Zscaler will be the year's first "unicorn" IPO. The security software provider achieved a $1 billion valuation in 2015. TPG led the $110 million round at $8.97, with equity ratchets that kick in below $11.21. Zscaler is now scheduled to raise $110 million at a fully diluted market value of $1.4 billion and begin trading during the week of March 12 .
Fast Facts on Zscaler, the First Unicorn IPO of 2018
Deal SizeMarket Cap
Price RangeShares Filed
Zscaler ( ZS )San Jose, CA
$10 - $1210,000,000
Morgan StanleyGoldman Sachs
Provides a cloud-based network security service for enterprises.
Zscaler checks the boxes of a hot tech IPO.
¤ Leading cybersecurity provider
¤ 50% growth, $150 million in sales, 80% gross margin
¤ Losses are under control
¤ Reasonable valuation
¤ 2017 software IPOs have outperformed
¤ Low float
Leading cybersecurity provider : Zscaler is a leading player in a multi-billion dollar industry. Its SaaS offering competes with top enterprise network security providers like Blue Coat (Symantec) and Forcepoint. Zscaler has a global offering (53% of sales are non-US) and its customers include of 200 of the Forbes Global 2000. It is worth highlighting the space's M&A, too: Symantec acquired Blue Coat (BLCT) in 2016 for $4.7 billion and Forcepoint (f/k/a Websense) was taken private in 2013 by Vista Equity Partners, before merging with Raytheon's cybersecurity segment in 2015.
50% growth, $150 million in sales, 80% gross margin : Zscaler has an attractive growth and gross margin profile at $150+ million in sales. Revenue growth accelerated to 53% in the most recent quarter, reaching $45 million. The company has roughly 3,000 enterprise customers (+14% YoY) and a 122% dollar-based net retention rate. Gross margin has steadily expanded to 81% in the MRQ.
Losses are under control : With an accumulated deficit of $180 million, losses are a concern. During the 1H18, adjusted EBITDA loss doubled to $10 million. That said, Zscaler's losses are far better than several of its high-growth peers, and cash flow from operations was nearly breakeven in the most recent quarter. Post-IPO it will have $168 million in cash with no debt.
Reasonable valuation : At $11 per share, Zscaler has a fully diluted market value of $1.4 billion and an enterprise value of $1.2 billion. That's 7.7x LTM sales, a discount to peers like SailPoint Technologies ( SAIL ) and Okta (OKTA; 16.1x).
2017 software IPOs have outperformed : Almost every software IPO from 2017 has had impressive gains. The eleven IPOs average a return of 88% from their offer price, including strong returns from Zscaler peers like Okta (+128% from IPO) and SailPoint (+88%).
Low float : Led by Morgan Stanley and Goldman Sachs, the offering consists of 10 million shares, representing 8.7% of the company's basic market value (8.3% after $5 million of insider buying). Tech IPOs often limit the initial float, propping up demand.
The article Zscaler leads the unicorn charge of 2018 - here's what you need to know originally appeared on IPO investment manager Renaissance Capital's web site renaissancecapital.com.
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