Zscaler ((ZS)) has held its Q1 earnings call. Read on for the main highlights of the call.
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The latest earnings call from Zscaler reflects a strong positive sentiment, showcasing the company’s ability to exceed financial expectations and achieve strategic goals ahead of schedule. Despite facing challenges in the competitive landscape and slight pressure on gross margins, Zscaler’s significant achievements in revenue growth, customer metrics, and product innovation, particularly in AI security and Zero Trust, indicate a robust performance.
Strong Start to Fiscal Year 2026
Zscaler kicked off Fiscal Year 2026 with impressive growth metrics. The company reported a 26% year-over-year increase in annual recurring revenue (ARR) and a 35% rise in remaining performance obligations (RPO). Revenue also grew by 26%, with the company operating at a rule of 78, outperforming the rule of four d metric, which underscores their strong market position.
AI Security Pillar Surpasses Expectations
The AI security pillar has been a standout performer, growing over 80% year over year. This growth allowed Zscaler to surpass its FY ’26 target of $400 million ARR three quarters early, with expectations to exceed $500 million by the end of the fiscal year. This achievement highlights the company’s leadership in AI-driven cybersecurity solutions.
Zero Trust Everywhere Achieves Early Success
Zscaler’s Zero Trust Everywhere initiative has also seen early success, securing 390 enterprises three quarters ahead of the target date. The company has now secured over 450 enterprises, demonstrating the effectiveness and appeal of their Zero Trust security solutions.
Introduction of Z Flex Program
The introduction of the Z Flex program has been a significant driver of growth, generating over $175 million in total contract value (TCV) and growing over 70% quarter over quarter. This program has facilitated meaningful upsells and reduced the sales cycle, contributing to the company’s strong financial performance.
Record-Breaking Customer Metrics
Zscaler closed Q1 with 698 customers generating over $1 million in ARR and 3,754 customers exceeding $100,000 in ARR. These record-breaking customer metrics underscore the company’s ability to attract and retain high-value clients.
Strong Financial Performance
In Q1, Zscaler reported revenue of $788 million, marking a 20% year-over-year growth and a 10% sequential increase, exceeding high-end guidance. The company also achieved a free cash flow margin of 52%, highlighting their efficient financial management.
Competitive Landscape Challenges
Despite its strong performance, Zscaler faces challenges in a competitive landscape with entrants and existing companies like Cisco, Check Point, and Palo Alto Networks introducing new products and strategies. This competitive pressure underscores the need for continuous innovation.
Gross Margin Pressure
Zscaler experienced a slight decline in gross margin to 79.9% from 80.6% last year. This was influenced by the introduction of new products optimized for faster go-to-market rather than margins, indicating a strategic focus on growth and market penetration.
Forward-Looking Guidance
Looking ahead, Zscaler provided robust guidance, reflecting strong financial performance and strategic growth initiatives. The company expects revenue between $3.282 billion and $3.301 billion for the full fiscal year 2026, with an operating profit of $732 million to $740 million and earnings per share ranging from $3.78 to $3.82. With continued investments in platform expansion and innovation, Zscaler is well-positioned to capitalize on the growing demand for comprehensive cybersecurity solutions.
In summary, Zscaler’s earnings call highlighted a strong positive sentiment, driven by exceptional revenue growth, strategic achievements in AI security and Zero Trust, and robust financial performance. Despite facing competitive challenges and slight margin pressures, the company’s forward-looking guidance and strategic initiatives position it well for continued success in the cybersecurity market.