Shares of Zscaler Inc. (NASDAQ: ZS), a notable player in the cybersecurity sector, have experienced a significant downturn in recent months, dropping over 10% in 2024. This decline has raised concerns among investors regarding the company's growth trajectory, leaving Zscaler poised to enter 2025 under challenging circumstances. A sharp decline of nearly 5% was observed on Tuesday following the release of the company's fiscal first-quarter results for 2025.

The results, which were disclosed after the market closed on Monday, initially prompted negative reactions. However, a closer examination of the data reveals that Zscaler may have posted stronger performance than the market response suggested. According to the earnings report, Zscaler achieved a revenue figure of $628 million for its fiscal Q1, representing a 26% increase year-over-year. Furthermore, the company's non-GAAP net income surged by 40%, landing at $0.77 per share, exceeding analysts’ forecasts that had anticipated earnings of $0.63 per share and revenues of $606 million.

This positive financial performance can largely be attributed to an uptick in customer spending, particularly from larger clients. Notably, the number of customers with annual recurring revenue (ARR) exceeding $100,000 rose by 17% over the previous year, bringing the total to 3,165. Additionally, Zscaler witnessed a 25% increase in customers exceeding $1 million in ARR, expanding the count to 585.

The company also reported a substantial 30% year-over-year increase in bookings, reflecting the value of contracts signed by customers during the quarter, which outpaced the growth of their top-line revenue. Management indicated that a key driver for this growth has been Zscaler’s expansion into artificial intelligence-focused cybersecurity services, which has led to higher spending from established customers. The firm’s dollar-based net retention rate was reported at 114%, suggesting that existing customers are not only remaining loyal but are also increasing their expenditure on Zscaler’s offerings.

Another noteworthy aspect of Zscaler's performance is the accelerated growth of its emerging products, which boasts an ARR increase more than double that of its core offerings. This trend aligns with the company’s strategic emphasis on securing public and private artificial intelligence applications, as well as the recent introduction of AI-powered solutions. During an earnings conference call, management highlighted that products like the AI-powered virtual assistant, ZDX Copilot, have contributed to increased deal sizes due to an uptick in customer adoption.

While the recent stock performance has led to negative sentiment among investors, analysts suggest that the fundamentals of Zscaler's financials and customer engagement may present a more optimistic outlook, potentially indicating a buying opportunity for those looking to invest in the cybersecurity market.

Source: Noah Wire Services