Zscaler Q3 FY7/25 Earnings Review

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Coil Spring... Keep Coiling... Release, Fly! 

By Hermit Warrior, a.k.a. Richard Iacuelli

Investors watching Zscaler's ($ZS) stock price meandering sideways for the better part of two years may have been hoping they were not about to see another version of Wile E Coyote's scheme to launch himself from a life-sized sling-shot in pursuit of the Road Runner. A slow walk back, stretching the big ACME rubber band thin...  

I think we can all agree that the outcome for shareholders since the April lows has been better than the one experienced by Wile E.

Sure, Q3 earnings were solid, with some interesting datapoints, however, the real story is the 70% rise in the share price since April 4th for which perhaps the latest earnings print served simply as a good catalyst for the price to keep going up.

Let's take a look at the headlines.

Revenue growth of 23% beat the 20% guide (we suggested as much in our Q2 earnings review) as they become more capital-markets-savvy, with the Q4 guide of 19% yoy revenue growth looking a little light, and likely offering the opportunity for another beat.

EBITDA margins were stable while unlevered free cashflow (UFCF) margins ticked down owing to increased capex as they invest in growth initiatives. 

Boiling it down, ZS delivered Q3 revenue growth that - for the first time in twelve quarters - simply matched the previous quarter's growth rate, with EBITDA and UFCF margins at similar or lower levels than for Q2, and a guide for Q4 that implies a significant slow down in revenue growth - and the stock price rose by 10% the day after earnings. 

Nevertheless, there are good reasons for the narrative around the stock to be shifting from one of a company struggling to arrest their rate of decline in revenue growth, to a more positive outlook that sees it stabilizing at current levels, or even accelerating.