Zscaler Q1 2026 Earnings Analysis

Dive into $ZS Zscaler’s Q1 2026 earnings with review of financial performance, key metrics, operating expenses, dilution, customer growth, future outlook

Sergey

May 27, 2026

Financial Results:

↗️$850.5M rev (+25.4% YoY, +4.3% QoQ) beat est by 1.8%

↗️GM* (80.7%, +0.5 PPs YoY)

↗️Operating Margin* (23.0%, +1.4 PPs YoY)🟢

↘️FCF Margin (16.0%, -1.6 PPs YoY)🟡

↘️Net Margin (-1.6%, -1.0 PPs YoY)🟡

↗️EPS* $1.08 beat est by 6.9%🟢

*non-GAAP

Key Metrics

➡️DBNR 115% (115% LQ)**

➡️ARR $3.53B (+25.1% YoY, +166 net new ARR)🟡

➡️cRPO $2.97B (+24.4% YoY)🟡

↗️RPO $6.46B (+29.8% YoY)

➡️Billings $972M (+23.9% YoY)🟡

Customers

➡️4,003 >$100k+ customers (+19.0% YoY, +117)

➡️748 $1M+ customers (+16.3% YoY, +20)

Regional Breakdown

↗️United States $452.6M rev (+32.0% YoY, 53% of Rev)

↘️EMEA $236.4M rev (+16.4% YoY, 28% of Rev)

↘️APAC $132.1M rev (+23.0% YoY, 16% of Rev)

↘️Other $29.4M rev (+19.1% YoY, 3% of Rev)

Operating expenses

↘️S&M*/Revenue 34.7% (-2.2 PPs YoY)

↗️R&D*/Revenue 16.9% (+1.2 PPs YoY)

↗️G&A*/Revenue 6.3% (+0.2 PPs YoY)

Quarterly Performance Highlights

↗️Net New ARR $139M (+15.4% YoY)

↗️CAC* Payback Period 30.5 Months (+1.0 YoY)🟡

↗️R&D* Index (RDI) 1.66 (+0.08 YoY)🟢

Dilution

↘️SBC/rev 25%, -2.1 PPs QoQ

↘️Basic shares up 3.8% YoY, -0.1 PPs QoQ

↘️Diluted shares up 1.2% YoY, -1.2 PPs QoQ

Guidance

➡️Q2’26 $875.0 - $878.0M guide (+21.9% YoY) in line with est

↗️$3,329.5 - $3,332.5M FY guide (+24.6% YoY) raised by 0.3% beat est by 0.4%

**-Kevin Rubin: ”You may recall that we shared we had a net retention of 115% in Q1, and that has been fairly stable the last several quarters.”

Points from Zscaler’s First Quarter 2026 Earnings Call:

Financial Performance

Zscaler delivered a strong Q3 FY2026. ARR grew 25% YoY to $3.5 billion, while revenue increased 25% YoY and 4% sequentially to $850 million, above guidance.

Net new ARR reached $166 million, up 24% YoY. Excluding Red Canary, net new ARR was $153 million, up 14% YoY, while organic ARR grew 21%.

Profitability improved. Non-GAAP gross margin rose to 80.7% from 80.3% last year. Non-GAAP operating income increased 34% YoY to $196 million, and operating margin expanded 140 bps to a record 23%.

Cash flow was more mixed. Operating cash flow was $198 million, while CapEx was $42 million, or 5% of revenue. Free cash flow margin was 16% in Q3, down from 18% last year, though year-to-date free cash flow margin remained strong at 29%.

Zscaler ended the quarter with $3.5 billion in cash, cash equivalents, and short-term investments, against $1.7 billion of debt.

Core Zero Trust

Core Zero Trust remains the foundation of Zscaler’s platform. Management emphasized a clear architectural difference versus firewall-based SASE: Zscaler connects authorized users and workloads only to specific applications instead of placing users on the corporate network.

Zscaler hides applications and data behind the Zero Trust Exchange, making them invisible from the public internet. Management framed the core security principle clearly: “An attacker can’t breach what it can’t reach.”

Scale remains a major advantage. The Zero Trust Exchange spans 160 public exchanges and processes more than 500 billion transactions per day, creating telemetry for AI-powered threat detection and prevention.

ZIA, ZPA, and ZDX remain the original Zero Trust user layer. The larger strategic goal is to expand customers into cloud, branch, data, AI, and workload security.

A seven-figure new logo win with a healthcare technology company started with user security, then expanded into Zero Trust Cloud, Zero Trust Branch, and four data security modules. The win supports Zscaler’s platform expansion strategy.

Jay Chaudhry, Chairman and CEO: “We offer the industry’s only complete Zero Trust SASE solution, a singular Zero Trust platform across users, across cloud workloads, and across branches.”

Jay Chaudhry, Chairman and CEO: “First, we hide applications and data behind our Zero Trust Exchange, making them invisible from the internet and eliminating the attack surface.”

Zero Trust Everywhere

Zero Trust Everywhere is the main platform expansion story. Zscaler is extending Zero Trust from users to branches, cloud workloads, AI applications, AI agents, IoT, and OT devices.

Adoption accelerated. Zscaler exited Q3 with more than 700 Zero Trust Everywhere enterprises, up from more than 550 in Q2.

Zero Trust Branch showed strong momentum. ARR approximately tripled YoY. Zscaler also signed its largest branch deal ever: an eight-figure upsell with a healthcare system across 2,000 sites.

The healthcare customer replaced a major firewall incumbent and a legacy VPN provider. Management said the customer can reduce lateral threat movement at roughly half the cost of the prior legacy solution.

Zero Trust Cloud also gained traction. A large automotive manufacturer signed a seven-figure upsell to secure a multi-cloud environment. The product now inspects encrypted traffic and enforces granular policies across hundreds of previously ungoverned cloud workloads.

Deployment speed was a key proof point. Zero Trust Cloud was configured in under 10 minutes during the customer proof of concept.

The main risk is execution. Zscaler must continue expanding platform adoption while FY2027 ARR and revenue growth are expected to slow to 16%–17%.

Jay Chaudhry, Chairman and CEO: “We started with Zero Trust security for users, so users can safely access applications from anywhere. We expanded our Exchange to provide Zero Trust security to branches, workloads, and connected IoT/OT devices.”

AI Security and ZDX

AI security was the strongest strategic theme. Management expects AI agents to become a new enterprise security risk because they can access sensitive applications and data at scale with less human oversight.

Frontier AI models create both risk and demand. Management said models such as Mythos can identify software vulnerabilities at machine speed and may expand unremediated vulnerability exposure by as much as 10x.

Zscaler’s response is not only patching. The company is focused on hiding applications from attackers and stopping lateral movement across the enterprise.

AI Protect is the clearest AI product proof point. Bookings crossed $100 million over the past 12 months.

AI Protect includes AI asset discovery, AI guardrails, continuous red teaming, prompt and response inspection, shadow AI discovery, data leak prevention, and prompt injection defense.

A Fortune 500 financial technology company signed a seven-figure upsell for AI Protect to secure public AI usage and internally built AI applications.

Zscaler is also moving into agentic security through Symmetry Systems. The planned acquisition adds access graph technology, which maps identities, applications, agents, and data sources across the enterprise.

ZDX was discussed as part of the original user security suite with ZIA and ZPA. The transcript did not provide standalone ZDX revenue, ARR, or customer metrics.

The AI opportunity is still early. Management cited strong inbound interest, OpenAI and Anthropic partnerships, and rising customer urgency, but said no meaningful AI-driven upside is included in Q4 guidance.

Jay Chaudhry, Chairman and CEO: “AI is changing the nature of cybersecurity in real time. Zscaler is the cybersecurity platform for the AI era.”

Jay Chaudhry, Chairman and CEO: “Today, users are the weakest link in cybersecurity. Soon, AI agents will be the weakest link because they operate at far greater speed and have far less oversight.”

Data Security

Data security is now a scaled business. ARR crossed $500 million, up more than 30% YoY.

Zscaler is combining data classification, email DLP, endpoint DLP, inline DLP, GenAI Security, and AI-related controls into one platform. The value proposition is lower complexity and fewer separate tools.

A federal agency was the key customer example. After moving from legacy VPN to Zscaler’s Zero Trust platform, the agency expanded into data security and adopted six of eight data security modules.

Adopted modules included data classification, email DLP, endpoint DLP, inline DLP, and GenAI Security.

Data security benefits directly from AI adoption. As sensitive data spreads across AI tools, SaaS apps, endpoints, and cloud workloads, enterprises want broader coverage without more agents or tool sprawl.

The challenge is competition. Data security remains crowded, and Zscaler must prove platform integration can beat specialized point products.

Jay Chaudhry, Chairman and CEO: “This agency is deploying Zscaler to modernize and unify its data security strategy, gaining broad coverage without the overhead of managing additional endpoint agents.”

Jay Chaudhry, Chairman and CEO: “As AI adoption accelerates and sensitive data increasingly resides across multiple locations, customers are reducing cost and complexity by consolidating onto our data security solution.”

Z-Flex and Non-Seat Revenue

Z-Flex was a major commercial highlight. The program generated more than $480 million in TCV during Q3, up more than 60% sequentially.

Over the last 12 months, Z-Flex produced more than $1 billion in TCV with an average contract term of roughly four years.

Z-Flex gives customers multi-year flexibility to activate or swap modules without restarting procurement. It helps shorten sales cycles, increase upsell velocity, and improve visibility.

A Fortune 500 finance and insurance customer signed a five-year, eight-figure Z-Flex deal and increased ARR by nearly 50%. The customer expanded four existing modules and adopted six new modules, including AI Protect.

A Global 2000 semiconductor manufacturer signed a three-year, eight-figure Z-Flex deal and increased annual spend by 60%. The customer added six new modules, including AI Protect and Zero Trust Branch.

Non-seat revenue is becoming more important. Metered usage solutions represented just over 30% of new ACV in Q3, while ARR tied to those offerings grew more than 100% YoY.

Kevin Rubin, Chief Financial Officer: “Z-Flex gives customers with multi-year commitments the flexibility to activate or swap modules without starting a new procurement cycle, along with premium deployment assistance and support.”

Product Innovation

Product innovation centers on extending the Zero Trust Exchange from users to branches, workloads, AI applications, and AI agents.

AI Protect is the strongest new product engine, with more than $100 million in bookings over the past 12 months. Key capabilities include AI asset discovery, AI guardrails, continuous red teaming, prompt inspection, and shadow AI governance.

Symmetry Systems adds access graph technology. The goal is to map relationships between identities, applications, data sources, and agents, then use those relationships to enforce policy.

Project AI-Guardian expands Zscaler’s AI security strategy through GSI partners. The program helps partners extend Zero Trust architecture to AI assets, including AI agents.

Zscaler is also working with Anthropic through Project Glasswing and OpenAI through the Daybreak program to access frontier models and harden systems proactively.

Jay Chaudhry, Chairman and CEO: “We recently announced the launch of Project AI-Guardian, a strategic collaboration with key GSI partners, which will help our partners extend the zero trust architecture to AI assets, including AI agents.”

Jay Chaudhry, Chairman and CEO: “We are also partnering with Anthropic on Project Glasswing and with OpenAI as part of its Daybreak program.”

Red Canary

Red Canary exited Q3 with $127 million of ARR.

Management raised FY2026 Red Canary ARR guidance to approximately $137 million, up from $130 million. Expected Q4 net new ARR is approximately $10 million.

FY2026 Red Canary revenue guidance also increased to approximately $137 million, up from $125 million.

In FY2027, Red Canary will be fully included in Zscaler’s results, and management will stop providing separate disclosure.

The integrated SecOps solution is expected in FY2027. Management expects Red Canary net new ARR to grow slower than the overall business due to uncertain adoption speed.

Kevin Rubin, Chief Financial Officer: “As we think about Red Canary, we are expecting Red Canary’s net new ARR to grow at a slower rate than the overall business in 2027.”

Customers

Zscaler ended Q3 with more than 9,400 customers.

The company serves about 4,500 enterprise customers out of an estimated 20,000-enterprise target market, implying roughly 23% penetration.

Large-customer momentum remained solid. Zscaler had 748 customers generating more than $1 million in ARR, up 18% YoY.

Customers generating more than $100,000 in ARR reached 4,003, up 19% YoY.

Q3 also set a record for $1 million-plus new ACV deals in a third quarter.

Major wins covered financial technology, federal government, healthcare, automotive, finance and insurance, and semiconductor manufacturing. Most examples were expansion deals, supporting the land-and-expand model.

Customer Wins

A Fortune 500 financial technology company signed a seven-figure AI Protect upsell to secure public AI usage and internal AI applications.

A federal agency signed a seven-figure upsell after moving from legacy VPN to Zscaler’s Zero Trust platform. The customer adopted six of eight data security modules.

A leading healthcare system signed the largest branch deal in Zscaler history: an eight-figure upsell across 2,000 sites. The customer replaced firewall and VPN incumbents and expects roughly 50% lower cost versus the legacy solution.

A healthcare technology company became a seven-figure new logo. The deal expanded from user security into Zero Trust Cloud, Zero Trust Branch, and four data security modules.

A large automotive manufacturer signed a seven-figure Zero Trust Cloud upsell. The customer’s ARR with Zscaler is up 10x over the last seven years.

A Fortune 500 finance and insurance customer signed a five-year, eight-figure Z-Flex deal, increasing ARR by nearly 50%.

A Global 2000 semiconductor customer signed a three-year, eight-figure Z-Flex deal, increasing annual spend by 60%.

Jay Chaudhry, Chairman and CEO: “With Zscaler, the customer is eliminating lateral threat movement in their health clinics at roughly half the cost of its prior legacy solution.”

Challenges

Sales leadership turnover is the largest operational concern. Two sales leaders left at the end of Q3. One replacement was appointed, while another hire was in late stages.

New logo execution also needs improvement. Management took a cautious view of new-logo contribution in the FY2027 outlook.

Zscaler plans to address new-logo performance by adding sales coverage for enterprises with 2,000 to 10,000 users, increasing VAR incentives, deepening GSI partnerships, and focusing major account teams on new logos.

CapEx pressure is rising. Memory, storage, and processor prices are increasing, partly due to AI data center demand.

FY2026 CapEx is now expected to reach the high single digits as a percentage of revenue, up from the prior mid-single-digit outlook.

FY2027 CapEx could increase by up to 200 bps as a percentage of revenue versus FY2026.

Regional performance was uneven. Americas represented 56% of revenue and grew 31% YoY. APJ represented 16% of revenue and grew 23% YoY. EMEA represented 28% of revenue and grew 16% YoY, showing slower growth.

Kevin Rubin, Chief Financial Officer: “At the end of the third quarter, two sales leaders departed the company. We already appointed a replacement for one of these leaders, and we are in the late stages of hiring a leader for the other role.”

Kevin Rubin, Chief Financial Officer: “The area that we haven’t been performing as well as we’d like is new logo. It certainly is a large priority for us, but I did take a tempered view of new logos going into 2027.”

Outlook

Q4 FY2026 revenue guidance is $875 million to $878 million, implying about 22% YoY growth.

Q4 non-GAAP gross margin is expected to be approximately 80%. Operating profit guidance is $206 million to $208 million, with EPS of $1.08 to $1.09.

Full-year FY2026 ARR guidance is $3.740 billion to $3.749 billion, or about 24% YoY growth.

Full-year revenue guidance is $3.3295 billion to $3.3325 billion, implying 24.6% to 24.7% growth.

Operating profit guidance increased to $755 million to $757 million, up about 30% YoY, versus prior guidance of $742 million to $748 million.

EPS guidance is $4.10 to $4.11.

Free cash flow margin guidance was cut to 22.8%–23.3%, down from 26.5%–27%, due to higher CapEx.

FY2027 ARR and revenue growth are expected at 16%–17%, signaling deceleration from FY2026 levels.

Management remains bullish on AI security, Zero Trust Everywhere, and data security, while guidance reflects caution around sales leadership changes, new-logo execution, Red Canary adoption, and CapEx inflation.

Jay Chaudhry, Chairman and CEO: “We expect AI and methods like frontier models to be one of the strongest tailwinds our business has ever seen.”

Key points on Zscaler Earnings Report:

🟢Positive

Revenue reached $850.5M, up 25.4% YoY and 4.3% QoQ, beating estimates by 1.8%.
ARR grew 25.1% YoY to $3.53B, with $166M in net new ARR.
Non-GAAP operating margin expanded to a record 23.0%, up 1.4 percentage points YoY.
Non-GAAP EPS was $1.08, beating estimates by 6.9%.
Data security ARR crossed $500M, growing more than 30% YoY.
AI Protect bookings passed $100M over the last 12 months, showing real demand for AI security.
Zero Trust Everywhere adoption accelerated to more than 700 enterprises, up from more than 550 in Q2.
Zero Trust Branch ARR approximately tripled YoY, helped by the company’s largest branch deal ever: an eight-figure upsell across 2,000 sites.
Z-Flex generated more than $480M in Q3 TCV, up more than 60% QoQ, and more than $1B over the last 12 months.
Non-seat metered solutions represented just over 30% of new ACV, with related ARR up more than 100% YoY.

🟡Neutral

DBNR stayed stable at 115%, signaling solid expansion but no acceleration.
Large customer base expanded to 748 customers above $1M ARR and 4,003 customers above $100K ARR.
Billings grew 23.9% YoY to $972M, broadly consistent with revenue and ARR growth.
cRPO increased 24.4% YoY to $2.97B, while total RPO rose 29.8% YoY to $6.46B.
Red Canary exited Q3 with $127M ARR, and FY2026 ARR guidance was raised to $137M from $130M.
Red Canary will be fully included in FY2027 results, with no separate disclosure going forward.
Q4 revenue guidance of $875M–$878M implies about 21.9%–22% YoY growth, in line with expectations.
Full-year FY2026 revenue guidance increased to $3.3295B–$3.3325B, implying 24.6%–24.7% YoY growth.
Americas remained strongest at $452.6M revenue, up 32.0% YoY, while APAC grew 23.0% YoY.

🔴Negative

Free cash flow margin fell to 16.0%, down 1.6 percentage points YoY.
FY2026 free cash flow margin guidance was cut to 22.8%–23.3%, down from 26.5%–27%, mainly due to higher CapEx.
CapEx is now expected to reach the high single digits as a percentage of revenue, above the prior mid-single-digit outlook.
FY2027 CapEx could rise by up to 200 bps as a percentage of revenue versus FY2026.
Net margin was -1.6%, down 1.0 percentage point YoY.
EMEA growth slowed to 16.4% YoY, below Americas at 32.0% and APAC at 23.0%.
Two sales leaders departed at the end of Q3, creating near-term execution risk.
New logo performance remains a concern; management took a cautious view of new-logo contribution in FY2027.
FY2027 ARR and revenue growth are expected at 16%–17%, signaling a clear slowdown from FY2026 growth levels.
Red Canary net new ARR is expected to grow slower than the overall business in FY2027 due to uncertain adoption speed.

My thoughts on Zscaler ER:

Overall, this was a solid quarter, but with some important concerns.

Revenue growth came in at +25.4% YoY. Growth slowed slightly compared to the previous quarter, although it is important to note that part of this growth came from the Red Canary acquisition.

Management did not provide exact figures for organic growth, but stated that Red Canary exited Q3 with $127 million of ARR. Based on these figures, we can roughly estimate organic revenue growth: Q3 2025 at +22% YoY, Q4 2025 at +22%, Q1 2026 at +21%, while guidance for the next quarter, assuming a similar beat, implies organic growth of approximately +19.5% YoY, indicating continued deceleration in organic revenue growth.

RPO growth slowed slightly to +29.8%, although it still remains above revenue growth. cRPO represented 46% of total RPO, and its growth also slowed to +24.4% YoY.

ARR growth was +25% YoY, but excluding the contribution from the Red Canary acquisition, total ARR growth was +21%.

Newer product areas are developing quite well. Zero Trust Everywhere adoption accelerated to more than 700 enterprises, while Zero Trust Branch ARR approximately tripled YoY, helped by the company’s largest branch deal ever: an eight-figure upsell across 2,000 sites. Data security ARR crossed $500 million, growing more than 30% YoY.

AI Protect bookings surpassed $100 million over the last 12 months. Although still a relatively small portion of the business, this demonstrates real demand for AI security solutions.

For Zscaler, the transition from a seat-based model to a hybrid revenue model is extremely important. In Q1, Z-Flex generated more than $480 million, growing more than 60% QoQ, and more than $1 billion over the last 12 months. Non-seat metered solutions represented just over 30% of new ACV, while related ARR grew more than 100% YoY. In the previous quarter, non-seat solutions represented 25% of new ACV, with ARR also growing more than 100% YoY. This suggests that adoption of non-seat solutions is progressing well.

Management did not provide an exact retention figure, but noted that after reaching 115% in Q3 2025, retention remains at a stable level. However, management also stated that retention is not their main concern — instead, they are more concerned about the pace of adding new logos. Regarding customers, in Q1 the company added 20 new customers with $1M+ ARR, which is the lowest Q1 addition level in the past five years. A year earlier, Zscaler added 22 new large customers in Q1.

There were also several clearly negative elements. For fiscal 2027, Zscaler provided an early outlook for total ARR and revenue growth of only 16%–17%. Free cash flow margin fell to 16.0%, while FY2026 free cash flow margin guidance was reduced to 22.8%–23.3%, down from 26.5%–27% previously. In addition, two sales leaders departed, creating near-term execution risk. Combined with slowing revenue growth, these factors created uncertainty around the company’s future and triggered a 20.8% decline in the stock price.

The integration of Red Canary also appears to be progressing less successfully than expected. Management stated that Red Canary net new ARR is expected to grow slower than the overall business in FY2027, which added additional negativity.

In my view, this was not a bad quarter, but a mixed one for Zscaler. Non-GAAP gross margin and operating margin improved, while revenue growth remains at a fairly high level despite slowing. The company still has areas that need improvement, and management appears aware of that. The rollout of the consumption-based component through Z-Flex appears to be progressing well.

However, the integration of Red Canary does not appear to be going smoothly, while the weak preliminary FY2027 outlook is concerning and likely reinforces negative sentiment around rising competition from Agentic AI, as well as intensifying competition across the cybersecurity segment.

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