ETR reviews its latest TSIS data and trends for select companies reporting earnings next week; read on as we analyze Zscaler, Gitlab, and UiPath in more detail.
Key Takeaways
• Spending intentions remain very strong for Zscaler amid adjustments to the company’s sales leadership, which we believe is in part due to strong SASE demand and platform quality
• Second half data for GitLab is incrementally better as the company benefits from DevOps consolidation and strong seat adoption, despite macroeconomic challenges
• Our TSIS data on UiPath continues to decline one quarter after the company cut its growth outlook and replaced its CEO, although we acknowledge these problems will take time for leadership to address
The final major week of off-calendar software earnings kicks off after Labor Day Weekend. Enterprise software companies continue to describe hesitation from enterprises towards deal closures, albeit at steady demand levels versus last quarter. In our final preview of this survey iteration, we highlight ETR’s data behind Zscaler, GitLab, and UiPath from our most recent July 2024 Technology Spending Intentions Survey (TSIS).
We note that our updated OCT24 TSIS survey is set to close on October 3rd. Averaged over the past 11 years, we observe a slight aggregate Net Score drop of 161 bps in our October TSIS data compared with July. Given that around 85% of publicly traded software companies mark the end of their fiscal calendars in December or January, we interpret this as finalized FY budgets reflecting slightly more difficult realities for ITDMs compared with mid-year intentions.
Zscaler: Continued Strength in Spending Data Amid Sales Organization Reboot
Zscaler is scheduled to report earnings on Tuesday, September 3rd, after the bell. Our data on the vendor remains strong, and ETR reiterated a Positive opinion on the data set during the JUL24 TSIS period. The overall second-half Net Score has remained steady since OCT22 and increased by one point year-over-year, with slightly higher Increase citations more than offsetting the two-point addition in Negative (Decrease and Replace) intentions.
Among Zscaler’s shared accounts with SASE competitors, Cloudflare, Palo Alto Networks, and Fortinet saw the highest Net Scores in JUL24, and we highlighted elevated Adoption rates within Netskope and Cloudflare. Palo Alto’s shared customers indicated a high 42% citation rate of Increasing spend with this competitor, while Check Point exhibits a Net Score below zero in shared accounts. Within Zscaler accounts, all listed competitors saw the customer overlap percentage shrink, with Check Point declining the most, which points to evidence of ongoing vendor consolidation. Zscaler’s competitors with shared accounts all saw improved Net Scores compared with our last 2H data in OCT23, apart from Netskope. Cloudflare and Wiz saw the highest improvements since October, up 15 and 14 percentage points, respectively.
Among Information Security peers, Zscaler's Positive citation rate (Adoption percentage plus Increase percentage) stands at the 95th percentile, while its pervasion is at the 87th percentile within the sector. Especially with the potential for Positive indications for CrowdStrike to fall in our OCT24 survey data, Zscaler holds one of the highest combined Positive % of all next-generation security platforms:
Figure 1. ETR’s Technology Spending Intentions Survey asked IT Decision Makers about Positive (Adoption and Increase) second half spending intentions for Zscaler.
Last quarter, Zscaler shares rose 8.5% on the day following strong Q3 results, exceeding expectations for both sales (+32%) and profitability. Billings (+30%) also outperformed consensus as management raised FY sales and billings guidance heading into its FQ4. Concerns around competition, slowing growth, and a challenging macroeconomic environment seemed more muted compared to the more difficult FQ2 result. Despite ongoing challenges in the software industry, the company showed resilience, particularly in cloud-based security solutions, with strong new logo additions, low churn, and large deals, including government contracts.
The appointment of Mike Rich as the company’s new CRO in November and increased sales leadership hiring in FQ3 could spur better long-term growth, although some short-term friction is anticipated as the company focuses on hiring quota-carrying sales reps in this quarter. Management stated their expectation of a few points of headwind to its FY25 billings guidance as it ramps sales productivity from this hiring push.
Net revenue retention fell another point q/q to 116% due to the sales model rebuild, with management noting that “while good for our business, our increased success in selling bigger bundles, selling multiple pillars from the start and faster upsells within a year can reduce our dollar-based net retention rate in the future.” Despite the short-term hit and continued economic headwinds, the business regained momentum, with sales changes beginning to take effect. Competition from large public and high-growth private SASE vendors is ongoing, but with a CAGR far outpacing total cybersecurity growth, we think Zscaler remains well-positioned to seize more of a growing pie.
GitLab: Momentum Across Organizations of all Sizes, International
GitLab is set to report results on Tuesday, September 3rd, following the market close. GitLab’s Net Score has trended up by six percentage points y/y, up from 32% to 38%. This is driven by gains in both Adoption and Increase responses, while Decrease indications were cut in half both sequentially and y/y. GitLab’s Net Score among critical Global 2000 organizations also improved by six percentage points sequentially and y/y to 39%. The percentage of Global 2000 respondents intending to Adopt the DevSecOps vendor was nearly double the levels captured in our last second-half survey in OCT23.
GitLab's Net Score stands at the 93rd percentile, while Pervasion is at the 85th percentile within the Infrastructure Software sector. GitLab’s Net Score is third among its competitor group, trailing only Microsoft and Microsoft’s GitHub. The company’s Adoption percentage landed at the 66th percentile, second among its peers and trailing only JFrog.
Net Score strengthened across all Enterprise Size subsamples, most notably among Small Organizations. Fortune 500 respondents showed the least improvement but remained highest in overall Net Score. Outside of the small sample in APAC, improvement within International markets was led by EMEA respondents, as all foreign cuts screened a higher Net Score than North America:
Figure 2. ETR’s JUL24 Technology Spending Intentions Survey data shows Net Score percentages across various subsample demographics for GitLab.
Shares declined modestly following the company's Q1 results, where GitLab beat both top and bottom line expectations with strong subscription revenue but saw billings fall short. Management provided Q2 revenue guidance in line with consensus while raising FY guidance by 1% at the midpoints. Net Revenue Retention ticked one point lower incrementally but remained strong at 129% in the quarter.
GitLab saw strong seat growth in Q1, driving the majority of NRR despite macro challenges continuing to pressure seat-based models. While management cited several positive developments in features, Generative AI has yet to contribute significantly to growth, but the long-term potential is intact. In July, shares of GitLab experienced volatility around a Reuters report that it was shopping itself to be acquired; however, nothing was alleged to be imminent, and we have heard no further update.
UiPath: NRR Remains Strong but Competitors Appear to Gain
The Robotic Process Automation vendor will host its call after market hours on Thursday, September 5th. UiPath’s Net Score reached new all-time lows in JUL24 at 24%, well below the RPA sector NS of 35%. This comes after a five-point y/y decline from the previous all-time low in OCT23, marking a historically high churn rate of 6% combined with an all-time low Increase rate of 27%, which is down eleven percentage points y/y.
Compounding this, all vendors in the RPA space with a minimum of 20 shared accounts with UiPath saw higher Net Scores vs last October, with Microsoft Power Automate (N = 122) leading the field in absolute Net Score at 77%, a twenty-point gain since October. Among shared accounts that cited plans to Decrease or Replace UiPath, Microsoft Power Automate’s Net Score jumps even further to 83% (a 26 ppt gain y/y).
Figure 3. ETR’s JUL24 TSIS asked IT Decision Makers with shared accounts between UiPath and competitors about second half spending intentions (Microsoft Power Automate N = 122, Automation Anywhere N = 57, Blue Prism N = 34, Pegasystems N = 29).
In May, UiPath lost over a third of its market cap in the day following a first-quarter sales beat due to a nearly 10% full-year revenue guidance cut. In conjunction with the earnings announcement, UiPath’s CEO abruptly resigned and was replaced by Founder and former Chief Executive Daniel Dines. FQ1 results were solid, with sales growing 16% y/y and ARR up 21% to $1.51 billion. Despite a still-solid net retention rate of 118% and gross retention rate of 98%, indicating overall stickiness, UiPath’s total customer count declined slightly due to attrition among smaller clients and difficulty in finding replacement logos. The company saw growth in total customers with >$100K in ARR, but those with >$1M in ARR remained flat.
Management attributed the difficult outlook to “seeing increased deal scrutiny and longer sales cycle with our large multiyear deals… updated guidance takes into consideration both the macroeconomic environment, our leadership transition and improved operating discipline, which will take time to implement.” Q2 sales guidance also fell below expectations as management also acknowledged internal issues, particularly in structuring sales force compensation, and emphasized plans to become more customer-centric and leverage partnerships. Along with concerns over potential RPA market displacement from generative AI adoption, these issues have dragged on UiPath’s valuation to a 3.7x EV/Forward Sales multiple going into the print. While the company hovers near achieving a Rule of 40 status, this multiple tracks well below the software average of 6.0x.
Enterprise Technology Research (ETR) is a technology market research firm that leverages proprietary data from our targeted IT decision maker (ITDM) community to provide actionable insights about spending intentions and industry trends. Since 2010, we have worked diligently at achieving one goal: eliminating the need for opinions in enterprise research, which are often formed from incomplete, biased, and statistically insignificant data. Our community of ITDMs represents $1+ trillion in annual IT spend and is positioned to provide best-in-class customer/evaluator perspectives. ETR’s proprietary data and insights from this community empower institutional investors, technology companies, and ITDMs to navigate the complex enterprise technology landscape amid an expanding marketplace. Discover what ETR can do for you at www.etr.ai