Zscaler Reports Third Quarter Fiscal 2022 Financial


Third Quarter Highlights

  • Revenue grows 63% year-over-year to $286.8 million
  • Calculated billings grows 54% year-over-year to $345.6 million
  • Deferred revenue grows 65% year-over-year to $818.7 million
  • GAAP net loss of $101.4 million compared to GAAP net loss of $58.5 million on a year-over-year basis
  • Non-GAAP net income of $24.7 million compared to non-GAAP net income of $21.4 million on a year-over-year basis

SAN JOSE, Calif., May 26, 2022 (GLOBE NEWSWIRE) — Zscaler, Inc. (Nasdaq: ZS), the leader in cloud security, today announced financial results for its third quarter of fiscal year 2022, ended April 30, 2022.

“Enterprises continue to consolidate point products in favor of our integrated Zero Trust security platform, resulting in larger, multi-year commitments to Zscaler. We delivered 63% revenue growth and 54% billings growth, while also generating a strong free cash flow margin of 15% for the third quarter. As a result of increasing demand, we are also raising our fiscal year guidance on all financial metrics,” said Jay Chaudhry, Chairman and CEO of Zscaler. “Demanding enterprises look to Zscaler as their strategic partner of choice in their Zero Trust journey, as the world races towards network and security transformation.”

Third Quarter Fiscal 2022 Financial Highlights

  • Revenue: $286.8 million, an increase of 63% year-over-year.
  • Income (loss) from operations: GAAP loss from operations was $86.6 million, or 30% of total revenue, compared to $43.9 million, or 25% of total revenue, in the third quarter of fiscal 2021. Non-GAAP income from operations was $27.2 million, or 9% of total revenue, compared to $22.9 million, or 13% of total revenue, in the third quarter of fiscal 2021.
  • Net income (loss): GAAP net loss was $101.4 million, compared to $58.5 million in the third quarter of fiscal 2021. Non-GAAP net income was $24.7 million, compared to $21.4 million in the third quarter of fiscal 2021.
  • Net income (loss) per share: GAAP net loss per share was $0.72, compared to $0.43 in the third quarter of fiscal 2021. Non-GAAP net income per share was $0.17, compared to $0.15 in the third quarter of fiscal 2021.
  • Cash flow: Cash provided by operations was $77.2 million, or 27% of revenue, compared to $73.4 million, or 42% of revenue, in the third quarter of fiscal 2021. Free cash flow was $43.7 million, or 15% of revenue, compared to $55.8 million, or 32% of revenue, in the third quarter of fiscal 2021.
  • Deferred revenue: $818.7 million as of April 30, 2022, an increase of 65% year-over-year.
  • Cash, cash equivalents and short-term investments: $1,657.9 million as of April 30, 2022, an increase of $155.3 million from July 31, 2021.

Recent Business Highlights

  • Launched industry-first Security Service Edge (SSE) innovations to protect enterprises from the most sophisticated cyberattacks. Delivered as part of the Zscaler Zero Trust Exchange, these innovations establish a new standard for ZTNA to minimize the attack surface, while stopping threats with private app protection, integrated deception, and privileged remote access capabilities for business and OT systems.
  • Released annual Zscaler ThreatLabZ research revealing up to a 400% increase in Phishing-as-a-Service as the key source of attacks across critical industries and consumers globally, underscoring the urgency for businesses and users to adopt a Zero Trust security model.
  • Invested in Zscaler’s hypergrowth strategy with the appointment of Brendan Castle, Chief People Officer. Bringing 30 years of experience from organizations like Google and Citibank, Castle will lead the expansion of Zscaler’s global People and Culture organization, including talent acquisition, learning and development, internal business partners, diversity, equity and inclusion, and our workplace experience.
  • As a founding member of the Cloud Security Alliance (CSA), Zscaler, along with alliance partners CrowdStrike and Okta, announced the formation of the Zero Trust Advancement Center to bring together existing research and education projects at CSA that will be disseminated online and through its global network chapters.

Financial Outlook

For the fourth quarter of fiscal 2022, we expect:

  • Total revenue of $304 million to $306 million
  • Non-GAAP income from operations of $33 million to $34 million 
  • Non-GAAP net income per share of approximately $0.20 to $0.21, assuming approximately 146 million to 147 million common shares outstanding

For the full year fiscal 2022, we expect:

  • Total revenue of approximately $1.078 billion
  • Calculated billings of $1.425 billion to $1.430 billion
  • Non-GAAP income from operations of $106 million to $108 million
  • Non-GAAP net income per share of $0.64 to $0.65, assuming approximately 147 million to 148 million common shares outstanding

These statements are forward-looking and actual results may differ materially. Refer to the Forward-Looking Statements safe harbor below for information on the factors that could cause our actual results to differ materially from these forward-looking statements.

Guidance for non-GAAP income from operations excludes stock-based compensation expense and related employer payroll taxes, amortization expense of acquired intangible assets, asset impairment related to facility exit, amortization of debt discount and issuance costs and income tax effects generated by intangible assets acquired in business acquisitions. Guidance for non-GAAP net income per share includes the anti-dilutive impact of the capped call transactions entered into in connection with our convertible senior notes. We have not reconciled our expectations to non-GAAP income from operations and non-GAAP net income per share to their most directly comparable GAAP measures because certain items are out of our control or cannot be reasonably predicted. Accordingly, a reconciliation for the guidance for non-GAAP income from operations and non-GAAP net income per share is not available without unreasonable effort.

Conference Call and Webcast Information

Zscaler will host a conference call for analysts and investors to discuss its third quarter fiscal 2022 earnings results and outlook for its fourth quarter of fiscal 2022 and full year fiscal 2022 today at 1:30 p.m. Pacific time (4:30 p.m. Eastern time).

Date: Thursday, May 26, 2022
Time: 1:30 p.m. PT
Webcast: https://ir.zscaler.com
Dial-in number: 918-922-3018
   

Upcoming Conferences

Fourth quarter of fiscal 2022 virtual investor conference participation schedule:

  • Loop Software Conference
    Wednesday, June 1, 2022
  • Bank of America’s 2022 Global Technology Conference
    Wednesday, June 8, 2022
  • 4th Annual Mizuho Cybersecurity Summit 2022
    Monday, June 13, 2022

Sessions which offer a webcast will be available on the Investor Relations section of the Zscaler website at https://ir.zscaler.com.

Forward-Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties, including, but not limited to, statements regarding our future financial and operating performance, including our financial outlook for the fourth quarter of fiscal 2022 and full year fiscal 2022. There are a significant number of factors that could cause actual results to differ materially from statements made in this press release, including but not limited to: macroeconomic factors such as the duration and global impact of COVID-19 and the Russia-Ukraine crisis on our business, operations and financial results and the economy in general; our limited operating history; our ability to identify and effectively implement the necessary changes to address execution challenges; risks associated with managing our rapid growth, including fluctuations from period to period; our limited experience with new product and subscription and support introductions and the risks associated with new products and subscription and support offerings, including the discovery of software bugs; our ability to attract and retain new customers; the failure to timely develop and achieve market acceptance of new products and subscriptions as well as existing products and subscription and support; rapidly evolving technological developments in the market for network security products and subscription and support offerings and our ability to remain competitive; length of sales cycles; and general market, political, economic and business conditions.

Additional risks and uncertainties that could affect our financial results are included under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth from time to time in our filings and reports with the Security Exchange Commission (SEC), including our Quarterly Report on Form 10-Q for the three months ended January 31, 2022 filed on March 9, 2022, as well as future filings and reports by us, copies of which are available on our website at ir.zscaler.com and on the SEC’s website at www.sec.gov. You should not rely on these forward-looking statements, as actual outcomes and results may differ materially from those contemplated by these forward-looking statements as a result of such risks and uncertainties. Additional information will also be set forth in other filings that we make with the SEC from time to time. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we do not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made.

Use of Non-GAAP Financial Information

We believe that the presentation of non-GAAP financial information provides important supplemental information to management and investors regarding financial and business trends relating to our financial condition and results of operations. For further information regarding why we believe that these non-GAAP measures provide useful information to investors, the specific manner in which management uses these measures, and some of the limitations associated with the use of these measures, please refer to the “Explanation of Non-GAAP Financial Measures” section of this press release.

About Zscaler

Zscaler (Nasdaq: ZS) accelerates digital transformation so customers can be more agile, efficient, resilient, and secure. The Zscaler Zero Trust Exchange protects thousands of customers from cyberattacks and data loss by securely connecting users, devices, and applications in any location. Distributed across more than 150 data centers globally, the SSE-based Zero Trust Exchange is the world’s largest in-line cloud security platform.

Zscaler™ and the other trademarks listed at https://www.zscaler.com/legal/trademarks are either (i) registered trademarks or service marks or (ii) trademarks or service marks of Zscaler, Inc. in the United States and/or other countries. Any other trademarks are the properties of their respective owners.

Investor Relations Contacts

Bill Choi, CFA
SVP, Investor Relations and Strategic Finance
(408) 816-1478
ir@zscaler.com

Natalia Wodecki
Media Relations Contact
press@zscaler.com

ZSCALER, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
               
  Three Months Ended   Nine Months Ended
  April 30,   April 30,
    2022       2021       2022       2021  
Revenue $ 286,807     $ 176,404     $ 772,887     $ 476,026  
Cost of revenue (1) (2)   64,022       38,977       173,974       104,839  
Gross profit   222,785       137,427       598,913       371,187  
Operating expenses:              
Sales and marketing (1) (2)   192,132       115,730       520,991       323,022  
Research and development (1) (2)   76,578       40,952       210,989       118,473  
General and administrative (1) (3)   40,672       24,595       111,833       70,107  
Total operating expenses   309,382       181,277       843,813       511,602  
Loss from operations   (86,597 )     (43,850 )     (244,900 )     (140,415 )
Interest income   949       593       1,979       2,288  
Interest expense (4)   (14,246 )     (13,436 )     (42,121 )     (39,730 )
Other income (expense), net   (2,001 )     71       (3,434 )     857  
Loss before income taxes   (101,895 )     (56,622 )     (288,476 )     (177,000 )
Provision (benefit) for income taxes   (490 )     1,837       4,150       4,006  
Net loss $ (101,405 )   $ (58,459 )   $ (292,626 )   $ (181,006 )
Net loss per share, basic and diluted $ (0.72 )   $ (0.43 )   $ (2.08 )   $ (1.34 )
Weighted-average shares used in computing net loss per share, basic and diluted   141,422       136,385       140,403       134,938  

(1) Includes stock-based compensation expense and related payroll taxes as follows:

Cost of revenue $ 6,511     $ 3,665     $ 17,596     $ 10,239  
Sales and marketing   53,576       34,798       144,706       101,316  
Research and development   31,366       15,033       89,936       47,680  
General and administrative   20,113       11,681       59,467       33,384  
Total $ 111,566     $ 65,177     $ 311,705     $ 192,619  

(2) Includes amortization expense of acquired intangible assets as follows:

Cost of revenue $ 1,980     $ 1,503     $ 6,036     $ 4,510  
Sales and marketing   178       73       526       219  
Research and development   80             133        
Total $ 2,238     $ 1,576     $ 6,695     $ 4,729  
(3) Includes asset impairment related to facility exit as follows: $     $     $     $ 416  
(4) Includes amortization of debt discount and issuance costs as follows: $ 13,887     $ 13,077     $ 41,043     $ 38,649  
                               
ZSCALER, INC.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
  April 30,   July 31,
    2022       2021  
Assets      
Current assets:      
Cash and cash equivalents $ 594,893     $ 275,898  
Short-term investments   1,062,981       1,226,654  
Accounts receivable, net   272,092       257,109  
Deferred contract acquisition costs   75,897       57,373  
Prepaid expenses and other current assets   41,182       31,269  
Total current assets   2,047,045       1,848,303  
Property and equipment, net   141,692       108,576  
Operating lease right-of-use assets   45,185       44,339  
Deferred contract acquisition costs, noncurrent   181,402       149,657  
Acquired intangible assets, net   27,034       32,129  
Goodwill   59,823       58,977  
Other noncurrent assets   22,363       15,650  
Total assets $ 2,524,544     $ 2,257,631  
       
Liabilities and Stockholders’ Equity      
Current liabilities:      
Accounts payable $ 15,234     $ 12,547  
Accrued expenses and other current liabilities   43,160       22,908  
Accrued compensation   102,678       93,622  
Deferred revenue   731,904       571,286  
Operating lease liabilities   19,600       19,842  
Total current liabilities   912,576       720,205  
Convertible senior notes, net   954,578       913,538  
Deferred revenue, noncurrent   86,839       59,315  
Operating lease liabilities, noncurrent   31,028       31,225  
Other noncurrent liabilities   7,946       4,453  
Total liabilities   1,992,967       1,728,736  
Stockholders’ Equity      
Common stock   142       139  
Additional paid-in capital   1,450,139       1,131,006  
Accumulated other comprehensive loss   (24,478 )     (650 )
Accumulated deficit   (894,226 )     (601,600 )
Total stockholders’ equity   531,577       528,895  
Total liabilities and stockholders’ equity $ 2,524,544     $ 2,257,631  
               
ZSCALER, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
  Nine Months Ended
  April 30,
    2022       2021  
Cash Flows From Operating Activities      
Net loss $ (292,626 )   $ (181,006 )
Adjustments to reconcile net loss to cash provided by operating activities:      
Depreciation and amortization expense   29,437       21,401  
Amortization expense of acquired intangible assets   6,695       4,729  
Amortization of deferred contract acquisition costs   48,793       28,577  
Amortization of debt discount and issuance costs   41,043       38,648  
Non-cash operating lease costs   18,988       15,156  
Stock-based compensation expense   294,745       178,538  
Amortization of investment premiums, net of accretion of purchase discounts   5,942       8,600  
Deferred income taxes   (521 )     (1,502 )
Impairment of assets         416  
Other   649       3  
Changes in operating assets and liabilities, net of effects of business acquisitions      
Accounts receivable   (15,449 )     (20,128 )
Deferred contract acquisition costs   (99,062 )     (71,130 )
Prepaid expenses, other current and noncurrent assets   (10,354 )     1,797  
Accounts payable   2,966       6,421  
Accrued expenses, other current and noncurrent liabilities   10,150       3,008  
Accrued compensation   9,056       11,583  
Deferred revenue   188,595       128,414  
Operating lease liabilities   (20,273 )     (16,221 )
Net cash provided by operating activities   218,774       157,304  
Cash Flows From Investing Activities      
Purchases of property, equipment and other assets   (48,046 )     (34,215 )
Capitalized internal-use software   (14,167 )     (7,047 )
Payments for business acquisitions, net of cash acquired   (380 )     (29,420 )
Strategic investments         (2,877 )
Purchases of short-term investments   (810,111 )     (724,472 )
Proceeds from maturities of short-term investments   955,279       562,744  
Proceeds from sale of short-term investments         22,499  
Net cash provided by (used in) investing activities   82,575       (212,788 )
Cash Flows From Financing Activities      
Proceeds from issuance of common stock upon exercise of stock options   6,190       13,910  
Proceeds from issuance of common stock under the employee stock purchase plan   11,509       8,563  
Payment of deferred consideration related to business acquisitions   (50 )     (2,250 )
Other   (3 )      
Net cash provided by financing activities   17,646       20,223  
Net increase (decrease) in cash and cash equivalents (1)   318,995       (35,261 )
Cash and cash equivalents at beginning of period (1)   275,898       141,851  
Cash and cash equivalents at end of period (1) $ 594,893     $ 106,590  
               

_________

(1) We did not hold restricted cash for any periods presented.

ZSCALER, INC.
Reconciliation of GAAP to Non-GAAP Financial Measures
(in thousands, except percentages)
(unaudited)
               
  Three Months Ended   Nine Months Ended
  April 30,   April 30,
    2022       2021       2022       2021  
               
Revenue $ 286,807     $ 176,404     $ 772,887     $ 476,026  
               
Non-GAAP Gross Profit and Non-GAAP Gross Margin              
GAAP gross profit $ 222,785     $ 137,427     $ 598,913     $ 371,187  
Add:              
Stock-based compensation expense and related payroll taxes   6,511       3,665       17,596       10,239  
Amortization expense of acquired intangible assets   1,980       1,503       6,036       4,510  
Non-GAAP gross profit $ 231,276     $ 142,595     $ 622,545     $ 385,936  
GAAP gross margin   78 %     78 %     77 %     78 %
Non-GAAP gross margin   81 %     81 %     81 %     81 %
               
Non-GAAP Income from Operations and Non-GAAP Operating Margin              
GAAP loss from operations $ (86,597 )   $ (43,850 )   $ (244,900 )   $ (140,415 )
Add:              
Stock-based compensation expense and related payroll taxes   111,566       65,177       311,705       192,619  
Amortization expense of acquired intangible assets   2,238       1,576       6,695       4,729  
Asset impairment related to facility exit (1)                     416  
Non-GAAP income from operations $ 27,207     $ 22,903     $ 73,500     $ 57,349  
GAAP operating margin   (30 )%     (25 )%     (32 )%     (29 )%
Non-GAAP operating margin   9 %     13 %     10 %     11 %
                               

___________

(1) Consists of asset impairment charges related to the relocation of our corporate headquarters.

ZSCALER, INC.
Reconciliation of GAAP to Non-GAAP Financial Measures
(in thousands, except per share amounts)
(unaudited)
               
  Three Months Ended   Nine Months Ended
  April 30,   April 30,
    2022       2021       2022       2021  
Non-GAAP Net Income per Share, Diluted              
GAAP net loss $ (101,405 )   $ (58,459 )   $ (292,626 )   $ (181,006 )
Stock-based compensation expense and related payroll taxes   111,566       65,177       311,705       192,619  
Amortization expense of acquired intangible assets   2,238       1,576       6,695       4,729  
Asset impairment related to facility exit (1)                     416  
Amortization of debt discount and issuance costs   13,887       13,077       41,043       38,649  
Benefit for income taxes (2)   (1,554 )           (1,915 )      
Non-GAAP net income $ 24,732     $ 21,371     $ 64,902     $ 55,407  
               
GAAP net loss per share, diluted $ (0.72 )   $ (0.43 )   $ (2.08 )   $ (1.34 )
Stock-based compensation expense and related payroll taxes   0.76       0.45       2.11       1.33  
Amortization expense of acquired intangible assets   0.02       0.01       0.05       0.03  
Asset impairment related to facility exit (1)                      
Amortization of debt discount and issuance costs   0.09       0.09       0.28       0.27  
Benefit for income taxes (2)   (0.01 )           (0.01 )      
Adjustment to total fully diluted earnings per share (3)   0.03       0.03       0.09       0.09  
Non-GAAP net income per share, diluted $ 0.17     $ 0.15     $ 0.44     $ 0.38  
               
Denominator:              
Weighted-average shares used in computing GAAP net loss per share, diluted   141,422       136,385       140,403       134,938  
Potentially diluted shares   8,233       10,220       10,175       10,389  
Antidilutive impact of capped call transactions (4)   (2,740 )     (1,692 )     (2,704 )     (844 )
Weighted-average shares used in computing non-GAAP net income per share, diluted   146,915       144,913       147,874       144,483  
                               

___________
(1) Consists of asset impairment charges related to the relocation of our corporate headquarters.

(2) We use our GAAP provision for income taxes for purposes of determining our non-GAAP income tax expense. The difference between our GAAP and non-GAAP income tax expense represents the effects of stock-based compensation expense recognized in foreign jurisdictions and any income tax benefits associated with business combinations. The income tax benefit related to stock-based compensation expense included in the GAAP provision for income taxes was not material for all periods presented. In the fiscal quarter ended April 30, 2022, we recorded a tax benefit of $1.6 million associated with a refund of certain foreign withholding taxes relating to the prior fiscal year. In the fiscal quarter ended January 31, 2022, we recorded a tax benefit of $0.4 million generated by intangible assets acquired in a business acquisition.

(3) The sum of the fully diluted earnings per share impact of individual reconciling items may not total to fully diluted Non-GAAP net income per share due to the weighted-average shares used in computing the GAAP net loss per share differs from the weighted-average shares used in computing the Non-GAAP net income per share and due to rounding of the individual reconciling items. The GAAP net loss per share calculation uses a lower share count as it excludes potentially dilutive shares, which are included in calculating the non-GAAP net income per share.

(4) We exclude the in-the-money portion of our convertible senior notes for non-GAAP weighted-average diluted shares as they are covered by our capped call transactions. Our outstanding capped call transactions are antidilutive under GAAP, but are expected to mitigate the dilutive effect of our convertible notes and therefore are included in the calculations of non-GAAP diluted shares outstanding.

ZSCALER, INC.
Reconciliation of GAAP to Non-GAAP Financial Measures
(in thousands, except percentages)
(unaudited)
               
  Three Months Ended   Nine Months Ended
  April 30,   April 30,
    2022       2021       2022       2021  
Calculated billings              
Revenue $ 286,807     $ 176,404     $ 772,887     $ 476,026  
Add: Total deferred revenue, end of period   818,743       495,434       818,743       495,434  
Less: Total deferred revenue, beginning of period   (759,931 )     (446,817 )     (630,601 )     (369,767 )
Calculated billings $ 345,619     $ 225,021     $ 961,029     $ 601,693  
               
Free cash flow              
Net cash provided by operating activities $ 77,241     $ 73,368     $ 218,774     $ 157,304  
Less: Purchases of property, equipment and other assets   (27,604 )     (14,812 )     (48,046 )     (34,215 )
Less: Capitalized internal-use software   (5,892 )     (2,775 )     (14,167 )     (7,047 )
Free cash flow $ 43,745     $ 55,781     $ 156,561     $ 116,042  
               
Free cash flow margin              
Net cash provided by operating activities, as a percentage of revenue   27 %     42 %     28 %     33 %
Less: Purchases of property, equipment and other assets, as a percentage of revenue (10)%   (8)%   (6)%   (7)%
Less: Capitalized internal-use software, as a percentage of revenue (2)%   (2)%   (2)%   (2)%
Free cash flow margin   15 %     32 %     20 %     24 %
                               

ZSCALER, INC.
Explanation of Non-GAAP Financial Measures

In addition to our results determined in accordance with generally accepted accounting principles in the United States of America (GAAP), we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In particular, free cash flow is not a substitute for cash provided by operating activities. Additionally, the utility of free cash flow as a measure of our liquidity is further limited as it does not represent the total increase or decrease in our cash balance for a given period. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation of our historical non-GAAP financial measures to their most directly comparable financial measures stated in accordance with GAAP has been included in this press release. Investors are cautioned that there are a number of limitations associated with the use of non-GAAP financial measures and key metrics as analytical tools. Investors are encouraged to review these reconciliations, and not to rely on any single financial measure to evaluate our business.

Expenses Excluded from Non-GAAP Measures

Stock-based compensation expense is excluded primarily because it is a non-cash expense that management believes is not reflective of our ongoing operational performance. Employer payroll taxes related to stock-based compensation, which is a cash expense, are excluded because these are tied to the timing and size of the exercise or vesting of the underlying equity awards and the price of our common stock at the time of vesting or exercise, which may vary from period to period independent of the operating performance of our business. Amortization expense of intangible assets acquired in business acquisitions and related income tax effects, if applicable, are excluded because these are considered by management to be outside of our core business operating performance. Asset impairments related to facility exit costs are excluded because such charges are not reflective of our ongoing operational performance. Amortization of debt discount and issuance costs from our convertible senior notes are excluded because these are non-cash expenses and are not reflective of our ongoing operational performance. We estimate the tax effect of these items on our non-GAAP results and may adjust our GAAP provision for income taxes, if such effects have a material impact to our non-GAAP results.

Non-GAAP Financial Measures

Non-GAAP Gross Profit and Non-GAAP Gross Margin. We define non-GAAP gross profit as GAAP gross profit excluding stock-based compensation expense and related employer payroll taxes and amortization expense of acquired intangible assets. We define non-GAAP gross margin as non-GAAP gross profit as a percentage of revenue.

Non-GAAP Income from Operations and Non-GAAP Operating Margin. We define non-GAAP income from operations as GAAP loss from operations excluding stock-based compensation expense and related employer payroll taxes, amortization expense of acquired intangible assets, asset impairment related to facility exit and certain litigation-related expenses. We define non-GAAP operating margin as non-GAAP income from operations as a percentage of revenue.

Non-GAAP Net Income per Share, Diluted. We define non-GAAP net income as GAAP net loss excluding stock-based compensation expense and related employer payroll taxes, amortization expense of acquired intangible assets, asset impairment related to facility exit, amortization of debt discount and issuance costs, income tax effects generated by the effects of stock-based compensation expense recognized in foreign jurisdictions, any income tax benefits associated with business combinations and refunds of certain foreign withholding taxes related to prior fiscal periods. We define non-GAAP net income per share, diluted, as non-GAAP net income divided by the weighted-average diluted shares outstanding, which includes the effect of potentially diluted common stock equivalents outstanding during the period and the antidilutive impact of the capped call transactions entered into in connection with our convertible senior notes.

Calculated Billings. We define calculated billings as total revenue plus the change in deferred revenue in a period. Calculated billings in any particular period aims to reflect amounts invoiced for subscriptions to access our cloud platform, together with related support services for our new and existing customers. We typically invoice our customers annually in advance, and to a lesser extent quarterly in advance, monthly in advance or multi-year in advance.

Free Cash Flow and Free Cash Flow Margin. We define free cash flow as net cash provided by operating activities less purchases of property, equipment and other assets and capitalized internal-use software. We define free cash flow margin as free cash flow divided by revenue. We believe that free cash flow and free cash flow margin are meaningful indicators of liquidity information to management and investors about the amount of cash generated from our operations that, after the investments in property, equipment and other assets and capitalized internal-use software, can be used for strategic initiatives.

Zscaler Inc



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