Zscaler slides 18% following earnings; August 5 low on the radar

Zscaler (ZS) reported its Q4 earnings, delivering a solid performance on both revenue and earnings per share (EPS). The company posted revenue of $592.9 million, up 30% year-over-year, surpassing analyst estimates of $568.5 million. Adjusted EPS also came in strong at $0.88, significantly above the consensus estimate of $0.70. However, despite the top and bottom-line beat, the stock dropped after hours due to mixed guidance for the upcoming fiscal year. Zscaler guided Q1 revenue between $604 million and $606 million, which was in line with estimates of $604.8 million, but Q1 EPS guidance of $0.62 to $0.63 missed the consensus of $0.73.

Key metrics like billings and deferred revenue also played a central role in Zscaler’s report. The company reported calculated billings of $910.8 million for Q4, a 27% year-over-year increase, exceeding estimates of $892.7 million. Deferred revenue rose 32% to $1.89 billion, slightly below expectations of $1.9 billion. While these figures indicate strong execution, concerns arose from Zscaler's guidance for FY25, which calls for billings growth of 19%—a deceleration from recent trends and just below the street’s expectation of 20%. The uneven billings outlook, with a weaker first half of FY25 expected before a stronger second half, added to investor hesitation.

The stock slipped 18% in pre-market trade and sits at $160. The August 5 low of $155 should be on traders radar for a bounce.

Zscaler’s guidance for FY25 reflects some caution. Management forecasted full-year revenue of $2.6 billion to $2.62 billion, in line with estimates of $2.625 billion. However, the full-year EPS guidance of $2.81 to $2.87 was notably below the consensus estimate of $3.33, raising concerns about margin pressures and growth sustainability. While management pointed to strong demand for its zero-trust security offerings and record billings in Q4, the outlook for billings growth, particularly in the first half of FY25, was less optimistic due to lingering macroeconomic challenges.

One of the key drivers behind Zscaler's performance was its continued success in upselling emerging products, which contributed 22% to new business in FY24. This diversification is a positive signal for long-term growth, but market sentiment was dampened by concerns over a potential deceleration in billings growth due to macro factors and the company’s go-to-market (GTM) changes. These structural changes are expected to impact the first half of FY25 but should improve in the second half as sales reps gain productivity.

In terms of valuation, Zscaler’s current price-to-earnings multiple has become a focal point for analysts. Despite a dip in after-hours trading, some analysts still view the stock as reasonably priced, with Scotia noting that Zscaler’s valuation at approximately 31x FY25 EBITDA remains attractive for a leading cloud security vendor. However, given the downward revision in price targets, with Jeffries lowering its PT from $250 to $225 and BTIG from $220 to $205, there are lingering concerns about competitive pressures and total addressable market (TAM) penetration.

Overall, Zscaler's Q4 performance was strong, but the mixed guidance for FY25 has investors cautious. The deceleration in billings growth, especially in the first half, combined with lower-than-expected EPS guidance, has overshadowed the company’s robust fundamentals and market leadership in the secure access service edge (SASE) space. However, analysts still see upside potential, particularly in the back half of FY25, as macro conditions stabilize and GTM changes take effect.