Zscaler Pops on Earnings, Buys Smokescreen

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By: R. Scott Raynovich

Cloud cybersecurity firm Zscaler (ZS) is on a roll: The company's shares soared today on a healthy earnings beat as the company concurrently announced the acquisition of Smokescreen Technologies.

Zscaler fiscal Q3 revenue and profit both topped Wall Street analysts' expectations, and the company raised guidance, making Wall St. happy with its performance. Shares rose to $194.18, up 21.44 (+12.41%), in midday trading. The company now has a market capitalization of $26 billion on less than a $1 billion annual revenue run rate.

The company reported earnings per share (EPS) of 15 cents on an adjusted basis, more than doubling its profit from 7 cents in the year-ago period. Revenue rose 60% to $176.4 million. The consensus forecast from Wall St. was $163.7 million in revenue and 7 cents per share, giving it a price/sales ratio over 30x revenue based on this year's estimates.

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For the current quarter, the company projected revenue of $185 million to $187 million, and EPS in a range of 8 cents to 9 cents, again on a non-GAAP basis. That compares to consensus for $174 million and a 9-cent profit per share.

Building a Smokescreen

At the same time, Zscaler is positioning for a strategic expansion, announcing it would purchase Mumbai, India-based Smokescreen Technologies, a six-year-old startup. The company specializes in active defense and deception technology designed to thwart cyberattackers. Terms were not disclosed.

"With the addition of Smokescreen to our Zero Trust Exchange, our customers will be able to change the economics of cyberattacks by making them far more costly, complex and difficult for the adversary both before and during their attempted intrusions," said Zscaler CEO and founder Jay Chaudhry in a company statement.

Zscaler and Smokescreen officials said in statements that they believe active defense tactics are a more sophisticated way to stop attackers by enabling businesses to identify intrusions before attackers compromise data and resources.

“Alert volume has never been higher," said Sahir Hidayatullah, CEO at Smokescreen. "Security teams can’t separate the signal from the noise to take a proactive stance against the most stealthy attackers. As analysts lose time chasing ghosts, the role of active defense has never been more critical. By taking the fight to the attacker, leading them down false paths with decoys deployed across networks, endpoints, and applications, and gathering the highest-fidelity security telemetry, we can dramatically speed up threat hunting and containment."

Zscaler said the deal is expected to close during Zscaler’s fiscal fourth quarter ending July 31, 2021.

Building a Cybersecurity Porfolio

Zscaler for years has operated one of the more popular firewall-as-a-service (FWaaS) platforms out there, but the Smokescreen acquisition shows it is intent on adding to its platform. The company is well positioned with a cloud-based network of 150 data centers, or points of presence (PoPs), worldwide. It is one of a new breed of cloud-based cybersecurity vendors, along with Cloudflare, who are operating an "as a service" model, where security services can be purchased and consumed from the cloud.

Using a Zero Trust architecture, Zscaler has many cybersecurity features to scan and filter customer network traffic, using technologies such as anti-virus, URL filtering, data loss protection, and screening for XSS attacks. It's also part of a larger trend known as Secure Access Service Edge (SASE), in which a number cybersecurity technologies are implemented by integrating them with cloud networks.

A recent escalation in cyberattacks has companies on edge. This includes the debilitating ransomware attack on the Colonial Pipeline that disrupted fuel supplies in the United States and cost the company nearly $5 million in ransom. Many companies are ramping up cyber-defense strategies in response to the Colonial attack -- a trend mentioned specifically in the Zscaler press release.