ZS — Zscaler, Inc.

Zscaler Q1 2026 Earnings Call Summary

1. Key Financial Results and Metrics

• Annual Recurring Revenue (ARR): Grew 26% year-over-year to over $3.2 billion.
• Revenue: Reported at $788 million, a 20% increase year-over-year and exceeding guidance.
• Remaining Performance Obligation (RPO): Increased 35% year-over-year to $5.9 billion, with 47% classified as current RPO.
• Gross Margin: 79.9%, down from 80.6% year-over-year, attributed to new product introductions.
• Operating Margin: 21.8%, slightly improved year-over-year.
• Free Cash Flow Margin: 52%, with cash reserves totaling $3.3 billion.
• Customer Metrics: 698 customers generating over $1 million in ARR and 3,754 customers exceeding $100,000 in ARR.

2. Strategic Updates and Business Highlights

• Growth Pillars: Zscaler's growth is driven by three pillars: AI Security, Zero Trust Everywhere, and Data Security Everywhere, with AI Security growing over 80% year-over-year.
• Zero Trust Everywhere: Surpassed the goal of securing 390 enterprises, now exceeding 450 customers.
• Z Flex Program: Launched to allow customers flexible spending commitments, generating over $175 million in total contract value (TCV) and growing 70% quarter-over-quarter.
• Innovations: New solutions introduced for AI security, including AI asset discovery, AI red teaming, and AI guardrails, enhancing the security of AI applications.

3. Forward Guidance and Outlook

• Q2 Guidance: Revenue expected between $797 million and $799 million, reflecting approximately 23% year-over-year growth.
• Full Year Fiscal 2026 Guidance: Revenue projected between $3.282 billion and $3.301 billion, with ARR growth anticipated at 22.7% to 23.3%. Operating profit expected between $732 million and $740 million.

4. Bad News, Challenges, or Points of Concern

• Gross Margin Decline: The decrease in gross margin is a concern, attributed to the introduction of new products, which may impact profitability in the short term.
• Competitive Landscape: While Zscaler maintains a strong position, there is increasing competition from established players like Cisco and Check Point, which could pressure market share.
• Tight IT Budgets: Customers are facing tighter budgets, which may lead to increased scrutiny on spending, although cybersecurity remains a priority.

5. Notable Q&A Insights

• Zero Trust Branch Demand: Strong demand is noted, with significant customer interest and successful deployments, indicating a robust pipeline for future growth.
• Organic Growth Consistency: Organic growth in Q1 was consistent with Q4, suggesting stability in the business.
• Integration of Red Canary: The acquisition is performing slightly better than expected, but its contribution to overall business remains minimal.
• Customer Spending Priorities: Customers are prioritizing Zero Trust and AI security solutions, indicating a strong market for Zscaler's offerings.
• Z Flex Program Impact: The Z Flex program is seen as a significant facilitator for customer adoption of Zscaler's technologies, providing greater visibility into future ARR.

Overall, Zscaler reported strong financial performance with accelerating growth in key areas, although challenges related to gross margins and competitive pressures remain. The company is well-positioned to capitalize on the growing demand for AI and Zero Trust security solutions.