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 |
||||
|---|---|---|---|---|
| Issuer Business |
Deal Size Market Cap |
Price Range Shares Filed |
Pricing Date |
Top Bookrunners |
| Zscaler (ZS) San Jose, CA |
$110M $1,360M |
$10 - $12 10,000,000 |
Wk of 03/12 |
Morgan Stanley Goldman 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 LTM 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 more manageable 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).
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%). For an in-depth analysis of Zscaler's valuation, institutional investors rely on Renaissance Capital's IPO Research.
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.
