Zscaler's Growth Strategy and Market Position
2023-08-01
Zscaler, a leading cloud security company, recently held its earnings call meeting to discuss its strategy for replacing legacy solutions and the impact of ramp deals on billings. The meeting addressed several key topics, with the most significant being customer concerns about the cost benefits of cloud services not meeting expectations.
One of the most interesting outcomes of the meeting was the discussion on the market opportunity for best-of-breed technology and Zscaler's position in it. Zscaler's Founder, Chairman, and CEO, Jay Chaudhry, highlighted the risk of enterprises prioritizing best-of-breed solutions, as many of them are already Zscaler customers. He also mentioned feedback from potential customers who may not prioritize best-of-breed technology. Chaudhry emphasized that their customers are seeking a best-of-breed platform with the right architecture, rather than individual point products. This indicates Zscaler's confidence in its market position and its ability to provide a superior architecture to meet customer needs.
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In terms of the market outlook, Zscaler expects a significant sequential growth of 50% or higher in the July quarter to meet their annual guide, despite billings for the April quarter being down 9% sequentially. The company acknowledges the increasing scrutiny and pressure on CIOs due to a tighter macroenvironment but reassures that customers still consider Zscaler a mission-critical service. Pricing and discounting are areas of focus, but the company is not under tremendous pressure in that regard. Zscaler expects their emerging products, particularly their cloud workload protection offerings, to contribute to their growth.
The key drivers of Zscaler's business include upselling to existing customers, consolidating point products into a clean architecture, competitive positioning, and cost management. The company plans to focus on upselling, maintaining a strong competitive position, and adjusting their business model to improve margins while instilling customer confidence.
Regarding the competitive landscape, Zscaler's CEO mentioned that their competitive positioning remains strong, particularly in the higher end of the market. They believe they have the right architecture and solutions, backed by positive feedback from thousands of customers. This suggests that the competitive landscape for Zscaler is relatively stable.
During the meeting, the most important key performance indicators (KPIs) discussed were related to cloud-related costs and customer adoption of cloud services. Zscaler's CEO acknowledged that while customers are embracing the cloud, there have been complaints about costs. Some large software development projects have slowed down due to cost reasons, creating an opportunity for Zscaler to partner more closely with hyperscalers and become an approved partner for cloud spend. Despite the cost concerns, it is rare to find a Chief Information Officer (CIO) who dislikes the cloud, according to Chaudhry.
Looking ahead, Zscaler provided its outlook for the third quarter of fiscal 2023, with expected revenue of $396 million to $398 million, reflecting year-over-year growth of 38% to 39%. The company anticipates gross margins of approximately 80% and an operating profit in the range of $55 million to $56 million. The full-year fiscal 2023 revenue is projected to be in the range of $1.558 billion to $1.563 billion, representing year-over-year growth of approximately 43%.
Zscaler is actively pursuing its growth strategy and making organizational improvements to achieve its strategic initiatives. The company has increased its workforce, invested in selling capacity and R&D development, and made adjustments to its enterprise segment. While the enterprise and commercial segments have performed well, larger deals have been affected by macro conditions.
The earnings call meeting included participation from various analysts and investors, indicating a strong interest in Zscaler's performance and strategic direction. The meeting focused on the company's financial performance and growth strategy, highlighting strong operating profit and free cash flow, expanding operating margin, and revenue growth. Zscaler emphasized its position as the world's largest security cloud, with a high growth retention rate and gross margins. The company acknowledged customer cautiousness, resulting in delays in large deals, but also mentioned strategic deals that would lead to higher annual run rates in the second year. Zscaler expects customer cautiousness to continue in the second half of the year, leading to longer sales cycles and uncertain timing of large deals. The importance of cybersecurity and the need for innovation to gain a competitive advantage in this area were also discussed. The company highlighted a targeted cost optimization plan to drive operational efficiency.
Overall, Zscaler's earnings call meeting provided insights into its market position, growth strategy, and financial performance. The company remains confident in its ability to meet customer needs, adapt to market conditions, and drive future growth.