ZS • 10-K • FY 2021 • Positive

Zscaler's Zero Trust Bet Pays Off with 56% Growth and Enterprise Expansion

September 16, 2021 • 1 min read

TL;DR

Zscaler delivered exceptional growth with revenue surging 56% YoY to $673.1M in FY21, validating its zero-trust architecture strategy. The company's transformation from SMB-focused to enterprise-ready drove significant expansion, with 202 customers now spending over $1M annually, up 87% YoY. Gross margins improved to 80.8%, demonstrating strong operational leverage despite aggressive R&D investments at 28% of revenue. Growing enterprise adoption and secular shift to cloud security position Zscal

Financial Performance Overview: Revenue accelerated to $673.1M (+56% YoY) from $431.3M, marking the strongest growth rate since IPO. Calculated billings grew 70% to $815.5M, indicating robust future revenue visibility. Gross margins expanded 120bps to 80.8% while operating margins improved 550bps to -13.4%. Dollar-based net retention rate reached 128%, reflecting strong upsell motion and minimal churn. The combination of accelerating growth and improving unit economics suggests sustainable momentum into FY22.
Strategic Initiatives and Operational Changes: Zscaler executed a strategic pivot to focus on large enterprise customers, investing heavily in direct sales capacity and technical expertise. The company launched Zscaler Cloud Protection and expanded ZPA capabilities to capture growing zero-trust demand. Partnership expansions with Microsoft, AWS, and Google Cloud enhanced market reach. Management's focus on 'land and expand' with Global 2000 companies is showing results, though extended sales cycles and implementation timelines remain execution risks.
Market Position and Competitive Dynamics: Zscaler maintained leadership in Gartner's Magic Quadrant for the 10th consecutive year while expanding TAM to $72B. Customer concentration decreased with no single customer exceeding 10% of revenue. Win rates against legacy vendors remained strong at >75%, though increased competition from Palo Alto Networks and Cisco requires continued innovation. The shift to zero-trust architectures and SASE adoption creates tailwinds, with Zscaler's cloud-native platform providing competitive advantages.
Operational Efficiency and Profitability: Despite aggressive investments in sales capacity and R&D, operating leverage improved significantly. Sales efficiency metrics strengthened with CAC payback period decreasing to 18 months from 22 months. R&D spend increased 65% YoY to $187.9M (28% of revenue) but delivered product innovations driving upsell opportunities. Gross margin expansion to 80.8% demonstrates platform scalability, though continued investments will delay near-term profitability.
Growth Catalysts and Material Risks: Key growth drivers include zero-trust architecture adoption, cloud transformation initiatives, and 5G-driven security needs. Federal sector momentum accelerated with FedRAMP certification and $150M+ TCV deals. Primary risks include intensifying competition, lengthy enterprise sales cycles, and potential macro headwinds affecting IT budgets. Management is mitigating risks through increased R&D investment and channel partner expansion, while maintaining 40%+ growth guidance.

Revenue

$673.1M ( YoY) with subscription revenue

↑ +56%

Rd Spend

$187.9M ( YoY) at of revenue

↑ +65%

Net Income

-$262.0M ( margin, improved from)

↓ -38.9%

Gross Margin

(+120bps YoY) driven by platform efficiency

↑ 80.8%

Free Cash Flow

$182.2M ( of revenue, YoY)

↑ 27%

Operating Margin

(+550bps YoY) with improving leverage

↓ -13.4%

Growth Indicators

5,431 ( YoY)

↑ +18%

Arr Or Bookings ↑$815.5M calculated billings (+70% YoY)

Retention Metrics ↑128% dollar-based net retention

Key Risks

Increasing competition from legacy vendors with significant resources
Extended enterprise sales cycles impacting growth predictability
Talent acquisition and retention in competitive market
Exposure to financial services and technology sector spending

Key Opportunities

Federal sector expansion with FedRAMP certification ($150M+ TCV pipeline)
Cross-sell momentum with 46% multi-product adoption
International expansion with >60% growth in EMEA/APJ
Zero-trust architecture adoption accelerating post-pandemic

Bottom Line

Zscaler's FY21 performance validates its strategic focus on zero-trust architecture and enterprise customers. The combination of accelerating growth (56% YoY), improving unit economics, and expanding product portfolio positions the company for sustained momentum. While competitive intensity is increasing, Zscaler's architectural advantages and first-mover position provide defensibility. Key metrics to watch include net retention rate, $1M+ customer growth, and federal sector traction. The shift to zero-trust architecture and cloud transformation initiatives create multi-year tailwinds, though execution in enterprise sales and product innovation remains critical.