Preview: Zscaler (ZS) Q1 earnings will be hurt by cloud traction

Zscaler Inc. (NASDAQ: ZS) is set to report its earnings results for the first quarter of 2020 on Tuesday, December 3, after the market closes. The cloud security company’s bottom line will be hurt by higher costs and expenses while the top line will be benefited by the huge traction to move enterprises’ applications to the cloud.

With the rapid cloud adoption and rising workforce mobility, traditional perimeter security approaches would provide inadequate protection for users and data and increasingly poor user experience. The enterprise applications are rapidly moving to the cloud for achieving greater IT agility, a faster pace of innovation and lower costs.

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The company’s future could turn profitable backed by the significant opportunity to expand its customer base both in the US and internationally. Zscaler will be leveraging a land-and-expand approach with its existing customers for selling subscriptions to additional users. For the first quarter, Zscaler will incur losses due to cloud traction investments.

Zscaler continues to invest in research and development for the expansion and innovation of new services as well as the expansion into the additional addressable market segments. The company plans to open its cloud security platform to third-party developers and vendors to offer new functionality and solutions.

Analysts expect the company’s earnings to remain flat with last year at $0.01 per share while revenue will jump by 42% to $89.79 million for the first quarter. The company has surprised investors by beating analysts’ expectations in all of the past four quarters. The majority of the analysts recommended a “hold” rating with an average price target of $62.61.

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For the fourth quarter, Zscaler posted a narrower loss helped by higher interest income and an income tax benefit. The top line surged by 53% on higher calculated billings. The company continues to see enterprises transforming their network and security to realize the benefits of the cloud.

For the first quarter of 2020, total revenue is expected to be in the range of $89-90 million and adjusted results are anticipated to be between breakeven and earnings of $0.01 per share. For the full year 2020, the company expects total revenue of $395-405 million, calculated billings of $490-500 million, and adjusted EPS of $0.12-0.15.

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