Zscaler Third Quarter 2019 Earnings Pt. 2

This is part 2 of my review of Zscaler (ZS) Third Quarter 2019 Earnings. Today we will cover the questions and answer portion of the earnings call. ZS is currently a 7.5% position in my portfolio.

We covered the results and prepared remarks in part 1 here.

Before we get back into the earnings let’s talk about the last few days in the market and our companies. There’s been a lot of panic and some big sell-offs. This is a completely normal and healthy aspect of investing. In fact, it’s required for building long-term wealth in the stock market.

Here’s a chart of the last 5-days - ranging from +.78% to down 10%

Here’s a chart of the last 1 year - ranging from up 92% to up 185%

I’m using this sell-off as an opportunity to assess my emotional response, test my discipline (if I’m panicking now, what will I do when a 20% or 30% drop happens?), and make sure I’m invested in what I believe are the world’s best Founder-led companies.

Zscaler Third Quarter 2019 Earnings Q&A

Question: Help us understand your differentiation vs some of the competitors that are leveraging public cloud partnerships to compete with Zscaler.

Answer:

Appliance vendors are having to compete for the cloud using technology that it wasn't meant from the cloud. So when they are spinning these virtual machines on public cloud and claiming to have presence in 100 locations or more is totally misleading. Let me walk through a little bit on how these public clouds work. Google, AWS, they're very large centralized data centers in about 100 locations around the world. They call them regions. That's where applications run, that's where storage and compute actually runs.

Now in addition they have 100 some locations, some of them call them points of presence, others call them natural edge locations and these are front doors that collect information so that the thing can be sent to the regions, which are about 20 or so. So these clouds are built to run applications as the destinations, not an in transit cloud. For example take AWS data center in Ohio. It is kind of staying away from Chicago, so the traffic goes there and comes back. Speed of light is speed of light, so the performance can't be good unless you build a cloud that's distributed to handle security to enforcement hence the response time architecturally can't be good.

Question: Can I ask you about when your competitors is having a lot of internal issues and just how Zscalar kind of react to that? Does it change your planning and you become more aggressive? Does it change the dialogue with customers? How are you guys reacting to your chief competitor being extremely weak at the moment?

Answer:

If we were selling a security box or a proxy box with the same channel looking for refresh opportunities, this will be a big impact. We have always said we have been selling top down transformation. Our need is driven by applications like Office365, projects like SD-WAN. So our whole business comes from securing new local breakouts, which is a greenfield opportunity. But in almost all cases where Zscaler is deployed we end up replacing secure web gateway or web proxy, just generally sitting in centralized locations. Weak competitors does it help us generally? Yes. Does it change our sales process? Not really.

Question: I was hoping you guys could talk a little bit about the degree to which you have any challenges in hiring of sales people, what the environment looks like and how how much of the spending is going into new hires to drive future growth? It seems like given the tense -- the difficult market out there that may be a challenge to continue to scale at that rate. Is that an issue that we should be concerned about?

Answer:

It is a competi