Zscaler Earnings: Robust Sales Growth Goes Hand In Hand with Strong Margin Expansion

Key Morningstar Metrics for Zscaler

• Fair Value Estimate: $183.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Zscaler’s Earnings

We are maintaining our $183 fair value estimate for Zscaler ZS after the firm kicked off fiscal 2024 with strong sales growth and profitability. While macroeconomic uncertainty continues to affect customer decisions, we were encouraged to see Zscaler’s strength in landing new business and expanding existing client spending.

In the long term, we believe the firm stands to materially benefit as organizations seek cloud-native security vendors to manage their increasingly complex needs. Further, since it provides multiple solutions across a client’s security apparatus, we think Zscaler will benefit as customers refocus their security spending toward a smaller set of vendors. With the company’s shares trading down after the earnings report, we view them as fairly valued.

Zscaler’s sales clocked in at $497 million in the quarter, up 40% year over year and well ahead of management’s prior guidance. Underscoring this revenue strength was a healthy mix of new sales and expanding spending from existing accounts. On the new sales front, Zscaler closed a record number of deals with an annual contract value of more than $1 million, as this customer cohort expanded 34% year over year to 468. At the same time, the firm was able to show robust execution on the upselling side. Net retention (a measure of additional spending by existing clients) came in at a solid 120%.

Zscaler’s adjusted operating margins for the quarter came in at 18%, above management’s guidance of 15% and up more than 600 basis points year over year. We attribute this rapid expansion to the firm’s emphasis on financial discipline during a period of macroeconomic uncertainty, as well as strong revenue. We believe this indicates the leverage inherent in the company’s business model and supports our long-term estimates.