

↑ +37%

Operating Margin

(-500bps YoY) due to growth investments

↓ -27%

Growth Indicators

4,500+ ( YoY) including 450 Global 2000

↑ +28%

Retention Metrics ↑120%+ dollar-based net retention rate

Calculated Billings ↑$550M (+55% YoY)

Key Risks

Intensifying competition from legacy vendors and cloud providers
Sales force expansion execution risk during rapid scaling
Cybersecurity incident reputation impact
Macro sensitivity in key verticals

Key Opportunities

Federal sector expansion with FedRAMP certification ($40B+ TAM)
International growth opportunity at 49% of revenue
5G-driven branch transformation acceleration
Platform expansion into adjacent security markets

Bottom Line

Zscaler's FY2020 results validate its leadership position in cloud security as COVID-19 accelerates zero-trust adoption. Strong unit economics and improving operational leverage suggest sustainable growth trajectory despite aggressive investments. Key metrics to watch include sales force productivity ramp, federal sector momentum, and competitive dynamics with legacy vendors. The shift to permanent remote work dramatically expands TAM while creating urgency for zero-trust initiatives. Management's aggressive investments in sales capacity and R&D position the company to capitalize on this secular trend.