- Cloud security firm beats Q2 estimates and Q3 guidance
- Unveils plans to cut 3% of workforce
- Markets nervous about signs of enterprise software weakness
Cloud security firm Zscaler (ZS:NASDAQ) reported second-quarter earnings and revenue overnight that topped Wall Street consensus targets. It also narrowly beat expectations for billings, according to FactSet, or future revenue that is already contracted.
Yet the share price tanked, falling 12% in after-hours trading to $117.95, a six-week low, leaving analysts and investors miffed.
WHAT ZSCALER REPORTED
The San Jose-based cyber security business that provides tools to protect datacentres against hacking attacks, reported Q2 EPS (earnings per share) of $0.37, nearly 30% better than the $0.29 estimate of analyst. Revenue for the quarter (to 31 Jan) came in at $387.6 million versus the consensus forecast of $365.5 million.
Zscaler billings came in at $493.8 million, compared to estimates of $491.4 million.
‘In January, we saw higher scrutiny on budgets compared to December, resulting in additional delays in large deals,’ said Jay Chaudhry, Zscaler chairman and chief executive.
As has been the case with many cloud-software vendors this earnings season, businesses are taking more time to scrutinise deal lengths or subscriptions, and cloud-software companies are streamlining their own operations, a worry for growth pace through 2023.
Yet this didn’t prevent Zscaler upping expectations for Q3. Zscaler sees EPS of $0.39, versus the consensus of $0.31, on $396 million to $398 million revenue, up from analyst consensus of $387.3 million.
Large contracts haven’t ‘gone away but customers are taking longer to make decisions and requiring additional approvals,’ said company boss Chaudhry.
WHAT DRAGGED ON THE SHARE PRICE?
Zscaler stock could have fallen on restructuring plans that will see a 3% worldwide headcount reduction, costing about $8 million to $10 million in redundancy and other one-off charges. That’s about 150 jobs, give or take.
These are pretty small numbers when compared to the thousands of jobs cut by major tech firms. Google-parent Alphabet (GOOG:NASDAQ) recently laid off 12,000 workers, equivalent to 12% of its workforce, while Meta Platforms (META:NASDAQ), Amazon (AMZN:NASDAQ) and Microsoft (MSFT:NASDAQ) have axed 39,000 jobs between them since November 2022.
One-off redundancy aside, this should mean more streamlined costs and efficient business going forward, theoretically good for investors. But it could also be read that swinging the workforce axe shows that Zscaler (and the rest) share concerns from across the industry about future prospects.
Whether this is confirmation of more bearish views for enterprise software companies even in vital areas like cybersecurity, where Zscaler operates, remains to be seen, but that’s how markets seem to be reading it.
