Zscaler shares fall 10% on conservative guidance as it takes longer to close deals

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


shares fell 10% after hours after rising 8.3% in the regular session to close at $144.50.

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

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

But last quarter’s earnings were a tough act to follow when Zscaler beat Wall Street expectations overalland the stock posted its best one-day performance since the company left publicly in 2018.

Admittedly, it is difficult for cloud software providers to close deals in an environment of cost consciousness and a looming recession. Over the past few years, cloud-native companies—and legacy companies that have migrated to the cloud—have introduced their version of a “platform,” or what is essentially an ecosystem. By adding new services or modules to the platform, customers are then up-sold, encouraged to add more modules or functionality to their custom platform.

Remo Canessa, Zscaler’s chief financial officer, told analysts on a conference call Thursday that the company’s billing length is above average, at 14 months versus the midpoint of 10 months. This will lead to an increase in invoices by about 5 percentage points.

“While it’s good for our business, larger deals take longer to close because clients put in more checks and reviews,” Kanesa said. “In this environment, we believe it is reasonable to expect a higher level of review and scrutiny from our customers to continue.”

Also, the reorganization of the company’s sales force to better serve customers was greeted by analysts on the call as an operating cost headwind worth questioning, but Jay Chaudhry, chairman and chief executive of Zscaler, played down the sales reorganization and played up the bigger picture of capturing bigger deals from bigger customers.

“They’re not massive changes, but they’re more than what we normally do,” Chaudhry said. “But none of these deals are going away. We are well positioned. We are already earning a little. We are working on more.”

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

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

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

As of Thursday’s close, shares were down 55% year-to-date, compared with a 15% loss for the S&P 500
A 27% drop from the tech-heavy Nasdaq Composite Index
and a 23% drop from the ETFMG Prime Cyber ​​Security ETF

Zscaler’s earnings report was similar to that of CrowdStrike Holdings Inc

on Tuesday, when the cybersecurity company said subscription growth slows due to longer purchase cycles from customers. CrowdStrike shares fell 15% the next day, for their second-worst day on record.

Salesforce Inc.

shares suffered after the customer relationship management software giant delivered a rare a forecast that does not meet expectations Wednesday and revealed that co-CEO Brett Taylor is leaving the company. Meanwhile, Snowflake Inc

the results were hailed with mixed reviews on Wall Street.

Even Palo Alto Networks Inc.
which started the cybersecurity earnings season with a bang, said it needs to become more proactive with customers to close deals earlier.

On the other hand, Okta Inc.

surprised investors by forecast fourth-quarter earnings surprise and maintain profitability next year and Workday Inc.

shares rose 17% on Wednesday after the human resources cloud software company raised its outlook and launched a share buyback program.

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