Zscaler Earnings Call Highlights Durable, Profitable Growth

Zscaler ((ZS)) has held its Q2 earnings call. Read on for the main highlights of the call.

Zscaler’s latest earnings call struck an upbeat tone, underscoring durable demand for its security platform despite a few manageable headwinds. Management highlighted strong top-line growth, accelerating ARR, improving operating leverage and record deal activity, offset only by modest margin pressure and integration risks tied to the Red Canary acquisition.

Robust ARR Expansion Underpins Growth Story

Total ARR climbed to $3.4 billion, up 25% year over year, with Q2 net new ARR of $156 million growing 19%. Even excluding Red Canary, net new ARR rose 7%, and full-year ARR guidance was lifted to a range of $3.73 billion to $3.745 billion, implying roughly 24% annual growth and reinforcing confidence in recurring demand.

Revenue Beats Drive Upward Revisions

Quarterly revenue reached $816 million, advancing 26% from a year earlier and 4% sequentially, beating the high end of guidance. On the back of this outperformance, Zscaler raised its full-year revenue outlook to $3.309 billion to $3.322 billion, implying growth of roughly 23.8% to 24.3%.

Healthy Cash Generation and Strong Balance Sheet

Zscaler exited the quarter with $3.5 billion in cash, equivalents and short-term investments against $1.7 billion of debt, giving it ample financial flexibility. Operating cash flow rose 14% year over year to $204 million, and first-half performance translated into a Rule-of-62 profile, combining rapid growth with strong free cash flow margins.

Margin Leverage Supports Profitability Story

Non-GAAP operating income increased to $181 million, up 29% year over year, as operating margin improved by 50 basis points to 22.2%. Non-GAAP gross margin held steady at about 80.2%, showing continued efficiency even as the company invests in platform expansion and scale.

Large Deals, Productivity and Global Traction

The company posted a record number of new $1 million-plus ARR deals in Q2, with 728 customers now above that threshold and 3,886 above $100,000, both up 18%. Regional performance was broad-based, with Americas revenue growing about 31% year over year, EMEA 18% and APJ 23%, aided by double-digit gains in sales productivity.

Z-Flex Becomes a Key Upsell Engine

Z-Flex generated more than $290 million in total contract value during Q2, surging over 65% sequentially and bringing cumulative TCV since launch to roughly $650 million on average four-year terms. Management emphasized that Z-Flex is shortening sales cycles, enhancing visibility and driving significant upsell into the installed base.

AI and Agentic Security Demand Accelerates

Positioning itself as a security platform for the AI era, Zscaler processed nearly 1 trillion AI transactions in calendar 2025 and over 500 billion transactions daily across its cloud. Wins included an eight-figure new logo with a Fortune 500 semiconductor customer and strong adoption of ZDX Advanced Plus, whose bookings surpassed $100 million over the last year, growing more than 80%.

Zero Trust Everywhere and Data Protection Momentum

Customers adopting Zero Trust Everywhere jumped from around 130 a year ago to over 550, underscoring rapid platform penetration. Illustrative wins included a Global 2000 financial firm whose Zero Trust Cloud deployment lifted ARR above $5 million and another financial customer whose data-security upsell nearly quintupled its ARR.

RPO Growth and Record Pipeline Conversion

Remaining performance obligation rose to $6.1 billion, up roughly 31% year over year, with about 47% classified as current. Management cited record pipeline conversion in Q2 alongside double-digit sales productivity gains, signaling solid visibility and execution heading into the back half of the fiscal year.

Red Canary Integration Brings Churn Risk

Red Canary closed the quarter with $114 million in ARR and is expected to be a meaningful contributor, but management acknowledged elevated churn typical of MDR businesses. While fiscal 2026 ARR expectations for Red Canary were raised to around $130 million, integration work and retention trends introduce some near-term uncertainty.

Free Cash Flow Margin Slips Quarter to Quarter

Q2 free cash flow margin came in at 20.7%, down from 22.1% a year earlier, primarily due to timing of cash collections rather than structural deterioration. Despite this quarterly dip, first-half results still showcase strong cash conversion, and management reiterated confidence in maintaining attractive free cash flow economics.

Slight Gross Margin Pressure and Cost Headwinds

Non-GAAP gross margin edged down to 80.2% from 80.4% last year, a modest contraction that management deemed manageable. They flagged potential future pressure from rising memory, storage and processor costs tied to data center and appliance investments, though current profitability remains solid.

Moderating Organic Net New ARR Growth

While overall net new ARR reaccelerated, growth excluding Red Canary was more moderate at 7% in Q2 and about 10% for the first half, against tough comparisons. Some portion of the raised outlook simply reflects the acquired ARR, signaling that purely organic acceleration is more measured even as the broader growth narrative stays intact.

Mixed Signals from Red Canary Outlook

Management increased its Red Canary ARR forecast materially yet simultaneously discussed elevated churn and deferred more detailed metrics to later quarters. That divergence creates a near-term question mark on the quality and durability of Red Canary’s contribution, even though the long-term strategic fit appears compelling.

Guidance Signals Confidence in Durable Growth

For Q3, Zscaler expects revenue of $834 million to $836 million, around 23% growth, with operating margins above 22% and EPS near $1.00. For fiscal 2026, the company now guides ARR growth of about 24%, revenue expansion near 24%, operating profit up almost 30%, EPS around $4 and free cash flow margins in the high-20% range, reinforcing a strong growth-and-profitability profile.

Zscaler’s earnings call painted a picture of a security leader benefiting from AI, Zero Trust and data protection tailwinds while managing integration and cost challenges. With raised guidance, robust large-deal momentum and solid balance sheet strength, investors heard a story of durable, profitable growth, tempered by watchpoints around Red Canary churn and modest margin pressures.