3 Answers from Zscaler on Earnings as Stock Sinks
Sentiment on Zscaler (ZS) shares took a nosedive after it disappointed analysts and investors with third quarter results Tuesday that project higher spending and lower free cash flow margins.
Shares of Zscaler were down 30% in early trading.
The company reported adjusted third quarter earnings of $1.08 per share, on revenue of $850.5M and annual recurring revenue (ARR) of $3.53B, all above estimates, with a non-GAAP operating margin of 23%. It raised its revenue guidance for the year to a range of $3.3295B to $3.3325B, boosted by the recent Red Canary acquisition. But the challenge: it cut its free cash flow margin outlook from 26.5% to 27%, down to 22.8% to 23.3%, citing capital expenditure as a percentage of revenue in the high single digits for fiscal 2026.
Founder and CEO Jay Chaudhry reminded listeners of Zscaler’s reputation for corporate cybersecurity that acts like a fortress against attackers, and “Zero Trust” architecture that prevents lateral movement.
CFO Kevin Rubin, who talked about results and cybersecurity in February, cited two significant sales leader departures as a setback but said there is opportunity “to continue scaling our rapidly expanding AI Security portfolio, accelerating Zero Trust everywhere adoption and growing our data security revenue.”
But analysts want to see more growth. From the conference call transcript, here are answers from management on some of the toughest Wall Street analyst questions:
Question from Ittai Kidron, an equity research analyst at Oppenheimer & Co: Why might ARR growth decelerate?
Answer: Rubin said prudent guidance resulted partly from talent disruption. He also said, “the pace of uptake with the integrated SecOps products … [requires a] prudent approach as it relates to Q4, so the guide implies 9.5% net new ARR growth on an organic basis, excluding Red Canary.”
Q: Gabriela Borges, an analyst and head of U.S. Software Equity Research at Goldman Sachs, asked about new logo and sales growth.
A: Rubin said he was not “trying to suggest that new logo growth is tempering. What I was intending to convey is that my expectations relative to the early look for next year took a tempered approach to how we thought about the contributions of new logo growths."
Q: Andrew DeGasperi, Senior Software Analyst at BNP Paribas, asked about inflation and the impact on customers. Zscaler’s hardware spending, including memory storage and processor purchases, is rising.
A: Chaudhry said, all these AI data centers [being constructed is] causing such a shortage of so many parts. … Rubin said, “We purchase equipment for our data center and Zero Trust branch appliances. … I think the world is recognizing that hardware costs have gone up. … We are also being opportunistic in taking advantage of delivery of data center equipment where we can get it to lock in today's prices ahead of potential increases in the future. This is pulling forward some of the investments we expected to make in fiscal 27 into Q4.”
