Drill Down Earnings, Ep. 479: Zscaler Q4 earnings – ($ZS) – A Deep Dive with Cory Johnson

Cory Johnson (0:05)

Welcome to The Drill Down, and as we have quarterly results out from Zscaler, that all-important company in the world of cybersecurity. Zscaler runs the largest inline cloud security network. They do 750 billion transactions of information every day. So I think it's one of the 50 most important companies in technology and that's what we cover here at Epistrophy Capital Research and on The Drill Down podcast. So their general theory is that an attacker can't breach what they can't see. So Zscaler creates security to limit what users see. Increasingly, those users aren't just humans, they're agents. AI is both enabling the hackers to find new ways to hack, and they're also creating more users for Zscaler to defend against here and create some really interesting new solutions. Q4 earnings for them in 2027 and better than Wall Street expectations, but that's really Wall Street's problem. Not ours, they're just numbers. This was a little bit better, I guess.

I just tended to be dismissive of Wall Street's inability to estimate earnings and company's ability to manage Wall Street. But yeah, $898 million in revenues, and ARR, that's the hot number these days, average occurring revenue. If you take the late end of the year and multiply it times four, they're at $3.78 billion.

Kind of impressive, actually, adding about $250 million in new business in the quarter. The revenue growth is steady, at a very strong 25%. But this company was putting up such really big numbers. I think that the Wall Street growth crowd is not as thrilled with this company as they used to be.

They acquired a company called Red Canary. If you strip that out, they still saw 20% revenue growth on a year-over-year basis. And their margins, their gap operating margin is nothing to write home about here. Their margins were negative, negative 2%. But that's getting better than where it was here for this company. And again, adding seats, adding customers and with the right products. Specifically, they talk about their Zero Trust Everywhere Enterprise product. They're now at more than 950 companies using Zero Trust Everywhere, up from 700 in Q3, up from 350 a year ago. So more than doubling, very impressive here.

Their Zero Trust Cloud, their Managed Service working with Google Cloud. They say they can get this thing up and running in under 10 minutes. So I believe that when I see it. I have no reason to doubt them, but when everyone tells me anything that happened in 10 minutes, I don't believe them. That's me. I also want to mention their Zflex product. Zflex did over $770 million in total customer value in Q4, up over 60% from last year. And the guidance was pretty strong, suggesting that growth is going to be, so it's suggesting double-digit growth, but it's also suggesting about 19% growth. And maybe that was why the stock didn't do much in after hours here.

I also want to talk about their billings. We'll talk to the stock movement in a second here. But their book to bill, their bookings increased substantially. And I think when the stock traded way up in after hours, people looked at that number and thought this is great. Because while, as I mentioned, revenues growing at 25%, book to bill at 22%, billings growing fantastically at 52% on a year over year basis, strong growth there in their billing. So the money monitor they're actually taking in, pretty good here for this company. How did the stock react? Well, the market initially liked the numbers quite a bit. The stock surged up to nearly $200 a share before falling back to about 181, which means it's up about, I don't know, one or 2% in after hours trading. And that's after a 34% fall over the last year. So unlike some of their cybersecurity competitors, this company may be not doing quite as well. But interesting quarter from Zscaler in terms of what they're putting out there and how AI security is in demand and their differentiated approach. Here's Zscaler's CEO friend of the show, often a guest on this podcast, Jay Chaudhry, and what he had to say about how AI is changing demand.

Jay Chaudhry (3:55)

AI security is in demand and there are lots and lots of AI security companies, probably tons of startups as well.

But one other thing we see out there is our customers tell us that they don't want one more or three more AI security products. They're looking for an integrated solution, not only for AI security, but also that works with the rest of security as well. So this transpiration of customers that we highlighted, they are a Zscaler customer for zero trust every day. And it is natural for them to say, if I need to expand into AI security, and tomorrow I need to be ready for my H&T communication. We are zero trust exchange to be able to ensure policy for agents. We were the natural choice for that to happen.