ZS • 10-Q • Q4 2021 • Positive

Zscaler Shows Accelerating Growth as Zero Trust Security Adoption Surges

December 08, 2021 • 1 min read

TL;DR

Zscaler delivered exceptional Q1 FY2022 results with revenue growing 62% YoY to $230.5M, significantly ahead of expectations. The company is seeing strong enterprise adoption of its Zero Trust Exchange platform as organizations accelerate their secure digital transformation initiatives. Billings grew 71% YoY to $248.7M, while remaining performance obligations surged 98% to $1.71B. Operating margins improved 300bps YoY despite aggressive investments in sales and R&D. The company raised full-year

Financial Performance Overview: Revenue accelerated to 62% YoY growth from 57% last quarter, marking the fourth consecutive quarter of growth acceleration. Calculated billings growth of 71% indicates strong future revenue visibility. Gross margins expanded 100bps YoY to 81%, while operating margins improved to -9% from -12% despite 60%+ headcount growth. Deferred revenue grew 74% YoY to $630.6M, demonstrating robust platform adoption. The company maintained best-in-class net retention rate above 125%, reflecting successful land-and-expand strategy.
Strategic Initiatives and Operational Changes: Zscaler continues aggressive expansion of its Zero Trust Exchange platform, launching new Zscaler Digital Experience and Cloud Protection capabilities. Sales capacity increased over 60% YoY with focus on large enterprise and federal sectors. Strategic partnerships with Microsoft, AWS, and Google Cloud deepened with new integrations. Management highlighted success of 'Summit' program targeting $1M+ deals, with 20+ new customers added this quarter. R&D investments increased 86% YoY to drive innovation in cloud security and zero trust architecture.
Market Position and Competitive Dynamics: Zscaler strengthened its leadership position in cloud security with Gartner positioning the company furthest in 'Completeness of Vision' for 10th consecutive year. Customer count grew 30% YoY to over 5,600 enterprises, including 35% of Fortune 500. Platform approach creates significant competitive moat versus point solutions. Win rates remain strong against legacy vendors and emerging cloud security players. Federal sector momentum accelerating with FedRAMP High certification and 100%+ YoY growth.
Operational Efficiency and Profitability: Despite aggressive growth investments, operating leverage improved through platform scalability and sales productivity gains. Sales efficiency metrics remain strong with CAC payback period under 18 months. Gross margin expansion driven by platform optimization and increased scale. Operating cash flow margins improved to 21% from 14% YoY, demonstrating underlying profitability potential. Management expects continued margin improvement while maintaining growth investments.
Growth Catalysts and Material Risks: Key growth drivers include accelerating zero trust adoption, cloud transformation initiatives, and expansion into adjacent markets like IoT security. Federal opportunity expanding with increased cybersecurity focus and funding. Primary risks include intensifying competition, potential cybersecurity incidents, and execution challenges in scaling sales organization. Management sees sustainable 30%+ growth opportunity given $72B TAM and low penetration of cloud security solutions.

Revenue

$230.5M ( YoY, QoQ)

↑ +62%

Gross Margin

(+100bps YoY)

↑ 81%

Free Cash Flow

$42M ( margin, +400bps YoY)

↑ +18%

Operating Margin

(+300bps YoY)

↓ -9%

Growth Indicators

$1.71B ( YoY)

↑ +98%

Net Retention ↑>125% (5th straight quarter)

Customer Count ↑5,600+ (+30% YoY)

Calculated Billings ↑$248.7M (+71% YoY)

Key Risks

Intensifying competition from legacy vendors and cloud providers
Execution risks in scaling global sales organization
Potential cybersecurity incidents affecting reputation
Customer concentration with largest at 4% of revenue

Key Opportunities

Zero trust adoption acceleration ($72B TAM)
Federal sector expansion with FedRAMP High certification
International growth with only 30% of revenue currently
Platform expansion into IoT/OT security and cloud workload protection

Bottom Line

Zscaler delivered exceptional results that validate its leadership position in cloud security and zero trust architecture. The combination of accelerating revenue growth, improving unit economics, and expanding market opportunity suggests sustainable growth momentum. While competition is intensifying, the company's architectural advantages and growing platform adoption provide meaningful competitive moats. Key metrics to watch include calculated billings growth, platform adoption trends, and sales productivity as the company scales. The primary risks revolve around execution in maintaining growth at scale and competitive dynamics. Overall, Zscaler appears well-positioned to capitalize on the secular shift to zero trust security architecture.