Zscaler Earnings: Solid Showing by Zero-Trust Vendor as Sales and Profitability Continue to Expand

We are maintaining our $170 fair value estimate for narrow-moat Zscaler ZS after the firm reported strong third-quarter results that were in line with the preliminary results the firm put out a few weeks ago. We continue to be impressed by Zscaler’s continued ability to land and expand its client base despite ongoing macro-induced client spend optimization. We attribute this success to not only strong execution from Zscaler’s side but also the stickiness of Zscaler’s solutions, which are hard to rip out despite customers seeking to cut IT spend in light of macro uncertainty. The firm’s shares traded slightly down after the earnings report after climbing almost 50% since the preliminary report in early May. Despite the valuation uplift over the last few weeks, we continue to view Zscaler as attractively priced for long-term investors seeking high-quality cybersecurity exposure.

Zscaler’s topline for the third quarter came in at $419 million, up 46% year over year, and at the high end of management’s preliminary range provided in early May. While some of this outperformance can be attributed to cybersecurity spending remaining resilient despite the macro uncertainty, we believe management’s prior guide in the second quarter was also overly conservative, creating an opportunity for the firm to provide upside to prior guidance.

While we have highlighted Zscaler’s strong showing with the turbulent macro backdrop, the firm has seen a sustained deceleration in large customer acquisition. Year-over-year growth in customers with annual recurring revenue, or ARR, of more than $100,000 and $1 million clocked in at 29% and 39%, respectively. While these growth rates would be impressive for just about any tech firm, they are considerably lower than Zscaler’s prior quarters. We attribute this deceleration to elongated sales cycles, with larger deals garnering greater C-suite scrutiny.