Zscaler Reports Second Quarter Fiscal 2019 Financial

Revenue grows 65% year-over-year to $74.3 million
Calculated billings grow 74% year-over-year to $115.0 million
Deferred revenue grows 73% year-over-year to $206.0 million
GAAP net loss of $3.6 million compared to GAAP net loss of $6.5 million on a year-over-year basis
Non-GAAP net income of $11.6 million compared to Non-GAAP net loss of $2.8 million on a year-over-year basis

SAN JOSE, Calif., Feb. 28, 2019 (GLOBE NEWSWIRE) -- Zscaler, Inc. (Nasdaq: ZS), the leader in cloud security, today announced financial results for its second quarter of fiscal year 2019, ended January 31, 2019.

"Our strong second quarter results demonstrate our ability to drive rapid growth and profitability while investing in our business," said Jay Chaudhry, Chairman and CEO of Zscaler. "We are seeing success in disrupting the traditional network security market, with a globally distributed cloud security platform that consistently applies policies and protections no matter the device or location. We are increasingly viewed as a strategic foundation to our customers' network and security transformation towards a cloud and mobile first world."

Second Quarter Fiscal 2019 Financial Highlights

Revenue: $74.3 million, an increase of 65% year-over-year.
Income (loss) from operations: GAAP loss from operations was $5.2 million, or 7% of total revenue, compared to $6.4 million in the second quarter of fiscal 2018, or 14% of total revenue. Non-GAAP income from operations was $10.0 million, or 13% of total revenue, compared to loss from operations of $2.7 million in the second quarter of fiscal 2018, or 6% of total revenue.
Net Income (Loss): GAAP net loss was $3.6 million, compared to $6.5 million in the second quarter of fiscal 2018. Non-GAAP net income was $11.6 million, compared to net loss of $2.8 million in the second quarter of fiscal 2018.
Net Income (Loss) Per Share: GAAP net loss per share was $0.03, compared to $0.29 in the second quarter of fiscal 2018. Pro forma non-GAAP net income per share was $0.09, compared to net loss per share of $0.03 in the second quarter of fiscal 2018.
Cash Flow: Cash provided by operations was $15.7 million, or 21% of revenue, compared to cash used in operations of $1.1 million, or 2% of revenue, in the second quarter of fiscal 2018. Positive free cash flow was $12.0 million, or 16% of revenue, compared to negative free cash flow of $4.6 million, or 10% of revenue, in the second quarter of fiscal 2018.
Deferred Revenue: $206.0 million at January 31, 2019, an increase of 73% year-over-year.
Cash, cash equivalents and short-term investments: $339.9 million as of January 31, 2019, an increase of $41.4 million from July 31, 2018 and no debt.

Recent Business Highlights

Published the Zscaler Cloud Insights Semi-Annual Report, which analyzes SSL-based threats across the Zscaler cloud from July through December 2018. With the growth in SSL traffic, there has been a corresponding growth in SSL-based threats:

• Zscaler™ cloud blocked 1.7 billion threats hidden in SSL traffic, which translates to an average of 283 million advanced threats blocked per month.
• Zscaler™ ThreatLabZ research team observed an increase of more than 400% in phishing attacks delivered over the SSL channel in 2018 when compared to 2017. Attackers continue to leverage the encrypted channel for delivering malware and exfiltrating sensitive information from their victims.
• In addition to phishing attacks, the Zscaler™ cloud also blocked an average of 196 million types of malicious content, including compromised websites, malicious redirect scripts and malvertising attempts.
Initiated the Zscaler Academy World Tours, eleven secure cloud transformation events planned in multiple locations around the world, providing customers and prospects hands-on labs, best practices and customer case studies.
Achieved FedRAMP authorization for Zscaler Internet Access™-Government (ZIA™-Government), becoming the first secure internet and web gateway solution to earn FedRAMP certification and to satisfy the strict requirements of the recently released Trusted Internet Connection 3.0 Initiative.

Financial Outlook

For the third quarter of fiscal 2019, we expect:

Total revenue of $74 million to $75 million
Non-GAAP income from operations of $0 million to $1 million
Pro forma non-GAAP earnings per share of $0.01 assuming approximately 135 million common shares outstanding

For the full fiscal 2019, we expect:

Total revenue of $289 million to $291 million
Calculated billings of $365 million to $370 million
Non-GAAP income from operations of $11 million to $13 million
Pro forma non-GAAP earnings per share of $0.11 to $0.13, assuming approximately 135 million common shares outstanding

These statements are forward-looking and actual results may differ materially. Refer to the Forward-Looking Statements safe harbor below for information on the factors that could cause our actual results to differ materially from these forward-looking statements.

Guidance for non-GAAP financial measures excludes stock-based compensation expense, amortization expense of acquired intangible assets and certain litigation-related expenses. We have not reconciled our expectations as to non-GAAP income (loss) from operations and pro forma non-GAAP net income (loss) per share to their most directly comparable GAAP measures because certain items are out of our control or cannot be reasonably predicted. Accordingly, a reconciliation for non-GAAP income (loss) from operations and pro forma non-GAAP net income (loss) per share is not available without unreasonable effort.

Conference Call Information

Zscaler will host a conference call for analysts and investors to discuss its second quarter fiscal 2019 earnings results and outlook for its third quarter of fiscal 2019 and full year fiscal today at 1:30 p.m., Pacific time (4:30 p.m. Eastern time).

Date:	Thursday, February 28
Time:	1:30 p.m. PT
Webcast:	https://ir.zscaler.com/
Dial-in number:	334-323-0522 or 855-719-5012

A live webcast of the conference call will be accessible from the Zscaler website at ir.zscaler.com. Listeners may log on to the call under the "Events & Presentations" section and select "Q2 2019 Zscaler Earnings Conference Call" to participate. A telephone replay of the conference call will be available at approximately 4:30 p.m. PT, February 28 through March 4, 2019 by dialing (888) 203-1112 or (719) 457-0820 and entering the passcode 7725301.

Forward-Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties, including statements regarding our future financial and operating performance, including our financial outlook for the third quarter of fiscal 2019 and full year fiscal 2019. There are a significant number of factors that could cause actual results to differ materially from statements made in this press release, including: our limited operating history; our ability to identify and effectively implement the necessary changes to address execution challenges; risks associated with managing our rapid growth; our limited experience with new product and subscription and support introductions and the risks associated with new products and subscription and support offerings, including the discovery of software bugs; our ability to attract and retain new customers; the failure to timely develop and achieve market acceptance of new products and subscriptions as well as existing products and subscription and support; rapidly evolving technological developments in the market for network security products and subscription and support offerings; length of sales cycles; and general market, political, economic and business conditions.

Additional risks and uncertainties that could affect our financial results are included under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth from time to time in our filings and reports with the Security Exchange Commission (SEC), including our Annual Report on Form 10-K for the fiscal year ended July 31, 2018 filed on September 13, 2018, as well as future filings and reports by us, copies of which are available on our website at ir.zscaler.com and on the SEC’s website at www.sec.gov. You should not rely on these forward-looking statements, as actual outcomes and results may differ materially from those contemplated by these forward-looking statements as a result of such risks and uncertainties. Additional information will also be set forth in other filings that we make with the SEC from time to time. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we do not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made.

Use of Non-GAAP Financial Information

Zscaler believes that the presentation of non-GAAP financial information provides important supplemental information to management and investors regarding financial and business trends relating to the Company’s financial condition and results of operations. For further information regarding why Zscaler believes that these non-GAAP measures provide useful information to investors, the specific manner in which management uses these measures, and some of the limitations associated with the use of these measures, please refer to the “Explanation of Non-GAAP Financial Measures" section of this press release.

About Zscaler

Zscaler™ enables the world’s leading organizations to securely transform their networks and applications for a mobile and cloud-first world. Its flagship services, Zscaler Internet Access™ and Zscaler Private Access™, create fast, secure connections between users and applications, regardless of device, location, or network. Zscaler services are 100 percent cloud-delivered and offer the simplicity, enhanced security and improved user experience that traditional appliances are unable to match. Used in more than 185 countries, Zscaler operates a multi-tenant distributed cloud security platform, protecting thousands of customers from cyberattacks and data loss. Learn more at zscaler.com or follow us on Twitter @zscaler.

Zscaler™, Zscaler Internet Access™, and Zscaler Private Access™, ZIA™ and ZPA™ are either (i) registered trademarks or service marks or (ii) trademarks or service marks of Zscaler, Inc. in the United States and/or other countries. Any other trademarks are the properties of their respective owners.

Investor Relations Contact:
Bill Choi, CFA
Vice President, Investor Relations
(669) 255-0767
ir@zscaler.com

Zscaler, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)

	Three Months Ended						Six Months Ended
	January 31,						January 31,
	2019			2018			2019			2018
Revenue	$	74,302		$	44,976		$	137,600		$	84,837
Cost of revenue ^{(1) (2)}	15,271			8,679			27,370			16,950
Gross profit	59,031			36,297			110,230			67,887
Operating expenses:
Sales and marketing ⁽¹⁾	38,756			27,110			75,301			54,038
Research and development ^{(1) (2)}	15,071			9,183			28,257			17,992
General and administrative ^{(1) (3)}	10,386			6,403			20,517			13,533
Total operating expenses	64,213			42,696			124,075			85,563
Loss from operations	(5,182		)	(6,399		)	(13,845		)	(17,676		)
Interest income, net	1,924			213			3,514			408
Other income, net	250			28			62			1
Loss before income taxes	(3,008		)	(6,158		)	(10,269		)	(17,267		)
Provision for income taxes	547			357			874			646
Net loss	$	(3,555	)	$	(6,515	)	$	(11,143	)	$	(17,913	)
Accretion of Series C and D redeemable convertible preferred stock	—			(2,579		)	—			(5,109		)
Net loss attributable to common stockholders	$	(3,555	)	$	(9,094	)	$	(11,143	)	$	(23,022	)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.03	)	$	(0.29	)	$	(0.09	)	$	(0.74	)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted	122,741			31,434			121,664			31,125

⁽¹⁾ Includes stock-based compensation expense as follows:

Cost of revenue	$	619	$	126	$	1,122	$	235
Sales and marketing	5,517		985		8,318			1,770
Research and development	4,398		494		7,193			892
General and administrative	2,693		459		4,180			900
Total	$	13,227	$	2,064	$	20,813	$	3,797

⁽²⁾ Includes amortization expense of acquired intangible assets as follows:

Cost of revenue	$	144	$	—	$	144	$	—
Research and development	—		—		95			—
Total	$	144	$	—	$	239	$	—

⁽³⁾ Includes certain litigation-related expenses as follows:

Litigation-related expenses	$	1,768			$	1,630			$	3,942			$	3,776

Zscaler, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
	January 31,			July 31,
	2019			2018
Assets
Current assets:
Cash and cash equivalents	$	67,467		$	135,579
Short-term investments	272,476			162,960
Accounts receivable, net	75,470			61,611
Deferred contract acquisition costs	18,058			16,136
Prepaid expenses and other current assets	12,540			10,878
Total current assets	446,011			387,164
Property and equipment, net	25,762			19,765
Deferred contract acquisition costs, noncurrent	42,543			39,774
Other noncurrent assets	3,797			1,078
Total assets	$	518,113		$	447,781

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	3,459		$	4,895
Accrued expenses and other current liabilities	13,934			12,313
Accrued compensation	15,541			23,393
Liability for early exercised stock options	972			1,561
Deferred revenue	176,326			140,670
Total current liabilities	210,232			182,832
Deferred revenue, noncurrent	29,694			23,353
Other noncurrent liabilities	1,114			1,360
Total liabilities	241,040			207,545
Stockholders’ Equity
Common stock	124			119
Additional paid-in capital	483,951			438,392
Notes receivable from stockholders	—			(2,051		)
Accumulated other comprehensive loss	(59		)	(124		)
Accumulated deficit	(206,943		)	(196,100		)
Total stockholders’ equity	277,073			240,236
Total liabilities and stockholders’ equity	$	518,113		$	447,781

Zscaler, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
	Six Months Ended
	January 31,
	2019			2018
Cash Flows From Operating Activities
Net loss	$	(11,143	)	$	(17,913	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization expense	4,662			3,910
Amortization of acquired intangible assets	239			—
Amortization of deferred contract acquisition costs	8,781			5,932
Stock-based compensation expense	20,813			3,797
Accretion of purchase discounts, net of amortization of investment premiums	(1,125		)	—
Other	202			(92		)
Changes in operating assets and liabilities:
Accounts receivable	(13,859		)	(8,482		)
Deferred contract acquisition costs	(13,472		)	(11,213		)
Prepaid expenses and other assets	(2,778		)	(1,094		)
Accounts payable	(786		)	(2,211		)
Accrued expenses and other liabilities	1,042			445
Accrued compensation	(7,852		)	(1,185		)
Deferred revenue	41,997			22,638
Net cash provided by (used in) operating activities	26,721			(5,468		)
Cash Flows From Investing Activities
Purchases of property, equipment and other	(8,607		)	(7,045		)
Capitalized internal-use software	(903		)	(950		)
Acquired intangible assets	(1,480		)	—
Purchases of short-term investments	(179,896		)	—
Proceeds from maturities of short-term investments	71,603			—
Net cash used in investing activities	(119,283		)	(7,995		)
Cash Flows From Financing Activities
Payments of offering costs related to initial public offering	(1,797		)	(2,896		)
Proceeds from issuance of common stock upon exercise of stock options	15,493			2,171
Proceeds from issuance of common stock related to early exercised stock options	—			869
Proceeds from issuance of common stock under the employee stock purchase plan	8,691			—
Repurchases of unvested common stock	(22		)	(3,090		)
Repayments of notes receivable from stockholders	1,905			—
Net cash provided by (used in) financing activities	24,270			(2,946		)
Net decrease in cash, cash equivalents and restricted cash	(68,292		)	(16,409		)
Cash, cash equivalents and restricted cash at beginning of period	136,147			88,546
Cash, cash equivalents and restricted cash at end of period	$	67,855		$	72,137
Reconciliation of cash, cash equivalents, and restricted cash within the condensed consolidated balance sheets to the amounts shown in the statements of cash flows above:
Cash and cash equivalents	$	67,467		$	71,569
Restricted cash, current	96			180
Restricted cash, non-current	292			388
Total cash, cash equivalents and restricted cash	$	67,855		$	72,137

Zscaler, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(In thousands)
(Unaudited)

	Three Months Ended								Six Months Ended
	January 31,								January 31,
	2019				2018				2019				2018

Revenue	$	74,302			$	44,976			$	137,600			$	84,837

Non-GAAP Gross Profit and Non-GAAP Gross Margin
GAAP gross profit	$	59,031			$	36,297			$	110,230			$	67,887
Add:
Stock-based compensation expense	619				126				1,122				235
Amortization expense of acquired intangible assets	144				—				144				—
Non-GAAP gross profit	$	59,794			$	36,423			$	111,496			$	68,122
GAAP gross margin			79	%			81	%			80	%			80	%
Non-GAAP gross margin			80	%			81	%			81	%			80	%

Non-GAAP Income (Loss) from Operations and Non-GAAP Operating Margin
GAAP loss from operations	$	(5,182		)	$	(6,399		)	$	(13,845		)	$	(17,676		)
Add:
Stock-based compensation expense	13,227				2,064				20,813				3,797
Litigation-related expenses	1,768				1,630				3,942				3,776
Amortization expense of acquired intangible assets	144				—				239				—
Non-GAAP income (loss) from operations	$	9,957			$	(2,705		)	$	11,149			$	(10,103		)
GAAP operating margin			(7	)%			(14	)%			(10	)%			(21	)%
Non-GAAP operating margin			13	%			(6	)%			8	%			(12	)%

Zscaler, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(In thousands, except per share amounts)
(Unaudited)

	Three Months Ended						Six Months Ended
	January 31,						January 31,
	2019			2018			2019			2018
Non-GAAP Net Income (Loss) per Share Attributable to Common Stockholders, Diluted
GAAP net loss attributable to common stockholders	$	(3,555	)	$	(9,094	)	$	(11,143	)	$	(23,022	)
Stock-based compensation expense	13,227			2,064			20,813			3,797
Litigation-related expenses	1,768			1,630			3,942			3,776
Amortization expense of acquired intangible assets	144			—			239			—
Accretion of Series C and D redeemable convertible preferred stock	—			2,579			—			5,109
Provision for income taxes ⁽¹⁾	—			—			—			—
Non-GAAP net income (loss) attributable to common stockholders	$	11,584		$	(2,821	)	$	13,851		$	(10,340	)

GAAP net loss per share attributable to common stockholders, diluted	$	(0.03	)	$	(0.29	)	$	(0.08	)	$	(0.74	)
Stock-based compensation expense	0.10			0.07			0.16			0.12
Litigation-related expenses	0.01			0.05			0.03			0.12
Amortization expense of acquired intangible assets	—			—			—			—
Accretion of Series C and D redeemable convertible preferred stock	—			0.08			—			0.16
Provision for income taxes ⁽¹⁾	—			—			—			—
Non-GAAP net income (loss) per share attributable to common stockholders, basic and diluted ⁽²⁾	$	0.09		$	(0.09	)	$	0.10		$	(0.33	)
Weighted-average shares used in computing non-GAAP net loss per share attributable to common stockholders, diluted	134,246			31,434			134,059			31,125

___________

⁽¹⁾ We use our GAAP provision for income taxes for purposes of determining our non-GAAP results. The difference between our GAAP and non-GAAP income tax expense primarily represents the excess tax deduction of stock-based compensation recognized in foreign jurisdictions. The income tax benefit included in the GAAP provision for income tax reported for fiscal Q1 FY19 was $0.3 million and not material for all other periods presented. For our U.S. entities, we do not include the impact of income taxes on the non-GAAP items due to our continued history of non-GAAP losses and full valuation allowance.

⁽²⁾ The sum of the non-GAAP per share attributable to common stockholders of individual line items excluded from our non-GAAP net income (loss) may not total to the non-GAAP net income (loss) per share attributable to common stockholders due to rounding.

Zscaler, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(In thousands, except per share amounts)
(Unaudited)

	Three Months Ended						Six Months Ended
	January 31,						January 31,
	2019			2018			2019			2018
Pro Forma Non-GAAP Net Income (Loss) per Share Attributable to Common Stockholders
Numerator:
GAAP net loss attributable to common stockholders	$	(3,555	)	$	(9,094	)	$	(11,143	)	$	(23,022	)
Stock-based compensation expense	13,227			2,064			20,813			3,797
Litigation-related expenses	1,768			1,630			3,942			3,776
Amortization expense of acquired intangible assets	144			—			239			—
Accretion of Series C and D redeemable convertible preferred stock	—			2,579			—			5,109
Provision for income taxes ⁽¹⁾	—			—			—			—
Non-GAAP net income (loss) attributable to common stockholders	$	11,584		$	(2,821	)	$	13,851		$	(10,340	)

Denominator:
Weighted-average shares used in computing GAAP net loss per share attributable to common stockholders, diluted	122,741			31,434			121,664			31,125
Potentially diluted shares	11,505			—			12,395			—
Pro forma adjustment to reflect assumed conversion of our convertible preferred stock as of the beginning of the period ⁽²⁾	—			72,501			—			72,501
Weighted-average shares used in computing pro forma non-GAAP net income (loss) per share attributable to common stockholders, diluted ⁽²⁾	134,246			103,935			134,059			103,626
Pro forma non-GAAP net income (loss) per share attributable to common stockholders, diluted ⁽²⁾	$	0.09		$	(0.03	)	$	0.10		$	(0.10	)

___________

⁽²⁾ We define pro forma non-GAAP net income (loss) per share attributable to common stockholders as the weighted-average shares used in computing the GAAP net loss per share attributable to common stockholders plus a pro forma adjustment to give effect to the automatic conversion of our redeemable convertible preferred stock into 72,500,750 shares of common stock as though the conversion had occurred as of the beginning of the periods presented. Upon the closing of our initial public offering on March 20, 2018, all our outstanding shares of redeemable convertible preferred stock automatically converted into 72,500,750 shares of common stock on a one-to-one basis.

Zscaler, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(In thousands)
(Unaudited)

	Three Months Ended										Six Months Ended
	January 31,										January 31,
	2019					2018					2019					2018
Calculated Billings
Revenue	$	74,302				$	44,976				$	137,600				$	84,837
Add: Total deferred revenue, end of period	206,020					119,257					206,020					119,257
Less: Total deferred revenue, beginning of period	(165,279				)	(98,266				)	(164,023				)	(96,619				)
Calculated billings	$	115,043				$	65,967				$	179,597				$	107,475

Free Cash Flow
Net cash provided by (used in) operating activities	$	15,707				$	(1,116			)	$	26,721				$	(5,468			)
Less:
Purchases of property and equipment	(3,193				)	(3,035				)	(8,607				)	(7,045				)
Capitalized internal-use software	(547				)	(416				)	(903				)	(950				)
Free cash flow	$	11,967				$	(4,567			)	$	17,211				$	(13,463			)
As a percentage of revenue:
Net cash provided by (used in) operating activities			21	%				(2	)%				20	%				(7	)%
Less:
Purchases of property and equipment			(4	)				(7	)				(6	)				(8	)
Capitalized internal-use software			(1	)				(1	)				(1	)				(1	)
Free cash flow margin			16	%				(10	)%				13	%				(16	)%

Zscaler, Inc.
Second Quarter Fiscal 2019 Financial Results
Explanation of Non-GAAP Financial Measures

In addition to our results determined in accordance with generally accepted accounting principles in the United States of America (GAAP), we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In particular, free cash flow is not a substitute for cash used in operating activities. Additionally, the utility of free cash flow as a measure of our liquidity is further limited as it does not represent the total increase or decrease in our cash balance for a given period. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation of the Company's historical non-GAAP financial measures to their most directly comparable financial measure stated in accordance with GAAP has been included in this press release. Investors are cautioned that there are a number of limitations associated with the use of non-GAAP financial measures and key metrics as analytical tools. Investors are encouraged to review these reconciliations, and not to rely on any single financial measure to evaluate our business.

Expenses Excluded from Non-GAAP Measures

Stock-based compensation expense is excluded primarily because they are non-cash expenses that management believes are not reflective of our ongoing operational performance. Amortization expense of acquired intangible assets is excluded because these are considered by management to be outside of the Company's core business operating performance. We also exclude certain litigation-related expenses consisting of professional fees and related costs incurred by us in defending against significant claims that we deem not to be in the ordinary course of our business and, if applicable, accruals related to estimated losses in connection with these claims. There are many uncertainties and potential outcomes associated with any litigation, including the expense of litigation, timing of such expenses, court rulings, unforeseen developments, complications and delays, each of which may affect our results of operations from period to period, as well as the unknown magnitude of the potential loss relating to any lawsuit, all of which are inherently subject to change, difficult to predict and could adversely affect our results of operations. We estimate the tax effect of these items on our non-GAAP results and may adjust our GAAP provision for income taxes, if such effects have a material impact to our non-GAAP results.

Non-GAAP Financial Measures

Non-GAAP Gross Profit and Non-GAAP Gross Margin. We define non-GAAP gross profit as GAAP gross profit excluding stock-based compensation expense and amortization expense of acquired intangible assets. We define non-GAAP gross margin as non-GAAP gross profit as a percentage of revenue.

Non-GAAP Income (Loss) from Operations and Non-GAAP Operating Margin. We define non-GAAP income (loss) from operations and non-GAAP operating margin as GAAP loss from operations and GAAP operating margin, respectively, excluding stock-based compensation expense, amortization expense of acquired intangible assets and certain litigation-related expenses.

Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) per Share Attributable to Common Stockholders, Diluted. We define non-GAAP net income (loss) as GAAP net loss plus stock-based compensation expense, amortization expense of acquired intangible assets, certain litigation-related expenses and accretion of Series C and Series D redeemable convertible preferred stock. We define non-GAAP net income (loss) per share attributable to common stockholders, diluted, as non-GAAP net income (loss) divided by the weighted-average diluted shares outstanding, which includes the dilutive effect of potentially diluted common stock equivalents outstanding during the period.

Pro Forma Non-GAAP Net Income (Loss) per Share Attributable to Common Stockholders, Diluted. We define pro forma non-GAAP net income (loss) per share attributable to common stockholders, diluted, as the weighted-average shares used in computing the GAAP net loss per share attributable to common stockholders, diluted, plus a pro forma adjustment to give effect to the automatic conversion, upon the closing of our initial public offering on March 20, 2018, of our redeemable convertible preferred stock into 72,500,750 shares of common stock as though the conversion had occurred as of the beginning of the periods presented. We believe that this adjustment is necessary in order to provide meaningful comparison between periods.

Free Cash Flow and Free Cash Flow Margin. We define free cash flow as net cash used in operating activities less purchases of property and equipment and capitalized internal-use software. We define free cash flow margin as free cash flow divided by revenue. We believe that free cash flow and free cash flow margin are meaningful indicators of liquidity information to management and investors about the amount of cash generated from our operations that, after the investments in property and equipment and capitalized internal-use software, can be used for strategic initiatives.

Calculated Billings. We define calculated billings as total revenue plus the change in deferred revenue in a period. Calculated billings in any particular period aims to reflect amounts invoiced for subscriptions to access our cloud platform, together with related support services related to our new and existing customers. We typically invoice our customers annually in advance, and to a lesser extent quarterly in advance, monthly in advance or multi-year in advance.

Zscaler Reports Second Quarter Fiscal 2019 Financial Results