01—Abstract
Summary
Summary of the 10-K filed September 18, 2019. Cited figures are marked; the original filing is the authoritative source.
Zscaler, Inc. (ZS) reported fiscal 2019 (year ended July 31, 2019) revenue of $302.8 milliona, up from $190.2 million in fiscal 2018, a 59% increase as stated in the filing.
The company remained unprofitable, with a net loss of $28.7 millionb compared with $33.6 million in fiscal 2018, and an accumulated deficit of $224.5 million. Operating cash flow turned positive at $58.0 million, and free cash flow was $29.3 million, or a 10% free cash flow margin. Non-GAAP income from operations was $25.1 million, an 8% non-GAAP operating margin, compared with a non-GAAP operating loss in fiscal 2018.
Growth was driven by customer expansion and new logos. Dollar-based net retention was 118% for the trailing 12 months ended July 31, 2019, and the customer count rose to over 3,900, including over 400 Forbes Global 2000 companies. Calculated billings grew to $390.0 millionc.
Channel partners generated 96% of revenue in fiscal 2019, and the top five channel partners accounted for 42% of revenue. Customers outside the United States represented 51% of revenue. Remaining performance obligations totaled $554.2 milliond, with 55% expected to be recognized over the next 12 months.
Key risks disclosed include ongoing patent litigation with Symantec Corporation, for which the company has recorded no liability because a loss is not deemed probable, and the Finjan settlement, which resulted in a $4.1 million incremental expense. Insiders beneficially owned approximately 50.9% of common stock, with Jay Chaudhry holding about 21.1%. The company also disclosed a new San Jose headquarters lease with total rent of approximately $37.3 million over its initial term, and it expects to continue incurring net losses.
02—Key points
Key Highlights
- Revenue increased to $302.8 million in fiscal 2019 from $190.2 million in fiscal 2018, a 59% year-over-year increase.
- Net loss narrowed to $28.7 million in fiscal 2019 from $33.6 million in fiscal 2018; accumulated deficit was $224.5 million.
- Net cash provided by operating activities was $58.0 million, and free cash flow was $29.3 million (10% margin), versus $2.1 million in fiscal 2018.
- Non-GAAP income from operations was $25.1 million (8% non-GAAP operating margin), compared with a non-GAAP loss of $15.4 million in fiscal 2018.
- Dollar-based net retention rate was 118% for the trailing 12 months ended July 31, 2019; customers grew to over 3,900, including over 400 of the Forbes Global 2000.
- Calculated billings rose to $390.0 million, and deferred revenue reached $251.2 million; remaining performance obligations totaled $554.2 million.
- Ongoing Symantec patent litigation; the company has not recorded a liability because a loss is not considered probable, and it paid $7.3 million to settle the Finjan litigation.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2019, Zscaler lost $0.09.
- Revenue$302.8M100.0%
- Cost of revenue−$59.7M19.7%
- Gross profit$243.2M80.3%
- Operating costs−$278.5M92.0%
- Operating income−$35.3M11.7%
- Interest, other & tax$6.7M2.2%
- Net income−$28.7M9.5%
04—Financials
Financial Highlights
Figures from 10-KFY2019filed September 18, 2019Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $302.84M$190.17M | +59.2% |
| Cost of Revenue | $59.67M$37.88M | +57.5% |
| Gross Profit | $243.17M$152.30M | +59.7% |
| R&D Expenses | $61.97M$39.38M | +57.4% |
| Operating Expenses | $278.48M$186.92M | +49.0% |
| Operating Income | -$35.31M-$34.62M | −2.0% |
| Interest Expense | $0$0 | — |
| Net Income | -$28.66M-$33.65M | +14.8% |
| EPS (Basic) | $-0.23$-0.63 | +63.5% |
| EPS (Diluted) | $-0.23— | — |
| Shares Outstanding (Basic) | 123.57M63.88M | +93.4% |
| Shares Outstanding (Diluted) | 123.57M— | — |
05—Questions
Frequently Asked Questions
How fast did Zscaler's revenue grow in fiscal 2019?
Revenue was $302.8 million in fiscal 2019, compared with $190.2 million in fiscal 2018, an increase of $112.7 million, or 59%. The filing attributes most of the growth to more users and additional subscriptions from existing customers, with new customers contributing $24.4 million.
Is Zscaler profitable?
On a GAAP basis, no. The company reported a net loss of $28.7 million for fiscal 2019 and has incurred net losses in every period since inception, and it expects to continue incurring losses for the foreseeable future. On a non-GAAP basis, income from operations was $25.1 million, an 8% margin, excluding stock-based compensation, litigation-related expenses and acquired intangible amortization.
How concentrated is Zscaler's sales channel?
Most revenue flows through channel partners: $289.6 million, or 96% of fiscal 2019 revenue. Sales through the top five channel partners and their affiliates represented 42% of revenue for fiscal 2019 and fiscal 2018. The filing notes that the agreements are generally non-exclusive and that partners may cease marketing the platform with limited notice.
What are the main legal risks disclosed?
Symantec Corporation has filed two patent infringement complaints against Zscaler's cloud security platform, and Symantec has also sent letters alleging infringement of additional patents. Zscaler is vigorously defending the cases and has not recorded a liability because it does not consider a loss probable. The filing states that an adverse outcome could require substantial damages, injunctions or ongoing royalties.
How much control do insiders have?
As of July 31, 2019, executive officers, directors, current 5% or greater stockholders and affiliated entities beneficially owned approximately 50.9% of common stock, and Jay Chaudhry and his affiliates owned approximately 21.1%. The filing says this concentration will likely allow these holders to control most matters requiring stockholder approval.
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