Zscaler’s Earnings Call: Optimism Amid Growth

Zscaler ((ZS)) has held its Q3 earnings call. Read on for the main highlights of the call.

Zscaler’s recent earnings call exuded a sense of optimism, driven by robust revenue and Annual Recurring Revenue (ARR) growth. The company’s strategic product expansions and successful program launches, such as Z Flex, have bolstered its market position despite macroeconomic challenges. This positive sentiment is largely attributed to Zscaler’s innovative and customer-centric approach, which has led to significant achievements that overshadow existing challenges.

Record TCV Bookings and RPO Growth

Zscaler achieved a milestone in its third quarter by recording Total Contract Value (TCV) bookings exceeding $1 billion, marking its best Q3 performance. The company’s Remaining Performance Obligations (RPO) approached $5 billion, indicating strong market demand and a solid growth trajectory.

Strong ARR and Revenue Growth

The company reported an Annual Recurring Revenue (ARR) of approximately $2.9 billion, with a year-over-year growth of 23%. This growth trajectory is expected to continue, with projections to surpass $3 billion by the end of the quarter and a fiscal year 2025 revenue growth rate of 24%.

Expansion of Zero Trust and AI Solutions

Zscaler’s platform now secures over 50 million users, with a focus on expanding AI-driven solutions for security operations. This expansion enhances the company’s competitive edge in the cybersecurity market.

Successful Launch of Z Flex Program

The Z Flex program, which offers flexible scaling options for customers, has been a success, contributing over $65 million in TCV bookings shortly after its launch. This program demonstrates Zscaler’s ability to innovate and meet customer needs effectively.

Significant Growth in Emerging Product Categories

Zscaler is witnessing significant growth in its emerging product categories, namely Zero Trust Everywhere, Data Security Everywhere, and Agentic Operations. These categories are growing faster than the overall ARR, with a combined ARR approaching $1 billion.

Macro Environment Challenges

Despite the positive growth metrics, Zscaler faces challenges due to the macroeconomic environment. Customers are cautious about IT spending, leading to increased scrutiny of large deals and elongated sales cycles.

Federal Revenue Growth Limited

The federal business segment, while meeting expectations, has not shown significant growth. This is attributed to the complex nature of government contracts, which often involve lengthy procurement processes.

Gross Margin Decline

Zscaler reported a decline in total gross margin to 80.3% from 81.4% in the previous year. This decline is primarily due to the introduction of new products that have not yet been optimized for margins.

Forward-Looking Guidance

Looking ahead, Zscaler remains optimistic about its growth prospects. The company expects to exceed $3 billion in ARR by the end of the fiscal year and continues to see strong customer commitment, as evidenced by its RPO nearing $5 billion. The company’s free cash flow margin stands at 28%, contributing to a ‘rule of 52’ performance, which surpasses the industry benchmark.

In summary, Zscaler’s earnings call highlighted a positive outlook, driven by strong growth in revenue and ARR, strategic product expansions, and successful program launches. Despite facing macroeconomic challenges, the company’s innovative approach and customer-centric strategies position it well for continued success.