Zscaler Reports First Quarter Fiscal 2020 Financial Results

• Revenue grows 48% year-over-year to $93.6 million
• Calculated billings grow 37% year-over-year to $88.3 million
• Deferred revenue grows 49% year-over-year to $245.9 million
• GAAP net loss of $17.1 million compared to GAAP net loss of $7.6 million on a year-over-year basis
• Non-GAAP net income of $4.1 million compared to non-GAAP net income of $2.3 million on a year-over-year basis

SAN JOSE, Calif., Dec. 03, 2019 (GLOBE NEWSWIRE) -- Zscaler, Inc. (Nasdaq: ZS), the leader in cloud security, today announced financial results for its fiscal first quarter of fiscal year 2020, ended October 31, 2019.

"We delivered strong revenue growth and non-GAAP profitability in Q1 while significantly investing in our business to pursue our large market opportunity. We are committed to scaling all elements of our go-to-market strategy, as we see enterprises increasingly transforming their network and security to realize the benefits of the cloud," said Jay Chaudhry, Chairman and CEO of Zscaler. "I am confident that our new sales leadership, coupled with our cloud-native security platform, is strengthening our foundation for the long-term growth of our business."

First Quarter Fiscal 2020 Financial Highlights

• Revenue: $93.6 million, an increase of 48% year-over-year.
• Income (loss) from operations: GAAP loss from operations was $18.3 million, or 20% of total revenue, compared to $8.7 million, or 14% of total revenue, in the first quarter of fiscal 2019. Non-GAAP income from operations was $2.9 million, or 3% of total revenue, compared to  $1.2 million, or 2% of total revenue, in the first quarter of fiscal 2019.
• Net income (loss): GAAP net loss was $17.1 million, compared to $7.6 million in the first quarter of fiscal 2019. Non-GAAP net income was $4.1 million, compared to $2.3 million in the first quarter of fiscal 2019.
• Net income (loss) per share: GAAP net loss per share was $0.13, compared to $0.06 in the first quarter of fiscal 2019. Non-GAAP net income per share was $0.03, compared to $0.02 in the first quarter of fiscal 2019.
• Cash flow: Cash provided by operations was $21.4 million, or 23% of revenue, compared to $11.0 million, or 17% of revenue, in the first quarter of fiscal 2019. Free cash flow was $9.4 million, or 10% of revenue, compared to $5.2 million, or 8% of revenue, in the first quarter of fiscal 2019.
• Deferred revenue: $245.9 million as of October 31, 2019, an increase of 49% year-over-year.
• Cash, cash equivalents and short-term investments: $377.6 million as of October 31, 2019, an increase of $13.0 million from July 31, 2019.

Recent Business Highlights

• Announced Zscaler B2B, a new solution that reduces the attack surface introduced by customer-facing applications. Built within a zero trust network access (ZTNA) architecture, Zscaler B2B enables enterprises to provide secure application access to their business customers and partners without exposing the applications to the internet.
• Microsoft named Zscaler the first and only cloud security provider to be a certified partner in the Microsoft Networking Partner Program (NPP) for Office 365, which has stringent requirements for user performance. Microsoft only recommends NPP partners for Office 365 connectivity. The program is designed to offer Office 365 customers a set of partners whose deployment practices and guidance provide users a fast and secure user experience by aligning with Microsoft’s networking recommendations.
• Partnered with Crowdstrike to provide joint customers with seamless protection across the cloud and the endpoint. Crowdstrike’s AI-powered Threat Graph will integrate with Zscaler’s cloud security platform to provide customers with real-time threat detection and automated policy enforcement.
• Zscaler was named a Leader in the Gartner Magic Quadrant for Secure Web Gateways for the ninth year in a row. The report positioned Zscaler furthest in completeness of vision and highest in ability to execute.
• Zscaler achieved significant milestones in the U.S. Federal business. Zscaler Private Access (ZPA), a ZTNA service, earned Federal Risk and Authorization Management Program (FedRAMP) Ready status at the High Impact level. Zscaler was also added to the Department of Homeland Security Continuous Diagnostics and Mitigation Program Approved Products List.
• Hosted Zenith Live Zscaler Cloud Summits in Las Vegas and Lisbon, Portugal.

Financial Outlook

For the second quarter of fiscal 2020, we expect:

• Total revenue of $97 million to $100 million
• Non-GAAP income from operations of $3 million to $4 million 
• Non-GAAP earnings per share of approximately $0.03, assuming approximately 138 million common shares outstanding

For the full year fiscal 2020, we expect:

• Total revenue of $405 million to $413 million
• Calculated billings of $500 million to $510 million
• Non-GAAP income from operations of $15 million to $18 million
• Non-GAAP earnings per share of $0.13 to $0.15, 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, 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 Information

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

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 "Q1 2020 Zscaler Earnings Conference Call" to participate.

A telephone replay of the conference call will be available at approximately 4:30 p.m. PT, December 3 through December 7, 2019 by dialing (888) 203-1112 or (719) 457-0820 and entering the passcode 2038494.

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 second 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; 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” 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 

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

⁽²⁾  Includes amortization expense of acquired intangible assets as follows:

  ⁽³⁾ Includes certain litigation-related expenses as follows:

(*) On August 1, 2019, we adopted the new leasing standard using the transitional provision that allow us for the adoption of Topic 842 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. 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.

___________

⁽¹⁾ 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 and included in the GAAP provision for income taxes was not material for all periods presented.

⁽²⁾ The sum of the GAAP net loss per share, diluted and the individual non-GAAP expense per share, diluted line items excluded from our non-GAAP results may not total to the non-GAAP net income per share due to rounding.

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. 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 and non-GAAP operating margin as GAAP loss from operations and GAAP operating margin, respectively, excluding stock-based compensation expense, amortization expense of acquired intangible assets and certain litigation-related expenses.

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, 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 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 meaningful indicators of liquidity 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.

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.