01—Abstract
Summary
Summary of the 10-K filed September 17, 2020. Cited figures are marked; the original filing is the authoritative source.
Zscaler, Inc. filed its Form 10-K for the fiscal year ended July 31, 2020 on September 17, 2020.
Revenue grew to $431.3 milliona in fiscal 2020 from $302.8 million in fiscal 2019, with the filing stating growth of 42%. The company reported a net loss of $115.1 million for fiscal 2020, compared with $28.7 million in fiscal 2019, and an accumulated deficit of $339.6 million. Management states it expects to keep incurring net losses for the foreseeable future and intends to keep prioritizing growth investment over near-term profitability.
Non-GAAP income from operations was $29.9 millionb, against a GAAP loss from operations of $114.0 million. The balance sheet strengthened significantly during the year. In June 2020 the company issued $1,150.0 million of 0.125% Convertible Senior Notes due 2025, with net proceeds of $1,130.5 million, and used $145.2 million of those proceeds to buy capped calls.
Cash, cash equivalents and short-term investments totaled $1,370.6 millionc at July 31, 2020. Operating cash flow was $79.3 million and free cash flow was $27.5 million. Deferred revenue reached $369.8 million, and the filing reports calculated billings of $549.8 million, up $159.8 million, or 41%, from fiscal 2019.
Customer metrics were also strong. The company had over 4,500 customers, including over 450 of the Forbes Global 2000, and a dollar-based net retention rate of 120%d for the trailing 12 months ended July 31, 2020.
Channel partners generated 96% of revenue in fiscal 2020, and the top five channel partners and their affiliates accounted for 40% of revenue. Gross margin declined to 78% from 80%, mainly because of higher public cloud costs used to handle increased ZPA traffic when employees began working from home in March 2020.
02—Key points
Key Highlights
- Revenue rose to $431.3 million in fiscal 2020, up 42% from $302.8 million in fiscal 2019, driven by more users and additional subscriptions from existing customers ($98.6 million of the increase) and new customer additions.
- GAAP net loss widened to $115.1 million from $28.7 million, while non-GAAP income from operations was $29.9 million (7% non-GAAP operating margin) after excluding $121.4 million of stock-based compensation and $18.4 million of litigation-related expenses.
- Issued $1,150.0 million of 0.125% Convertible Senior Notes due 2025 in June 2020, with net proceeds of $1,130.5 million and $145.2 million spent on capped calls.
- Cash, cash equivalents and short-term investments totaled $1,370.6 million as of July 31, 2020, and management believes this is sufficient to meet needs for at least the next 12 months.
- Customer base grew to over 4,500 customers, including over 450 Forbes Global 2000 companies; dollar-based net retention rate was 120% for the trailing 12 months.
- Gross margin fell to 78% from 80% as higher public cloud infrastructure costs were incurred to handle increased ZPA traffic from remote work during COVID-19.
- Deferred revenue reached $369.8 million and calculated billings increased 41% to $549.8 million; remaining performance obligations were $782.8 million, with 55% expected to be recognized over the next 12 months.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2020, Zscaler lost $0.27.
- Revenue$431.3M100.0%
- Cost of revenue−$95.7M22.2%
- Gross profit$335.5M77.8%
- Operating costs−$449.5M104.2%
- Operating income−$114.0M26.4%
- Interest, other & tax−$1.2M0.3%
- Net income−$115.1M26.7%
04—Financials
Financial Highlights
Figures from 10-KFY2020filed September 17, 2020Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $431.27M$302.84M | +42.4% |
| Cost of Revenue | $95.73M$59.67M | +60.4% |
| Gross Profit | $335.54M$243.17M | +38.0% |
| R&D Expenses | $97.88M$61.97M | +57.9% |
| Operating Expenses | $449.49M$278.48M | +61.4% |
| Operating Income | -$113.96M-$35.31M | −222.7% |
| Interest Expense | $5.03M$0 | — |
| Net Income | -$115.12M-$28.66M | −301.7% |
| EPS (Basic) | $-0.89$-0.23 | −287.0% |
| EPS (Diluted) | $-0.89$-0.23 | −287.0% |
| Shares Outstanding (Basic) | 129.32M123.57M | +4.7% |
| Shares Outstanding (Diluted) | 129.32M123.57M | +4.7% |
05—Questions
Frequently Asked Questions
How fast did Zscaler's revenue grow in fiscal 2020, and what drove it?
Revenue increased $128.4 million, or 42%, to $431.3 million in fiscal 2020. The filing attributes $98.6 million of the increase to more users and additional subscriptions sold to existing customers, as reflected in a 120% dollar-based net retention rate. The remainder came from new customers, and the customer base grew 17% from July 31, 2019 to July 31, 2020.
Is Zscaler profitable, and does the company expect to become profitable?
No. Zscaler reported a GAAP net loss of $115.1 million for fiscal 2020 and an accumulated deficit of $339.6 million. Management states it expects to continue incurring net losses for the foreseeable future and plans to keep investing significantly in growth. On a non-GAAP basis, income from operations was $29.9 million, which excludes stock-based compensation, litigation-related expenses, impairment and amortization of acquired intangibles.
What are the terms of the convertible notes issued in June 2020?
The company issued $1,150.0 million of 0.125% Convertible Senior Notes due July 1, 2025, with an initial conversion price of $150.80 per share (6.6315 shares per $1,000 principal). Interest is payable semiannually. The company currently intends to settle the principal in cash, and the notes are unsecured with no financial covenants. Capped call transactions with a cap price of $246.76 per share were purchased for $145.2 million to reduce potential dilution.
How concentrated is Zscaler's revenue among channel partners and customers?
Channel partners accounted for 96% of revenue in fiscal 2020, and sales through the top five channel partners and their affiliates represented 40% of revenue. No single end customer contributed 10% or more of revenue in fiscal 2020, fiscal 2019 or fiscal 2018. Revenue from customers outside the United States was 51% of the total in fiscal 2020.
What main factors pressured gross margin and what caused the increase in the net loss in the quarter ended January 31, 2020?
Gross margin declined from 80% to 78%, mainly because of higher public cloud infrastructure costs incurred to handle increased ZPA traffic as customers' employees began working from home in March 2020. The sequential increase in the net loss for the quarter ended January 31, 2020 was primarily due to a $15.0 million payment to Broadcom to settle the Symantec patent cases.
06—Continue