Zscaler Earnings: Large Customers Drive Revenue Strength While Margins Surge

We raise our fair value estimate to $183 from $170 for narrow-moat Zscaler ZS after the firm finished fiscal 2023 with strong financial results and guidance for the upcoming year. While the macroeconomic environment remains uncertain, we were impressed by Zscaler’s ability to close a record number of deals with an annual contract value of more than $1 million. We attribute this strong performance upmarket to the impressive value proposition Zscaler’s platform offers its customers, especially as they seek cloud-native security vendors to manage their increasingly complex security needs. As we look ahead, we expect Zscaler’s products to remain top-of-mind for companies and so forecast robust growth for the firm over the next decade as investments in cloud-native security solutions ramp up. The firm’s shares traded slightly down after the earnings report, and we view them as marginally undervalued.

Zscaler’s sales for the fourth quarter clocked in at $455 million, up 43% year over year and more than $20 million above the high end of management’s prior guidance. Forward-looking metrics such as billings and deferred revenue also showed signs of continued strength, growing 38% and 41% year over year, respectively. Further, management provided strong billings guidance for fiscal 2024, indicating that Zscaler has a strong business pipeline ahead of it.

Zscaler’s emerging products category, which includes workload protection, business analytics, and digital experience monitoring, was another bright spot for the quarter. Emerging products accounted for 18% of the firm’s new business, up from single digits a couple of years ago. We believe these new products provide Zscaler with a potent cross/up-selling sales motion in the future while entrenching its customers further, thereby reducing the likelihood of churn.