ZScaler (NASDAQ:ZS) Is Leveraging The Cloud

Business Accelerates At ZScaler

ZScaler (NASDAQ:ZS) is still a small microcap company but it is one with a large-cap future. The company provides cloud-based and cloud-centric security solutions for business and industry and seen an impressive surge in demand. Like so many others riding the tidal wave of demand spurred by the pandemic, ZScaler’s business is also supported by secular trends that mean 2020 gains are more than sticky. Based on the results and the outlook, ZScaler’s business is still accelerating with no end in sight.

"Our customers are accelerating their digital transformation, and this drove our strong first-quarter results," said Jay Chaudhry, Chairman and CEO of Zscaler. "Organizations are turning to the Zscaler™ Zero Trust Exchange platform for the right security architecture, which can be implemented easily and rapidly. Our visibility and business momentum remain strong, and we are pleased to increase our fiscal year guidance."

Mixed Results For ZScaler Drive Shares Higher

ZScaler’s results are very impressive except for one item. On a GAAP basis, the company’s loss is widening but even that is not so bad. ZScaler is still investing in its growth meaning today’s loss is tomorrow’s gain. Moving past that, the company’s revenue jumped 52.3% in the fiscal 1st quarter accelerating from the +46.2% posted in the fiscal 4th, calendar 2nd. In terms of the analysts, who had been upping estimates going into the report, the revenue beat consensus by more than 750 basis points.

As impressive as the revenue gains are, it is the margins and earnings that really got the market excited. The company is leveraging its growth very well and delivered adjusted margins far above consensus. The 14% adjusted margin beat by more than 1100 basis points and led to better than expected earnings and increased guidance for the remainder of the year.

On an adjusted basis, the operating earnings came in at $19.7 million or up 432% over the same quarter last year. Cash from operations came in at 38% of revenue with FCF at 30% of revenue. The total cash position increased to $1.42 billion, a gain of 3.3% from the prior quarter, with an adjusted EPS of $0.14. Adjusted EPS is $0.08 above the consensus.

Looking forward, the company is raising guidance not only because of the FQ1 results but also because of calculated billings and deferred revenue. The calculated billings are up 64% and deferred revenue 54% and accelerating on a sequential basis. Management now expects Q2 revenue in the range of $146 to $148 million with EPS near $0.08, both well ahead of the consensus targets. As for the year, ZScaler sees revenue in the range of $608 to $612 million versus the $558 estimated by Wall Street.

The Technical Outlook: ZScaler Is About To Set A New All-Time High

Shares of ZScaler have been trending higher since the February correction, a correction that looks like a mere blip in retrospect, I might add. Now, with the FQ1 results in the bag the stock is up more than 11% in aftermarket trading and ready to rocket higher. The only thing holding it back right now is the potential for resistance at the current all-time high, but I don’t see it lingering for long.

Using the longer-term weekly chart as my point of reference, the stock seems to be a consolidation within an uptrend that could lead to at least a multi-quarter rally if not a multi-year rally. A move up to new highs would confirm this outlook and bring the technical target of $220 into play. I get this figure by projecting the magnitude of the 2020 rally onto the $120 level and/or the 150-day moving average.