Zscaler Lays Off 3% of Staff Amid Delays Closing Large DealsNearly 180 Workers Exit After Vetting Around Large Deals Takes Bite Out of Billings
Zscaler has axed nearly 180 workers after increased deliberation from new customers around large purchasing decisions in January 2023 led to reduced billings growth.
The San Jose, California-based cloud security vendor on Thursday revealed plans to reduce its 5,900-person staff by approximately 3% - or about 177 positions - as Zscaler adapts to a more challenging business environment by focusing on expanding its profitability, says Chief Financial Officer Remo Canessa. The layoffs come after Zscaler doubled the size of its workforce over the past 18 months, Canessa says (see: Zscaler Buys Canonic Security to Thwart Supply Chain Attacks).
"We are adapting to the changes we saw in Q2 [the fiscal quarter ended Jan. 31]," Canessa tells investors during an earnings conference call Thursday. "This is a targeted optimization initiative to address inefficiencies in certain job functions and projects."
Zscaler plans to moderate its hiring for the next several months, with a focus on investing in selling capacity and research and development, according to Canessa. Founder, chairman and CEO Jay Chaudhry says Zscaler will selectively hire quota-carrying sales reps as well as core engineering team members. Despite the layoffs, he expects Zscaler's year-end headcount to be higher than current levels.
"The macro conditions are impacting the higher-end, large deals," Chaudhry tells investors Thursday. "New logos with large deals are more challenging as there is additional scrutiny and additional approvals needed."
Profitability Takes Center Stage in Down Economy
Zscaler's billings grew by just 34% in the fiscal year ended Jan. 31 due to new customers being more deliberate around purchasing decisions, according to Chaudhry. Canessa called out macroeconomic challenges in Europe, the Middle East and Africa, or EMEA. In the fiscal quarter ending April 30, Zscaler expects to spend between $8 million and $10 million on layoffs-related severance and benefits costs (see: Zscaler CEO: 'Uncertainty Can Act as a Catalyst for Change').
"The recurring nature of our business model gives us good visibility on top-line revenue and allows us to adapt quickly to changes in market conditions to deliver on our operating profit and margin goals," Canessa says. "If the environment becomes more challenging, we will continue to prioritize profitability, leveraging our strong unit economics and driving efficiencies in our cost structure."
Zscaler expects its global workforce reduction to be substantially complete by the end of July. Chaudhry says streamlining operations will better align people, roles and projects to Zscaler's strategic priorities.
"We will continue to hire the best candidates in high-priority areas," Canessa says.
Layoffs looming in the sector didn't stop Zscaler from pursuing inorganic opportunities. Just 18 days ago, the firm purchased Tel Aviv, Israel-based Canonic Security to help customers streamline SaaS application governance and enforcement. Zscaler in September bought workflow automation startup ShiftRight for $25.6 million to provide customers with real-time visibility into their security posture (see: Zscaler Buys Workflow Automation Firm ShiftRight for $25.6M).
"New logos with large deals are more challenging as there is additional scrutiny and additional approvals needed."
– Jay Chaudhry, founder, chairman and CEO, Zscaler
Zscaler is the fourth major pure-play cybersecurity vendor to conduct layoffs in 2023. Oxford, U.K.-based platform security vendor Sophos in January laid off 10% of its staff, or 450 workers. And last month, San Francisco-based identity security giant Okta axed 5% of its workers - or roughly 300 employees - while Atlanta-based cybersecurity services vendor Secureworks cut 9% of its staff, or approximately 210 positions.
Stock Drops to Lowest Level Since January
|Zscaler||Quarter Ended Jan. 31 2023||Quarter Ended Jan. 31 2022||Change|
|Loss Per Share||$0.40||$0.71||43.7%|
|Non-GAAP Net Income||$57.6M||$19.2M||200.3%|
|Non-GAAP Earnings Per Share||$0.37||$0.13||184.6%|
Zscaler's revenue of $387.6 million in the quarter ended Jan. 31 beat Seeking Alpha's sales estimate of $364.8 million. And the company's non-GAAP earnings of $0.37 per share crushed Seeking Alpha's estimate of $0.29 per share.
The company's stock is down $15.43 - 11.50% - to $118.70 per share in after-hours trading Thursday. That's the lowest Zscaler's stock has traded since Jan. 20. The Americas accounted for 53% of Zscaler's revenue in the most recent fiscal quarter, while EMEA and APAC generated 32% and 15% of the company's sales, respectively, Canessa says.
For the quarter ending April 30, Zscaler expects non-GAAP net income of $0.39 per share on revenue of between $396 million and $398 million.