Factors Likely to Decide Zscaler's (ZS) Fate in Q3 Earnings

Zscaler ZS is slated to report third-quarter fiscal 2022 results on May 26.

For the third quarter, Zscaler projects total revenues between $270 million and $272 million, reflecting year-over-year growth of 53-54%. The Zacks Consensus Estimate for the same is pegged at $271.8 million, suggesting growth of 54.1% from the year-ago quarter.

Zscaler anticipates non-GAAP earnings to be 10-11 cents per share. The Zacks Consensus Estimate for the same stands at 11 cents per share, indicating a year-over-year decline of 26.7%.

The company’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 51.2%.

Zscaler, Inc. Price and EPS Surprise

Zscaler, Inc. price-eps-surprise | Zscaler, Inc. Quote

Factors to Note

Zscaler’s third-quarter results are likely to reflect continued solid demand for its security and networking products, given the healthy environment of the global security market.

With work from anywhere being the new normal since the start of the pandemic, an increasing number of people are logging into employers' networks through off-premises locations, triggering the need for greater security. This might have spurred demand for Zscaler’s products in the quarter under review.

Per the latest Market Reports World report, the market size for SD-WAN solutions is likely to reach $5.22 billion by 2028 from $995.2 million in 2021, witnessing a CAGR of 26.2% during the forecast period 2022-2028. Increased adoption of Software-Defined Wide Area Network (“SD-WAN”) solutions may have acted as a key growth driver in the quarter to be reported.

Solid adoption of Zscaler’s in-cloud security platform, Zero Trust Exchange, owing to the ongoing digital transformation across enterprises, is likely to have acted as a key catalyst. Also, its existing core products, especially the ZIA (“Zscaler Internet Access”) and the ZPA (“Zscaler Private Access”), are likely to have driven strong customer retention.

However, since the company has been focusing more on time to market and growth, its emerging products like Zscaler Digital Experience (“ZDX”) and Cloud Security Posture Management (“CSPM”) for Software-as-a-service (“SaaS”) applications may have witnessed lower gross margins in the quarter to be reported.

Increased investments to enhance sales and marketing (S&M) capabilities and higher research and development (R&D) expenses may have weighed on the company’s to-be-reported quarter’s bottom line. The company witnessed a year-over-year increase of 66.3% in non-GAAP S&M and 62.9% in non-GAAP R&D expenses in the first quarter. Non-GAAP operating expenses climbed 62.3% year over year in the quarter due to increased hiring and higher compensation expenses.

What Our Model Says

Our proven model does not conclusively predict an earnings beat for Zscaler this season. The combination of a positive Earnings ESP and Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. But that’s not the case here.

Zscaler currently has a Zacks Rank #4 (Sell) and an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks With the Favorable Combination

Per our model, Golar LNG Limited GLNG, Commercial Metals CMC and BRP DOOO have the right combination of elements to post an earnings beat in their upcoming releases.

Golar LNG is slated to report first-quarter 2022 results on May 26. The stock has a Zacks Rank #1 and an Earnings ESP of +22.37%. Its earnings beat the Zacks Consensus Estimate in three of the preceding four quarters and missed once, the average surprise being 49.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for GLNG’s quarterly earnings is pegged at 25 cents per share, suggesting a year-over-year improvement of 400%. Its quarterly revenues are estimated to decrease 22% year over year to $92.3 million.

Commercial Metals has a Zacks Rank #1 and an Earnings ESP of +38.66%. The company is scheduled to report third-quarter fiscal 2022 results on Jun 16. Its earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters and missed once, the average surprise being 16%.

The Zacks Consensus Estimate for CMC’s third-quarter bottom line is pegged at $1.54 per share, suggesting year-over-year growth of 48.1%. The consensus mark for revenues stands at $2.19 billion, indicating a rise of 18.9% from the year-ago quarter.

BRP has a Zacks Rank #2 and an Earnings ESP of +15.25%. The company is scheduled to report first-quarter fiscal 2023 results on Jun 3. It has surpassed the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average surprise being 67.8%.

The Zacks Consensus Estimate for DOOO’s first-quarter earnings is pegged at 84 cents per share, suggesting year-over-year decline of 58%. The consensus mark for revenues stands at $1.45 billion, indicating an increase of 1.72% year over year.

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