1. Zscaler (ZS) – Earnings Review
Zscaler 101:
Zscaler is a large player in network security. It competes with Palo Alto’s next-gen suite, Cloudflare and many others. ZScaler’s Zero Trust Exchange (ZTE) is its latest and greatest cloud security platform. It blazes a trail between users, apps and devices across eligible networks. It also secures data at rest and in motion.
Zero Trust is exactly what it sounds like: never trusting a device or end user. The exchange vets and verifies all traffic as it moves within a company’s perimeter. It does not allow bad actors to breach the most vulnerable piece of infrastructure and freely move about it thereafter without any subsequent verification. ZScaler uses risk scores to assess needed levels of verification for requests. That makes sure it’s only creating user friction when there’s actual security concern.
This Zero Trust exchange is delivering benefits like a 70% infrastructure cost reduction for Siemens. It does so by shrinking the attack surface down to grant permission one app, one user and one piece of traffic at a time. Permissions are based on client policy. This approach replaces an antiquated network security philosophy in which every device & user within a perimeter gets perpetual and unconditional access. So?
Zero Trust is safer, cheaper AND allows remote employees to responsibly work from anywhere. Zero Trust is rapidly replacing firewalls and virtual private networks (VPNs) for these reasons.
I know readers are most familiar with endpoint security and CrowdStrike based on what I’ve most closely covered. While Zscaler and CrowdStrike do compete in some areas (sort of), they partner more frequently and even offer joint products.
Zscaler Product Definitions:
Zscaler Internet Access (ZIA) protects internet connections. It’s the middleman between a user and a network that ensures proper authorization & access.
Zscaler Private Access (ZPA) offers remote access to internal apps. This is an upgraded VPN by “connecting directly to the required resources without public exposure” per Zscaler filings.
Zscaler Digital Experience (ZDX) ensures the high quality and always-on performance of cloud apps. It sifts through networks to identify sources holding back performance to be remediated.
Risk360 flags vulnerabilities and offers end-to-end risk quantification with intuitive next steps for remediation.
Breach Predictor is a newer Zscaler product. It uses GenAI models to “anticipate potential breach scenarios.” It eliminates those scenarios before they even surface.
More Sector Definitions:
Secure Access Service Edge (SASE) provides access to software for users regardless of where they’re working.
Virtual Private Cloud (VPC): These are subsections of public cloud environments. They offer users more autonomy with their network and apps. They also allow for secure connections between cloud and self-hosted (on-premise) environments with no public network exposure. This is especially key for highly regulated industries.
Virtual Desktop Infrastructure (VDI): Allows software to be accessed on remote devices. Zscaler’s Zero Trust Exchange ensures this is done safely and securely.
Firewall is a legacy form of network security that uses a fixed set of rules to authorize outbound and inbound traffic.
The aforementioned Zero Trust Exchange is the overarching platform layer tying all of this utility together to drive network security vendor consolidation, cost savings & enhanced efficacy.
a. Demand
Beat revenue estimates by 3.6% and beat its revenue guidance by 3.8%. Its lofty 49.5% 3-year revenue compounded annual growth rate (CAGR) compares to 51.6% Q/Q & 53.5% 2 quarters ago.
Beat billings estimates by 2.7%. Some buy-side estimates called for 30% Y/Y billings growth (well ahead of sell-side consensus). It fell short of this expectation as it delivered 27.1% Y/Y growth.
Dollar based net revenue retention (DBNRR) was 117% vs. 120% Q/Q, 121% 2 quarters ago, and over 125% in the quarters before that.
b. Profitability
Beat EBIT guidance by 41.8% & beat estimates by 42.5%.
Beat $0.58 EPS estimates & beat beat guide by $0.18 each. It earned $0.76 per share vs. $0.37 Y/Y.
Beat free cash flow (FCF) estimates by 25%. FCF rose by 60.5% Y/Y.
c. Balance Sheet
$2.4 billion in cash & equivalents.
$1.1 billion in senior notes.
Diluted shares rose 2.8% Y/Y.
d. Guidance & Valuation
Raised revenue guidance by 1.2%, which beat estimates by 0.7%.
Raised billings guidance by 0.8%.
Raised EBIT guidance by 9.7%, which beat estimates by 9.2%.
Raised its earnings per share (EPS) guidance from $2.23 to $2.75, which beat estimates by $0.27.
Reiterated a low 20% FCF margin for the fiscal year.
Zscaler’s guide balances a “still challenging macro environment and sales leadership change uncertainty” with broad “business optimism.” This is code for “we set guidance at a level that we think we can easily surpass.”
Some pointed to its guidance of -7% Q/Q billings growth as a red flag for the quarter. It isn’t. Billings always seasonally fall between its fiscal Q2 and Q3. And furthermore, the annual guide was raised.
Zscaler trades for 80x fiscal year 2024 earnings guidance. Earnings are expected to grow by 53.6% Y/Y based on its updated guidance.
e. Call & Release Highlights
The Zero Trust Exchange Platform & Winning:
Evidence of Zscaler effectively delivering a cohesive, overarching network security platform was on full display this quarter. $1 million+ annual recurring revenue (ARR) customers rose 31% Y/Y while $100,000+ ARR customers rose 21% Y/Y. Its ability to consolidate point solutions in on-premise, private cloud and public cloud network security with overarching (user, infrastructure, traffic and app) security is resonating. This makes a lot of sense considering its point solution displacements routinely deliver a 3x return on investment for clients.
Zscaler set a new record for customers added in a single quarter with 50% of year-to-date bookings coming from brand new clients. It’s not just expanding with existing customers, it’s landing a lot of new logos too. These wins included:
New 8 figure contract for its overarching Zero Trust Exchange Platform with a large tech firm. This firm wanted to eliminate its legacy firewall infrastructure and turned to Zscaler to do so with a 2x return on investment.
Two other 7 figure contracts for ZIA, ZPA, ZDX and its data protection product with two customers looking to reduce cost and complexity. Cost and complexity reduction was a common theme across all of its large deals, as was the desire to replace legacy firewalls and VPNs.
A large cabinet-level agency upsell will double that client’s annual spend. Zscaler still is only used by 15% of its users and devices. Plenty of up-selling left.
With FedRAMP certification for ZIA and ZPA secured, it’s turning focus to jump-starting efforts for certification abroad. “This will take time.”
It’s not just ZIA, ZPA and ZDX enjoying scaled growth, but newer products too. Zero Trust for Workloads was included in two large contracts this quarter, which led to 2x spend levels in one of the deals. This, as the name indicates, is Zscaler’s Zero Trust program for specific workloads in the cloud. Business Insights was included in a Global 2000 contract. This product gives firms a global view of software and app usage to cut redundant costs. It’s a big piece of its AI cloud tools, along with Risk360 and breach predictor (coming soon).
Go-to-Market Updates:
Zscaler updated its go to market in a few subtle ways. It’s introducing new account designs that are more granularly aligned with customer objectives; it’s also partnering with customers to develop product migration roadmaps with them. Interestingly, it’s adding a lot of industry-specific talent (“Vertical Domain Expertise”) to better-cater to areas like healthcare and the public sector. This program is working well and it’s now expanding to other verticals. Finally, it’s more intentionally and aggressively pursuing system integrator (SI) partnerships to add that compelling channel to its list of demand sources. As a reminder, Mike Rich was brought in as the Chief Revenue Officer last quarter to lead this re-vamped go to market.
Secular Tailwinds, Palo Alto Networks & Macro:
Demand for Zero Trust was called “robust” by CEO Jay Chaudhry, with budgets for this product type set to rise Y/Y. It threw a bit of shade at other competition like Palo Alto and Fortinet as Chaudhry told us “spinning up firewalls and VPNs in the cloud” and calling it Zero Trust-based SASE doesn’t solve anything. Speaking of Palo Alto and Fortinet, this strong quarter, paired with Cloudflare’s strong results, Okta’s great print and Palo Alto’s strong next-gen performance is encouraging for another reason. It gives me all of the evidence needed to be confident in competitive pressure and weak demand cited by Palo Alto coming from its legacy firewall business. The weakness is not coming from Zero Trust, next-gen endpoint or next-gen identity demand.
“We're operating in a strong demand environment for Zero Trust architecture.” — CEO Jay Chaudhry
Profitability:
Gross margin expansion was due to extending the useful life of some of its cloud infrastructure. This diminished input costs and raised unit economics. This is not shady in any way. Meta, Google, Cloudflare, Amazon and many others have done the same thing. This is Zscaler not wanting to invest in more general compute infrastructure while the accelerated compute movement enters full swing. It wants to extract as much value out of its current general compute as possible rather than spending more here.
f. Take
I see what the stock is doing after-hours. That does absolutely nothing to change the fact that this was a great quarter. The company is navigating the backdrop far more effectively than Palo Alto, and the boosts to annual guidance are the effect. More rapid compounding paired with more growth opportunities, secular tailwinds, superior products, expanding margins and a pristine balance sheet is always a good recipe. That’s exactly what Zscaler brings to the table. This is a very expensive name and the quarter offered us more signs that it deserves to be. Well done.
2. Celsius (CELH) – Earnings Review
a. Demand
Celsius beat revenue estimates by 4.8%. Its 113% 3-year revenue CAGR compares to 119% Q/Q & 121% 2 quarters ago.
b. Profitability
Beat EBITDA estimates by 12%.
Met GAAP EPS estimates.
Beat 47.6% GAAP GPM estimates by 20 bps.
Note that Q4-22 GAAP EBIT & net income margins exclude $37.6M distributor termination fee.
c. Balance Sheet
$756 million in cash & equivalents.
No debt.
Stock comp is 1% of revenue.
d. Guidance & Valuation
Celsius sees stable Y/Y gross margin for 2024. That’s all the forward looking guidance that it offered. Analysts wanted 90 bps of Y/Y gross margin expansion, which means this is a miss.
Celsius trades for 76x 2024 GAAP EPS and about 47x 2024 EBITDA. GAAP EPS is expected to grow by 33.4% Y/Y and EBITDA is expected to grow by 35.3% Y/Y.
e. Call & Release Highlights
Party in the USA:
Celsius as a U.S. brand resembles a freight train. Don’t stand in the tracks when that train is coming. It was the #1 dollar and unit grower in the U.S. multi-outlet + convenience (MULO+C) category. Its growth outpaced the category by over 10x. It’s the best-selling energy drink on Amazon with 19.7% market share vs. 19.6% for Monster and 12.3% for Red Bull. It actually had 21.4% Amazon share as of last quarter, but there’s volatility to quarterly trends; the large Y/Y gain is what to focus on here, and annually, the 19.7% share compares to 16.9% Y/Y.
Overall, it’s now the 3rd largest MULO+C energy drink brand in the U.S. with 10.5% share vs. 4.9% Y/Y. In 12 key U.S. markets, its share position is closer to 15% and actually leads Red Bull in a few of them.
All Commodity Volume (ACV) now reaches 97.8% of total tracked distribution points vs. 90.6% Y/Y. With distribution across MULO+C now complete, Celsius is focused on raising volume per location and growing non-tracked channel revenue in the U.S. These non-tracked channels include food service, vending machines, universities etc.
In convenience stores, distribution coverage rose from 89.4% to 96.9% Y/Y. Celsius was also just named 7-Eleven’s prestigious 2023 supplier of the year for non-alcoholic drinks. Finally, for the club channel, revenue rose 64% Y/Y to $77 million.
International:
Two months into its official Canadian entrance, Celsius is “very pleased with sales, consumer enthusiasm and acceptance, which are all exceeding expectations.” It also signed a new distribution agreement with Suntory Beverage in Great Britain and Ireland. It expects revenue generation there to begin this spring.
Innovation:
Celsius’s brand update to its line of non-carbonated drinks is off to a great start.
Its line of sports drinks (Celsius Essentials) launched 2 new flavors to reach 6 in total. ACV distribution coverage for this newer line of beverages crossed 49% as of February 18th vs. 40% just 6 weeks earlier. This launch is going very well and is already materially incremental to its overall results.
Its Celsius on-the-go-powder now has a leading market share in that category as well. Share reached 23.1% vs. 17.5% Y/Y as it gears up to launch several other flavors.
Its newer Astro, Galaxy and Cosmic Vibe flavors are now available in Circle K.
2024 Spring Re-Sets:
Multi-outlet inventory plan re-sets take place from January to May. Last year, when this was happening, Celsius owned 4.5% of the total market. With share more than doubling Y/Y, it’s “very pleased” with the incremental space that it’s gaining this year among large retailers. That will “be reflected in results across the first half of 2024.” Part of this improved placement is its 300% Y/Y growth in display coolers across the USA to reach 10,000 total. Growth will stay rapid in 2024.
Marketing:
Regardless of what we think of its claim to being a healthier energy drink (ingredients label is quite the adventure), Celsius continues to lean into this reputation. And it’s clearly working. It’s a new Major League Soccer sponsor and also the team sponsor for Formula One’s Ferrari team. It plans to continue ramping sales & marketing investments to build its brand.
“These strategic investments placed our premium brand in the forefront of consumers who share our passion to live fit.” — CEO John Fieldly
Costs:
Sales & marketing dollars fell 11% Y/Y due to the absence of distributor termination charges.
General & Administrative (G&A) was 8% of sales vs. 12% Y/Y due to sales leverage mainly.
Inventory turn rate with Pepsi is stable Q/Q. This is the firm’s 5th quarter operating within Pepsi’s distribution network. It expects all of the margin progress enjoyed from the move to be permanent.
Gross profit margin was helped by raw material sourcing efficiencies, less waste, better marketing efficiency and rapid revenue growth. These same factors helped all other margins too.
f. Take
This was a fantastic quarter. Some analysts were looking for a larger beat due to stronger alt-sales data for the quarter. Regardless, this was a remarkably positive quarter amid a sea of consistently strong Celsius execution. Anyone saying otherwise is getting too picky. Congrats to shareholders on your well deserved victory lap.
3. Progyny (PGNY) — Earnings Review
a. Demand
Progyny missed revenue estimates by 1.5% & missed its guidance by 0.9%. Seasonality was slightly less favorable than expected, which is why Progyny revenue was slightly underwhelming. Its 39.1% 3-year revenue CAGR compares to 41.6% Q/Q & 62.9% 2 quarters ago.
“We are confident in sustaining our growth trajectory.” – CEO Peter Anevski
b. Profitability
Met EBITDA estimates & met EBITDA guidance.
Beat $0.11 GAAP EPS estimates & beat $0.11 guidance by $0.02 each. It earned $0.13 per share vs. $0.03 Y/Y. This is despite paying out $2.8 million in taxes vs. just $730,000 Y/Y.
Please note that my Q4 2020 GAAP net income margin calculation excludes a large tax benefit.
For the full year, GPM expanded from 21.3% in 2022 to 21.9% in 2023. This was due to realizing “ongoing efficiencies” in the delivery of care. The expansion is despite intentional cost control efforts to maintain superior client affordability amid rampant inflation. Sales & marketing expenses as a percent of revenue were flat at 5.5% in 2023 as it invested in new go-to-market partnerships. G&A was 10.8% of 2023 sales vs. 12.5% Y/Y due to back office efficiencies. This led to a 17.2% 2023 EBITDA margin vs. 16.0% Y/Y. It generated $189 million in operating cash flow vs. $80 million Y/Y. This was helped by better income statement profitability, collection timing and the positive impact of new Rx receipt contracts as it gains bargaining leverage through scale.
c. Balance Sheet
$371M in cash & equivalents.
No debt.
Diluted shares +0.7% Y/Y.
Bad debt expense rose 44% Y/Y compared to 38% Y/Y revenue growth and 49% Y/Y EBITDA growth. This is quite reasonable considering the deteriorating macro backdrop during the period.
Accounts receivable was flat Y/Y in 2023.
Progyny announced its very first buyback. That’s the luxury of having a cash printing business with a growing liquidity pile and no debt. This investment is NOT coming at the expense of product innovation, as it’s gearing up to launch multiple new offerings in 2024. It can walk and chew gum at the same time here thanks to its pristine balance sheet.
d. Guidance & Valuation
Annual revenue guidance missed by 1.5%, EBITDA guidance met expectations and $0.68 GAAP EPS guidance missed estimates by $0.03. Finally, its operating cash flow guidance (assuming mid-70% EBITDA conversion means 75%) came in at $216 million vs. about $188 million expected. A lot of additional context is needed here.
For the first half of Q1, Progyny experienced a treatment mix-shift anomaly. Utilization rates are stable quarter-to-date, but a shift in type of IVF treatment led to a $15 million revenue headwind and about a $3 million EBITDA headwind for this period. This has happened a few times before in Progyny’s history, with the issue being very temporary and quickly normalizing. That normalization has already played out as we head into March with a mix-shift back to historical trends. Biology didn’t suddenly change… IVF needs didn’t suddenly change. Progyny expects this reversion to last through the year like it has previously. Treatment mix has been stable throughout Progyny’s history with a few short-lived anomalies. That’s what this is. This blip on the radar led to the revenue shortfall, with revenue in line with expectations excluding this headwind. EBITDA would have been slightly ahead of expectations. Furthermore, the EPS miss is based on Progyny excluding any expected tax benefits from the guidance. It also doesn’t include potential boosts from its share repurchase program.
Other notes on 2024 expectations:
It reiterated 460+ clients and 6.7 million lives for 2024. This includes 200,000 members that are expected to go live in Q2 and Q3.
It began disclosing non-GAAP EPS this quarter. Previously, it only disclosed GAAP, while most firms report both. This made Progyny look unfairly more expensive than it actually is. That issue is now resolved and will make apples-to-apples valuation comps easier. It expects to generate $1.56 in non-GAAP earnings per share in 2024.
2024 guidance assumes flat Y/Y utilization vs. 6% Y/Y utilization growth in 2023.
Guidance assumes no material boost to growth from existing client headcount expansion.
Guidance assumes a 19.4% incremental EBITDA margin for 2024.
Guidance assumes 11.6% Y/Y growth in Q1 and then 22% Y/Y growth for the following 3 quarters combined.
e. Call & Release Highlights
2023:
The 2023 selling season was again successful for Progyny. As previously discussed, it set new records for clients and members added. It also added new channel partnerships, like with Blue Cross Blue Shield, to enhance go to market effectiveness.
2023 overall was another year in which Progyny delivered near 100% gross client retention and its 8th straight year of leading all clinical outcome data. It maintained a net promoter score in the 80s, which is unheard of within healthcare.
Alabama:
The Alabama news I covered earlier this month was addressed on the call. Just like the Dobbs decision 2 years ago, there’s strong bipartisan support in Alabama to protect the continued availability of IVF treatments. The state’s Attorney General also said it has no intention to prosecute families seeking treatment. That treatment support has been a consistent theme among the 12 states with abortion laws in question. Progyny is confident in its ability to ensure IVF access for all members “regardless of where they live.” It looks like the tiny potential revenue hit will be no revenue hit at all.
2024 Selling Season so Far:
It’s very early in Progyny’s 2024 selling season. Early activity thus far is “very positive” with healthy active pipeline growth. It has also enjoyed a few large wins in apparel, healthcare and media.
More Services:
Progyny is “exceptionally well-positioned” to expand into relevant product adjacencies. For the 2024 selling season, it will begin offering new preconception, maternity, postpartum and menopause services to clients. It also now has over 1,000 reproductive urologists in its network for male infertility.
A few years ago, Progyny was a two product company. It’s now looking to morph into more of an end-to-end reproductive health platform and has been investing in its product organization to “enable the quick addition of new features.” These heavy investments are why the pace of EBITDA margin expansion in 2024 is set to modestly slow. Still, investing heavily in future growth while maintaining leverage works for me. All of these new offerings will begin to boost revenue starting in 2025 as they were not part of the 2023 selling season product kit.
Progyny’s second product (ProgynyRx) will have a 93% client attach rate in 2024 vs. 85% in 2022. This shows how effectively the firm can up-sell new solutions beyond treatment cycles.
f. Take
I can’t say that I’m thrilled with this quarter, but I’m not overly concerned about it either. The treatment mix anomaly should be just that… an anomaly. We have several years of data, previous instances and a normalization that has already occurred to point to for confidence. The company continues to be a steady compounder, a margin expander, a market share taker and a clear clinical outcome leader. While this was not a perfect report, it does nothing to change my bullish long term view. I increased my stake on Wednesday. Thesis entirely intact.
I have owned and followed Zscalar for a while. Do you understand what is the downside of using Zscalar’s aggressive Zero trust architecture? From what you wrote it’s cheaper and more aggresssive in trust. So is the downside speed/user experience?
PGNY is on a fire sale. This dip was a massive overreaction. The company is stronger than ever with an innovative product lightyears ahead of any “competition” if you even want to call them that. They’re administering fertility benefits the right way and you can see that with tons of customer testimonials all over Reddit and Facebook IVF groups. People suffering from infertility are jumping ship to companies offering Progyny and it’s not a surprise. The immaculate balance sheet is a plus. Endless ceiling here I’m in for the long run. I expect it to slide back to $40 by end of month.