Security vendor says it needs a more efficient sales machine, analysts note increasing competition
Zscaler, one of the hottest security vendors in the market, took a couple of body blows this week following its earnings report, in which quarterly revenue failed to meet Wall Street expectations and management indicated slowing sales cycles. The market interpreted that as the company hitting economic and competitive headwinds that will slow its pace toward $1 billion in revenue.
The Lowdown: Fundamentally, Zscaler is in a sound position financially. In its quarterly and annual earnings report, the company stated that revenue and deferred revenue (subscription bookings) grew 53% while calculated billings (anticipated revenue) grew 32%. For fiscal-year 2019, which ended July 31, the company posted revenue of $302 million, with narrowing losses and increasing cash flow. And for its forecast for the first quarter of fiscal-year 2020, Zscaler anticipates revenue of around $90 million with continued narrowing operating losses.
The Details: Despite the fundamentals, Zscaler acknowledges that it’s facing headwinds that could curb its pace of growth. In its earnings call earlier this week, management said larger deals – typically with enterprises – are taking longer to close. CEO and founder Jay Chaudhry said the company needs to build a sales machine that’s more efficient at converting opportunities into sales. Zscaler is unsure if the macroeconomic climate is contributing to the longer sales cycles, but says it’s not seeing increasing competitive pressure. Analysts, however, say they’re noting increased competition – particularly from Palo Alto Networks – that may be impacting Zscaler’s sales.
The Impact: What’s happening at Zscaler is significant given its subscription-based sales model. The earnings report and management comments indicate that the issues are at the enterprise sales level – which is typically direct, but the potential for channel sales being weaker than expected cannot be dismissed. Success in subscription-based services requires persistent results in customer acquisition, consumption expansion, and account retention. Subpar performance in any one of those sales areas will result in sluggish financial performance.
Background: Zscaler issued its initial public offering (IPO) in March 2018. The stock soared on expectations that the security service vendor would outperform the market. Zscaler is one of several security companies founded by Chaudhry; others include AirDefense, Secure Computing, CiperTrust, and CoreHarbor.
The Buzz: “To keep on growing at a rapid pace as we seek to reach $1 billion in revenue, we need to build a sales machine to drive consistent sales execution critical for a top-down transformational sale, which delivers even if the market environment gets tougher,” said Zscaler CEO Jay Chaudhry, on the company’s earnings call earlier this week. “We’re not sure if the macroeconomic environment is having an impact, but we started to see some large deals taking longer to close.”
“The slowdown in billings and a weak bookings momentum will raise the question if there are execution issues or if Zscaler is facing a tougher competitive landscape,” said Guggenheim analyst Imtiaz Koujalgi. “Although the company indicated that there has been no change in competitive dynamics, our checks have picked up increased competition that could be elongating/disrupting sales cycles.”
“Many organizations are undergoing an operational and business transformation by rapidly moving apps, data, and services to the cloud to create higher efficiencies, agility, and more insights. This shift in where the resources are and how workers access them is creating new stresses and opportunities for organizations seeking a better way to protect their assets and workers,” said Dali Rajic, Chief Revenue Officer at Zscaler. “Zscaler’s ability to impact key use cases for this secure transformation allows Zscaler to act as a true partner bringing transformational ideas with appropriate planning to organizations. Zscaler has a strong strategy, a uniquely differentiated offering, a great team that cares about customers, and a massive market opportunity. I couldn’t be more excited to grow the team with top talent, so we can help guide customers with maximum impact on their journey.”