Zscaler Inc. grappled with a significant drop in shares during the extended session on Tuesday, despite reporting a robust quarter and outlook that surpassed Wall Street’s predictions. The cybersecurity giant’s stock experienced a sharp downturn as company executives revealed that the current business climate was causing deals to take longer to close, with shares swinging to a loss just minutes into CEO Jay Chaudry’s prepared remarks. The stock, which had been up by as much as 5% following the earnings release, was down by as much as 3% during the call, reversing the 2.8% gain it had achieved to close at $162.74 in the regular session.

In a climate of increasing economic uncertainty, CFO Remo Canessa emphasized the challenges in closing deals within a 90-day window. Canessa highlighted that the company will continue to facilitate new strategic customers in ramping up larger subscription commitments, despite these arrangements temporarily reducing first-year billings. However, he anticipates these deals will result in a higher annual run-rate level in their second year. Despite the turbulent macro environment, Zscaler’s strong performance is reflected in its gross margins exceeding 80% and the doubling of its annual recurring revenue to more than $2 billion.

Zscaler Inc. Swings to Loss Despite Strong Quarter

Strong Quarter, but Uncertain Macro Environment

Zscaler Inc., a leading cybersecurity company, reported strong quarterly results that surpassed Wall Street’s expectations. However, the company’s shares swung to a loss in the extended session Tuesday as executives noted that deals were taking longer to close in the present business environment. During prepared remarks, CEO Jay Chaudry cited the company’s notable achievements, including gross margins above 80% and annual recurring revenue doubling to over $2 billion. Yet, amid these successes, Zscaler’s stock, which had been up by 5% post-earnings release, fell by as much as 3% during the call.

Executives Cite Global Economic Uncertainty

"The global macro environment remains uncertain," stated CFO Remo Canessa, further explaining that the increasing economic uncertainty has made closing deals within 90 days challenging. Canessa also mentioned that customers continue to scrutinize large deals due to the ongoing global uncertainty. Despite this, the company plans to continue enabling new strategic customers to ramp up their larger subscription commitments. In the long-run, these deals are expected to increase the company’s annual run-rate level in the second year, despite initially reducing first-year billings.

Q1 and Full-Year Forecasts

For the fiscal first quarter, the company is expecting adjusted earnings of about 48 cents to 49 cents a share on revenue of $472 million to $474 million. This forecast surpasses the estimates provided by analysts at FactSet, who had projected 45 cents a share on revenue of $464.8 million and billings of $434.1 million for the quarter. For the full year, Zscaler is forecasting earnings per share between $2.20 and $2.25 on revenue of $2.05 billion to $2.07 billion and billings of $2.52 billion to $2.56 billion. Again, these predictions exceed analysts’ estimates.

Q4 Results

In the fiscal fourth quarter, Zscaler reported a loss of $30.7 million, or 21 cents a share, compared with a loss of $97.7 million, or 69 cents a share, in the same period last year. However, the adjusted net income, which excludes stock-based compensation and other items, was 64 cents a share, a substantial increase from 25 cents a share in the previous year. Revenue rose to $455 million, up from $318.1 million in the year-ago quarter, with billings growing by 38% to $719.3 million.

Takeaways

Despite the uncertain macro environment and prolonged deal closures, Zscaler has demonstrated robust performance. Its Q4 results and Q1 and full-year forecasts surpass Wall Street’s expectations. However, the company must address the ongoing challenges of closing deals within a 90-day window in this uncertain environment. The focus on enabling new strategic customers to increase their subscription commitments is a promising strategy that could bolster future revenues. Despite the temporary stock loss, the company’s year-to-date stock performance remains strong, up 45.4%.