ZS Earnings Preview: All eyes on backend loaded outlook

Zscaler (ZS) is set to report its Q1 FY25 earnings on December 2 after market close, with results expected around 4:05 p.m. ET and an earnings call at 4:30 p.m. The company previously guided Q1 EPS at $0.62-$0.63 and revenue at $604-$606 million, aligning with consensus estimates of $0.63 and $605.5 million. Analysts will also closely monitor billings, with the company guiding for billings to account for 16.2% of its FY25 guidance, implying $503 million, or 10% year-over-year growth. ZS’s history of consistently beating estimates raises expectations for an upside surprise, though guidance and commentary on the full fiscal year will likely drive stock action.

Key themes for investors include the demand environment for cybersecurity software and how Zscaler is navigating longer enterprise sales cycles amid cautious IT spending. While competitors like CrowdStrike (CRWD) and Palo Alto Networks (PANW) reported resilient demand but issued cautious forward guidance, ZS faces similar challenges. Of note, ZS tends to be conservative with its outlooks. Additionally, analysts will scrutinize updates on the company's go-to-market (GTM) strategy, which shifted to an account-centric model last year to drive cross-selling. Management’s ability to convey progress in sales productivity and execution will be critical, especially given the back-end-loaded growth implied in its FY25 guidance.

The rise of generative AI technologies is expected to create tailwinds for Zscaler's cybersecurity solutions, particularly its new GenAI security products. Demand for these solutions and their adoption by enterprises will be a key focus. However, competition remains a concern, with some channel partners reporting plateauing momentum and competitive pressures in the Zero Trust market. Federal contracts are also likely to contribute to growth, and analysts will seek more clarity on deal pipelines and win rates in this vertical, which showed strength in prior quarters.

Zscaler delivered strong Q4 FY24 results, beating consensus estimates across key metrics, including a 30% year-over-year increase in revenue to $592.9 million and a 27% rise in billings to $910.8 million. The company also achieved record quarterly bookings of $1 billion and posted adjusted EPS of $0.88, significantly outpacing the $0.70 consensus. Management highlighted robust demand for its Zero Trust and GenAI security products, driven by growing cybersecurity needs, with a dollar-based net retention rate of 115%. Despite these solid results, the company's FY25 billings guidance disappointed, projecting 19-20% growth, which sparked concerns over a significant deceleration in the first half of FY25.

The FY25 guidance revealed a billings growth slowdown to 13% in 1H FY25, followed by an acceleration to 23% in the second half. Management attributed this uneven growth to challenges in sales productivity and timing effects from prior year contracts, noting that new go-to-market (GTM) strategies and sales ramp-ups are expected to bolster 2H performance. While analysts acknowledged Zscaler's history of conservative guidance and its ability to beat expectations, the heavily back-loaded outlook amplified investor concerns about competition and total addressable market (TAM) saturation. These factors led to a sharp decline in Zscaler’s stock price, dropping nearly 17% in post-earnings trading.

Zscaler's valuation and market position remain points of contention among analysts. While the stock’s rich valuation, with a trailing price-to-sales ratio over 13x, makes it vulnerable to growth concerns, analysts emphasized the company's leadership in the early innings of the Secure Access Service Edge (SASE) market. Furthermore, despite potential headwinds from competitors like Microsoft, Zscaler's enterprise win rates and broadening portfolio appear resilient. Analysts largely maintained favorable ratings, arguing that the conservative guidance provides room for upside surprises, especially if GTM changes successfully enhance sales execution.

Looking ahead, Zscaler plans to further refine its GTM strategy and drive adoption of its new products, including its GenAI security solutions. The company continues to emphasize profitability alongside growth, maintaining some of the highest margins in the software space. While the Q4 results underscored Zscaler's strong execution capabilities, the FY25 guidance raised questions about near-term growth dynamics, leaving investors to weigh its longer-term prospects against short-term uncertainties. The upcoming quarters will be critical as Zscaler seeks to reassure the market with tangible improvements in sales productivity and sustained leadership in cloud security solutions.

ZS shares have rallied 23% since October, reflecting a rebound after its initial FY25 guidance disappointed investors. With this strong stock performance, expectations are high, and ZS faces pressure to deliver both a beat on Q1 results and a potential upward revision to its FY25 billings guidance to maintain momentum. Investors will also be watching commentary on key areas such as AI-driven opportunities, competition, and sales execution. Overall, while ZS is expected to continue showcasing its leadership in the cybersecurity space, the ability to address growth concerns will determine whether the stock can sustain its recent gains.