This article first appeared on GuruFocus.

Annual Recurring Revenue (ARR): $3.2 billion, reflecting approximately 26% year-over-year growth.

Revenue: $788 million, growing 26% year over year and 10% sequentially.

Remaining Performance Obligation (RPO): $5.9 billion, growing approximately 35% year over year.

Gross Margin: 79.9%, compared to 80.6% in the previous fiscal year's Q1.

Operating Margin: 21.8%, growing by approximately 40 basis points year over year.

Free Cash Flow Margin: 52%, including data center CapEx at 2% of revenue.

Cash, Cash Equivalents, and Short-term Investments: $3.3 billion at the end of the quarter.

Q2 Revenue Guidance: $797 million to $799 million, reflecting year-over-year growth of approximately 23%.

Full-Year Fiscal 2026 Revenue Guidance: $3.282 billion to $3.301 billion, reflecting year-over-year growth of 22.8% to 23.5%.

Full-Year Fiscal 2026 ARR Guidance: $3.698 billion to $3.718 billion, reflecting year-over-year growth of 22.7% to 23.3%.

Warning! GuruFocus has detected 6 Warning Signs with TCX.

Is ZS fairly valued? Test your thesis with our free DCF calculator.

Release Date: November 25, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Zscaler Inc (NASDAQ:ZS) reported a strong start to fiscal year 2026 with annual recurring revenue (ARR) growth accelerating to 26% year over year.

The company's AI Security pillar grew over 80% year over year, exceeding the FY26 target of $400 million ARR three quarters earlier than expected.

Zscaler Inc (NASDAQ:ZS) achieved a free cash flow margin of 52%, contributing to its operation at a rule of 78, surpassing the rule of 40 metric.

The company has successfully expanded its Zero Trust Everywhere initiative, securing over 4500 enterprises, surpassing its target three quarters ahead of schedule.

Zscaler Inc (NASDAQ:ZS) introduced the ZFlex program, which generated over $175 million in total contract value, growing over 70% quarter over quarter, and providing customers with flexibility in module adoption.

Gross margin slightly decreased to 79.9% compared to 80.6% in the previous fiscal year Q1, influenced by the introduction of new products optimized for faster go-to-market rather than margins.

Operating expenses increased by 11% sequentially and 23% year over year, reaching $458 million.

Despite strong performance, the core business, including ZIA and ZPA, is expected to grow at a smaller rate compared to the emerging areas.

The competitive landscape remains challenging with new entrants from firewall companies, although Zscaler Inc (NASDAQ:ZS) maintains a strong brand presence.

IT budgets remain tight, with scrutiny for large deals, although cybersecurity spending is under less pressure compared to other IT areas.

Q: Jay, I wanted to ask about Zero Trust Branch, which we continue to hear good things about. Its showing some nice early adoption, but as we look ahead, how much more work needs to be done on the product and or go-to-market fine-tuning to see real acceleration from here? A: We have done some amazing work on the technology side to build Zero Trust Branch where each branch is merely an island, no lateral movement thats generally caused by traditional networking with SD-WAN and MPLS. The product is in great shape. Go-to-market, we put together a specialty team that can actually engage with the right buyers to explain the solutions. The numbers are pretty impressive. I often joke internally that Zero Trust Branch needs no pipeline generation effort because theres so much demand in the customers. Weve got about 4,400 enterprise-class customers. Weve only gone to about 10% of it. So I see a big opportunity. I think its an exciting area for us, and its part of our Zero Trust Everywhere platform.

Q: The billion dollars in ARR thats coming from the three emerging areas is clearly outgrowing the rest of the business. But I was wondering if you could help us think about the other $2 billion in ARR and maybe specifically, is it fair to think about that other tranche as more of a la carte Zero Trust tools like ZIA and ZPA? A: Yes, its very true that our three buckets, a billion-dollar ARR, has been growing very well. The remaining $2 billion, yes, a big part of that is ZIA and ZPA. It has been going quite well, but the big opportunity for that business is also to emerge into Zero Trust Everywhere. The core business by itself will grow at a smaller rate than the rest of the overall business, but our goal is really to take every customer to Zero Trust Everywhere, and thats what we are successfully doing.

Q: Maybe just wanted to ask a question about Red Canary and just how its kind of performing towards expectations given that you guys have been looking at a fair amount of churn within your kind of assumptions for that business. A: The integration of Red Canary with Zscaler is going very well. The G&A integration was done right away. The two other main areas were, one, engineering and products, integrating Red Canary's agentic AI technology with the Zscaler platform, doing well. Second is go-to-market. Red Canary's go-to-market team has become a security operations specialist team. Its working with our field sales organization, which is uncovering opportunities. So seeing a vast majority of the Zscaler-Red Canary pipeline is now coming from Zscaler customers. Red Canary is trending slightly better than our previous guidance, but keep in mind that we dont believe that Red Canarys contribution is material to our overall business.

Q: In your conversations with customers, how are they thinking about spending in calendar 2026, and what are the priority areas that they have as a part of that? A: Broadly speaking, theres no significant growth in the macro environment. IT budgets remain tight. There is pressure on CIOs. There is far less pressure on the cyber side of it, so cyber is under less pressure. We do see scrutiny for large deals, similar to what we shared in the past. But two areas are still of high interest to customers. One is Zero Trust Security because of all these breaches happening out there. And second is AI Security because everyone is trying to do some level of deployments of AI applications because CIOs feel like if they arent doing anything in this area, theyll be viewed as laggards.

Q: I just wanted to come back to the SASE market specifically, and Jay, I know youre probably already cringing at the word SASE, but there was a lot of security vendor talk out there last week discussing some success in competitive displacements in the SASE market. Id just love to get your feedback specifically on what youre seeing as far as trends from a competitive or pricing discipline standpoint. A: We remain very strong when it comes to, I will call it the Zero Trust market because the SASE word has no meaning. Every vendor claims themselves to be calling SASE, for example. If you do Zero Trust, you dont do SD-WAN. And most of the SD-WAN vendors get viewed into the SASE space. Our expansion in our customer base is because of all the new functionality we are bringing to take Zero Trust Everywhere. Our expansion is happening as we have taken our Data Security platform and made it much bigger. So weve done so many innovations in so many spaces. So we think in spite of new entrants in the market, I think the market has already kind of sorted out the winners, and we are creating more distance among a number of other vendors who are entering the space.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.