Zscaler Inc
Zscaler reported preliminary third-quarter revenue of $415 million - $419 million, higher than prior guidance of $396 million - $398 million (consensus $397.42 million). The company also expects adjusted income from operations of $60 million - $64 million higher than previous guidance of $55 million - $56 million.
Zscaler also increased its full-year outlook. It now expected full-year revenue of $1.587 billion - $1.591 billion versus prior guidance of $1.558 billion - $1.563 billion (consensus $1.560 billion).
Needham analyst Alex Henderson reiterates Zscaler with a Strong Buy and maintains a $210 price target.
Despite the negative sentiment, Zscaler delivered a strong quarter, so they positively pre-released well above guidance numbers and raised the full-year guide by more than the beat.
Sentiment shifted away from ZS during the quarter, and the shares have been under pressure. Investor concerns from increased competition, deal times stretching, and a weaker position in the Gartner MQ hit the stock over 30% compared to a 0%-3% rise in the NASDAQ and the S&P over the same period.
Zscaler called out a strong pipeline and raised estimates for the year more than they beat by implying improving visibility. The bears will likely point to the guide indicating a deceleration in 4Q, while the bulls will likely point to the guide as conservative and prudently beatable.
The analyst flagged that Zscaler has been doing more of what they call "Ramp" deals. These deals address the tight budget by timing the payments ramp of the customer to the timing of the customer's cost savings, tending to understate the ACV, billings, and revenues up front in the current year.
A customer on a ramp deal of $100K per year on a 3-5 year contract might spend $20-$30K in the first six months of the deal as their payments to Zscaler ramp to total run rate over time which he thinks is a smart strategy and customer-centric thinking.
