Zscaler (ZS) Earnings Preview: Navigating Elevated Expectations Amid Strong Cybersecurity Demand

Zscaler (ZS), a leading player in the Zero Trust cybersecurity space, is set to report its Q4 earnings, followed by an earnings call at 4:30 p.m. ET. The market is closely watching Zscaler's performance, particularly given the recent trends in cybersecurity spending, ongoing economic uncertainties, and heightened deal scrutiny within the tech sector.

Analysts' consensus estimates peg Zscaler's Q4 earnings per share (EPS) at $0.70 and revenue at $567.5 million. As the broader IT spending environment remains mixed, Zscaler's results will shed light on whether it can maintain its growth trajectory amid a challenging macroeconomic backdrop.

Resilience in Cybersecurity Spending Despite Economic Headwinds

Despite a fluctuating IT spending environment, cybersecurity remains a top priority for enterprises as the threat landscape continues to intensify. Zscaler's recently published report on July 30 highlighted that global ransomware attacks have increased by 18% year-over-year.

This stark reality has kept cybersecurity spending resilient, as organizations are compelled to fortify their defenses against an ever-evolving array of cyber threats.

The prioritization of cybersecurity is evident in the recent performance of Zscaler's peers, such as SentinelOne (S) and CrowdStrike (CRWD). Both companies posted upside Q2 results on August 27 and 28, respectively, reinforcing the notion that cybersecurity is not an area where companies are willing to cut corners.

However, CrowdStrike did mention that sales cycles for both new and existing customers are extending, requiring higher levels of approval, reflecting a cautious approach from enterprises in their purchasing decisions. This sentiment could resonate with Zscaler's own sales trends as it navigates a cautious IT spending environment.

Expectations Set High Following Strong Q3 Results and Guidance

Zscaler enters this earnings season on the back of a strong Q3 performance. The company not only delivered a top and bottom-line beat but also achieved a significant milestone by generating its first quarter of GAAP profitability on a net income basis.

During its Q3 earnings call, Zscaler reiterated its confidence in the ongoing demand for its cybersecurity platform, noting that Zero Trust security remains a critical initiative for IT teams. This optimism led the company to issue solid guidance for Q4, projecting EPS of $0.69 to $0.70, slightly ahead of the consensus, and revenue guidance of $565 to $567 million, in line with expectations.

Another crucial metric for Zscaler is its calculated billings, a forward-looking indicator that reflects the company's future revenue and cash flow potential. In the previous quarter, billings grew by 30% year-over-year to $628 million, demonstrating strong momentum.

Investors will be keenly awaiting Zscaler's initial billings guidance for FY25 in tonight's earnings release to gauge whether this growth trajectory can be sustained. Meeting or exceeding these expectations could provide a meaningful lift to the stock, especially given its recent rally.

Key Metrics to Watch: FY25 Guidance and Market Reaction

For Zscaler to meet market expectations for FY25, it will need to provide guidance of at least $3.33 in EPS and $2.62 billion in revenue. Given the robust performance seen in its previous quarters and the general prioritization of cybersecurity investments, there is optimism that Zscaler will be able to meet these expectations.

However, the bar is set high as the stock has rallied approximately 15% over the past month. This rally has likely priced in some level of optimism, meaning that any shortfall in guidance could trigger a pullback.

One of the potential risks for Zscaler remains the elongated sales cycles and deal scrutiny, as indicated by CrowdStrike's recent commentary. If Zscaler signals similar trends, it could temper some of the bullish sentiment surrounding its growth prospects.

However, if Zscaler's management provides a confident outlook, supported by continued strong demand and resilience in its Zero Trust architecture, it could further solidify its position as a leader in the cybersecurity space.

Conclusion: Zscaler Faces High Expectations Amid Strong Cybersecurity Tailwinds

As Zscaler prepares to report its Q4 earnings, the company is navigating a landscape of both opportunity and challenge.

The increasing urgency for robust cybersecurity solutions provides a favorable backdrop, but economic uncertainties and cautious enterprise spending patterns could impact growth. Investors will closely scrutinize Zscaler's billings growth, FY25 guidance, and commentary on the demand environment to gauge whether the recent rally in its stock is justified or if a recalibration is needed.

With elevated expectations, Zscaler has a high bar to clear to maintain its upward trajectory in a competitive cybersecurity market.