Cloud security platform Zscaler (NASDAQ:ZS) beat Wall Street’s revenue expectations in Q3 CY2024, with sales up 26.4% year on year to $628 million. The company expects next quarter’s revenue to be around $634 million, close to analysts’ estimates. Its non-GAAP profit of $0.77 per share was 22.7% above analysts’ consensus estimates.
Is now the time to buy Zscaler? Find out by accessing our full research report, it’s free.
Zscaler (ZS) Q3 CY2024 Highlights:
- Revenue: $628 million vs analyst estimates of $605.6 million (26.4% year-on-year growth, 3.7% beat)
- Adjusted EPS: $0.77 vs analyst estimates of $0.63 (22.7% beat)
- Adjusted Operating Income: $134.1 million vs analyst estimates of $115.4 million (21.4% margin, 16.2% beat)
- Q4 revenue guidance of $634 million vs analyst estimates of $633.1 million (in line)
- Q4 operating profit (non-GAAP) guidance of $127 million vs analyst estimates of $127.3 million (in line)
- The company slightly lifted its revenue guidance for the full year to $2.63 billion at the midpoint from $2.61 billion (slight beat)
- Management raised its full-year operating income (non-GAAP) guidance to $554 million at the midpoint from $535 million (3.4% beat)
- Operating Margin: -4.9%, up from -9.3% in the same quarter last year
- Free Cash Flow Margin: 46.5%, up from 23% in the previous quarter
- Billings: $516.7 million at quarter end, up 13.2% year on year (2.7% beat)
- Market Capitalization: $31.7 billion
“Growing customer engagements and strong sales execution drove a solid Q1 with all metrics exceeding our guidance. The combination of Zero Trust and AI is creating exciting new opportunities, which we are well positioned to capture with our large and expanding platform,” said Jay Chaudhry, Chairman and CEO of Zscaler.
Company Overview
After successfully selling all four of his previous cybersecurity companies, Jay Chaudhry's fifth venture, Zscaler (NASDAQ:ZS) offers software-as-a-service that helps companies securely connect to applications and networks in the cloud.
Network Security
Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks. The migration of businesses to the cloud and employees working remotely in insecure environments is increasing demand modern cloud-based network security software, which offers better performance at lower cost than maintaining the traditional on-premise solutions, such as expensive specialized firewall hardware.
Sales Growth
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Thankfully, Zscaler’s 44.6% annualized revenue growth over the last three years was incredible. Its growth surpassed the average software company and shows its offerings resonate with customers, a great starting point for our analysis.
This quarter, Zscaler reported robust year-on-year revenue growth of 26.4%, and its $628 million of revenue topped Wall Street estimates by 3.7%. Company management is currently guiding for a 20.8% year-on-year increase in sales next quarter.
Looking further ahead, sell-side analysts expect revenue to grow 19.2% over the next 12 months, a deceleration versus the last three years. Despite the slowdown, this projection is commendable and indicates the market is factoring in success for its products and services.
Here at StockStory, we certainly understand the potential of thematic investing. Diverse winners from Microsoft (MSFT) to Alphabet (GOOG), Coca-Cola (KO) to Monster Beverage (MNST) could all have been identified as promising growth stories with a megatrend driving the growth. So, in that spirit, we’ve identified a relatively under-the-radar profitable growth stock benefiting from the rise of AI, available to you FREE via this link.
Billings
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Zscaler’s billings punched in at $516.7 million in Q3, and over the last four quarters, its growth was impressive as it averaged 24.3% year-on-year increases. This alternate topline metric grew slower than total sales, meaning the company recognizes revenue faster than it collects cash - a headwind for its liquidity that could also signal a slowdown in future revenue growth. 
Customer Acquisition Efficiency
The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.
Zscaler is quite efficient at acquiring new customers, and its CAC payback period checked in at 32.6 months this quarter. The company’s performance indicates it has a strong brand reputation, giving it the freedom to invest in new product initiatives while maintaining optionality. 
Key Takeaways from Zscaler’s Q3 Results
We were impressed that Zscaler beat on billings, revenue, adjusted operating profit, and adjusted EPS. We also liked that the company lifted full year guidance across the board as well. What was less exciting was that the company gave revenue and adjusted operating profit for next quarter that was only in line with expectations. It seems that for a high-multiple stock that's up nearly 15% in the last month, expectations were for more convincing guidance. The stock traded down 5.7% to $196.80 immediately after reporting.
Big picture, is Zscaler a buy here and now? We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.
