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Zscaler's (NASDAQ:ZS) Q2 Sales Top Estimates, Next Quarter Growth Looks Optimistic

StockStory - Thu Feb 29, 3:24PM CST

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Cloud security platform Zscaler (NASDAQ:ZS) reported Q2 FY2024 results exceeding Wall Street analysts' expectations, with revenue up 35.4% year on year to $525 million. The company expects next quarter's revenue to be around $535 million, in line with analysts' estimates. It made a non-GAAP profit of $0.76 per share, improving from its profit of $0.37 per share in the same quarter last year.

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Zscaler (ZS) Q2 FY2024 Highlights:

  • Revenue: $525 million vs analyst estimates of $506.8 million (3.6% beat)
  • EPS (non-GAAP): $0.76 vs analyst estimates of $0.58 (30.5% beat)
  • Revenue Guidance for Q3 2024 is $535 million at the midpoint, roughly in line with what analysts were expecting
  • The company lifted its revenue guidance for the full year from $2.10 billion to $2.12 billion at the midpoint, a 1.2% increase (billings guidance was also lifted and came in in line with Wall Street's expectations)
  • Free Cash Flow of $100.8 million, down 55.1% from the previous quarter
  • Gross Margin (GAAP): 77.7%, in line with the same quarter last year
  • Market Capitalization: $35.2 billion

"We delivered strong Q2 results, with billings, revenue and operating profit all coming in above our guidance as customer interest in the Zscaler Zero Trust Exchange platform remains high," said Jay Chaudhry, Chairman and CEO of Zscaler.

After successfully selling all four of his previous cybersecurity companies, Jay Chaudhry's fifth venture, Zscaler (NASDAQ:ZS) offers software-as-a-service that helps companies securely connect to applications and networks in the cloud.

Network Security

Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks. The migration of businesses to the cloud and employees working remotely in insecure environments is increasing demand modern cloud-based network security software, which offers better performance at lower cost than maintaining the traditional on-premise solutions, such as expensive specialized firewall hardware.

Sales Growth

As you can see below, Zscaler's revenue growth has been impressive over the last two years, growing from $255.6 million in Q2 FY2022 to $525 million this quarter.

Zscaler Total Revenue

Unsurprisingly, this was another great quarter for Zscaler with revenue up 35.4% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $28.3 million in Q2 compared to $41.7 million in Q1 2024. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.

Next quarter's guidance suggests that Zscaler is expecting revenue to grow 27.7% year on year to $535 million, slowing down from the 46% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 23.7% over the next 12 months before the earnings results announcement.

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Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Zscaler's free cash flow came in at $100.8 million in Q2, up 60.4% year on year.

Zscaler Free Cash Flow

Zscaler has generated $500.7 million in free cash flow over the last 12 months, an eye-popping 26.4% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from Zscaler's Q2 Results

We were glad its revenue and profitability outperformed Wall Street's estimates. Guidance was solid, but given the recent stock action and valuation, the market was likely expecting full year guidance for billings and revenue more convincingly above Wall Street estimates. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The stock is down 4.1% after reporting, trading at $231.75 per share.

So should you invest in Zscaler right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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