It has been about a month since the last earnings report for Zscaler (ZS). Shares have added about 11.4% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Zscaler due for a pullback? 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 drivers.
Zscaler's Q4 Earnings and Revenues Surpass Estimates
Zscaler reported fourth-quarter fiscal 2020 adjusted earnings of 5 cents per share that beat the Zacks Consensus Estimate by 66.7%. However, quarterly earnings plunged 28.6% from the year-ago quarter’s earnings of 7 cents per share.
Revenues of $110.5 million surged 46% 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 6.3%.
Americas accounted for 50% of revenues, while EMEA contributed 40%. The remaining came in from the Asia Pacific and Japan.
Calculated billings jumped 55% year over year to $194.9 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 in the fiscal fourth quarter.
Customer Details
Zscaler continued to win customers and its net dollar retention rate was strong at 120% compared with the 119% recorded in the previous quarter and 118% in the year-ago quarter.
Remaining Performance Obligations (RPO), which represent Zscaler’s committed non-cancelable future revenues, were $783 million as of Jul 31, up 41% year over year.
Operating Details
In the reported quarter, non-GAAP gross margin contracted 300 basis points (bps) year over year to 78%. The company stated that this decline was mainly due to the increased ZPA traffic which grows 10 times in the fiscal fourth quarter. The firm had to use AWS and Azure data centers to support the sudden spike in demand, which run at higher cost than Zscaler’s data centers.
Non-GAAP research & development (R&D), sales & marketing (S&M) and general & administrative (G&A) expenses flared up 54%, 46% and 33% to $20.3 million, $59.7 million and $10.7 million, respectively.
Non-GAAP operating income was $7.8 million in the fiscal fourth quarter compared with the year-ago quarter’s $7.9 million.
Balance Sheet & Cash Flow
As of Jul 31, Zscaler had $1.37 billion in cash, cash equivalents and short-term investments compared with the previous quarter’s $391.3 million. This uptick resulted from the issuance of convertible senior notes worth $1.15 billion in June 2020.
In the reported quarter, cash provided by operations was $31.6 million. Free cash flow was $10.9 million. In fiscal 2020, the company generated operating and free cash flows of $79.3 million and $27.5 million, respectively.
Deferred revenues surged 47% year over year to $369.8 million.
Guidance
For first-quarter fiscal 2021, Zscaler expects revenues between $131 million and $133 million. Non-GAAP income from operations is expected between $8 million and $10 million. Non-GAAP earnings are projected between 5 cent and 6 cents per share.
For fiscal 2021, Zscaler expects revenues between $580 million and $590 million. Non-GAAP income from operations is expected to be $44-$46 million. Non-GAAP earnings are anticipated between 28 cents and 30 cents per share.
The company’s fiscal 2020 calculated billings are estimated between $710 million and $720 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted -65.26% due to these changes.
VGM Scores
At this time, Zscaler has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, 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 trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Zscaler has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
