Zscaler Is Well-Positioned For Growth In 2024 As Cybersecurity Spending Remains Healthy | #hacking | #cybersecurity | #infosec | #comptia | #pentest | #ransomware

While enterprises are keeping a close eye on overall IT spending, cybersecurity remains a top priority. Amid the evolving threat landscape, Zscaler (ZS) continues to experience solid demand.

In a recent Gartner survey, 80% of CIOs said they planned to increase spending on cybersecurity, particularly due to rising threats of new AI-enabled cyberattacks. For 2024, Gartner forecasts worldwide end-user spending on security and risk management will rise by 14%, matching projected growth for this year.

With a robust and expanding product portfolio, Zscaler is well-positioned for growth across its total addressable market of $72 billion. In FY’23 (ended July), Zscaler’s total revenue rose 48% to $1.617 billion.

In fiscal Q4 (July), total revenue advanced 43% to $455.0 million, 5.7% above the consensus estimate. Record billings of $719.3 million were up 38%, only a slight deceleration from 40% growth in the previous quarter. Deferred revenue gained 41% to $1.439 billion, while total RPO of $3.51 billion was up 35%. Gross margin remained solid at 80.7%.

Zscaler has surpassed $2 billion in annual recurring revenue (ARR), doubling this metric in just the past seven quarters. The company’s longer-term goal is $5 billion of total ARR. To reach this target, Zscaler will continue to enhance and expand its product portfolio to drive more follow-on business across the total customer base of 7,700. As for new customers, it only has about 30% of the Global 2000, leaving ample room for growth.

Zscaler has 2,609 customers with total ARR of more than $100k, up 25% year over year. In FQ4, the company added a record 49 new $1 million+ ARR customers, bringing this total to 449 customers, up 37% year over year. There are now 43 customers with ARR above $5 million.

The company is doing a good job when it comes to cross-selling and up-selling. There’s still plenty of upside potential, as only about a quarter of all customers have bought all three of its core solutions covering secure internet access (ZIA), secure private access (ZPA) and digital experience management (ZDX).

Zscaler has an expanding product portfolio that will help fuel growth going forward. In FY’23, emerging products (including those for cloud workload protection) accounted for 18% of new annual contract value (ACV), up from 14% in the prior year. For FY’24, emerging products are expected to account for more than 20% of all new business. While deal sizes in the cloud security segment are still relatively small, they have been on the increase in recent quarters.

Zscaler’s data loss protection (DLP) product, now approaching $250 million in total ARR, represents a new growth driver. The company has been successfully going after the big installed base of legacy Symantec DLP customers. Zscaler can offer enterprises superior DLP technology at a much lower cost, making the switchover to its offering an easy decision. The total DLP opportunity alone is worth around $10 billion, according to Zscaler CEO Jay Chaudhry.

In the current macro environment, it is taking longer to get deals closed. At the Goldman Sachs tech conference in early September, Chaudhry sounded a bit more upbeat about cybersecurity demand. He said recent conversations with a number of customers and potential customers revealed a slightly reduced focus on deal scrutiny. While Chaudhry was not quite ready to declare a major change in the overall environment, he said he was encouraged that the tone of the market felt directionally better.

In late September, Morgan Stanley got more positive on Zscaler after its latest reseller partner survey suggested that security demand is nearing a trough after a weaker-than-expected first half of 2023. The firm looks for new bookings to modestly accelerate by calendar Q4 on easier comps and a slightly stronger year-end budget flush versus last year. Morgan Stanley said Zscaler screened as the leading share gainer in secure access service edge (SASE) by a wide margin in the survey.

Piper Sandler in early October upgraded Zscaler to ‘Overweight’ with a price target of $190 (up from $160), saying it believes the company will continue to benefit from relatively strong trends in security spending and network transformation momentum. With SASE still in the early stages and Zscaler remaining a top beneficiary of further adoption, the company’s core growth driver should remain durable over the coming years, according to Piper.

For fiscal Q1 (Oct.), Zscaler’s total revenue guidance range of $472 million to $474 million was above the consensus at the time of $464.7 million. The company’s initial FY’24 revenue guide indicating 27% growth at the midpoint looks pretty conservative. Zscaler over the past several years has normally beaten the midpoint of the initial revenue outlook by more than 10%, according to Evercore ISI. In the fiscal year ended July, the outperformance versus the initial estimate was 8.1%.

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