Core Viewpoint - Zscaler's stock price has been on an upward trend over the past six months, driven by market sentiment and other factors, despite a deteriorating short-term outlook and weak leading indicators [1][2][16] Financial Performance - In Q2, Zscaler generated $648 million in revenue, a 23% year-over-year increase, although below the expected 25% growth [12] - The annual recurring revenue (ARR) at the end of the quarter was $2.7 billion, also reflecting a 23% year-over-year growth [12] - The remaining performance obligation (RPO) grew 28% year-over-year to $4.615 billion, while total calculated billings increased 18% to $743 million [12] - The company expects Q3 revenue to be between $665 million and $667 million, representing a year-over-year growth of 20-21% [12] Customer Growth and Retention - Zscaler saw a strong net customer increase in Q2, with the number of customers generating $100,000 in annual revenue growing by 19% and those generating $1 million growing by 28% [14] - The net retention rate improved to 115% in Q2, indicating a recovery in customer retention [14] Market Position and Strategy - Zscaler continues to promote its zero-trust model, questioning the advantages of SD-WAN and most SASE architectures, focusing on reducing attack surfaces and eliminating lateral threat propagation [4] - The upcoming device refresh cycle presents an opportunity for Zscaler to convert customers from traditional architectures [4] - The company is expanding its offerings from user protection to workloads, OT devices, and B2B users [6] Product Development and AI Integration - Zscaler views artificial intelligence as a tailwind for demand and product development, particularly in data security [10] - The company has launched AI analytics solutions, with the ACV of its AI analytics product line nearly doubling year-over-year in Q2 [10] Sales and Operational Efficiency - Zscaler has shifted to a customer-centric sales model, which initially led to sales personnel turnover but is now stabilizing with improved productivity [11] - The company is expected to continue increasing the number of sales representatives, which should support growth in the near term [11] Competitive Landscape - Zscaler faces significant competition in the SASE market, and its ability to leverage the device refresh cycle will be crucial for its architecture and customer perception [1][4] - The company is actively promoting the benefits of its zero-trust approach to attract new customers [4] Challenges and Outlook - Despite the overall improvement in investor confidence towards SaaS companies, Zscaler acknowledges that the environment remains challenging [1] - The demand environment for 2025 appears to be deteriorating, contrasting with expectations for stability or improvement in 2024 [2] - Zscaler's growth rate is slowing, but the company still has substantial long-term growth opportunities [6][19]

Core Insights - Zscaler collaborated with T-Mobile to implement the Zscaler Zero Trust Exchange™ AI-powered cloud security platform, enhancing T-Mobile's cybersecurity infrastructure and reducing reliance on traditional VPNs [1][2][3] Company Overview - Zscaler is a leader in cloud security, providing a platform that protects thousands of customers from cyberattacks and data loss by securely connecting users, devices, and applications globally [4] Deployment Details - T-Mobile's deployment of the Zscaler Zero Trust Exchange took three months and has since improved secure access to applications and the internet, regardless of user location or device [1][3] - The platform operates on the principle of least-privileged access, establishing trust based on user identity and context, which includes location, device, application, and content [3] Security Enhancements - The collaboration aims to enhance T-Mobile's cybersecurity approach, ensuring that only verified and authorized users can access necessary systems, thereby significantly reducing cyber threat risks [2][3] - Zscaler's tools have allowed T-Mobile to retire legacy firewalls and VPNs, promoting more efficient access to applications and information [3] Additional Features - Zscaler offers various services, including Zscaler Internet Access™ (ZIA™) for secure internet access, Zscaler Private Access™ (ZPA™) to replace traditional VPNs, and advanced threat detection technologies [5]

Core Viewpoint - The article discusses the author's previous bullish stance on Zscaler (NASDAQ: ZS) due to its growth potential driven by factors such as Federal spending and a shift in the go-to-market model [1] Group 1: Company Analysis - Zscaler was previously rated as a buy, indicating strong confidence in its growth trajectory [1] - The growth strength of Zscaler is supported by external factors like government spending and changes in its market approach [1] Group 2: Investment Approach - The author emphasizes a diverse investment strategy that includes fundamental, technical, and momentum investing, suggesting a holistic approach to capital management [1] - The intention behind writing on Seeking Alpha is to track investment ideas and connect with other investors sharing similar interests [1]

Group 1 - The article discusses the investment strategy of Zscaler, Inc. (NASDAQ: ZS), with a reiterated "buy" rating and a price target of $221, indicating a bullish outlook on the company's growth potential [1] - The investment strategy focuses on sustainable, growth-driven companies that aim to maximize shareholder equity, reflecting a broader trend in the investment community towards responsible investing [1] - The author highlights the importance of financial literacy and aims to make complex macroeconomic concepts more accessible to a wider audience, which aligns with current trends in democratizing investment knowledge [1]

Group 1 - The article highlights that tariffs and recession fears have negatively impacted most growth stocks this year, with Zscaler being a notable exception in the cybersecurity sector [1] - Zscaler focuses on protecting customer data, positioning itself as a resilient player amidst challenging market conditions [1] Group 2 - The author, Gary Alexander, has extensive experience in technology companies and has been a contributor to Seeking Alpha since 2017, indicating a strong background in industry analysis [1] - Alexander's insights are informed by his experience in both Wall Street and Silicon Valley, as well as his advisory role to seed-round startups [1]

Group 1 - Zscaler is viewed as largely insulated from market volatility, with minimal roadblocks to its growth trajectory and ongoing progress towards profitability [1] - The company is expected to continue delivering strong revenue growth, although caution is advised regarding future projections [1] - The investment strategy focuses on identifying undervalued companies with secular growth potential, emphasizing strong balance sheets and management teams [1]

Annual ThreatLabz Report Reveals 36x More AI/ML Transactions in World’s Largest Security Cloud, Stressing the Need for Zero Trust Everywhere to Enable Secure GenAI Adoption and Stop AI-Powered Threats ThreatLabz 2025 AI Security Report Top AI Applications ChatGPT is the most popular AI/ML application, accounting for nearly half of all AI/ML transactions (45.2%) and is also the most-blocked AI application, followed by Grammarly, and Microsoft Copilot as the second and third most-blocked applications, resp ...

Company Overview - Zscaler has seen its shares increase nearly 10% year-to-date, driven by strong financial performance in its fiscal 2025 second quarter, which ended January 31 [2] - The company specializes in cybersecurity software and is experiencing robust demand as businesses face increasing digital threats [2] Financial Performance - Zscaler reported revenue of $647.9 million for the fiscal 2025 second quarter, marking a 23% increase year-over-year and exceeding guidance of $634 million [9] - The company has raised its full-year revenue forecast for fiscal 2025 by $14 million to $2.647 billion [9] - Operating expenses grew by only 19% in the first half of fiscal 2025, slower than the nearly 25% revenue growth, indicating improved cost management [10] - Zscaler's net loss for the first half of fiscal 2025 was $19.7 million, a 68% reduction from the previous year's loss of $61.9 million [11] - On a non-GAAP basis, Zscaler achieved profitability of $251.8 million, a 35.1% increase compared to the first half of fiscal 2024 [12] Market Position and Strategy - Zscaler's stock remains 45% below its all-time high from 2021, suggesting potential for investment [3] - The company has shifted from a growth-at-all-costs strategy to a more balanced approach, focusing on sustainable growth and profitability [13] - Zscaler aims to create a "Zero Trust Everywhere" environment, with 130 customers currently adopting this approach and plans to triple that number in 18 months [8] Analyst Sentiment - The majority of analysts covering Zscaler stock have assigned it the highest buy rating, with no recommendations to sell [3][14] - The average price target for Zscaler's stock is $236.50, indicating an 18% potential upside, while the highest target suggests a 35% upside [15] Industry Context - The total addressable market for Zscaler is valued at $96 billion, indicating significant growth potential [16] - Cybercrime is projected to cause $10.5 trillion in damages globally in 2025, suggesting increasing demand for advanced cybersecurity solutions [17] - Zscaler's stock, previously overvalued at around $370, may have the potential to reclaim that level if it continues its current growth trajectory [18]

Core Insights - Zscaler has shown a 20% gain over the past six months, outperforming the S&P 500 index, which remained flat during the same period [1] - The company released its fiscal 2025 second-quarter results, which exceeded expectations and led to a positive outlook for the future [2][3] Financial Performance - Fiscal Q2 revenue increased by 23% year over year to $648 million, while earnings per share grew by 24% to $0.78, surpassing both guidance and consensus expectations [3] - Zscaler raised its fiscal 2025 revenue growth expectation to 22% and increased its operating profit estimate to $567 million from $554 million [4] Market Opportunity - The serviceable addressable market for Zscaler's cloud-based cybersecurity solutions is estimated at $96 billion, indicating significant growth potential [5] - The global data protection market is projected to exceed $500 billion in annual revenue by 2032, suggesting Zscaler can accelerate its growth rate [7] Customer Demand and Growth Metrics - Annual recurring revenue (ARR) from emerging products grew at twice the rate of core products, driven by demand for AI analytics and data protection solutions [6] - Remaining performance obligations (RPO) increased by 28% to $4.6 billion, indicating a higher volume of contracts being secured [8] Profitability and Valuation - Increased spending by existing customers and a larger customer base positively impacted Zscaler's operating profit margin, which rose by 2 percentage points year over year [9] - Zscaler trades at 12 times sales, higher than the U.S. technology sector index's multiple of 7.3, but its growth profile justifies this valuation [10] Future Projections - If Zscaler's revenue reaches $3.84 billion in a couple of fiscal years, its market cap could increase to $46 billion, representing a 43% rise from current levels [11]

[PART I. FINANCIAL INFORMATION](index=5&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis of Zscaler, Inc [Item 1. Financial Statements (unaudited)](index=5&type=section&id=Item%201.%20Financial%20Statements%20(unaudited)) Zscaler's unaudited condensed consolidated financial statements show increased assets, revenue growth, and reduced net losses [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Zscaler's balance sheet shows total assets increased to $5.01 billion, driven by cash, with liabilities slightly down and equity up Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Jan 31, 2025 | July 31, 2024 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $1,758,506 | $1,423,080 | | Total current assets | $3,665,206 | $3,396,617 | | Total assets | $5,005,968 | $4,704,968 | | **Liabilities & Equity** | | | | Deferred revenue (current) | $1,595,780 | $1,643,919 | | Total current liabilities | $3,048,866 | $3,112,887 | | Total liabilities | $3,398,622 | $3,430,866 | | Total stockholders' equity | $1,607,346 | $1,274,102 | [Condensed Consolidated Statement of Operations](index=7&type=section&id=Condensed%20Consolidated%20Statement%20of%20Operations) Zscaler's statement of operations shows revenue growth of 23.4% for the quarter and a significant reduction in net loss Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended Jan 31, 2025 | Three Months Ended Jan 31, 2024 | Six Months Ended Jan 31, 2025 | Six Months Ended Jan 31, 2024 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $647,900 | $524,999 | $1,275,855 | $1,021,702 | | Gross Profit | $499,402 | $407,800 | $985,895 | $793,109 | | Loss from operations | $(40,140) | $(45,457) | $(70,807) | $(91,514) | | Net loss | $(7,724) | $(28,469) | $(19,775) | $(61,952) | | Net loss per share | $(0.05) | $(0.19) | $(0.13) | $(0.42) | [Condensed Consolidated Statements of Cash Flows](index=11&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Zscaler's cash flow statement shows strong operating cash flow of $510.8 million and a significant increase in cash and cash equivalents Cash Flow Summary for Six Months Ended January 31 (in thousands) | Activity | 2025 | 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $510,768 | $402,875 | | Net cash used by investing activities | $(201,142) | $(248,750) | | Net cash provided by financing activities | $25,800 | $22,255 | | **Net increase in cash and cash equivalents** | **$335,426** | **$176,380** | [Notes to Unaudited Condensed Consolidated Financial Statements](index=13&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) The notes detail Zscaler's accounting policies and provide further information on revenue, obligations, acquisitions, and tax benefits - Zscaler is a cloud security company providing its platform via a **SaaS model**, with financial statements prepared under **U.S. GAAP**[39](index=39&type=chunk) - The **United States** remains the largest market, accounting for **51% of revenue**, with **89% of sales** generated through channel partners[51](index=51&type=chunk) - As of January 31, 2025, remaining performance obligations (RPO) totaled **$4.62 billion**, with **49%** expected to be recognized as revenue within 12 months[55](index=55&type=chunk) - The acquisition of **Fidenty B.V.** was completed on December 19, 2024, for **$1.1 million**, recognizing **$0.7 million** in goodwill[71](index=71&type=chunk) - A **$17.2 million tax benefit** was recognized due to the release of the valuation allowance on **U.K. deferred tax assets**, reflecting sustained profitability in the region[104](index=104&type=chunk)[107](index=107&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=33&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Zscaler's performance, highlighting 25% revenue growth, elongated deal cycles, and strong liquidity [Overview and Key Business Metrics](index=33&type=section&id=Overview%20and%20Key%20Business%20Metrics) Zscaler's overview highlights its cloud-native security platform, subscription revenue model, and the impact of macroeconomic conditions on deal cycles and retention rates - The company generates revenue primarily from **subscriptions** to its cloud platform, serving over **8,650 customers** as of July 31, 2024[113](index=113&type=chunk) - Macroeconomic conditions are leading to increased **customer scrutiny** and **elongated approval processes** for transactions, especially larger deals[115](index=115&type=chunk) - The **dollar-based net retention rate** was **115%** for the trailing 12 months ended January 31, 2025, a slight decrease from 117% a year prior[123](index=123&type=chunk) [Non-GAAP Financial Measures](index=36&type=section&id=Non-GAAP%20Financial%20Measures) Zscaler utilizes non-GAAP measures like operating income, free cash flow, and calculated billings to assess performance, showing strong margins and growth Non-GAAP Operating Results (in thousands) | Metric | Three Months Ended Jan 31, 2025 | Three Months Ended Jan 31, 2024 | | :--- | :--- | :--- | | Non-GAAP income from operations | $140,461 | $103,162 | | Non-GAAP operating margin | 22% | 20% | Free Cash Flow (in thousands) | Metric | Three Months Ended Jan 31, 2025 | Three Months Ended Jan 31, 2024 | | :--- | :--- | :--- | | Free cash flow | $143,428 | $100,788 | | Free cash flow margin | 22% | 19% | Calculated Billings (in thousands) | Metric | Three Months Ended Jan 31, 2025 | Three Months Ended Jan 31, 2024 | | :--- | :--- | :--- | | Calculated billings | $742,685 | $627,630 | [Results of Operations](index=42&type=section&id=Results%20of%20Operations) Zscaler's results show 23% quarterly revenue growth, a slight gross margin decrease, and an 11% increase in operating expenses, driven by R&D investments Revenue Comparison - Three Months Ended Jan 31 | Period | Revenue (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | | Q2 FY25 | $647,900 | $122,901 | 23% | | Q2 FY24 | $524,999 | | | Operating Expenses Comparison - Three Months Ended Jan 31 (in thousands) | Expense Category | Q2 FY25 | Q2 FY24 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Sales and marketing | $307,872 | $276,481 | $31,391 | 11% | | Research and development | $170,860 | $122,181 | $48,679 | 40% | | General and administrative | $60,810 | $54,595 | $6,215 | 11% | - The decrease in income tax provision was primarily due to a **$17.2 million tax benefit** from the release of the valuation allowance on **U.K. deferred tax assets**[170](index=170&type=chunk)[174](index=174&type=chunk) [Liquidity and Capital Resources](index=51&type=section&id=Liquidity%20and%20Capital%20Resources) Zscaler maintains strong liquidity with $2.88 billion in cash and investments, sufficient to meet operational and debt obligations for the next 12 months - Principal sources of liquidity as of January 31, 2025, were cash, cash equivalents, and short-term investments totaling **$2.88 billion**[193](index=193&type=chunk) - The company has **$1.15 billion** in convertible senior notes due 2025, now classified as a current liability[194](index=194&type=chunk)[361](index=361&type=chunk) Cash Flow Summary for Six Months Ended January 31 (in thousands) | Activity | 2025 | 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $510,768 | $402,875 | | Net cash used by investing activities | $(201,142) | $(248,750) | | Net cash provided by financing activities | $25,800 | $22,255 | [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=55&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) Zscaler is exposed to market risks, including interest rate fluctuations on investments and convertible notes, and foreign currency risk on operating expenses - The company is exposed to **interest rate risk** on its **$2.88 billion** in cash and investments, with a 100 basis point change impacting available-for-sale securities by **$11.1 million**[213](index=213&type=chunk) - The fair value of the **$1.15 billion convertible senior notes** is sensitive to **interest rate risk** and fluctuations in the company's common stock price[216](index=216&type=chunk) - A portion of operating expenses are denominated in foreign currencies, which the company hedges using **foreign currency forward contracts**[217](index=217&type=chunk)[219](index=219&type=chunk) [Item 4. Controls and Procedures](index=57&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that Zscaler's disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - The **CEO and CFO** concluded that Zscaler's **disclosure controls and procedures were effective** at a reasonable assurance level as of January 31, 2025[222](index=222&type=chunk) - No **material changes** in internal control over financial reporting occurred during the three months ended January 31, 2025[223](index=223&type=chunk) [PART II. OTHER INFORMATION](index=58&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, equity sales, and other disclosures for Zscaler, Inc [Item 1. Legal Proceedings](index=58&type=section&id=Item%201.%20Legal%20Proceedings) Zscaler is involved in various legal matters, but management anticipates no material adverse effect on financial results or operations - There are no pending or threatened legal proceedings expected to have a **material adverse effect** on the company's financial results or operations[92](index=92&type=chunk)[227](index=227&type=chunk) [Item 1A. Risk Factors](index=58&type=section&id=Item%201A.%20Risk%20Factors) This section details Zscaler's key risks, including profitability challenges, intense competition, reliance on partners, security breaches, and convertible debt - The company has a history of **net losses** and may not achieve or sustain profitability while investing in growth[231](index=231&type=chunk) - The business faces **intense competition** from large networking and security vendors, potentially leading to market share loss[247](index=247&type=chunk) - A majority of revenue is derived from sales through **channel partners**, and maintaining these relationships is crucial to the business[246](index=246&type=chunk) - Actual or perceived **security failures** of the cloud platform could damage reputation, leading to customer loss and potential legal liability[260](index=260&type=chunk)[293](index=293&type=chunk) - The company's ability to service its **convertible notes due in 2025** depends on future performance and cash flow, with conversion potentially impacting financial condition[360](index=360&type=chunk)[361](index=361&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=101&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) There were no unregistered sales of equity securities or issuer purchases of equity securities during the quarter - There were **no unregistered sales of equity securities** or issuer repurchases of equity securities during the period[383](index=383&type=chunk)[384](index=384&type=chunk) [Item 5. Other Information](index=101&type=section&id=Item%205.%20Other%20Information) Syam Nair, Zscaler's CTO, adopted a Rule 10b5-1 trading plan to potentially sell up to 28,947 shares of common stock - Syam Nair, the company's CTO, adopted a **Rule 10b5-1 trading plan** on December 18, 2024, to sell up to **28,947 shares of common stock**[385](index=385&type=chunk) [Item 6. Exhibits](index=102&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including CEO and CFO certifications and XBRL data - The report includes filed exhibits such as **CEO and CFO certifications** under Sarbanes-Oxley Sections 302 and 906, and **XBRL interactive data files**[387](index=387&type=chunk)[388](index=388&type=chunk)