Zscaler Q2 earnings preview: Will strong demand, user growth translate into profit?

Zscaler Inc. (NASDAQ: ZS) has gained a strong foothold in the highly competitive information security market in a relatively short period of time. In what could be a testament to its technical prowess, the company recently became a certified partner in Microsoft’s (MSFT) Networking Partner Program.

The internet security solutions provider is all set to report its second-quarter results Thursday at 4:05 pm ET. It is widely expected that January-quarter earnings would decline 67% annually to $0.03 per share, on revenues of $98.97 million.

Zscaler has been strengthening its product portfolio to keep pace with industry leaders like Cisco (CSCO) while giving competition to peers. As a result, the company continues to expand its user-base. More and more businesses, including top-tier companies, are adopting Zscaler’s cloud security solutions.

Strong Portfolio

One key factor that gives the company an advantage over its rivals is the availability of its services across almost all device categories and platforms. It is estimated that the growing demand for the company’s security apps boosted revenue growth in the to-be-reported quarter.

Related: Zscaler Q1 2020 Earnings Call Transcript

The contribution of channel partners to revenue growth has been increasing steadily, which bodes well for the company as far as its second-quarter performance is concerned. Meanwhile, the positive top-line performance might not fully translate into profit this time, because margins remain under pressure from elevated marketing costs.

Looking Back

For the first quarter, Zscaler reported a wider net loss of $0.13 per share, despite a 48% growth in revenues to $93.6 million. The bottom-line was negatively impacted by an increase in expenses, mainly related to sales and investments in R&D.

Competitors

Last week, Cloudflare (NET) reported a net loss of 6 cents per share for its fourth-quarter when the company’s revenue surged 51% year-over-year to $84 million.

Also read: The road ahead for Cloudera looks bleak

Zscaler’s stock had a positive start to 2020 and gained about 35% since the beginning of the year. However, the shares are trading far below the record highs seen in the second half of last year. Most analysts recommend buying the stock and forecast a modest decline in value in the near term.

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