Though wider digitalization initiatives natively favor cloud security firm Zscaler (NASDAQ:ZS), Wall Street has other ideas. Although the company posted strong results for its fiscal first-quarter earnings report, management disclosed conservative guidance for Q2, citing a long sales cycle and other headwinds. Consequently, ZS stock dropped 9% in the morning session before extending losses to 11% in the early afternoon hours.
On paper, circumstances appeared auspicious for Zscaler. Adjusted net income came out to 29 cents a share, beating the 14 cents a share it posted in the year-ago quarter. As well, revenue increased to $355.5 million from Q1 2022’s $230.5 million. Calculated billings, or revenue plus deferred revenue acquired over the quarter, rose 37% year-over-year to $340.1 million, according to MarketWatch.
Heading into the Q1 2023 report, analysts surveyed by FactSet pegged earnings to hit 26 cents a share. For the top line, they forecasted revenue of $340.7 million and billings of $333.1 million.
Despite the outperformance against expectations, the market soured on ZS stock due to the underlying company’s expectations for Q2. Per MarketWatch, “Zscaler said it expects adjusted earnings of 29 cents to 30 cents a share on revenue of $364 million to $366 million for the fiscal second quarter. Analysts surveyed by FactSet estimate 26 cents a share on revenue of $325.1 million and billings of $355.3 million for the quarter.”
One noteworthy development was that the company’s billing duration pinged above average (14 months versus the usual 10 months). “While good for our business, larger deals take longer to close as customers introduce more checks and reviews,” said Remo Canessa, Zscaler’s chief financial officer. “In this environment, we think it’s prudent to expect a higher level of review and scrutiny by our customers to continue.”
ZS Stock Faces Longer-Term Relevancy Issues
Another challenge that analysts raised regarding ZS stock centered on the underlying firm’s salesforce reorganization, noting it as an operating expense headwind worth questioning, according to MarketWatch. However, Zscaler chairman and CEO Jay Chaudhry downplayed these concerns, pointing to the aforementioned pivot toward bigger deals.
“They’re not massive changes, but they are more than normal that we typically have done,” Chaudhry said. “But none of these deals are going away. We are well positioned. We’re winning some already. We’re working on more.”
Still, a nagging factor for ZS stock may target how the underlying business skyrocketed to relevance during the coronavirus pandemic. As its press release noted, Zscaler enjoys superior federal certifications “to meet civilian agencies’ high security requirements, the Department of Defense (DoD), and other related intelligence organizations.”
In part, Zscaler’s solutions focus on virtual private network (VPN)-related security threats. Nevertheless, its press release notes that “Despite high awareness of VPN risks, remote working forced many companies to rely more heavily on legacy access methods during the pandemic. As a result, cybercriminals continue to take advantage of security vulnerabilities and increased attacks on enterprises using VPNs.”
However, this extraordinary relevancy may come under fire if full or near-full normalization in the workplace materializes. According to a report by Resume Builder, 90% of companies will require employees to return to the office at least part of the week in 2023.
Not only that, if VPN-related attacks continue to threaten enterprise integrity, the easiest solution presumably may be to recall employees. In that circumstance, Zscaler’s total addressable market may diminish, presenting more questions about ZS stock.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.