A month has gone by since the last earnings report for Zscaler (ZS). Shares have lost about 13.3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Zscaler due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Zscaler’s Q2 Earnings and Revenues Top Estimates
Zscaler reported second-quarter fiscal 2021 adjusted earnings of 10 cents per share, beating the Zacks Consensus Estimate by 25%. However, quarterly earnings remained flat, year over year.
Revenues of $157 million jumped 55% year over year on rise in adoption of the company’s cloud platform security solutions by global enterprises. The figure surpassed the consensus mark by 6.5%.
Americas accounted for 51% of revenues, while the EMEA contributed 38%. The remaining came in from the Asia Pacific and Japan.
Calculated billings surged 71% year over year to $232 million in the reported quarter.
Zscaler’s quarterly results benefited from continued solid demand for its products, given the healthy environment of the global security market.
Also, a huge global workforce is working remotely in an effort to contain the spread of coronavirus. However, an increasing number of people logging into employers’ networks has been prompting a greater need for security. This trend spurred demand for Zscaler’s products during the fiscal second quarter.
Customer Details
Zscaler continued to win customers and its net dollar retention rate was outstanding at 127% compared with the 122% recorded in the previous quarter and 116% in the year-ago quarter.
Remaining Performance Obligations (RPO), which represent Zscaler’s committed non-cancelable future revenues, were $1.025 billion as of Jan 31, significantly up 68% year over year.
Operating Details
In the reported quarter, non-GAAP gross margin contracted 100 basis points year over year to 81%. Sequentially, non-GAAP gross margin remained flat but exceeded management’s expectations, mainly driven by a higher mix of newly-introduced products.
Non-GAAP research & development (R&D), sales & marketing (S&M) and general & administrative (G&A) expenses flared up 71%, 57% and 57% to $24 million, $76.5 million and $12.5 million, respectively.
Total non-GAAP operating expenses shot up 60% to $112.9 million year over year. As a percentage of revenues, operating expenses expanded 200 basis points to 72%.
As a result of lower gross margin and elevated operating expenses as a percentage of sales, non-GAAP operating margin shrunk 300 basis points to 9%. Non-GAAP operating income was $14.8 million in the fiscal second quarter compared with the year-ago quarter’s $12.4 million.
Balance Sheet & Cash Flow
As of Jan 31, Zscaler had $1.44 billion in cash, cash equivalents and short-term investments compared with the previous quarter’s $1.42billion. Notably, the company had issued convertible senior notes worth $1.15 billion in June 2020.
In the reported quarter, the company generated operating cash flow of $30.4 million and $18 million of free cash flow. In the first six months of fiscal 2021, it generated operating and free cash flows of $83.9 million and $60.3 million, respectively.
Deferred revenues surged 60% year on year to $446.8 million.
Guidance
For third-quarter fiscal 2021, Zscaler projects revenues between $162 million and $164 million. Non-GAAP income from operations is estimated between $11 million and $12 million. Non-GAAP earnings are projected at 7 cents per share.
For fiscal 2021, Zscaler raised the revenue guidance to $634-$638 million from the $608-$612 million projected earlier. Non-GAAP income from operations is now expected to be $59-$61 million, up from the previous forecast of $55-$57 million. The non-GAAP earnings estimate has been revised upward to 39-40 cents per share from 37-38 cents per share.
The company’s fiscal 2021 calculated billings are estimated now between $820 million and $825 million, up from the earlier guided range of $755-$765 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -7.69% due to these changes.
VGM Scores
Currently, Zscaler has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren’t focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It’s no surprise Zscaler has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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