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Zscaler beat expectations in Q3, with revenue rising 25% year over year to $850 million and annual recurring revenue (ARR) also up 25% to $3.5 billion. Non-GAAP operating margin hit a record 23%, and the company ended the quarter with strong customer growth and a $6.5 billion remaining performance obligation.
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Management said AI security is becoming a major growth driver, citing rising customer interest in protecting AI applications, models and agents. Zscaler’s AI Protect has surpassed $100 million in bookings over the past 12 months, and the company plans to integrate Symmetry Systems to strengthen its zero-trust approach for AI.
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The company also highlighted expanding traction in Zero Trust Branch and data security, including a record branch deal and data security ARR topping $500 million. However, guidance was tempered by two sales leadership departures and higher capital spending expected due to rising hardware costs.
Zscaler (NASDAQ:ZS) reported stronger-than-expected fiscal third-quarter results, with management highlighting growth in annual recurring revenue, record operating margin and rising demand for its zero-trust security platform as enterprises adopt artificial intelligence tools.
Chairman and CEO Jay Chaudhry said the company delivered “strong Q3 results,” with ARR up 25% and non-GAAP operating margin reaching an all-time high of 23%. Chaudhry framed AI as a major shift in cybersecurity and said Zscaler’s zero-trust architecture is positioned for that transition.
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“AI is changing the nature of cybersecurity in real time,” Chaudhry said. “Zscaler is the cybersecurity platform for the AI era.”
Revenue rises 25% as ARR reaches $3.5 billion
CFO Kevin Rubin said fiscal third-quarter revenue was $850 million, up 25% year over year and 4% sequentially, exceeding the high end of the company’s guidance. Total ARR reached $3.5 billion, also up 25% year over year, while net new ARR was $166 million, up 24%.
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Excluding the contribution from Zscaler’s acquisition of Red Canary, net new ARR was $153 million, up 14% year over year, and total ARR grew 21%. Rubin said Red Canary exited the quarter with $127 million of ARR.
The company ended the quarter with 748 customers generating more than $1 million in ARR and 4,003 customers exceeding $100,000 in ARR, up 18% and 19% year over year, respectively. Rubin said Zscaler also recorded a third-quarter record for $1 million-plus new annual contract value deals.
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By region, the Americas accounted for 56% of revenue and grew approximately 31% year over year. EMEA represented 28% of revenue and grew approximately 16%, while APJ accounted for 16% of revenue and grew approximately 23%. Remaining performance obligation was approximately $6.5 billion, up about 30%.
Management points to AI security as a growth driver
Chaudhry said enterprises are facing heightened security risks as AI applications, models and agents gain access to mission-critical applications and sensitive data. He argued that AI agents could become a major weak point because they operate faster and with less oversight than human users.
He also cited new frontier AI models, including one he referred to as Mythos, as a factor that can accelerate the discovery of software vulnerabilities. Chaudhry said Zscaler’s approach focuses on hiding applications from attackers and eliminating lateral movement within networks.
Zscaler said its AI Protect solution has surpassed $100 million in bookings over the past 12 months. Chaudhry cited a seven-figure upsell with a Fortune 500 financial technology company that adopted AI Protect to discover AI assets, enforce guardrails and inspect prompts and responses in real time.
The company also announced its intent to acquire Symmetry Systems on May 21. Chaudhry said Symmetry provides an access graph that maps how identities, applications and data sources connect across an enterprise. He said Zscaler plans to integrate that technology with its Zero Trust Exchange as part of its effort to secure AI agents.
In the question-and-answer portion of the call, Chaudhry said Zscaler has received a high level of inbound interest from customers concerned about AI-related vulnerabilities. He said the company is not factoring a meaningful impact from those opportunities into its fiscal fourth-quarter outlook, but he believes they will have an impact in fiscal 2027.
Zero Trust Branch, Cloud and data security gain traction
Chaudhry said Zscaler is seeing momentum beyond user security, including branch, workload and data protection. He said the company signed the largest branch deal in its history during the quarter: an eight-figure upsell with a leading healthcare system to deploy its Zero Trust Branch solution across 2,000 sites.
He said Zscaler’s Zero Trust Branch ARR approximately tripled year over year, while data security crossed $500 million in ARR, up more than 30% year over year. The company also ended the quarter with more than 700 “Zero Trust Everywhere” enterprises, up from more than 550 in the prior quarter. Zscaler defines those as customers that purchase zero-trust offerings across users, branches and cloud workloads.
Rubin highlighted Z-Flex, a program that gives customers with multi-year commitments flexibility to activate or swap modules without starting a new procurement cycle. Z-Flex generated just over $480 million in total contract value in the quarter, up more than 60% sequentially, and has produced more than $1 billion in TCV over the past 12 months with an average four-year term.
Sales leadership departures factor into guidance
Rubin said two sales leaders departed the company at the end of the third quarter. Zscaler has already appointed a replacement for one role and is in the late stages of hiring for the second, he said. Management said it is taking a prudent approach to guidance during the transition.
Asked by Deutsche Bank analyst Brad Zelnick whether the departures were voluntary or involuntary and how they could affect the business, Chaudhry said the leaders were part of Chief Revenue Officer Mike Rich’s team and that the company wanted to account for possible short-term disruption. Rubin added that leadership changes “can have some disruptive nature to those organizations.”
Rubin said Zscaler’s fiscal fourth-quarter outlook calls for:
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Revenue of $875 million to $878 million, representing approximately 22% year-over-year growth.
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Gross margin of approximately 80%.
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Operating profit of $206 million to $208 million.
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Earnings per share of approximately $1.08 to $1.09.
For the full fiscal year 2026, the company expects ARR of $3.740 billion to $3.749 billion, revenue of $3.3295 billion to $3.3325 billion, operating profit of $755 million to $757 million and earnings per share of $4.10 to $4.11. The full-year revenue outlook implies growth of 24.6% to 24.7%.
Rubin also provided an early view of fiscal 2027, saying the company currently expects total ARR and revenue growth of 16% to 17%. He said Zscaler typically does not provide that type of guidance this early, but wanted to align expectations following the Red Canary acquisition and as ARR becomes the company’s primary growth metric.
Capex outlook rises on hardware costs
Zscaler ended the quarter with $3.5 billion in cash, cash equivalents and short-term investments, and $1.7 billion of debt. Operating cash flow was $198 million, while capital expenditures were $42 million, or 5% of revenue. Free cash flow margin was 16% for the quarter and 29% year to date.
Rubin said rising memory, storage and processor prices are affecting the company’s data center equipment and Zero Trust Branch appliances. Zscaler expects higher capital expenditures in the fourth quarter as it pulls forward some fiscal 2027 investments to lock in current prices.
As a result, the company now expects fiscal 2026 capital expenditures to be in the high single digits as a percentage of revenue, up from its prior expectation of mid-single digits. For fiscal 2027, Rubin said capex as a percentage of revenue could increase by up to 200 basis points compared with fiscal 2026 levels based on current market prices.
Management said it continues to see long-term growth opportunities from AI security, zero-trust adoption, data security and customer expansion, while acknowledging near-term caution tied to sales leadership changes and the pace of uptake for newly integrated security operations products.
About Zscaler (NASDAQ:ZS)
Zscaler is a cloud security company that delivers a cloud-native platform to protect users, applications and data as organizations move away from traditional, network-centric security architectures. The company focuses on a zero trust approach that assumes no implicit trust for users or devices, providing secure access to the internet, SaaS applications and private applications regardless of where users are located. Zscaler positions its services as an alternative to legacy appliances and site-centric VPNs, aiming to simplify security while enabling modern, distributed workforces.
Key offerings are built around the Zscaler Zero Trust Exchange, a multi-tenant cloud platform that enforces security and access policies in-line.
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The article “Zscaler Q3 Earnings Call Highlights” was originally published by MarketBeat.
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