Shares in Zscaler Inc. fell more than 6% in late trading today on concerns about increased spending despite the cloud security company delivering beats in its latest quarter and issuing a better-than-expected earnings outlook.

For its fiscal first quarter that ended Oct. 31, Zscaler reported adjusted earnings per share of 67 cents, up from 29 cents in the same quarter of last year, on revenue of $496.7 million, up 40% year-over-year. Analysts had been expecting earnings per share of 49 cents on revenue of $473.36 million.

The company saw adjusted income from operations of $89.7 million or 18% of revenue, up from $42.1 million or 12% of revenue in the same quarter of fiscal 2023. Cash provided by operations came in at $260.8 million, up from $125.8 million and deferred revenue as of Oct. 31 sat at $1.34 billion, up 39% year-over-year. Zscaler also had $2.324 billion in cash, cash equivalents and short-term investments on hand as of the end of the quarter.

Recent business highlights include Zscaler announcing a joint solution with CrowdStrike Holdings Inc. and Imprivata Inc. in September to deliver a zero-trust security solution for healthcare organizations. The integration is said to provide visibility, threat protection and traceability for end-to-end, multi-user, shared device access control that are required for healthcare organizations to meet regulatory compliance requirements, such as Health Insurance Portability and Accountability Act and the Health Information Technology for Economic and Clinical Health Act.

The company also introduced a series of zero-trust innovations to the Zscaler Workloads Communications solution designed to simplify and improve cloud workload security through native integration with Amazon Web Services Inc. user-defined tags. The advancements are designed to deliver granular zero trust virtual private cloud segmentation for cloud-based virtual desktop infrastructure and enable customers to connect and protect workloads across the full spectrum of cloud environments – including Government Cloud.

For its fiscal 2024 second quarter, Zscaler said it expects adjusted earnings per share of 57 to 58 cents on revenue of $505 million to $507 million. Both figures are beats, as analysts were expecting 51 cents and $497 million. It was a similar story with the company’s full fiscal year 2024 outlook, with Zscaler expecting $2.45 to $2.48 and $2.09 billion to $2.1 billion, versus an expected $2.24 and $2.06 billion.

With solid figures all around, the obvious question is: Why is Zscaler’s stock down in late trading? The answer could be in this quote.

“We are enabling enterprises to move forward with their key transformative initiatives — Zero Trust and AI — which is driving demand for our Zero Trust Exchange,” Jay Chaudhry, chairman and chief executive officer of Zscaler, said in the company’s earnings release. “In order to meet this growing need, we are scaling our go-to-market and R&D organizations, strengthening our foundation for the long-term growth of our business.”

According to Barron’s, the last part of the quote “implies higher costs and could explain the market’s tepid reaction to the otherwise strong results.” It certainly could, but the reaction of investors does seem a bit over the top, given the otherwise excellent figures.

Image: Zscaler