Zscaler, Inc. (ZS) Earnings

Management highlights

- Core Differentiation and AI Era Positioning * Zscaler offers the industry's only complete zero-trust SaaS platform covering users, cloud workloads, and branches, with key advantages over competing firewall-based SASE solutions: it hides applications from attackers to eliminate attack surface, blocks lateral attacker movement to reduce breach blast radius, and operates the world's largest distributed inline security platform with high-fidelity telemetry that powers AI security capabilities. * The rise of frontier AI models (like Mithos) and large-scale AI agents creates new cybersecurity risks: frontier models can find unpatched vulnerabilities 10x faster than manual methods, expanding existing vulnerability backlogs, while compromised AI agents can steal data at catastrophic speed. Zscaler's zero-trust architecture (hiding applications + eliminating lateral movement) is purpose-built to address these risks, making it the leading cybersecurity platform for the AI era. - Product and M&A Strategy * Announced the planned acquisition of Symmetry Systems, whose AccessGraph technology maps connections between identities, applications, and data across the enterprise to enable agentic security policy enforcement; this technology will be integrated with Zscaler's Zero Trust Exchange. * Established strategic partnerships: Project GlassWing with Entropic, and participation in OpenAI's Daybreak program (formerly Trusted Access for Cyber) to access frontier models to harden Zscaler systems and improve customer security. * AI Protect, launched in January 2026, includes AI asset discovery, shadow AI management, AI guardrails, and continuous red teaming, with strong early customer adoption. - Go-to-Market Progress * Deepened partnerships with Global System Integrators (GSIs), launching Project AI Guardian to enable GSIs to deliver Zscaler zero-trust security for AI assets and agents; bookings through GSI partners are growing strongly. * Cloud marketplace transactions year-to-date fiscal 2026 hit ~$900 million in total contract value (TCV), more than doubling year-over-year, establishing cloud marketplaces as a growing important route to market. * ZFlex, a program that gives multi-year commitment customers flexibility to activate/swap modules without new procurement cycles, generated just over $480 million in TCV in Q3, up over 60% quarter-over-quarter, with over $1 billion in TCV over the last 12 months and an average 4-year contract term. - Operational Customer Momentum * Exited Q3 with over 700 Zero Trust Everywhere customers (enterprises that purchase all three zero-trust offerings for users, branches, and cloud), up from over 550 in Q2. * Closed several notable large deals: a seven-figure AI Protect upsell with a Fortune 500 fintech company, an eight-figure upsell with a federal agency expanding to six data security modules, the largest branch deal in company history (an eight-figure upsell with a leading healthcare system across 2,000 sites displacing legacy incumbents), a seven-figure new logo win with a leading healthcare technology company for full platform adoption, and a seven-figure Zero Trust Cloud upsell with a large automotive manufacturer. * Ended Q3 with 748 customers generating over $1 million in ARR (up 18% YoY) and 4,003 customers generating over $100,000 in ARR (up 19% YoY), with a record number of $1 million+ new ACV deals for a Q3.

Guidance

- Q4 Fiscal 2026 (non-GAAP): Revenue is expected to be $875 million to $878 million, representing ~22% year-over-year growth. Gross margin is expected to be ~80%. Operating profit is expected to be $206 million to $208 million, representing ~30% to 31% year-over-year growth. EPS is expected to be $1.08 to $1.09. - Full Year Fiscal 2026 (non-GAAP): Total ARR is expected to be $3.740 billion to $3.749 billion, representing ~24% year-over-year growth; organic net new ARR (ex-Red Canary) is expected to grow ~9.5%. Red Canary ARR is expected to be $137 million, an upward revision from prior guidance of $130 million. Total revenue is expected to be $3.3295 billion to $3.3325 billion, representing 24.6% to 24.7% year-over-year growth. Operating profit is expected to be $755 million to $757 million, an upward revision from prior guidance of $742 million to $748 million. EPS is expected to be $4.10 to $4.11. Free cash flow margin is expected to be 22.8% to 23.3%, a downward revision from prior guidance of 26.5% to 27%, due to higher expected capital expenditures. CapEx as a percentage of revenue is now expected to be high single digits, up from prior guidance of mid-single digits, as some planned Fiscal 27 investments are pulled forward to Q4. - Fiscal 2027 Preliminary Guidance: Total ARR and revenue are expected to grow 16% to 17% year-over-year. CapEx as a percentage of revenue is expected to increase up to 200 basis points compared to Fiscal 2026 levels due to elevated data center hardware prices. - The lower 2027 growth guidance reflects a prudent approach due to short-term disruption from recent sales leadership turnover, and tempered expectations for near-term uptake of the integrated Red Canary SecOps solution.

Segment performance

By geographic segment: Americas generated 56% of total revenue, growing 31% year-over-year. EMEA generated 28% of total revenue, growing 16% year-over-year. APJ generated 16% of total revenue, growing 23% year-over-year. By product line: Data security reached $500 million in annual recurring revenue (ARR), growing over 30% year-over-year. Zero Trust Branch ARR has approximately tripled year-over-year. Non-seat-based metered usage solutions delivered just over 30% of new annual contract value (ACV) in Q3, with associated ARR growing more than 100% year-over-year. Red Canary exited Q3 with $127 million in ARR. AI Protect reached $100 million in bookings over the past 12 months.

Risks & headwinds

- Recent departure of two senior sales leaders creates potential short-term disruption to sales operations, which management has incorporated into lower near-term guidance. - Elevated memory, storage, and processor prices for data center equipment and Zero Trust branch appliances are increasing capital expenditure costs, pushing 2026 CapEx higher and expected 2027 CapEx up 200 basis points as a percentage of revenue. - Growth in new customer acquisition has underperformed management's targets, creating pressure to improve execution in this core area. - EMEA regional growth has slowed relative to other regions, requiring improved execution to return EMEA to high growth. - Frontier AI models increase cybersecurity risk for enterprises, which creates opportunity but also requires ongoing product innovation to address rapidly evolving threats. - Uptake of the integrated SecOps solution from Red Canary is uncertain, with uncertain pace of adoption among existing customers.

Analyst Q&A

• Q: What is the context of the recent sales leadership turnover, and how does it impact guidance? Is the pipeline still intact, and how would guidance have differed without the turnover?

  A: Two senior sales leaders departed the company; one internal replacement has already been appointed, and the second role is in late stages of hiring. Management is taking a prudent approach to guidance to account for potential short-term disruption from the leadership change, even though the company has a strong existing sales bench and mature sales organization. Leadership turnover is a normal periodic occurrence.

• Q: What explains the tempered outlook for organic net new ARR growth in Fiscal 2027, beyond sales leadership turnover? What are the key moving parts across business segments?

  A: The company has a strong track record of stable upsell growth that is expected to continue, but new logo growth has underperformed targets, so management took a tempered view of new logo contributions for the early 2027 outlook. Red Canary's integrated SecOps solution will launch in 2027, but the pace of customer uptake is uncertain, so management also took a prudent view of Red Canary's net new ARR contribution. Despite the prudent forecast, underlying demand for Zscaler's zero-trust solutions has grown sharply following the emergence of frontier AI vulnerability discovery.

• Q: How is the emergence of frontier AI models impacting customer demand and pipeline, and when will this impact show up in financial results?

  A: Zscaler has seen an unprecedented surge in inbound customer inquiries, as enterprise C-suite leaders are increasingly concerned about AI-related cybersecurity risks. Most other vendors focus on patching vulnerabilities, which can never keep up with growing backlogs, while Zscaler's core zero-trust approach (hiding attack surfaces and eliminating lateral movement) directly addresses the root risk. No material impact from these new opportunities is factored into Q4 guidance, but management expects significant positive impact in Fiscal 2027, with particular strength driving upsells for Zscaler Private Access and deception technology.

• Q: What are Zscaler's key plans to improve new logo growth, and what are the highest priority areas for improvement?

  A: The top priority is expanding coverage in the lower enterprise segment (2,000-10,000 users), where current coverage is limited, by adding new salespeople focused on this segment. Second, the company is creating new channel incentive programs for VAR partners, which play a key role in the lower enterprise segment, specifically for new logo acquisition. Third, the company is deepening collaboration with GSIs to target new large enterprise logos, through initiatives like the Project AI Guardian partnership. Fourth, major account teams will increase their focus on new logo acquisition (in addition to existing upsell focus), with adjusted incentives to prioritize new customer wins.

• Q: How does Symmetry Systems' technology add to Zscaler's AI agent security capabilities, and what is their expected revenue contribution?

  A: Symmetry's core innovation is an access graph that maps all connections between identities (users, workloads, AI agents) and enterprise data sources, a hard problem that required years of specialized development. This technology is complementary to Zscaler's platform, enabling better policy enforcement for AI agents on the Zero Trust Exchange. Symmetry is primarily a technology and talent acquisition, with current ARR that is immaterial (low single-digit millions). SquareX, another recent acquisition, also has immaterial ARR.