Zscaler Company overview:
Zscaler was founded in 2008 by Jay Chaudhry who also acts as the CEO of the company up to date. The company is located at San José / California. It currently has approximately 1500+ employees. The IPO of Zscaler was in March of 2019 with an IPO price of 16 USD. It's current market capitalization is at 12.7 B USD and the current stock price is 98 USD (End of business day May 29, 2020).
On May 28 they reported a very strong Q3 / Fiscal Year 2020.
Quick Overview:
Zscaler's Business model:
Zscaler specializes in globas cloud-based information security. It provides solutions for customers to allow for safe data transfer via cloud solution that allows data transfer independent from device/system used. Meanwhile it has Millions of users worldwide including major companies and institutions that are using their service. Like Siemens with over 350.000 employees or the british National Health Service of MCNC which built, owns and operates the North Caroline Research and Education Network.
With the trend of having employees not only work at their offices but also while travelling, at homeoffice and also accessing company information via smartphone and other means this field may experience another boost. In this regard the company may also turn out to be benefitting from the current global situation with more companies having employees work from home.
Their competitors are companies like Palo Alto networks, Cisco, Fortinet and Symantec.
The overall estimated market potential for the network security market is approx. 20 billion USD.
There are several strong points about Zscaler that need to be mentioned. Their CEO Jay Chaudhry has many years of experience and has brough several internet security companies to success before founding Zscaler. He founded and led AirDefense (acquired by Motorola), founded and led CipherTrust (merged with Secure Computing) and founded and led CoreHarbor (acquired by USI/AT&T).
PR appearances indicate that he has a very clear vision of what cloud security is about and what Zscaler would like to achieve.
Another big point about Zscaler is their strong partnership with Microsoft with deep integration in Microsoft Azure Cloud Services and Office 365 support.
Currently their main products/Services are ZIA (Zscaler internet access) and ZPA (Zscaler private access).
ZIA replaces outbound gateways - it is between user and the internet to use externally managed applications, protection from malware and to secure that no company data leaks out - moving from a Hub-and-spoke gateway to a cloud architecture.
ZPA replaces inbound gateways - it replaces VPN to manage internal applications. Applications may be hosted in the company own data center or in public clouds. It provides a better user experience - getting rid of delays when switching network connections unlike necessary re-connections via VPN.
Zscaler will also shortly introduce further products:
ZB2B
ZDX (Zscaler digital experience)
Their Coretechnologies are backed up by more than 100 pending patents. Main benefits are:
better and faster user experience
improved security - full inline inspection of internet traffic
lower network security costs (eliminating certain network security costs)
simplicity (simplify entire company network by minimizing need for hub-and-spoke networks and related infrastructure.
Fundamentals
The total revenue 2019 was at 302.8 mio USD over 190 mio in 2018 and 125 mio in 2017. The cost of revenue was 59.7 mio USD in 2019, over 27.4 mio in 2018 and 27.5 million in 2017.
Geographically 51% of the revenue is Americas based, 40% EMEA and 9%APJ.
Their net retention rate was at a very good 119%.
The SG&A expenses in these timeframes were 216.5 mio USD in 2019, over 147.5 mio in 2018 and 99.8 mio in 2017.
Their gross profit was 243.1 mio USD in 2019, over 186.9 mio in 2018 and 133.3 mio in 2017.
One might think that these expenses currently just about outweigh their revenue growth.
It needs to be stated that the company currently operates at a loss at this time and also may continue to do so in the shortterm. Their EBIT in 2019 was at -28.6 mio USD. The reason for this is the rapid growth and expenses that are spent for R&D but also a lot of hiring that the companies pursues and has been pursuing over the past months to increase their sales power.
Their latest reported current assets (as of May 28, 2020) are at 552.1 Million USD and their current liabilities at 345.6 mio USD, giving them a pretty good current ratio of 1.6. Given the fact that they are IT heavy and rapidly growing those numbers look good to me.
Their operating cashflow from the latest report is 124.6 mio USD.
They have just recently acquired Cloudneeti Corporation for 9 Mio USD and Edgewise Networks for 31 Mio USD. They do not expect any noticeably revenue impact in FY 20/21 by these companies since they are still relatively young companies.
Conclusion
It needs to be understood that the company is in an extremely aggressive growth phase and sees the current times as a huge opportunity to grow as it may even experience a boost from the current Covid-19 related situation, where many companies worldwide expand their homeoffice opportunities and want to give their employees better and faster opportunities to have access to applications and data independent from location. The benefits that the Zscaler products provide to grant faster access to applications may enable them to disrupt the market and their strong relationship and integration in Microsoft.
They have just previously acquired two smaller companies (Edgewise Networks and Cloutneeti Corporation) to expand their IP.
Zscaler puts continuously big efforts in public exposure by hosting congresses and spending a lot on their Marketing.
Once they have established themselves sufficiently there are a lot of opportunities to safe cost on the marketing side, which currently seems excessive but gives them high likelihood to continue their rapid growth.
I read an article at the #MotleyFool in March where the author was not convinced of their business as he had the opinion that this industry is slowing down. They may have been wrong there, specifically since there is this strong boost by Covid-19 which may be just at the right time for them to take benefit from their increased sales force and that may pay out over the mid- to longterm.
Does #Zscaler have Tenbagger potential?
I think the company has the potential to become a ten- or at least a multibagger. Currently they are rapidly expanding their customer base. Due to the licensing model this will continuously increase the revenue created by linceses of existing products. Furthermore Zscaler is intending to also introduce more products. There is high likelihood that companies that are already using their existing services may purchase some of these as well.
They reported an extremely successful Q3/FY2020 and noticed a large benefit from the Covid-19 situation as several major customers during the lockdown deployed several hundred thousands new ZPA users, giving very positive feedback.
Depending on how things continue for them I see a possibility that Microsoft at some point may just try to acquire them - I haven't read anything about such plans.
The reason why I strongly believe in the success of the company is their ability to make homeoffice, which plays a major role and will continue to do so, a much faster and better experience and I can say so after being in home office myself for several weeks experience the very slow data access via VPN access, that would not be required if our company would use such service. In simple words - more work at a higher speed can be done from home - so this will directly pay out for companies enabling their employees to use it.
Just after their May 28th quarterly report their stock jumped by approximately 30% within just one day. I am currently invested in Zscaler and intend to hold this stock longterm.
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