Zscaler Reports Second Quarter Fiscal 2020 Financial Results

2/20/2020, 10:05 PM (Source: GlobeNewswire)

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  • Revenue grows 36% year-over-year to $101.3 million
  • Calculated billings grow 18% year-over-year to $135.4 million
  • Deferred revenue grows 36% year-over-year to $280.0 million
  • GAAP net loss of $29.2 million compared to GAAP net loss of $3.6 million on a year-over-year basis
  • Non-GAAP net income of $12.0 million compared to non-GAAP net income of $11.6 million on a year-over-year basis

SAN JOSE, Calif., Feb. 20, 2020 (GLOBE NEWSWIRE) -- Zscaler, Inc. (Nasdaq: ZS), the leader in cloud security, today announced financial results for its second quarter of fiscal year 2020, ended January 31, 2020.

"In the quarter, we delivered strong earnings results while making tremendous progress on our go-to-market initiatives," said Jay Chaudhry, Chairman and CEO of Zscaler. "Momentum is continuing to build across our business as our customers embrace and accelerate their cloud transformation."

Second Quarter Fiscal 2020 Financial Highlights

  • Revenue: $101.3 million, an increase of 36% year-over-year.
  • Income (loss) from operations: GAAP loss from operations was $30.3 million, or 30% of total revenue, compared to $5.2 million, or 7% of total revenue, in the second quarter of fiscal 2019. Non-GAAP income from operations was $10.9 million, or 11% of total revenue, compared to $10.0 million, or 13% of total revenue, in the second quarter of fiscal 2019.
  • Net income (loss): GAAP net loss was $29.2 million, compared to $3.6 million in the second quarter of fiscal 2019. Non-GAAP net income was $12.0 million, compared to $11.6 million in the second quarter of fiscal 2019.
  • Net income (loss) per share: GAAP net loss per share was $0.23, compared to $0.03 in the second quarter of fiscal 2019. Non-GAAP net income per share was $0.09, compared to $0.09 in the second quarter of fiscal 2019.
  • Cash flow: Cash provided by operations was $5.4 million, or 5% of revenue, compared to $15.7 million, or 21% of revenue, in the second quarter of fiscal 2019. Free cash flow was negative $1.9 million, or negative 2% of revenue, compared to free cash flow of $12.0 million, or 16% of revenue, in the second quarter of fiscal 2019. Decrease in free cash flow was primarily due to a $15.0 million cash payment as a result of a legal settlement agreement. Excluding this settlement, free cash flow would have been $13.1 million, or 13% of revenue.
  • Deferred revenue: $280.0 million as of January 31, 2020, an increase of 36% year-over-year.
  • Cash, cash equivalents and short-term investments: $384.9 million as of January 31, 2020, an increase of $20.3 million from July 31, 2019.

Financial Outlook

For the third quarter of fiscal 2020, we expect:

  • Total revenue of $105 million to $107 million
  • Non-GAAP income from operations of $1 million to $3 million 
  • Non-GAAP earnings per share of approximately $0.01 to $0.03, assuming approximately 139 million common shares outstanding

For the full year fiscal 2020, we expect:

  • Total revenue of $414 million to $417 million
  • Calculated billings of $512 million to $517 million
  • Non-GAAP income from operations of $16 million to $18 million
  • Non-GAAP earnings per share of $0.14 to $0.16, assuming approximately 139 million common shares outstanding

These statements are forward-looking and actual results may differ materially. Refer to the Forward-Looking Statements safe harbor below for information on the factors that could cause our actual results to differ materially from these forward-looking statements.

Guidance for non-GAAP financial measures excludes stock-based compensation expense, amortization expense of acquired intangible assets, asset impairment related to facility exit, certain litigation-related expenses and income tax effects generated by intangible assets acquired in business acquisitions. We have not reconciled our expectations to non-GAAP income from operations and non-GAAP net income per share to their most directly comparable GAAP measures because certain items are out of our control or cannot be reasonably predicted. Accordingly, a reconciliation for non-GAAP income from operations and non-GAAP net income per share is not available without unreasonable effort.

Conference Call and Webcast Information

Zscaler will host a conference call for analysts and investors to discuss its second quarter fiscal 2020 earnings results and outlook for its third quarter of fiscal 2020 and full year fiscal 2020 today at 1:30 p.m. Pacific time (4:30 p.m. Eastern time).

Date:Thursday, February 20, 2020
Time:1:30 p.m. PT
Webcast:https://ir.zscaler.com/
Dial-in number:334-777-6978

Upcoming Conferences 

Third Quarter of Fiscal 2020 Investor Conference Participation Schedule:

  • Morgan Stanley 2020 Media, Telecommunications & Technology Conference
    March 4, 2020 – San Francisco, CA

  • SunTrust Robinson Humphrey 2020 Technology, Internet & Services Conference
    March 11, 2020 – New York, NY

  • Credit Suisse Investor Relations 1x1 Conference
    March 12, 2020 – New York, NY

Zscaler's conference presentations are expected to be available via webcast on the Investor Relations section of the company's website. To hear these presentations and to access the most updated information, please visit the Investor Relations section of Zscaler’s website at https://ir.zscaler.com.

Forward-Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties, including statements regarding our future financial and operating performance, including our financial outlook for the third quarter of fiscal 2020 and full year fiscal 2020. There are a significant number of factors that could cause actual results to differ materially from statements made in this press release, including but not limited to: our limited operating history; our ability to identify and effectively implement the necessary changes to address execution challenges; risks associated with managing our rapid growth, including fluctuations from period to period; our limited experience with new product and subscription and support introductions and the risks associated with new products and subscription and support offerings, including the discovery of software bugs; our ability to attract and retain new customers; the failure to timely develop and achieve market acceptance of new products and subscriptions as well as existing products and subscription and support; rapidly evolving technological developments in the market for network security products and subscription and support offerings and our ability to remain competitive; length of sales cycles; and general market, political, economic and business conditions.

Additional risks and uncertainties that could affect our financial results are included under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth from time to time in our filings and reports with the Security Exchange Commission (SEC), including our Annual Report on Form 10-K for the fiscal year ended July 31, 2019 filed on September 18, 2019, as well as future filings and reports by us, copies of which are available on our website at ir.zscaler.com and on the SEC’s website at www.sec.gov. You should not rely on these forward-looking statements, as actual outcomes and results may differ materially from those contemplated by these forward-looking statements as a result of such risks and uncertainties. Additional information will also be set forth in other filings that we make with the SEC from time to time. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we do not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made.

Use of Non-GAAP Financial Information

We believe that the presentation of non-GAAP financial information provides important supplemental information to management and investors regarding financial and business trends relating to our financial condition and results of operations. For further information regarding why we believe that these non-GAAP measures provide useful information to investors, the specific manner in which management uses these measures, and some of the limitations associated with the use of these measures, please refer to the “Explanation of Non-GAAP Financial Measures" section of this press release.

About Zscaler

Zscaler enables the world’s leading organizations to securely transform their networks and applications for a mobile and cloud-first world. Its flagship services, Zscaler Internet Access™ and Zscaler Private Access™, create fast, secure connections between users and applications, regardless of device, location, or network. Zscaler services are 100 percent cloud-delivered and offer the simplicity, enhanced security and improved user experience that traditional appliances are unable to match. Used in more than 185 countries, Zscaler operates a multi-tenant distributed cloud security platform, protecting thousands of customers from cyberattacks and data loss. Learn more at zscaler.com or follow us on Twitter @zscaler.

Zscaler™, Zscaler Internet Access™, and Zscaler Private Access™, ZIA™ and ZPA™ are either (i) registered trademarks or service marks or (ii) trademarks or service marks of Zscaler, Inc. in the United States and/or other countries. Any other trademarks are the properties of their respective owners.

Investor Relations Contact:

Bill Choi, CFA

Vice President, Investor Relations
(669) 255-0767
ir@zscaler.com 


ZSCALER, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
        
 Three Months Ended Six months ended
 January 31, January 31,
 2020 2019 2020 2019
Revenue$101,268  $74,302  $194,858  $137,600 
Cost of revenue (1) (2)20,238  15,271  39,796  27,370 
Gross profit81,030  59,031  155,062  110,230 
Operating expenses:       
Sales and marketing (1) (2)61,621  38,756  121,032  75,301 
Research and development (1) (2)20,706  15,071  40,977  28,257 
General and administrative (1) (3) (4)28,983  10,386  41,608  20,517 
Total operating expenses111,310  64,213  203,617  124,075 
Loss from operations(30,280) (5,182) (48,555) (13,845)
Interest income, net1,855  1,924  3,877  3,514 
Other income (expense), net(13) 250  (42) 62 
Loss before income taxes(28,438) (3,008) (44,720) (10,269)
Provision for income taxes716  547  1,510  874 
Net loss$(29,154) $(3,555) $(46,230) $(11,143)
Net loss per share, basic and diluted$(0.23) $(0.03) $(0.36) $(0.09)
Weighted-average shares used in computing net loss per share, basic and diluted128,408  122,741  127,978  121,664 


 (1) Includes stock-based compensation expense as follows:               
                
Cost of revenue$1,580  $619  $2,961  $1,122 
Sales and marketing11,943  5,517  21,982  8,318 
Research and development6,077  4,398  10,951  7,193 
General and administrative4,266  2,693  6,348  4,180 
Total$23,866  $13,227  $42,242  $20,813 


(2) Includes amortization expense of acquired intangible assets as follows:               
                
Cost of revenue$205  $144  $410  $144 
Sales and marketing8    16   
Research and development429    995  95 
Total$642  $144  $1,421  $239 


(3) Includes asset impairment related to facility exit as follows:$316  $  $316  $ 


(4) Includes litigation-related expenses as follows:$16,334  $1,768  $18,341  $3,942 



ZSCALER, INC.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
 January 31, July 31,
 2020 (*) 2019
Assets   
Current assets:   
Cash and cash equivalents$76,534  $78,484 
Short-term investments308,380  286,162 
Accounts receivable, net94,784  93,341 
Deferred contract acquisition costs23,527  21,219 
Prepaid expenses and other current assets19,917  16,880 
Total current assets523,142  496,086 
Property and equipment, net52,355  41,046 
Operating lease right-of-use assets32,142   
Deferred contract acquisition costs, noncurrent50,523  48,566 
Acquired intangible assets, net7,287  8,708 
Goodwill7,479  7,479 
Other noncurrent assets3,497  2,277 
Total assets$676,425  $604,162 
    
Liabilities and Stockholders’ Equity   
Current liabilities:   
Accounts payable$2,675  $6,208 
Accrued expenses and other current liabilities13,606  12,810 
Accrued compensation25,019  21,544 
Deferred revenue251,221  221,387 
Operating lease liabilities11,142   
Total current liabilities303,663  261,949 
Deferred revenue, noncurrent28,801  29,815 
Operating lease liabilities, noncurrent23,300   
Other noncurrent liabilities1,497  3,840 
Total liabilities357,261  295,604 
Stockholders’ Equity   
Common stock129  127 
Additional paid-in capital589,229  532,618 
Accumulated other comprehensive income491  268 
Accumulated deficit(270,685) (224,455)
Total stockholders’ equity319,164  308,558 
Total liabilities and stockholders’ equity$676,425  $604,162 

(*) On August 1, 2019, we adopted Topic 842 using the transition option that allows to be applied prospectively at the beginning of the fiscal year of adoption. As such, the condensed consolidated balance sheets for prior periods are not comparable to our fiscal 2020 periods. The adoption of this standard resulted in the recognition of the operating lease right-of-use assets and operating lease liabilities related to our real estate and co-location arrangements.


ZSCALER, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 Six Months Ended
 January 31,
 2020 2019
Cash Flows From Operating Activities   
Net loss$(46,230) $(11,143)
Adjustments to reconcile net loss to cash provided by operating activities   
Depreciation and amortization expense7,508  4,662 
Impairment of assets316   
Amortization expense of acquired intangible assets1,421  239 
Amortization of deferred contract acquisition costs11,425  8,781 
Noncash operating lease costs6,215   
Stock-based compensation expense42,242  20,813 
Accretion of purchased discounts, net of amortization of investment premiums(442) (1,125)
Other248  202 
Changes in operating assets and liabilities, net of effects of business acquisitions:   
Accounts receivable(1,432) (13,859)
Deferred contract acquisition costs(15,690) (13,472)
Prepaid expenses, other current and noncurrent assets(3,981) (2,778)
Accounts payable(603) (786)
Accrued expenses, other current and noncurrent liabilities(1,243) 1,042 
Accrued compensation3,475  (7,852)
Deferred revenue28,820  41,997 
Operating lease liabilities(5,189)  
Net cash provided by operating activities26,860  26,721 
Cash Flows From Investing Activities   
Purchases of property, equipment and other(15,099) (8,607)
Capitalized internal-use software(4,273) (903)
Acquired intangible assets  (1,480)
Purchases of short-term investments(147,543) (179,896)
Proceeds from maturities of short-term investments126,013  71,603 
Net cash used in investing activities(40,902) (119,283)
Cash Flows From Financing Activities   
Payments of offering costs related to initial public offering  (1,797)
Proceeds from issuance of common stock upon exercise of stock options6,758  15,493 
Proceeds from issuance of common stock under the employee stock purchase plan5,334  8,691 
Repurchases of unvested common stock  (22)
Repayments of notes receivable from stockholders  1,905 
Net cash provided by financing activities12,092  24,270 
Net decrease in cash, cash equivalents and restricted cash(1,950) (68,292)
Cash, cash equivalents and restricted cash at beginning of period78,484  136,147 
Cash, cash equivalents and restricted cash at end of period$76,534  $67,855 
Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets:   
Cash and cash equivalents$76,534  $67,467 
Restricted cash, current  96 
Restricted cash, non-current  292 
Total cash, cash equivalents and restricted cash$76,534  $67,855 



ZSCALER, INC.
Reconciliation of GAAP to Non-GAAP Financial Measures
(in thousands)
(unaudited)
        
 Three Months Ended Six Months Ended
 January 31, January 31,
 2020 2019 2020 2019
        
Revenue$101,268  $74,302  $194,858  $137,600 
        
Non-GAAP Gross Profit and Non-GAAP Gross Margin       
GAAP gross profit$81,030  $59,031  $155,062  $110,230 
Add:       
Stock-based compensation expense1,580  619  2,961  1,122 
Amortization expense of acquired intangible assets205  144  410  144 
Non-GAAP gross profit$82,815  $59,794  $158,433  $111,496 
GAAP gross margin80% 79% 80% 80%
Non-GAAP gross margin82% 80% 81% 81%
        
Non-GAAP Income from Operations and Non-GAAP Operating Margin       
GAAP loss from operations$(30,280) $(5,182) $(48,555) $(13,845)
Add:       
Stock-based compensation expense23,866  13,227  42,242  20,813 
Litigation-related expenses16,334  1,768  18,341  3,942 
Amortization expense of acquired intangible assets642  144  1,421  239 
Asset impairment related to facility exit (1)316    316   
Non-GAAP income from operations$10,878  $9,957  $13,765  $11,149 
GAAP operating margin(30)% (7)% (25)% (10)%
Non-GAAP operating margin11% 13% 7% 8%

___________

(1) Consists of asset impairment charges related to the relocation of our corporate headquarters.



ZSCALER, INC.
Reconciliation of GAAP to Non-GAAP Financial Measures
(in thousands, except per share amounts)
(unaudited)
        
 Three Months Ended Six Months Ended
 January 31, January 31,
 2020 2019 2020 2019
Non-GAAP Net Income per Share, Diluted       
GAAP net loss$(29,154) $(3,555) $(46,230) $(11,143)
Stock-based compensation expense23,866  13,227  42,242  20,813 
Litigation-related expenses16,334  1,768  18,341  3,942 
Amortization expense of acquired intangible assets642  144  1,421  239 
Asset impairment related to facility exit (1)316    316   
Provision for income taxes (2)       
Non-GAAP net income$12,004  $11,584  $16,090  $13,851 
        
GAAP net loss per share, diluted$(0.23) $(0.03) $(0.36) $(0.09)
Stock-based compensation expense0.17  0.10  0.31  0.16 
Litigation-related expenses0.12  0.01  0.13  0.03 
Amortization expense of acquired intangible assets    0.01   
Asset impairment related to facility exit (1)       
Provision for income taxes (2)       
Adjustment to total fully diluted earnings per share (3)0.03  0.01  0.03   
Non-GAAP net income per share, diluted$0.09  $0.09  $0.12  $0.10 
Weighted-average shares used in computing non-GAAP net income per share, diluted136,663  134,246  136,843  134,059 

___________

(1) Consists of asset impairment charges related to the relocation of our corporate headquarters.

(2) We use our GAAP provision for income taxes for purposes of determining our non-GAAP income tax expense. The difference between our GAAP and non-GAAP income tax expense represents the excess tax deduction of stock-based compensation expense recognized in foreign jurisdictions and any income tax benefits associated with business combinations. The income tax benefit related to stock-based compensation expense included in the GAAP provision for income taxes was not material for all periods presented.

(3) The sum of the fully diluted earnings per share impact of individual reconciling items may not total to fully diluted Non-GAAP net income per share due to the basic share counts used to calculate the GAAP net loss per share differ from the fully diluted share counts used to calculate the non-GAAP net income per share and due to rounding of the individual reconciling items. The GAAP net loss per share calculation uses a lower share count as it excludes potentially dilutive shares, which are included in calculating the non-GAAP income per share.



ZSCALER, INC.       
Reconciliation of GAAP to Non-GAAP Financial Measures      
(in thousands)       
(unaudited)       
        
 Three Months Ended Six Months Ended
 January 31, January 31,
 2020 2019 2020 2019
Calculated Billings       
Revenue$101,268  $74,302  $194,858  $137,600 
Add: Total deferred revenue, end of period280,022  206,020  280,022  206,020 
Less: Total deferred revenue, beginning of period(245,869) (165,279) (251,202) (164,023)
Calculated billings$135,421  $115,043  $223,678  $179,597 
        
Free Cash Flow       
Net cash provided by operating activities$5,431  $15,707  $26,860  $26,721 
Less: Purchases of property, equipment and other(4,889) (3,193) (15,099) (8,607)
Less: Capitalized internal-use software(2,471) (547) (4,273) (903)
Free cash flow$(1,929) $11,967  $7,488  $17,211 
As a percentage of revenue:       
Net cash provided by operating activities5% 21% 14% 20%
Less: Purchases of property, equipment and other(5)% (4)% (8)% (6)%
Less: Capitalized internal-use software(2)% (1)% (2)% (1)%
Free cash flow margin(2)% 16% 4% 13%



ZSCALER, INC.
Explanation of Non-GAAP Financial Measures

In addition to our results determined in accordance with generally accepted accounting principles in the United States of America (GAAP), we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In particular, free cash flow is not a substitute for cash used in operating activities. Additionally, the utility of free cash flow as a measure of our liquidity is further limited as it does not represent the total increase or decrease in our cash balance for a given period. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation of the Company's historical non-GAAP financial measures to their most directly comparable financial measure stated in accordance with GAAP has been included in this press release. Investors are cautioned that there are a number of limitations associated with the use of non-GAAP financial measures and key metrics as analytical tools. Investors are encouraged to review these reconciliations, and not to rely on any single financial measure to evaluate our business.

Expenses Excluded from Non-GAAP Measures

Stock-based compensation expense is excluded primarily because they are non-cash expenses that management believes are not reflective of our ongoing operational performance. Amortization expense of acquired intangible assets is excluded because these are considered by management to be outside of the Company's core business operating performance. Asset impairments related to facility exit costs are excluded because such charges are not reflective of our ongoing operational performance. We also exclude certain litigation-related expenses consisting of professional fees and related costs incurred by us in defending against significant claims that we deem not to be in the ordinary course of our business and, if applicable, actual losses and accruals related to estimated losses in connection with these claims. There are many uncertainties and potential outcomes associated with any litigation, including the expense of litigation, timing of such expenses, court rulings, unforeseen developments, complications and delays, each of which may affect our results of operations from period to period, as well as the unknown magnitude of the potential loss relating to any lawsuit, all of which are inherently subject to change, difficult to predict and could adversely affect our results of operations. We estimate the tax effect of these items on our non-GAAP results and may adjust our GAAP provision for income taxes, if such effects have a material impact to our non-GAAP results.

Non-GAAP Financial Measures

Non-GAAP Gross Profit and Non-GAAP Gross Margin. We define non-GAAP gross profit as GAAP gross profit excluding stock-based compensation expense and amortization expense of acquired intangible assets. We define non-GAAP gross margin as non-GAAP gross profit as a percentage of revenue.

Non-GAAP Income  from Operations and Non-GAAP Operating Margin. We define non-GAAP income from operations as GAAP loss from operations excluding stock-based compensation expense, amortization expense of acquired intangible assets, asset impairment related to facility exit and certain litigation-related expenses. We defined non-GAAP operating margin as non-GAAP income from operations as a percentage of revenue.

Non-GAAP Net Income per Share, Diluted. We define non-GAAP net income as GAAP net loss plus stock-based compensation expense, amortization expense of acquired intangible assets, asset impairment related to facility exit, certain litigation-related expenses, income tax effects generated by the excess tax deduction of stock-based compensation expense recognized in foreign jurisdictions and any income tax benefits associated with business combinations. We define non-GAAP net income per share, diluted, as non-GAAP net income divided by the weighted-average diluted shares outstanding, which includes the dilutive effect of potentially diluted common stock equivalents outstanding during the period.

Free Cash Flow and Free Cash Flow Margin. We define free cash flow as net cash provided by operating activities less purchases of property, equipment and other and capitalized internal-use software. We define free cash flow margin as free cash flow divided by revenue. We believe that free cash flow and free cash flow margin are meaningful indicators of liquidity information to management and investors about the amount of cash generated from our operations that, after the investments in property, equipment and other and capitalized internal-use software, can be used for strategic initiatives.

Calculated Billings. We define calculated billings as total revenue plus the change in deferred revenue in a period. Calculated billings in any particular period aims to reflect amounts invoiced for subscriptions to access our cloud platform, together with related support services related to our new and existing customers. We typically invoice our customers annually in advance, and to a lesser extent quarterly in advance, monthly in advance or multi-year in advance.

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