Congratulations to Zscaler as it crosses $1 Billion in annual revenue and joins the software Revenue Unicorns!
Let's see what we can learn from Zscaler's journey...
Revenue Growth
Zscaler displayed robust revenue growth in each revenue range, with growth surpassing 50% for four of the five revenue ranges. Notably, Zscaler was the first Revenue Unicorn to successfully accelerate revenue growth for three chapters in a row as growth accelerated to 54%, 60%, and 62%.We believe this “acceleration at scale” defies the conventional wisdom of “diminishing returns at scale” and is exceptionally difficult to accomplish. Congratulations to the Zscaler team.
Gross Margin
Zscaler maintained 80%+ gross margins throughout its journey, a sign of consistency in its operating model and higher than the Revenue Unicorn median across all revenue ranges. Atlassian and Splunk are the only other Revenue Unicorns to maintain 80%+ gross margins across the journey from $100 Million to $1 Billion+ in revenue.
Sales & Marketing
Zscaler had a higher sales and marketing investment level across all revenue ranges as compared to the median Revenue Unicorn. Other Revenue Unicorns with consistently elevated sales and marketing investment include DocuSign, HubSpot, MongoDB, Nutanix, Okta, Snowflake, and Splunk.
Research & Development
Zscaler invested less into research and development than the median Revenue Unicorn as a percentage of revenue throughout its journey. Other Revenue Unicorns with comparatively lower research and development investment include Docusign, HubSpot, Palo Alto Networks, ServiceNow, Splunk, Veeva, and Zoom. Of note, Zscaler spent 3x more on sales and marketing compared to research and development, one full multiple turn above the Revenue Unicorn median of 2x.
General & Administrative
Zscaler’s general and administrative expense was also lower than the median Revenue Unicorn across all revenue ranges. Datadog, Nutanix, Palo Alto Networks, ServiceNow, Veeva, Wix, and Workday exhibited a similar path.
Stock Based Compensation
Zscaler had a higher SBC expense as a percentage of revenue compared to the Revenue Unicorn median once the business passed $250 Million in revenue. Zscaler’s SBC expense was nearly 2x higher than that of the Revenue Unicorn median, and stabilized as a percentage of revenue after $500 Million in revenue. When we look at SBC as a percentage of enterprise value, Zscaler comes in at 1.2%, which is in-line with the median of 1.4% for all Revenue Unicorns in the $1 Billion+ revenue range.
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Free Cash Flow
Zscaler generated free cash flow beyond $250 Million in revenue, and the Company’s FCF margin was above the Revenue Unicorn median across all revenue ranges from $250 Million onwards. We believe Zscaler’s superior growth and investment efficiency as compared to the median Revenue Unicorn supported the Company’s strong free cash flow profile.
Time to Reach $1 Billion in Revenue
Zscaler reached $1 Billion in revenue after 14.5 years. This is longer than the median time of 11.25 years it took other Revenue Unicorns to reach the $1 Billion mark. Other Revenue Unicorns that took a similar amount of time to achieve the $1 Billion revenue threshold include Wix (14.25 years), Splunk (13.5 years), and Zendesk (13 years).
Other Revenue Unicorns founded around the same time as Zscaler (2007 founding) include Wix (2006), Veeva (2007), and Twilio (2008). This set of companies took a median of 11.75 years to achieve $1 Billion in revenue (Wix at 14.25 years, Veeva at 11.75 years, and Twilio at 10.75 years).
The Journey to $1 Billion in Revenue
For those of you that love data as much as we do, below is the full data set used for this analysis.
Again, congratulations to the Zscaler team! Stay tuned for the next Revenue Unicorn update.
Note: The complete list of Revenue Unicorns used in the comparison can be found in the presentation here.
About Zscaler
As per the Company’s materials, Zscaler is a cybersecurity company that anticipates, secures, and simplifies the experience of doing business. The Company was founded in 2007 by Jay Chaudhry and Kailash Kailash . Zscaler was founded during the early stages of cloud adoption and mobility, based on a vision that the internet would become the new corporate network as the cloud became the new data center. Zscaler predicted that with rapid cloud adoption and increasing workforce mobility, traditional perimeter security approaches would provide inadequate protection for users and data and an increasingly poor user experience. Zscaler pioneered a cloud platform, the Zscaler Zero Trust Exchange, that represents a fundamental shift in the architectural design and approach to networking and security.
The Company reported $318 Million in fourth quarter revenue for the period ended July 31, 2022. Combined with results from the preceding quarters, this recent performance boosts Zscaler across the $1 Billion in annual revenue threshold as measured on a last twelve month basis to become the latest software Revenue Unicorn.
About the Revenue Unicorn Playbook
The Revenue Unicorn Playbook is an analytical guide that explores the growth of public software companies from $100 Million to $1 Billion in revenue. The goal of the Playbook is to offer founders and company leaders a framework to examine their growth and investments as they scale.
You can find the original revenue unicorn article here and presentation here.
The information provided herein is the opinion of Friends & Family Capital and does not reflect the view of any other person or entity. It is for informational purposes and should not be construed as an investment recommendation. Data sources include CapIQ and Wall Street research. Copyright © 2022, S&P Global Market Intelligence (and its affiliates, as applicable). Friends & Family Capital is an investment adviser registered with the U.S. Securities and Exchange Commission.
