I/O Fund is keeping tabs on cloud security company Zscaler because of its surging sales and strong growth over multiple quarters. Zscaler's success is evident in the most recent earnings results.

Sales History

Zscaler's growth is impressive, because sales have grown over 50%+ for five consecutive quarters.

In fact, as you can see in the chart below, Zscaler has grown 40%+ or more in every quarter, except one, as a public company.

Growth Factors

Zscaler's notably high growth is due to a few secular tailwinds propelling the company forward:

1. Rise of the cloud environment
2. Obsolescence of firewalls used to secure networks in the cloud
3. Network effects, as Zscaler collects massive amounts of data, over 300 trillion signals everyday

Upward Trending Sales and Persistent Demand

Market demand for Zscaler's products and solutions is demonstrated in customers' willingness to pay for multi-year contracts upfront, allowing for a constant stream of revenue and capital to go back into Zscaler's operations.

Current cashflow trends are indicative of Zscaler's ability to deliver high quality results.

We can see upfront cash payments by looking at deferred revenue, which increased 74% YoY. It is also worth pointing out that long-term deferred revenue (DR) increased 99% YoY to $63 million. Deferred revenue turns into sales in the future and an outsized growth in DR highlights that there is ample balance sheet support for future sales.

Deferred revenue actually represented 281% of Q1 sales, the highest seasonal value in the firm's history.

Thoughts from Zscaler's Management

Management has raised its sales guide, and expects FY2022 sales to grow 50% YoY to $1 billion. Management also expects billings to increase 40% YoY to $1.3 billion, which further underscores recent topline growth.

I/O Fund's Potential Position on Zscaler

I/O Fund is watching Zscaler closely but we do have reservations about the company’s elevated valuation. Zscaler trades at over 50x fwd sales which is a premium multiple in the cloud category.

We will be tracking cloud earnings to better understand whether Zscaler is positioned to continue to grow strongly going forward.

But there's more to Zscaler and this analysis -

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