Zscaler, Inc. Q2 FY2026 earnings call

• ARR Growth: ARR increased by 25%, driven by strong demand across all growth pillars. • AI Focus: AI is a transformative technology, and Zscaler is positioned to secure the AI era using its Zero Trust Exchange. • AI Security Details: Consists of two product areas - AI Protect (securing enterprise AI adoption) and agentic operations (including agentic SecOps and ITOps). • Zero Trust Everywhere: Over 550 enterprises are adopting Zero Trust Users, Branch, and Cloud, with significant growth in Zero Trust Branch and Cloud, creating a flywheel effect for other offerings. • Data Security Everywhere: Eight modules with customers consolidating data security point products onto Zscaler's integrated platform due to strong demand from AI app usage. • ZFlex Program: Driving upsell with multi-year commitments, generating over $290 million in TCV in Q2 with a 65% quarter-over-quarter increase since launch.

ARR grew 25% reflecting strong demand for Zscaler's platform, reaching $3.4 billion. Revenue for Q2 was $816 million, up 26% year-over-year and 4% sequentially. In terms of product segments: AI security saw robust demand with solutions like AI Protect and agentic operations; Zero Trust Everywhere had over 550 enterprises adopting Zero Trust Users, Branch, and Cloud, with significant growth in Zero Trust Branch and Cloud; Data security everywhere had eight modules with customers consolidating point products onto Zscaler's integrated platform. Geographically, the Americas accounted for 57% of revenue, EMEA 28%, and APGA 15%, with respective year-over-year growth rates. Remaining Performance Obligation (RPO) was $6.1 billion, up approximately 31%, with ~47% classified as current RPO.

• Q3 Financial Outlook: Revenue is expected to be $834 million to $836 million, representing approximately 23% year-over-year growth. Gross margin is expected to be approximately 80%, operating profit is $187 million to $189 million, net other income is approximately $25 million, and earnings per share (EPS) is $1 to $1.01. • Full-Year ARR and Revenue: Full-year ARR is projected to be $3.730 billion to $3.745 billion, a year-over-year growth of approximately 24%. Net new ARR excluding Red Canary is expected to be approximately 9.5%. For the full year, revenue is expected to be $3.309 billion to $3.322 billion, with year-over-year growth of 23.8% to 24.3%. Operating profit is expected to be $742 million to $748 million, and EPS is $3.99 to $4.02. • Red Canary Expectations: Red Canary's ARR is expected to be approximately $130 million in fiscal 2026, up from prior guidance of $95 million, with net new ARR for Red Canary being approximately $6 million in Q3 and $10 million in Q4. • Second Half Guidance: The second half of fiscal 2026 is expected to have approximately 40% of total net new ARR recognized in Q3.

• Forward-Looking Statements: Subject to risks and uncertainties beyond the company's control, including those related to future performance not guaranteed by forward-looking statements. • Supply Chain Risks: Increases in memory, storage, and processor prices and availability could potentially impact the company's operations in the future when purchasing equipment for data centers and Zero Trust branch appliances. • Red Canary Churn: Post-acquisition, Red Canary's churn has been elevated, which is a risk factor to consider.

Q: Saket Kalea from Barclays inquired about the competitive backdrop and win rates.

A: Jay Chaudhry stated that there hasn't been much change in competitive dynamics in recent quarters, mentioned a record pipeline conversion for Q2 and record large deal wins, and emphasized that customers care about zero trust and almost always win when the company explains zero trust, noting that SASE is not equivalent to zero trust.

Q: Brad Zelnick from Deutsche Bank asked about the raise in full-year ARR expectation.

A: Kevin Rubin explained that the company's business seasonality favors the second half of the year, with a strong pipeline of deals entering the back half, giving confidence in the raise.

Q: Greg Moskowitz from Mizuho asked about non-seat-based metered usage solutions.

A: Jay Chaudhry said the company started with zero trust for users, now extends to workloads, branches, devices, and AI agents, with non-seat-based solutions being used for various use cases like third-party contractors and guest Wi-Fi, and expecting growth with AI agents due to the need for zero trust exchange to secure AI agent communication.

Q: Brian Essex from J.P. Morgan asked about AI-related budgets and CIO funding.

A: Jay Chaudhry said CIOs are eager to implement AI security projects, with budgets coming from either the security side or allocated from AI projects, and Zscaler is benefiting from this interest.

Q: Meta Marshall from Morgan Stanley asked about sales cycles with AI.

A: Jay Chaudhry mentioned that sales cycles depend on the scope of the project, are faster with integrated solutions as customers want an integrated way to handle AI security, starting with smaller deals that are expected to grow over time.

Q: Fatima Bulani from Citi asked about Red Canary's churn and financial contribution.

A: Kevin Rubin said Red Canary was a technology and talent acquisition, with elevated churn post-acquisition, but there is a positive impact to ARR from Red Canary's business.

Q: Roger Boyd from UBS asked about sales productivity.

A: Jay Chaudhry and Kevin Rubin stated that changes in the go-to-market strategy have led to double-digit sales productivity growth, with record pipeline conversion and large deal wins indicating improved productivity.

Q: Etai Kidron from Oppenheimer and Company asked about core ZIA, ZPA growth.

A: Kevin Rubin said ZIA and ZPA have shown consistent performance, with a 2 - 3x ARR lift when customers move to Zero Trust Everywhere and high interest in replacing legacy solutions like SD-WAN and virtual firewalls.

Q: Gray Powell from BTIG asked about ZFlex deals.

A: Kevin Rubin explained that ZFlex gives customers flexibility with multi-year commitments, no difference in ARR ramp compared to non-ZFlex deals, with average TCV of eight-figure and a typical four-year term.

Q: Jonathan Rookover from Cancer Fitzgerald asked about Square X acquisition.

A: Jay Chaudhry said the Square X acquisition provides a better solution for browser security on unmanaged devices, avoiding the issues of full-blown enterprise browsers with vulnerabilities and multiple agents.

Q: Eric Keith from KeyBank asked about monetizing AI agent traffic.

A: Jay Chaudhry said more AI agents mean more traffic through the zero trust exchange, creating revenue opportunities as the only way to secure AI agent communication is through the scalable, reliable, and globally distributed zero trust exchange.

Q: Matt Hedberg from RBC asked about ARR raise.

A: Kevin Rubin said the underlying organic growth of the business gives confidence in the raise, with net new ARR excluding Red Canary growing 10% in the first half of the year compared to 1% last year.

Q: Keith Bachman from BMO asked about zero trust everywhere's significance.

A: Jay Chaudhry said there is a 2 - 3x ARR lift when customers move to Zero Trust Everywhere, with high interest in replacing legacy solutions like SD-WAN and virtual firewalls, and potential for a large number of customers to become Zero Trust Everywhere customers over time