01—Abstract
Summary
Summary of the 10-K filed September 13, 2018. Cited figures are marked; the original filing is the authoritative source.
Zscaler, Inc. (Nasdaq: ZS) filed its Form 10-K for fiscal 2018, the year ended July 31, 2018, reporting revenue of $190.2 milliona, up from $125.7 million in fiscal 2017, a 51% increase.
The company remains unprofitable, with a net loss of $33.6 millionb in fiscal 2018 compared with $35.5 million in fiscal 2017, and an accumulated deficit of $196.1 million as of July 31, 2018. Gross margin improved to 80% from 78%, and non-GAAP operating margin improved to (8)% from (15)%. The company describes its cloud security platform, ZIA and ZPA, as processing approximately 50 billion internet requests per day across more than 100 data centers, serving over 3,250 customers including more than 300 of the Forbes Global 2000.
The company completed its IPO in March 2018, selling 13,800,000 shares at $16.00c per share for net proceeds of $205.3 million. Cash, cash equivalents and short-term investments totaled $298.5 million at July 31, 2018, and operating cash flow was positive at $17.3 million, with free cash flow of $2.1 million.
Deferred revenue rose to $164.0 milliond, and remaining performance obligations were $397.9 million, of which 53% is expected to be recognized over the next 12 months. Investors should weigh the company's strong growth, improving margins and dollar-based net retention rate of 117% against ongoing losses, concentration of ownership (insiders and affiliates beneficially owning approximately 60%), reliance on channel partners that generated 92% of fiscal 2018 revenue, and pending patent litigation with Symantec and Finjan.
02—Key points
Key Highlights
- Revenue grew 51% to $190.2 million in fiscal 2018 from $125.7 million in fiscal 2017.
- Net loss narrowed slightly to $33.6 million in fiscal 2018 from $35.5 million in fiscal 2017; the company expects continued net losses.
- Gross margin rose to 80% from 78%, and non-GAAP operating margin improved to (8)% from (15)%.
- IPO completed in March 2018 at $16.00 per share, raising net proceeds of $205.3 million; cash and short-term investments totaled $298.5 million at July 31, 2018.
- Dollar-based net retention rate was 117% for the trailing 12 months ended July 31, 2018, up from 115% in fiscal 2017.
- Customers grew to over 3,250, including over 300 of the Forbes Global 2000; approximately 55% of fiscal 2018 revenue came from customers outside the United States.
- Channel partners accounted for 92% of fiscal 2018 revenue, and the company faces ongoing patent litigation with Symantec and Finjan.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2018, Zscaler lost $0.18.
- Revenue$190.2M100.0%
- Cost of revenue−$37.9M19.9%
- Gross profit$152.3M80.1%
- Operating costs−$186.9M98.3%
- Operating income−$34.6M18.2%
- Interest, other & tax$978,0000.5%
- Net income−$33.6M17.7%
04—Financials
Financial Highlights
Figures from 10-KFY2018filed September 13, 2018Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $190.17M$125.72M | +51.3% |
| Cost of Revenue | $37.88M$27.47M | +37.9% |
| Gross Profit | $152.30M$98.25M | +55.0% |
| R&D Expenses | $39.38M$33.56M | +17.3% |
| Operating Expenses | $186.92M$133.32M | +40.2% |
| Operating Income | -$34.62M-$35.07M | +1.3% |
| Interest Expense | $0— | — |
| Net Income | -$33.65M-$35.46M | +5.1% |
| EPS (Basic) | $-0.63$-1.54 | +59.1% |
| Shares Outstanding (Basic) | 63.88M29.22M | +118.6% |
05—Questions
Frequently Asked Questions
How quickly is Zscaler growing and is it approaching profitability?
Revenue increased 51% to $190.2 million in fiscal 2018. The company still reported a net loss of $33.6 million and an accumulated deficit of $196.1 million, and it expects to keep incurring net losses. Loss from operations narrowed to $34.6 million from $35.1 million, and free cash flow turned positive at $2.1 million.
How much cash does Zscaler have after its IPO?
Cash, cash equivalents and short-term investments totaled $298.5 million as of July 31, 2018. The IPO generated net proceeds of $205.3 million after $15.5 million of underwriting discounts and commissions. The company states that existing cash is sufficient to fund operations for at least the next 12 months.
What risks does concentrated ownership and channel dependence pose for investors?
As of July 31, 2018, executive officers, directors, 5% stockholders and affiliates beneficially owned approximately 60% of common stock, with Jay Chaudhry and affiliates owning approximately 22.4%, giving insiders control over most stockholder matters. Channel partners generated most revenue, and the top five channel partners represented 42% of fiscal 2018 revenue.
What pending legal matters could affect Zscaler?
Symantec filed two patent infringement complaints alleging that Zscaler's cloud security platform infringes multiple patents, and Finjan filed a complaint on similar grounds. Zscaler believes its technology does not infringe and is vigorously defending the cases. It has not recorded a liability for Symantec, and it has accrued a total of $3.2 million related to past negotiations with Finjan.
06—Continue