Zscaler Reports Third Quarter Fiscal 2018 Financial

Revenue grows 49% year over year to $49.2 million
Calculated billings grow 73% year over year to $54.7 million
Deferred revenue grows 61% year over year to $124.8 million
Raised $205.3 million in Initial Public Offering

SAN JOSE, Calif., June 06, 2018 (GLOBE NEWSWIRE) -- Zscaler, Inc. (Nasdaq:ZS), a leader in cloud security, today announced financial results for its third fiscal quarter ended April 30, 2018.

"In our first quarter as a public company, we delivered very strong revenue and billings growth, as well as a solid year over year improvement in operating performance,” said Jay Chaudhry, Chairman and CEO of Zscaler. "Our results reflect the strength of our security cloud platform and the momentum we’re seeing as our customers embrace and accelerate their cloud transformation. We are also very pleased to generate positive free cash flow for the quarter. We have the opportunity to dramatically change the legacy security market and to significantly reduce the costs of networking and security infrastructure."

Third Quarter Fiscal 2018 Financial Highlights

Total revenue was $49.2 million, an increase of 49% year-over-year.
GAAP loss from operations was $9.0 million, or 18% of total revenue, compared to $7.6 million in the third quarter of fiscal 2017, or 23% of total revenue. Non-GAAP loss from operations was $2.9 million, or 6% of total revenue, compared to $5.0 million of the third quarter of fiscal 2017, or 15% of total revenue.
GAAP net loss was $8.8 million, compared to $7.6 million in the third quarter of fiscal 2017. Non-GAAP net loss was $2.6 million, compared to $5.0 million in the third quarter of fiscal 2017.
GAAP net loss per share was $0.14, compared to $0.34 for the third quarter of fiscal 2017. Pro forma non-GAAP net loss per share was $0.02, compared to $0.05 for the third quarter of fiscal 2017.
Net cash flow from operations was $8.1 million, compared to $0.2 million for the third quarter of fiscal 2017. Free cash flow was $3.7 million, or 7% of total revenue, compared to negative $1.8 million, or 5% of total revenue, in the third quarter of fiscal 2017.
Cash and cash equivalents were $287.4 million as of April 30, 2018.

Reconciliations between GAAP and non-GAAP financial measures are provided in the tables of this press release.

Financial Outlook

For the fourth quarter of fiscal 2018, we expect:

Total revenue of $50.0 to $51.0 million
Non-GAAP loss from operations of $6.0 to $7.0 million
Pro forma non-GAAP net loss per share of $0.05 to $0.06 using shares outstanding of approximately 120.0 million

For the full fiscal 2018, we expect:

Total revenue of $184.0 to $185.0 million
Non-GAAP loss from operations of $19.0 to $20.0 million
Pro forma non-GAAP net loss per share of $0.17 to $0.18 using shares outstanding of approximately 110.0 million

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 and significant litigation-related expenses. We have not reconciled our expectations as to non-GAAP loss from operations and pro forma non-GAAP net loss per share to their most directly comparable GAAP measure because certain items are out of our control or cannot be reasonably predicted. Accordingly, a reconciliation for non-GAAP loss from operations and pro forma non-GAAP net loss per share is not available without unreasonable effort.

Conference Call Information

Zscaler will host a conference call for analysts and investors to discuss its third quarter fiscal 2018 earnings results and outlook for its fourth quarter fiscal 2018 today at 1:30 p.m., Pacific time (4:30 p.m. Eastern time).

Date:	Wednesday, June 6
Time:	1:30 p.m. PT (4:30 p.m. ET)
Webcast:	https://ir.zscaler.com/
Dial-in number:	(323) 794-2094 or (800) 263-0877, conference ID: 8313258

A live webcast of the conference call will be accessible from the Zscaler website at ir.zscaler.com. Listeners may log on to the call under the "Events & Presentations" section and select "Q3 2018 Zscaler Earnings Conference Call" to participate. A telephone replay of the conference call will be available at approximately 4:30 p.m. PT, June 6 through June 8, 2018 by dialing (888) 203-1112 or (719) 457-0820 and entering the passcode 8313258.

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 fourth fiscal quarter and full fiscal year 2018. There are a significant number of factors that could cause actual results to differ materially from statements made in this press release, including: 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; 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; 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” included in our final prospectus dated March 15, 2018, as filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (File No. 333-223072), which is 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. Actual outcomes and results may differ materially from those contemplated by these forward-looking statements as a result of such 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

Zscaler believes that the presentation of non-GAAP financial information provides important supplemental information to management and investors regarding financial and business trends relating to the Company’s financial condition and results of operations. For further information regarding why Zscaler believes 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 and Other Key Metrics” 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 are registered trademarks of Zscaler, Inc.

Investor Relations Contact:
Bill Choi, CFA
Vice President, Investor Relations
(669) 255-0767
ir@zscaler.com

Media Relations Contact:
Angel Badagliacco
Manager, PR
(408) 313-5358
abadagliacco@zscaler.com



Zscaler, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

	Three Months Ended April 30,						Nine Months Ended April 30,
	2018			2017			2018			2017
Revenue	$	49,163		$	32,964		$	134,000		$	89,173
Cost of revenue⁽¹⁾	9,424			6,997			26,374			19,438
Gross profit	39,739			25,967			107,626			69,735
Operating expenses:
Sales and marketing⁽¹⁾	29,892			20,689			83,930			55,601
Research and development⁽¹⁾	9,907			7,778			27,899			24,952
General and administrative⁽¹⁾	8,964			5,061			22,497			11,201
Total operating expenses	48,763			33,528			134,326			91,754
Loss from operations	(9,024		)	(7,561		)	(26,700		)	(22,019		)
Other income, net	610			183			1,019			379
Loss before income taxes	(8,414		)	(7,378		)	(25,681		)	(21,640		)
Provision for income taxes	357			184			1,003			551
Net loss	$	(8,771	)	$	(7,562	)	$	(26,684	)	$	(22,191	)
Accretion of Series C and D redeemable convertible
preferred stock	(1,223		)	(2,355		)	(6,332		)	(7,088		)
Net loss attributable to common stockholders	$	(9,994	)	$	(9,917	)	$	(33,016	)	$	(29,279	)
Net loss per share attributable to common stockholders,
basic and diluted	$	(0.14	)	$	(0.34	)	$	(0.73	)	$	(1.01	)
Weighted-average shares used in computing net loss per
share attributable to common stockholders, basic and
diluted	73,818			29,583			45,047			28,875

_____

(1) Includes stock-based compensation expense as follows:

	Three Months Ended April 30,				Nine Months Ended April 30,
	2018		2017		2018		2017
	(in thousands)
Cost of revenue	$	199	$	106	$	434	$	245
Sales and marketing	1,493		762		3,263		1,998
Research and development	960		306		1,852		5,231
General and administrative	657		412		1,557		862
Total stock-based compensation expense	$	3,309	$	1,586	$	7,106	$	8,336

Zscaler, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)

	April 30, 2018			July 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	287,443		$	87,978
Accounts receivable, net	40,215			39,052
Deferred contract acquisition costs	13,753			10,469
Prepaid expenses and other current assets	9,036			5,410
Total current assets	350,447			142,909
Property and equipment, net	20,441			13,139
Deferred contract acquisition costs, noncurrent	32,755			24,193
Other noncurrent assets	1,895			2,661
Total assets	$	405,538		$	182,902
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	4,944		$	3,763
Accrued expenses and other current liabilities	13,767			11,648
Accrued compensation	14,820			11,608
Liability for early exercise of unvested stock options	2,625			7,972
Deferred revenue	111,035			85,468
Total current liabilities	147,191			120,459
Deferred revenue, noncurrent	13,771			11,151
Other noncurrent liabilities	1,384			1,457
Total liabilities	162,346			133,067
Redeemable Convertible Preferred Stock	—			200,977
Stockholders’ Equity (Deficit)
Preferred stock	—			—
Common stock	119			18
Additional paid-in capital	434,250			18,734
Notes receivable from stockholders	(2,039		)	(7,878		)
Accumulated deficit	(189,138		)	(162,016		)
Total stockholders’ equity (deficit)	243,192			(151,142		)
Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)	$	405,538		$	182,902

Zscaler, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

	Nine Months Ended April 30,
	2018			2017
Cash Flows From Operating Activities
Net loss	$	(26,684	)	$	(22,191	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization expense	5,842			5,007
Amortization of deferred contract acquisition costs	9,354			5,992
Stock-based compensation expense	7,106			8,336
Other	278			(46		)
Changes in operating assets and liabilities:
Accounts receivable	(1,161		)	255
Deferred contract acquisition costs	(21,200		)	(11,660		)
Prepaid expenses and other assets	(3,341		)	(1,438		)
Accounts payable	(1,620		)	138
Accrued expenses and other liabilities	2,676			1,133
Accrued compensation	3,212			336
Deferred revenue	28,187			11,827
Net cash provided by (used in) operating activities	2,649			(2,311		)
Cash Flows From Investing Activities
Purchases of property and equipment	(11,008		)	(6,291		)
Capitalized internal-use software	(1,424		)	(146		)
Net cash used in investing activities	(12,432		)	(6,437		)
Cash Flows From Financing Activities
Proceeds from initial public offering, net of underwriting discounts and commissions	205,344			—
Payments of costs related to initial public offering	(3,566		)	—
Proceeds from issuance of common stock upon exercise of stock options	4,345			1,415
Proceeds from issuance of common stock related to early exercised stock options	869			—
Repurchases of unvested common stock	(3,090		)	—
Repayments of notes receivable from stockholders	5,346			1,856
Net cash provided by financing activities	209,248			3,271
Net increase (decrease) in cash and cash equivalents	199,465			(5,477		)
Cash and cash equivalents, beginning of period	87,978			92,842
Cash and cash equivalents, end of period	$	287,443		$	87,365

Zscaler, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(In thousands, except per percentage data)
(Unaudited)

	Three Months Ended April 30,						Nine Months Ended April 30,
	2018			2017			2018			2017
Revenue	$	49,163		$	32,964		$	134,000		$	89,173

Non-GAAP Gross Profit and Non-GAAP Gross Margin
Gross Profit	$	39,739		$	25,967		$	107,626		$	69,735
Add: Share-based compensation expense included in cost of revenue	199			106			434			245
Non-GAAP gross profit	$	39,938		$	26,073		$	108,060		$	69,980
Gross margin	81		%	79		%	80		%	78		%
Non-GAAP gross margin	81		%	79		%	81		%	78		%

Non-GAAP Loss from Operations and Non-GAAP Operating Margin
Loss from operations	$	(9,024	)	$	(7,561	)	$	(26,700	)	$	(22,019	)
Add:
Stock-based compensation expense	3,309			1,586			7,106			8,336
Litigation-related expenses	2,836			1,006			6,612			1,526
Non-GAAP loss from operations	$	(2,879	)	$	(4,969	)	$	(12,982	)	$	(12,157	)
Operating margin	(18		)%	(23		)%	(20		)%	(25		)%
Non-GAAP operating margin	(6		)%	(15		)%	(10		)%	(14		)%

Zscaler, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(In thousands, except per share data)
(Unaudited)

	Three Months Ended April 30,						Nine Months Ended April 30,
	2018			2017			2018			2017
Non-GAAP net loss per share attributable to common stockholders
GAAP net loss attributable to common stockholders	$	(9,994	)	$	(9,917	)	$	(33,016	)	$	(29,279	)
Stock-based compensation expense	3,309			1,586			7,106			8,336
Litigation-related expenses	2,836			1,006			6,612			1,526
Accretion of Series C and D redeemable convertible preferred stock	1,223			2,355			6,332			7,088
Income tax expense effects⁽¹⁾	—			—			—			—
Non-GAAP net loss attributable to common stockholders	$	(2,626	)	$	(4,970	)	$	(12,966	)	$	(12,329	)

GAAP net loss per share attributable to common stockholders, basic and diluted	$	(0.14	)	$	(0.34	)	$	(0.73	)	$	(1.01	)
Stock-based compensation expense	0.04			0.05			0.16			0.29
Litigation-related expenses	0.04			0.03			0.15			0.05
Accretion of Series C and D redeemable convertible preferred stock	0.02			0.08			0.14			0.25
Income tax expense effects⁽¹⁾	—			—			—			—
Non-GAAP net loss per share attributable to common stockholders,
basic and diluted⁽²⁾	$	(0.04	)	$	(0.17	)	$	(0.29	)	$	(0.43	)

Weighted-average shares used in computing net loss per share
attributable to common stockholders, basic and diluted	73,818			29,583			45,047			28,875

___________

(1)		We do not include the effects of income taxes on non-GAAP items due to our continued history of non-GAAP losses and full valuation allowance.
(2)		The sum of the non-GAAP per share attributable to common stockholders of individual line items excluded from our non-GAAP net loss may not total to the non-GAAP net loss per share attributable to common stockholders due to rounding.

Zscaler, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(In thousands, except per share data)
(Unaudited)

	Three Months Ended April 30,						Nine Months Ended April 30,
	2018			2017			2018			2017
Pro Forma Non-GAAP net Loss per Share Attributable to Common Stockholders
Numerator:
GAAP net loss attributable to common stockholders	$	(9,994	)	$	(9,917	)	$	(33,016	)	$	(29,279	)
Stock-based compensation expense	3,309			1,586			7,106			8,336
Litigation-related expenses	2,836			1,006			6,612			1,526
Accretion of Series C and D redeemable convertible preferred stock	1,223			2,355			6,332			7,088
Income tax expense effects ⁽¹⁾	—			—			—			—
Non-GAAP net loss attributable to common stockholders	$	(2,626	)	$	(4,970	)	$	(12,966	)	$	(12,329	)

Denominator:
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted⁽²⁾	73,818			29,583			45,047			28,875
Pro forma adjustment to reflect assumed conversion of our convertible preferred stock as of the beginning of the period ⁽²⁾	38,287			72,501			61,347			72,501
Weighted-average shares used in computing pro forma non-GAAP net loss per share attributable to common stockholders, basic and diluted	112,105			102,084			106,394			101,376
Pro forma non-GAAP net loss per share attributable to common stockholders, basic and diluted ⁽²⁾	$	(0.02	)	$	(0.05	)	$	(0.12	)	$	(0.12	)

___________

(1)		We do not include the effects of income taxes on non-GAAP items due to our continued history of non-GAAP losses and full valuation allowance.

(2)		We define pro forma non-GAAP net loss per share attributable to common stockholders as the weighted-average shares used in computing the net loss per share attributable to common stockholders plus a pro forma adjustment to give effect to the automatic conversion of our redeemable convertible preferred stock into 72,500,750 shares of common stock as though the conversion had occurred as of the beginning of the periods presented. Upon the closing of our initial public offering on March 20, 2018, all our outstanding shares of redeemable convertible preferred stock automatically converted into 72,500,750 shares of common stock on a one-to-one basis.

Zscaler, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(In thousands, except percentage data)
(Unaudited)

	Three Months Ended April 30,						Nine Months Ended April 30,
	2018			2017			2018			2017
Calculated Billings
Revenue	$	49,163		$	32,964		$	134,000		$	89,173
Add: Total deferred revenue, end of period	124,806			77,740			124,806			77,740
Less: Total deferred revenue, beginning of period	(119,257		)	(79,091		)	(96,619		)	(65,913		)
Calculated billings	$	54,712		$	31,613		$	162,187		$	101,000

	Three Months Ended April 30,						Nine Months Ended April 30,
	2018			2017			2018			2017
Free Cash Flow
Net cash provided by (used in) operating activities	$	8,117		$	243		$	2,649		$	(2,311	)
Less: Purchases of property and equipment	(3,963		)	(1,878		)	(11,008		)	(6,291		)
Less: Capitalized internal-use software	(474		)	(146		)	(1,424		)	(146		)
Free cash flow	$	3,680		$	(1,781	)	$	(9,783	)	$	(8,748	)
As a percentage of revenue:
Net cash provided by (used in) operating activities	16		%	1		%	2		%	(3		)%
Less: Purchases of property and equipment	(8		)%	(6		)%	(8		)%	(7		)%
Less: Capitalized internal-use software	(1		)%	—		%	(1		)%	—		%
Free cash flow margin	7		%	(5		)%	(7		)%	(10		)%

Zscaler, Inc.
Third Quarter Fiscal 2018 Financial Results
Explanation of Non-GAAP Financial Measures and Other Key Metrics

In addition to our results determined in accordance with U.S. 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 U.S. 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 U.S. GAAP has been provided in the financial statement tables 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.

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

Non-GAAP Loss from Operations and Non-GAAP Operating Margin. We define non-GAAP loss from operations and non-GAAP operating margin as GAAP loss from operations and GAAP operating margin, respectively, excluding stock-based compensation expense and certain litigation-related expenses. These excluded litigation-related expenses are 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, 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 estimate and could adversely affect our results of operations.

Non-GAAP Net Loss and Non-GAAP Net Loss per Share, Diluted. We define non-GAAP net loss as GAAP net loss plus stock-based compensation, litigation-related expenses and accretion of Series C and Series D redeemable convertible preferred stock. We do not include the effects of income taxes on non-GAAP items due to our continued history of non-GAAP losses and full valuation allowance. We define non-GAAP net loss per share, diluted, as non-GAAP net loss divided by the weighted-average diluted shares outstanding, which includes the dilutive effect of potentially diluted common stock equivalents outstanding during the period. Since we have reported net losses for all periods presented, we have excluded all potentially dilutive securities from the calculation of the diluted net loss per share as their effect is antidilutive and accordingly, basic and diluted net loss per share is the same for all periods presented. We believe that excluding these items from non-GAAP net loss and non-GAAP net loss per share, diluted, provides management and investors with greater visibility into the underlying performance of our core business operating results.

Pro Forma Non-GAAP Net Loss per Share, Diluted. We define pro forma non-GAAP net loss per share, diluted, as the weighted-average shares used in computing the GAAP net loss per share, diluted, plus a pro forma adjustment to give effect to the automatic conversion of our redeemable convertible preferred stock into 72,500,750 shares of common stock as though the conversion had occurred as of the beginning of the periods presented. Upon the closing of our initial public offering on March 20, 2018, all our outstanding shares of redeemable convertible preferred stock automatically converted into 72,500,750 shares of common stock on a one-to-one basis. We believe that giving effect to the conversion of our redeemable convertible preferred stock as though the conversion had occurred as of the beginning of the periods presented is necessary to provide meaningful comparison between periods.

Free Cash Flow and Free Cash Flow Margin. We define free cash flow as net cash used in operating activities less purchases of property and equipment 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 useful indicators of liquidity that provide information to management and investors about the amount of cash generated from our operations that, after the investments in property and equipment and capitalized internal-use software, can be used for strategic initiatives, including investing in our business and strengthening our financial position.

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.

Zscaler Reports Third Quarter Fiscal 2018 Financial Results