Zscaler Earnings: Impressive Traction in Emerging Products Drives Sales Growth for the Quarter

Key Morningstar Metrics for Zscaler ZS

• Fair Value Estimate: $213.00
• Morningstar Rating: 4 stars
• Economic Moat: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Zscaler’s Earnings

We maintain our $213 per share fair value estimate for narrow-moat Zscaler after the firm reported fiscal third-quarter earnings with sales and profitability exceeding the firm’s prior guidance. Along with strong execution in its core business, we were encouraged to see a fourth of Zscaler’s new and upselling business coming from its emerging products category. The strong growth in emerging products, coupled with management’s commentary on customer spending, lends further credence to our existing thesis that Zscaler stands to benefit from increased vendor consolidation as customers seek to simplify their cybersecurity outlay.

While investors liked Zscaler’s earnings report, sending shares up sharply in after-hours trading, we believe there is further upside for long-term investors. We believe the market is undervaluing Zscaler’s market opportunity, especially as zero trust security becomes increasingly integral to a modern enterprise’s security infrastructure.

Zscaler’s sales for the third quarter clocked in at $553 million, up 32% year over year and almost $20 million above management’s prior guidance. Along with success in emerging products, we were impressed by Zscaler’s ability to land larger clients. Customers with an annual contract value of more than $100,000 and $1 million expanded by 20% and 31%, respectively. With approximately 40% of Forbes’ Global 2000 companies using Zscaler’s solutions, we believe the firm has a long growth runway ahead of it as it moves upmarket.

While the top line continues to increase at a nice clip, we like management’s emphasis on operational discipline. During the current period of macroeconomic uncertainty, we believe this emphasis is timely and showcases the operating leverage built into the business models of many security companies under our coverage. Zscaler’s adjusted operating margins for the quarter came in at 22%, up 680 basis points year over year.