Zscaler(ZS) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis of Zscaler, Inc Item 1. Financial Statements (unaudited) Zscaler's unaudited condensed consolidated financial statements show increased assets, revenue growth, and reduced net losses Condensed Consolidated Balance Sheets 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 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 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 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] - The United States remains the largest market, accounting for 51% of revenue, with 89% of sales generated through channel partners[51] - 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] - The acquisition of Fidenty B.V. was completed on December 19, 2024, for $1.1 million, recognizing $0.7 million in goodwill[71] - 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][107] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Zscaler's performance, highlighting 25% revenue growth, elongated deal cycles, and strong liquidity Overview and Key Business Metrics 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] - Macroeconomic conditions are leading to increased customer scrutiny and elongated approval processes for transactions, especially larger deals[115] - 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] Non-GAAP Financial Measures 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 | $627,630 | Results of Operations Zscaler's results show 23% quarterly revenue growth, a slight gross margin decrease, and an 11% increase in operating expenses, driven by R&D investments Revenue Comparison - Three Months Ended Jan 31 | Period | Revenue (in thousands) | Change ($) | 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][174] Liquidity and Capital Resources 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] - The company has $1.15 billion in convertible senior notes due 2025, now classified as a current liability[194][361] 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 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] - 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] - A portion of operating expenses are denominated in foreign currencies, which the company hedges using foreign currency forward contracts[217][219] Item 4. Controls and Procedures 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] - No material changes in internal control over financial reporting occurred during the three months ended January 31, 2025[223] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, and other disclosures for Zscaler, Inc Item 1. Legal Proceedings 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][227] Item 1A. Risk Factors 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] - The business faces intense competition from large networking and security vendors, potentially leading to market share loss[247] - A majority of revenue is derived from sales through channel partners, and maintaining these relationships is crucial to the business[246] - Actual or perceived security failures of the cloud platform could damage reputation, leading to customer loss and potential legal liability[260][293] - 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][361] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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][384] Item 5. Other Information 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] Item 6. Exhibits 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][388]