In the ever-evolving landscape of cybersecurity, Zscaler Inc. (ZS) has managed to stand out as a beacon of consistency and excellence. The company’s recent performance in the first quarter of fiscal year 2023 not only reaffirmed its position as an industry leader but also demonstrated its ability to weather market fluctuations. Despite a remarkable run of over 20% in November, ZS initially faced a minor setback in its share price. This article delves into the reasons behind this temporary retreat and explores the factors that continue to drive Zscaler’s growth and success.
A Track Record of Excellence
Zscaler’s Q1 earnings report for October showcased the company’s exceptional performance. It reported earnings per shareEarnings per share (EPS) is a fundamental financial metric that provides valuable insights into a company's profitability. This widely used indicator helps investors and analysts g... (EPS) of 67 cents, surpassing the consensus estimate of 49 cents. Additionally, the company’s Q1 revenue stood at an impressive $496.7 million, exceeding the consensus estimate of $473.35 million. Such results are part of a consistent trend for ZS, as the company has not missed earnings and sales estimates for over five years.
The Initial Retreat
The initial dip in Zscaler’s share price may have left some investors puzzled. However, this retreat can be attributed to the market’s high expectations and the stock’s rapid ascent, with a more than 20% increase in under 30 days. Investors, accustomed to ZS exceeding expectations, may have tempered their enthusiasm, and profit-taking ensued at the slightest sign of imperfection.
Billings Guidance for FY24
While the majority of ZS’s Q1 report brought positive news, the company’s billings guidance for fiscal year 2024 left some investors underwhelmed. ZS maintained its billings outlook for the year at $2.52-2.56 billion, despite an exceptional Q1 performance. CFO Remo Canessa attributed this relatively conservative guidance to the onboarding of new sales leadership and caution regarding close rates in Q1.
Mizuho’s Perspective
Mizuho, a reputable financial firm, offered its insight into Zscaler’s fiscal 2024 billings guidance. While some investors may have been disappointed by the reiterated guidance, Mizuho sees favorable demand signals and believes that ZS is intentionally leaving room for flexibility after appointing a new chief revenue officer. The firm maintains a Buy rating on ZS shares and sets a price target of $205.
Accelerated Growth and New Executives
Zscaler’s decision to add new executives to its sales and marketing teams was a direct response to accelerating demand. The company noted that more customers are embracing its comprehensive platform, consolidating multiple products and increasing their average deal size. Conversations with IT executives further confirmed that cybersecurity remains a top priority within IT spending.
Record-Breaking Performance in Q1
ZS’s Q1 report featured several record-breaking achievements. The number of new customers with annualized recurring revenue (ARR) exceeding $1 million reached 468, reflecting a 34% year-over-year increase. Additionally, ZS’s U.S. Federal cohort experienced growth of over 90% year-over-year, with four deals boasting an annual contract value (ACV) greater than $1 million. These impressive statistics contributed to ZS’s Q1 bottom line, which grew by 131% year-over-year to $0.67 per share, and a top line that expanded by 40% to $496.7 million.
Revised FY24 Predictions
Thanks to its robust Q1 performance and the optimistic outlook for cybersecurity spending, ZS revised its FY24 predictions upward. The company now anticipates adjusted EPS of $2.45-2.48, up from the previous range of $2.20-2.25, and revenue in the range of $2.09-2.10 billion, an increase from the previous $2.050-2.065 billion.
ZS’s Position in the Market
In the broader context of the cybersecurity industry, ZS’s Q1 report stands out as overwhelmingly positive. While some of its peers, such as Palo Alto Networks (PANW) and Fortinet (FTNT), have recently faced challenges, ZS has not shown any glaring concerns. With cybersecurity remaining a top priority for both private and public sectors, Zscaler is well-positioned to reap substantial benefits over the long term.
Bottom-line: Zscaler’s Q1 performance, despite an initial share price pullback, reflects its unwavering commitment to excellence and its ability to adapt to changing market dynamics. As cybersecurity continues to be a pressing concern in an increasingly digital world, ZS’s consistent growth and forward-looking guidance make it a compelling player in the industry. Investors would do well to keep a close eye on this cybersecurity stalwart as it navigates the evolving landscape of online security.
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