On Friday, Evercore ISI adjusted its outlook on shares of Zscaler (NASDAQ:ZS), reducing the price target to $245 from $270, while maintaining an Outperform rating. The firm cited a robust fiscal third quarter performance by Zscaler, with billings growth surpassing expectations at 30%, compared to the anticipated 24-25%.
The company also reported a year-over-year revenue increase of 32%, significant customer acquisition with more than 50 customers now exceeding $5 million in annual recurring revenue (ARR), and operating margins reaching 22%.
Zscaler's execution of its business strategy was highlighted as most metrics exceeded forecasts. The firm's confidence in the company's direction was reinforced by Zscaler's recent success in the public sector, notably a seven-figure contract from the Department of Defense.
Management emphasized the strength seen across various industries, with both new customer acquisitions and upselling opportunities contributing to growth. The sales approach is also shifting to a more account-centric model.
The company's financial guidance for the full year was revised upwards, with revenue projections increased by $21 million, indicating a 32.4% growth. Operating margin expectations were also lifted by 100 basis points to 19.8%, and free cash flow (FCF) margin is projected to be in the low-to-mid-20% range. While no specific guidance was provided for FY25, the focus on accelerating the hiring of quota-carrying representatives may present a slight challenge to billings growth in FY25.
Zscaler's fundamental business indicators continue to show positive trends, with committed remaining performance obligations (CRPO) bookings up by 33% year-over-year. The company now boasts 523 customers with over $1 million in ARR, marking an increase of 26 customers and a 30.8% year-over-year growth. Additionally, the number of customers with over $100,000 in ARR grew by 102, reaching 2,922, a 20.1% increase from the previous year.
Despite a consistently high gross retention rate in the mid-high 90% range, the net revenue retention (NRR) rate slightly declined to 116% from 117% in the prior quarter. Management anticipates that the successful selling of multiple product pillars from the outset and quicker upselling could lead to future variability in NRR.
InvestingPro Insights
As Zscaler continues to navigate its growth trajectory, real-time data and InvestingPro Tips offer additional insights for investors considering the company's stock. Zscaler holds more cash than debt, which is a positive sign of financial stability (InvestingPro Tip #0). Furthermore, analysts are optimistic about the company's future, expecting net income and sales to grow this year (InvestingPro Tips #1 and #2). This aligns with Evercore ISI's confidence in Zscaler's robust fiscal performance and upwardly revised financial guidance.
Despite the lack of specific guidance for FY25, the company's impressive gross profit margins, which stand at a robust 77.55%, demonstrate operational efficiency and the potential for profitable scalability (InvestingPro Tip #3). Additionally, with a market capitalization of $26.15 billion and a significant year-over-year revenue growth of 40.62%, Zscaler is cementing its position in the cybersecurity market.
Investors should note that while the P/E ratio is currently negative, reflecting the company's high growth phase, Zscaler is trading at a high revenue valuation multiple (InvestingPro Tip #10), which could indicate expectations of continued growth. For those interested in further analysis and insights, there are 16 additional InvestingPro Tips available, which can be explored with a special offer using the coupon code PRONEWS24 for an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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