01—Abstract
Summary
Summary of the 10-Q filed March 6, 2024. Cited figures are marked; the original filing is the authoritative source.
Zscaler, Inc. reported its fiscal 2024 second-quarter results for the three months ended January 31, 2024 in this Form 10-Q.
Revenue rose to $525.0 milliona from $387.6 million, an increase of 35%, and gross margin was 78%. Loss from operations narrowed to $45.5 million from $65.2 million, and net loss narrowed to $28.5 million, or $0.19 per share, from $57.5 million, or $0.40 per share. Interest income of $28.4 million, up from $12.7 million, helped narrow the net loss.
For the six months ended January 31, 2024, revenue was $1,021.7 millionb, up 37%, and net loss was $62.0 million. Cash flow and balance sheet metrics were strong. Net cash provided by operating activities for the six months was $402.9 million, and free cash flow was $325.5 million, versus $158.4 million a year earlier.
Cash, cash equivalents and short-term investments totaled $2,459.8 millionc at January 31, 2024. Deferred revenue reached $1,502.2 million, and remaining performance obligations were $3,613.0 million. The company also disclosed that its 0.125% convertible senior notes due 2025 became convertible at holders' option from February 1, 2024 through April 30, 2024, because the conditional conversion trigger was met.
The filing notes that a change in the estimated useful life of servers and networking equipment from four to five years reduced depreciation expense by $3.2 milliond in the quarter and $6.3 million for the six months, supporting the gross margin improvement. Dollar-based net retention was 117% for the trailing 12 months ended January 31, 2024. The company's calculated billings grew 27% for the quarter and 30% for the six months.
02—Key points
Key Highlights
- Revenue of $525.0 million for the quarter, up 35% from $387.6 million a year earlier; six-month revenue of $1,021.7 million, up 37%.
- GAAP gross margin of 78% for the quarter, versus 77% a year earlier; non-GAAP gross margin of 81%.
- Loss from operations narrowed to $45.5 million from $65.2 million; non-GAAP income from operations of $103.2 million, a 20% non-GAAP operating margin.
- Net loss of $28.5 million, or $0.19 per share, compared with $57.5 million, or $0.40 per share, in the prior-year quarter, aided by interest income of $28.4 million.
- Free cash flow of $325.5 million for the six months, versus $158.4 million a year earlier; operating cash flow of $402.9 million.
- Cash, cash equivalents and short-term investments of $2,459.8 million; deferred revenue of $1,502.2 million and remaining performance obligations of $3,613.0 million.
- Convertible senior notes ($1,150.0 million principal, due July 1, 2025) became convertible at holders' option from February 1, 2024 through April 30, 2024.
03—One dollar
Follow one dollar
For each $1.00 of revenue in Q2 FY2024, Zscaler lost $0.05.
- Revenue$525.0M100.0%
- Cost of revenue−$117.2M22.3%
- Gross profit$407.8M77.7%
- Operating costs−$453.3M86.3%
- Operating income−$45.5M8.7%
- Interest, other & tax$17.0M3.2%
- Net income−$28.5M5.4%
04—Financials
Financial Highlights
Figures from 10-QQ2 FY2024filed March 6, 2024Financial Statements
Q2 FY2024 against Q2 FY2023
| Line item | Q2 FY2024Q2 FY2023 | Change |
|---|---|---|
| Revenue | $525.00M$387.60M | +35.4% |
| Cost of Revenue | $117.20M$87.60M | +33.8% |
| Gross Profit | $407.80M$299.99M | +35.9% |
| R&D Expenses | $122.18M$85.77M | +42.5% |
| Operating Expenses | $453.26M$365.23M | +24.1% |
| Operating Income | -$45.46M-$65.24M | +30.3% |
| Interest Expense | $1.34M$1.33M | +0.3% |
| Net Income | -$28.47M-$57.45M | +50.4% |
| EPS (Basic) | $-0.19$-0.40 | +52.5% |
| EPS (Diluted) | $-0.19$-0.40 | +52.5% |
| Shares Outstanding (Basic) | 148.95M144.51M | +3.1% |
| Shares Outstanding (Diluted) | 148.95M144.51M | +3.1% |
05—Questions
Frequently Asked Questions
How did Zscaler's revenue and profitability trend in the quarter ended January 31, 2024?
Revenue grew 35% to $525.0 million, and the GAAP operating loss narrowed to $45.5 million from $65.2 million. Net loss narrowed to $28.5 million from $57.5 million. Gross margin rose to 78% from 77%, and non-GAAP operating margin rose to 20% from 13%.
What drove the improvement in gross margin?
The filing attributes the increase primarily to a change in the estimated useful life of servers and network equipment from four to five years, effective beginning fiscal 2024. This reduced depreciation expense by $3.2 million for the quarter and $6.3 million for the six months.
Does Zscaler have enough liquidity and what is the status of its convertible notes?
The company stated that existing cash, cash equivalents and short-term investments are expected to be sufficient for at least the next 12 months. The $1,150.0 million 0.125% convertible senior notes due 2025 are convertible at holders' option from February 1, 2024 through April 30, 2024. If holders convert and the company does not elect to settle in shares only, cash settlement could affect liquidity, and the notes could be reclassified as current liabilities.
How concentrated is Zscaler's revenue by channel and geography?
Channel partners generated 92% of revenue for the quarter, and direct customers generated 8%. The United States accounted for 50% of revenue, Europe, Middle East and Africa 31%, Asia Pacific 15%, and other regions 4%. No single customer accounted for 10% or more of revenue or receivables.
What are the main risks the filing highlights for investors?
The filing cites a history of net losses, with an accumulated deficit of $1,152.3 million as of January 31, 2024. It also cites intense competition, reliance on channel partners (top five channel partners represented 25% of revenue for the six months ended January 31, 2024), macroeconomic pressure lengthening sales cycles, and the company's stated intention to keep investing for growth, which may limit near-term profitability.
06—Continue