ZS — Zscaler, Inc.

Zscaler Q2 2026 Earnings Call Summary

1. Key Financial Results and Metrics

• Revenue: $816 million, up 26% year-over-year and 4% sequentially.
• Annual Recurring Revenue (ARR): Total ARR reached $3.4 billion, reflecting a 25% year-over-year growth. Net new ARR was $156 million, up 19%.
• Free Cash Flow Margin: 36%, with operating cash flow of $204 million, up 14% year-over-year.
• Gross Margin: Non-GAAP gross margin at 80.2%.
• Operating Income: Non-GAAP operating income of $181 million, a 29% increase year-over-year.
• Customer Growth: 728 customers generating over $1 million in ARR, and 3,886 customers exceeding $100,000 in ARR, both up 18% year-over-year.

2. Strategic Updates and Business Highlights

• AI Security Focus: Zscaler is positioning itself as a leader in AI security, launching products like AI Protect and integrating AI Red Teaming for enhanced security measures.
• Zero Trust Expansion: The company reported significant growth in its Zero Trust Everywhere initiative, with over 550 enterprises adopting the solution, up from 130 a year ago. ARR uplift for these customers is estimated at 2x to 3x.
• Z-Flex Program: This program allows customers with multiyear commitments to activate or swap modules, generating over $290 million in Total Contract Value (TCV) in Q2, up 65% quarter-over-quarter.
• Acquisitions: The acquisition of SquareX enhances browser security capabilities, while Red Canary integration is ongoing, albeit with elevated churn rates.

3. Forward Guidance and Outlook

• Q3 2026 Guidance: Expected revenue of $834 million to $836 million, reflecting approximately 23% year-over-year growth. Operating profit projected between $187 million to $189 million.
• Full Year Fiscal 2026 Guidance: ARR expected to be between $3.730 billion to $3.745 billion, indicating about 24% year-over-year growth. Operating profit guidance raised to $742 million to $748 million, with earnings per share projected at $3.99 to $4.02.

4. Bad News, Challenges, or Points of Concern

• Elevated Churn for Red Canary: Post-acquisition churn rates for Red Canary have been higher than anticipated, which could impact future ARR contributions.
• Memory and Processor Costs: Rising prices and availability of memory, storage, and processors could affect operational costs and pricing strategies in the future.
• Competitive Pressures: While Zscaler maintains strong competitive positioning, the market remains crowded with players offering various solutions, including SASE, which could dilute focus on Zero Trust.

5. Notable Q&A Insights

• Competitive Landscape: CEO Jay Chaudhry noted stable competitive dynamics, with Zscaler winning most engagements by emphasizing its Zero Trust architecture over traditional SASE solutions.
• Sales Cycle Dynamics: The introduction of AI into customer projects has generally shortened sales cycles, as companies seek integrated solutions quickly.
• Budget Allocation for AI Security: CIOs are increasingly allocating budgets for AI security, viewing it as essential alongside AI project funding.
• Z-Flex Deal Dynamics: Z-Flex deals are seen as strategic partnerships rather than transactional, with the potential for longer-term customer engagement and upsell opportunities.

Overall, Zscaler reported strong financial performance driven by robust demand for its AI security and Zero Trust solutions, while navigating challenges related to acquisitions and competitive pressures. The company remains optimistic about future growth and expansion in the AI era.