EUR 850.00 For Business Accounts Only

Morningstar | ZS Updated Forecasts and Estimates from 05 Mar 2019

Zscaler delivered stellar fiscal second-quarter results, with both the top and bottom line coming in appreciably above consensus estimates. Management continued its beat-and-raise cadence of the past few quarters, increasing full-year revenue guidance to $290 million at the midpoint. The firm continues to be buoyed by secular trends, as enterprises deploying increasingly mission-critical workloads in the cloud are utilizing Zscaler's platform to garner security without compromising the flexibility and agility that are a large part of a cloud environment’s value proposition. Still, we are maintaining our no-moat rating, as we continue to believe the firm will be structurally disadvantaged longer term versus competitors with broader portfolios, particularly if hybrid environments continue to be the dominant paradigm in IT infrastructure. We are also maintaining our fair value estimate of $35 per share. With the shares up as much as 15% after hours, we do not see an attractive margin of safety in the name and would admonish prospective investors to remain on the sidelines.

Revenue came in at $74.3 million, representing a 65% increase year over year. Deferred revenue grew 73% to $206 million, implying a runway for sustained growth throughout the year. The firm performed admirably on the operating margin front, with adjusted operating margin expanding to 13% from a loss of 6% in the year-ago quarter. Zscaler continued to supply evidence of deepening and expanding relationships with new and existing customers, including several key wins and upsells during the quarter. Still, we maintain our view that the firm will be hard-pressed to increase the stickiness of its solutions in the service of sustainable economic rents. Better-capitalized competitors will continue to fight Zscaler tooth and nail for greenfield opportunities, placing a ceiling on long-term growth and profitability.