Morningstar | Zscaler Continues Robust Top-Line Growth; Maintaining $35 FVE. See Updated Analyst Note from 04 Dec 2018
No-moat Zscaler's first quarter of fiscal 2019 resulted in a 59% year-over-year revenue increase to $63.3 million. As the company continues its rapid investment mode to gain customer share, Zscaler posted an operating loss of $8.7 million compared with a loss of $11.3 million in the prior year. After incorporating the quarter's results, we are maintaining our fair value estimate of $35. We recommend investors to maintain their position in this 3-star security.Zscaler's net loss of $7.6 million shrank from its first-quarter fiscal 2018 loss of $11.4 million while operating cash flow increased to $11.0 million compared with $4.4 million of cash used by operations in the prior year. The company posted positive free cash flow of $5.2 million compared with negative $8.9 million a year ago. Deferred revenue increased 68% to $165.3 million in the October quarter and the company continues to have no debt. Although the company is operating at a loss, we believe Zscaler can create operating leverage in the coming years, become GAAP profitable in fiscal 2022, and grow its operating margin into the 20% range by fiscal 2024.
Increased adoption of cloud-based IT architecture coupled with a more mobile workforce for enterprises are driving Zscaler's top-line results. Zscaler announced three new customer wins (100k, 52k, and 15k users) that included its transformation bundle. We believe this bundle, which includes cloud firewall, intrusion protection system, and sandboxing make Zscaler a sticker cybersecurity solution for enterprises. However, we note that other firms are encroaching on Zscaler's cloud-based security approach and we expect rampant competition to slow long-term growth.
Zscaler is a cloud security company that developed a platform incorporating security functionalities needed to enable users to safely utilize authorized applications and services based on an organization's policies. The company's solution is a purpose-built, multi-tenant, distributed cloud security platform that secures access for users and devices to applications and services, regardless of location. The company delivers its solutions using a software-as-a-service business model and sells subscriptions to customers to access its cloud platform, together with related support services. The company conducts business worldwide, with presence in North America, Europe and Asia.
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