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Zscaler (ZS): Powering the Future of Secure Digital Transformation
Published on September 24, 2024 | Ticker: ZS

Zscaler, Inc. (NASDAQ: ZS) is a leading provider of cloud-based security solutions, revolutionizing the way enterprises approach cybersecurity in the digital age. With its innovative Zero Trust Exchange platform, Zscaler has positioned itself as a strategic partner for organizations undergoing digital transformation and seeking robust protection against evolving cyber threats.

Business Overview

Founded in 2007, Zscaler's vision was to create a cloud-based security solution that could effectively secure the modern, cloud-centric and mobile-first enterprise. As traditional perimeter-based security models became increasingly ineffective, Zscaler recognized the need for a fundamental shift in security architecture. The company's cloud platform, the Zscaler Zero Trust Exchange, has emerged as a game-changer, enabling organizations to securely connect users, devices, and applications, regardless of their location.

Financials

In the fiscal year 2023, Zscaler reported annual revenue of $1.62 billion, a testament to the growing demand for its cloud security solutions. The company's net income for the year stood at -$202.3 million, reflecting its continued investment in research and development, as well as sales and marketing initiatives to drive long-term growth. Zscaler's annual operating cash flow reached $462.3 million, and its free cash flow amounted to $333.6 million, showcasing the strength of its business model.

The company's financial performance in the most recent quarter, Q3 2024, was particularly impressive. Revenue grew by 32% year-over-year to $553.2 million, while calculated billings increased by 30% to $628.0 million. Zscaler's operating margin reached a record 22%, nearly doubling year-over-year, demonstrating the company's ability to drive operational efficiency while investing in growth.

Geographically, Zscaler's revenue is well-diversified, with the Americas accounting for 54% of total revenue, EMEA contributing 31%, and the Asia-Pacific region making up the remaining 15%. This balanced geographic mix underscores the global demand for the company's cloud security solutions.

Competitive Advantage

Zscaler's success can be attributed to its differentiated Zero Trust architecture, which sets it apart from traditional security solutions. By delivering security through a cloud-based platform, Zscaler eliminates the need for legacy on-premises appliances and enables organizations to securely connect users, devices, and applications, regardless of their location. This approach has proven particularly valuable as enterprises accelerate their digital transformation initiatives and embrace cloud-based technologies.

The company's product portfolio has expanded significantly beyond its core Secure Web Gateway (ZIA) and Virtual Private Network (ZPA) offerings. Zscaler has made strategic investments in areas such as data protection, workload protection, and branch security, further solidifying its position as a comprehensive cloud security platform.

Growth Drivers

One of Zscaler's key growth drivers has been its ability to upsell and cross-sell to its existing customer base. The company has seen strong traction in selling larger bundles of its services, as customers recognize the value of consolidating their security infrastructure onto Zscaler's unified platform. This strategy has contributed to the company's impressive dollar-based net retention rate, which stood at 116% in the most recent quarter.

Zscaler's customer base continues to expand, with the number of customers with over $1 million in annual recurring revenue (ARR) reaching 523 as of the end of Q3 2024, representing a 31% year-over-year increase. The company also boasts 50 customers with over $5 million in ARR, underscoring the strategic importance of its solutions to large enterprises.

Innovation and Acquisitions

The company's focus on innovation has been a key differentiator, as it consistently introduces new products and features to address the evolving security needs of its customers. Recent acquisitions, such as Avalor and Airgap Networks, have further strengthened Zscaler's capabilities in areas like data protection, vulnerability management, and branch security.

Outlook

Looking ahead, Zscaler has provided guidance for the full fiscal year 2024, which includes revenue in the range of $2.14 billion to $2.142 billion, representing year-over-year growth of approximately 32%. The company also expects to achieve an operating profit in the range of $422 million to $424 million, reflecting up to 490 basis points of operating margin improvement compared to the previous year.

Conclusion

Zscaler's strong financial performance, innovative product portfolio, and strategic customer relationships position the company as a leader in the cloud security market. As enterprises continue to embrace digital transformation and seek robust security solutions, Zscaler is well-poised to capitalize on this growing demand and drive long-term shareholder value.

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