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Zscaler Issues Revenue Outlook Below Street Views Despite Fiscal Third-Quarter Beat

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Zscaler Issues Revenue Outlook Below Street Views Despite Fiscal Third-Quarter Beat

Zscaler (ZS) shares tanked early Wednesday after the cloud security company provided a fiscal fourth-quarter revenue outlook below market estimates, even though it reported better-than-expected results for the prior three-month period.

Revenue is anticipated to come in between $875 million and $878 million for the ongoing quarter, representing growth of about 22%, the company said late Tuesday. The current consensus on FactSet is for $878.4 million. The stock dropped 21% in the most recent premarket activity.

"At the end of the third quarter, two sales leaders departed the company," Chief Financial Officer Kevin Rubin said during an earnings call, according to a FactSet transcript. "We are taking a prudent approach to our guidance during this transition."

The company's management noted the outlook reflects "deliberate conservatism rather than weakening demand," Truist Securities said in an emailed client note. The cautious view is driven by the firm's new logo contribution, potential disruption from the sales leadership changes and uncertainty surrounding the timing of new product ramp, according to the brokerage.

Adjusted earnings are pegged at $1.08 to $1.09 per share for the fourth quarter, while the Street is looking for $1.04.

For fiscal 2026, Zscaler now expects a free cash flow margin of roughly 22.8% to 23.3%, compared with its previous forecast of 26.5% to 27%, reflecting capital expenditures in the high single-digits as a percentage of revenue. "Looking ahead to fiscal 2027, based on higher prices we see in the market today, we expect (capital expenditure) as a percentage of revenue to increase up to 200 basis points compared to fiscal 2026 levels," Rubin said on the call.

The company now sees adjusted EPS at $4.10 to $4.11 for the ongoing fiscal year, up from its prior expectations of $3.99 to $4.02. Revenue is anticipated to come in at up to $3.33 billion versus the previous guidance range of $3.31 billion to $3.32 billion. The market's current view is for non-GAAP EPS of $4.01 and sales of $3.32 billion.

For fiscal 2027, Zscaler projects revenue growth of 16% to 17%, Rubin told analysts. The guidance suggested a "step-down in growth trajectory" and triggered investor concerns about the deceleration, Truist said.

The company's adjusted EPS advanced to $1.08 for the quarter ended April from $0.84 the year before, ahead of the average analyst estimate of $1.01. Revenue climbed 25% to $850.5 million, topping the Street's view for $835.6 million.

Annual recurring revenue amounted to $3.53 billion, up 25% year over year. For fiscal 2026, the company expects ARR of $3.74 billion to $3.75 billion, reflecting a higher bottom end versus the previous estimate of $3.73 billion.

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