February 3, 2023

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Zscaler stock drops 10% on conservative guidance, as it’s taking longer to close deals

Zscaler stock drops 10% on conservative guidance, as it's taking longer to close deals

Zscaler Inc. stock fell in the extended session Thursday after the cybersecurity company said longer sales cycles and other headwinds contributed to its conservative guidance, one slightly above the Wall Street consensus.

Zscaler 
ZS,
+8.28%
shares dropped 10% after hours, following an 8.3% gain in the regular session to close at $144.50.

Zscaler said it expects adjusted earnings of 29 cents to 30 cents a share on revenue of $364 million to $366 million for the fiscal second quarter. Analysts surveyed by FactSet estimate 26 cents a share on revenue of $325.1 million and billings of $355.3 million for the quarter.

The company also forecast adjusted earnings of $1.23 to $1.25 a share on revenue of about $1.53 billion for the year and billings of $1.93 billion to $1.94 billion, while analysts had forecast earnings of $1.18 a share on revenue of $1.5 billion and billings of $1.93 billion for the year.

But last quarter’s earnings were a tough act to follow, when Zscaler exceeded Wall Street’s expectations across the board, and the stock logged its best one-day performance since the company went public in 2018.

Admittedly, it is tough out there for cloud-software vendors to snag deals in a cost-conscience environment with a looming recession. Over the past several years, native cloud companies — and legacy companies that migrated to the cloud — have pitched their version of a “platform,” or what essentially is an ecosystem. By adding new services, or modules, to the platform, customers are then upsold, encouraged to add more modules, or functionality, to their customized platform.

Remo Canessa, Zscaler’s chief financial officer, told analysts on a conference call Thursday that the company’s billings duration was above average, 14 months versus the midpoint of 10 months. That’s going to ding billings growth by about 5 percentage points.

“While good for our business, larger deals take longer to close as customers introduce more checks and reviews,” Canessa said. “In this environment, we think it’s prudent to expect a higher level of review and scrutiny by our customers to continue.”

Also, a reorganization of the company’s salesforce to better cater to customers was greeted by analysts on the call as an operating expense headwind worth questioning, but Jay Chaudhry, Zscaler’s chairman and chief executive, downplayed the sales reorganization and played up the bigger picture, of snagging bigger deals from larger customers.

“They’re not massive changes, but they are more than normal that we typically have done,” Chaudhry said. “But none of these deals are going away. We are well positioned. We’re winning some already. We’re working on more.”

The company reported a fiscal first-quarter loss of $68.2 million, or 48 cents a share, compared with a loss of $90.8 million, or 65 cents a share, in the year-ago period. Adjusted net income, which excludes stock-based compensation and other items, was 29 cents a share, compared with 14 cents a share in the year-ago period.

Revenue rose to $355.5 million from $230.5 million in the year-ago quarter, the company said. Calculated billings, or revenue plus deferred revenue acquired over the quarter, rose to 37% to $340.1 million from the year-ago period.

Analysts surveyed by FactSet had forecast earnings of 26 cents a share on revenue of $340.7 million and billings of $333.1 million.

As of Thursday’s close, the stock is down 55% year to date, compared with a 15% loss by the S&P 500 index 
SPX,
-0.09%,
a 27% decline by the tech-heavy Nasdaq Composite Index
COMP,
+7.36%,
and a 23% decline by the ETFMG Prime Cyber Security ETF 
HACK,
+3.37%.

Zscaler’s earnings report was similar to CrowdStrike Holdings Inc.’s
CRWD,
+5.46%
on Tuesday, when the cybersecurity company said subscription growth was slowing because of longer buying cycles from customers. Shares of CrowdStrike dropped 15% the next day, for their second-worst day ever.

Salesforce Inc.
CRM,
-8.27%
shares suffered after the customer-relationship management software giant provided a rare forecast that fell short of expectations Wednesday and revealed that co-Chief Executive Bret Taylor is leaving the company. Meanwhile, Snowflake Inc.’s
SNOW,
+7.80%
results were greeted with mixed reviews on Wall Street.

Even Palo Alto Networks Inc.
PANW,
+5.00%,
which kicked off cybersecurity earnings season with a bang, said it needs to get more active with customers to close deals sooner.

On the other hand, Okta Inc.
OKTA,
+26.46%
surprised investors by forecasting a surprise profit for the fourth quarter, and maintaining profitability through the following year, and Workday Inc.
WDAY,
+0.94%
shares surged 17% Wednesday after the cloud -based human-resources software company hiked its outlook and launched a share buyback program.