Cloud Security And Channel Superstar Zscaler Files For $100 Million IPO

Zscaler has filed to raise up to $100 million in an initial public offering (IPO) and revealed that channel partners account for more than 90 percent of the company's revenue.

The San Jose, Calif.-based cloud security vendor said that it works closely with global systems integrators and regional telecom service providers, with sales through Zscaler's top five channel partners accounting for 47 percent of overall revenue in the company's the most recent fiscal year, which ended July 31.

"Our ability to achieve revenue growth in the future will depend in large part on our success in maintaining successful relationships with our channel partners, identifying additional channel partners, and training our channel partners to independently sell and deploy our platform," Zscaler said in its 173-page S-1 registration statement filing with the U.S. Securities and Exchange Commission.

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Zscaler declined to comment on its S-1 filing. The company was founded in 2008, and has raised $148 million in just two rounds of funding. The company had previously filed confidentially for an IPO, TechCrunch reported in October.

The company said in its S-1 filing that it plans to use the net proceeds of its IPO for general corporate purposes, and be listed on the Nasdaq stock exchange under the ticker symbol "ZS."

The company's share of business coming from the channel increased from 80 percent in the year ended July 31, 2015, to 91 percent in the six months ending Jan. 31, 2018. Zscaler's channel partner contracts typically have a one-year term, and the company works with VARs such as CDW and SHI, SIs such as Deloitte and HCL Technologies, and telecom providers such as, Deutsche Telekom and Verizon.

Each of these relationships entails rigorous performance testing of Zscaler's cloud infrastructure, education and training of channel partners' marketing and sales professionals, and integration and alignment of pricing strategies, according to the S-1 filing.

"These channel partners are engaging at the C-level to discuss strategic network transformation and cloud migration projects, and we work with these channel partners to deliver security solutions to their most important enterprise customers," Zscaler wrote in its S-1 filing.

From a sales standpoint, Zscaler said it hopes to provide channel partners with education, training and programs, which includes supporting their independent sales of the company's products. Plus the company engages in joint marketing activities with its deeply-integrated ecosystem of channel partners, according to Zscaler.

"We believe that such investment, and investment in our sales force, will lead to significant expansion in our customer base, which will materially impact our business and results of operations," Zscaler wrote in its S-1 filing.

Zscaler has experienced massive growth in recent years, according to its S-1 filing, with sales jumping to $125.7 million in its most recent fiscal year, up 56.5 percent from $80.3 million in 2016 and 134.1 percent from $53.7 million in 2015. The company's net losses increased from $12.8 million in fiscal 2015 to $35.5 million in fiscal 2017, with no quick path to profitability on the horizon. In that same period, Zscaler has gone from 2,050 customers to 2,800 customers.

CEO Jay Chaudhry and his affiliates own 53.8 percent of Zscaler before the IPO, according to the S-1 filing, with entities affiliated with TPG Capital holding 8.7 percent. TPG Capital led Zscaler's $110 million Series B round of venture capital, which was announced in August 2015.