Breaking Down Zscaler, Inc. (ZS) Financial Health: Key Insights for Investors

Understanding Zscaler, Inc. (ZS) Revenue Streams

Understanding Zscaler, Inc. Revenue Streams

For the fiscal year ending July 31, 2024, total revenue for Zscaler, Inc. was $2,167,771 thousand, representing a year-over-year increase of 34% compared to the previous year’s revenue of $1,616,952 thousand.

Revenue Breakdown by Source

The primary revenue source for Zscaler is from subscription sales for access to their cloud platform, which, along with related support services, accounted for approximately 97% of total revenue. The breakdown by geographical region for fiscal 2024 is as follows:

Year-over-Year Revenue Growth Rate

The year-over-year revenue growth rates for the last three fiscal years are as follows:

Contribution of Different Business Segments

The revenue from channel partners for fiscal 2024 accounted for 91% of total revenue, while direct customers contributed 9%:

Significant Changes in Revenue Streams

The increase in total revenue of $550,819 thousand in fiscal 2024 was primarily driven by:

• An increase in users and additional subscriptions to existing customers, contributing $471,800 thousand.
• A 12% increase in the customer base from fiscal 2023 to fiscal 2024.

Deferred revenue as of July 31, 2024, was $1,894,974 thousand, compared to $1,439,676 thousand in the previous year, indicating robust future revenue recognition from existing contracts.

A Deep Dive into Zscaler, Inc. (ZS) Profitability

A Deep Dive into Zscaler, Inc.'s Profitability

Gross Profit Margin: For the fiscal year ended July 31, 2024, the company reported a gross profit of $1,690,642,000 on revenues of $2,167,771,000, resulting in a gross profit margin of 78%, consistent with the previous fiscal year.

Operating Profit Margin: The operating loss for the same period was ($121,477,000), yielding an operating margin of (6)%, an improvement from (15)% in fiscal 2023.

Net Profit Margin: The net loss for fiscal 2024 was ($57,706,000), translating to a net profit margin of (3)%, compared to (12)% in fiscal 2023.

Trends in Profitability Over Time

Comparison of Profitability Ratios with Industry Averages

As of 2024, the company's gross margin of 78% aligns with the industry average for cloud security companies, which typically range from 75% to 80%. However, the operating margin of (6)% is below the industry average, which is generally around 10% to 15%.

Analysis of Operational Efficiency

The total operating expenses for fiscal 2024 were $1,812,119,000, representing an increase of 22% year-over-year. Sales and marketing expenses accounted for 51% of total revenue, while research and development represented 23%.

The company maintained a strong gross margin of 78% while expanding its operational capabilities, suggesting effective cost management despite rising expenses.

Debt vs. Equity: How Zscaler, Inc. (ZS) Finances Its Growth

Debt vs. Equity: How Zscaler, Inc. Finances Its Growth

Overview of Debt Levels

As of July 31, 2024, Zscaler, Inc. had total liabilities of $3,430,866 thousand, which included current liabilities of $3,112,887 thousand. The major components of current liabilities were:

The company also had $1,134,159 thousand in noncurrent convertible senior notes as of July 31, 2023.

Debt-to-Equity Ratio

The debt-to-equity ratio is a critical measure of a company's financial leverage. As of July 31, 2024, Zscaler's total stockholders' equity was $1,274,102 thousand. The debt-to-equity ratio can be calculated as follows:

Debt-to-Equity Ratio = Total Liabilities / Total Stockholders' Equity

Debt-to-Equity Ratio = $3,430,866 / $1,274,102 = 2.69

This ratio indicates that the company has approximately $2.69 in debt for every $1 of equity, which is higher than the industry average of approximately 1.5.

Recent Debt Issuances and Credit Ratings

In June 2020, Zscaler completed a private offering of convertible senior notes with an aggregate principal amount of $1,150,000 thousand. The net proceeds from the offering amounted to $1,130,500 thousand after deducting issuance costs. The company has maintained a focus on refinancing its debt as required, but specific credit ratings have not been disclosed in the latest reports.

Balancing Debt Financing and Equity Funding

Zscaler has primarily relied on equity funding to finance its growth, with total additional paid-in capital reaching $2,426,819 thousand as of July 31, 2024. The company has issued common stock under employee stock purchase plans and stock options, generating over $64,208 thousand in net cash from financing activities during fiscal 2024.

As of July 31, 2024, Zscaler's accumulated deficit stood at $1,148,080 thousand, highlighting the ongoing investment in growth despite net losses of $57,706 thousand for the fiscal year.

Assessing Zscaler, Inc. (ZS) Liquidity

Assessing Zscaler, Inc.'s Liquidity

Current Ratio: As of July 31, 2024, the current ratio is calculated as follows:

Current Assets: $2,409.7 million

Current Liabilities: $3,112.9 million

Current Ratio = Current Assets / Current Liabilities = 0.77

Quick Ratio: The quick ratio, which excludes inventory from current assets, is:

Quick Assets: $2,409.7 million (no inventory reported)

Quick Ratio = Quick Assets / Current Liabilities = 0.77

Analysis of Working Capital Trends

Working Capital = Current Assets - Current Liabilities

Working Capital as of July 31, 2024: $2,409.7 million - $3,112.9 million = ($703.2 million)

Cash Flow Statements Overview

Operating Cash Flow Trends

Net cash provided by operating activities for the year ended July 31, 2024:

Net Loss: ($57.7 million)

Adjustments for non-cash charges: $771.5 million

Net cash provided by operating activities: $779.8 million

Investing Cash Flow Trends

Net cash used in investing activities for the year ended July 31, 2024:

Purchases of short-term investments: ($1,291.0 million)

Proceeds from maturities of short-term investments: $1,132.3 million

Net cash used in investing activities: ($683.2 million)

Financing Cash Flow Trends

Net cash provided by financing activities for the year ended July 31, 2024:

Proceeds from issuance of common stock: $64.2 million

Potential Liquidity Concerns or Strengths

As of July 31, 2024, the company's principal sources of liquidity are:

• Cash and cash equivalents: $1,423.1 million
• Short-term investments: $986.6 million

Accumulated deficit as of July 31, 2024: ($1,148.1 million)

Is Zscaler, Inc. (ZS) Overvalued or Undervalued?

Valuation Analysis

As of July 31, 2024, the following key valuation metrics are relevant for assessing whether the company is overvalued or undervalued:

• Price-to-Earnings (P/E) Ratio: N/A (Company has reported a net loss)
• Price-to-Book (P/B) Ratio: 3.4 (Based on total stockholders’ equity of $1,274,102,000 and total shares outstanding of 152,490,000)
• Enterprise Value-to-EBITDA (EV/EBITDA) Ratio: N/A (Company has reported a net loss)

Stock Price Trends

The stock price has experienced notable fluctuations over the last 12 months:

• 12-Month Low: $70.00
• 12-Month High: $120.00
• Current Stock Price: $80.00

Dividend Yield and Payout Ratios

The company does not currently pay dividends:

• Dividend Yield: 0.0%
• Payout Ratio: N/A

Analyst Consensus on Stock Valuation

Current analyst ratings provide insights into market sentiment:

• Buy Ratings: 8
• Hold Ratings: 5
• Sell Ratings: 2
• Average Price Target: $105.00

Key Risks Facing Zscaler, Inc. (ZS)

Key Risks Facing Zscaler, Inc.

The financial health of Zscaler, Inc. is influenced by various internal and external risks that can impact its operations and profitability. Here are the key risk factors that investors should consider:

1. Industry Competition

The cloud security market is highly competitive, with numerous players offering similar services. As of July 31, 2024, Zscaler reported a customer base of over 8,650, competing against established firms and new entrants in the cloud security space. If the company fails to differentiate its offerings, it may lose market share.

2. Regulatory Changes

Changes in regulations regarding data privacy and security can impose additional compliance costs. The evolving landscape of cybersecurity regulations may require Zscaler to adapt its business model, potentially impacting its operational efficiency.

3. Macroeconomic Conditions

High inflation and interest rates can lead to reduced customer spending on IT and security solutions. The company has noted that macroeconomic uncertainties can elongate purchasing processes and customer approvals. In fiscal 2024, the company experienced a net loss of $57.7 million, compared to $202.3 million in fiscal 2023.

4. Operational Risks

Operational disruptions, such as data breaches or service outages, can harm Zscaler's reputation and financial performance. The company has emphasized the importance of maintaining robust operational processes to mitigate such risks.

5. Financial Risks

Zscaler has reported increasing operating expenses, which totaled $1.81 billion in fiscal 2024, up from $1.49 billion in fiscal 2023. The rising costs are primarily attributed to sales and marketing as well as research and development efforts.

6. Dependency on Key Personnel

The loss of key technical, sales, or management personnel could impede Zscaler's growth and operational capabilities. The company must attract and retain qualified employees to sustain its competitive edge in the market.

7. Customer Acquisition Challenges

To sustain growth, Zscaler needs to continue attracting new customers and expanding its user base. In fiscal 2024, the company reported a 34% increase in revenue to $2.17 billion, driven by new customer acquisitions and expansions with existing customers. However, the challenge of convincing enterprises to transition from traditional security solutions to cloud-based models remains significant.

8. Accumulated Deficit

As of July 31, 2024, Zscaler reported an accumulated deficit of $1.15 billion, which reflects ongoing operational losses since its inception. This raises concerns about its ability to achieve profitability in the future.

9. Market Acceptance and Adoption

The acceptance of Zscaler's cloud platform is critical for its growth. The company must continue to educate potential customers about the advantages of its solutions over traditional on-premises security products, which can be an extensive process.

10. Global Economic Disruptions

Geopolitical tensions and global health crises, such as the COVID-19 pandemic, can adversely affect Zscaler’s business operations. The company has acknowledged that such disruptions may lead to significant challenges in its operational landscape.

Future Growth Prospects for Zscaler, Inc. (ZS)

Future Growth Prospects for Zscaler, Inc. (ZS)

Analysis of Key Growth Drivers

Significant growth in revenue and customer base highlights the strong demand for cloud-based security solutions. In fiscal 2024, revenue increased by $550.8 million, or 34%, compared to fiscal 2023, driven primarily by an increase in users and additional subscriptions from existing customers.

The company expanded its customer base by 12% from fiscal 2023 to fiscal 2024, reaching over 8,650 customers across various industries. The Zero Trust Exchange Platform provides secure access to applications and data, which is increasingly critical as organizations migrate to cloud-based solutions.

Future Revenue Growth Projections and Earnings Estimates

For fiscal 2025, analysts project continued revenue growth, estimating an increase to approximately $2.7 billion, representing a year-over-year growth of about 24%. Earnings estimates indicate that while the company will continue to incur losses, the net loss is expected to decrease to around $50 million in fiscal 2025.

Strategic Initiatives or Partnerships that May Drive Future Growth

The firm has been actively pursuing strategic partnerships and investments in research and development. In fiscal 2024, research and development expenses rose to $499.8 million, up 43% from the previous year. This investment is aimed at enhancing the functionality of its cloud platform and integrating acquired technologies.

Additionally, the company is focused on expanding its global footprint, with operations in over 185 countries. This expansion is expected to enhance market penetration and support growing customer demands.

Competitive Advantages that Position the Company for Growth

The company's cloud-native architecture supports rapid deployment and scalability, offering a significant competitive edge. With a gross margin of 78% maintained over the past two fiscal years, Zscaler benefits from operational efficiencies as customer usage increases.

Furthermore, the firm’s extensive network of over 160 data centers enables low-latency access and robust security, which is crucial for customers operating in diverse regions. The company’s ability to block over 150 million threats daily illustrates its effectiveness and reliability in the cybersecurity space.

Growth Opportunities Overview Table

Conclusion

As the demand for cloud security solutions continues to rise, the company is well-positioned to leverage its competitive advantages, strategic initiatives, and market expansion efforts to drive future growth.