Zscaler Inc (ZS) Q3 2025 Earnings Call Highlights: Strong Growth Amid Economic Challenges

Revenue: $678 million, up 23% year over year and 5% sequentially.
Annual Recurring Revenue (ARR): Approximately $2.9 billion, representing 23% year-over-year growth.
Remaining Performance Obligations (RPO): $4.978 billion, up 30% year over year.
Calculated Billings: $785 million, up 25% year over year.
Gross Margin: 80.3%, compared to 81.4% in the year-ago quarter.
Operating Margin: Approximately 22%, comparable year over year.
Free Cash Flow Margin: 18%, including data center CapEx at 11% of revenue.
Cash and Cash Equivalents: Approximately $3 billion.
Guidance for Q4 Revenue: $705 million to $707 million, reflecting approximately 19% year-over-year growth.
Full-Year Fiscal 2025 Revenue Guidance: $2.659 billion to $2.661 billion, reflecting approximately 23% year-over-year growth.
Full-Year Fiscal 2025 Free Cash Flow Margin Guidance: Approximately 25.5% to 26%.
Warning! GuruFocus has detected 4 Warning Sign with ZS.
Release Date: May 29, 2025
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Zscaler Inc (NASDAQ:ZS) achieved its best Q3 with TCV bookings of over $1 billion and remaining performance obligations nearing $5 billion.
The company reported a strong year-over-year growth in new logo ACV of over 40% and total new ACV up double digits.
Zscaler Inc (NASDAQ:ZS) maintained a robust annual recurring revenue (ARR) of approximately $2.9 billion, marking the third consecutive quarter of 23% year-over-year growth.
The company's free cash flow margin of 28% combined with a 24% revenue growth resulted in a Rule of 52 performance, surpassing the industry benchmark of Rule of 40.
Zscaler Inc (NASDAQ:ZS) continues to expand its platform with significant growth in Zero Trust Everywhere, Data Security Everywhere, and Agentic Operations, with these categories approaching $1 billion in ARR.
The macroeconomic environment remains challenging, with ongoing economic uncertainty causing customers to be cautious about IT spending.
Zscaler Inc (NASDAQ:ZS) faces increased scrutiny of large deals, which could impact the timing and closure of significant contracts.
The company's total gross margin decreased to 80.3% from 81.4% in the year-ago quarter, influenced by the introduction of new products optimized for faster go-to-market rather than margins.
There is potential variability in the dollar-based net retention rate due to the company's success in selling bigger bundles and faster upsells, which could affect future metrics.
The acquisition of Red Canary, valued at $675 million, is expected to be largely neutral to FY26 consensus operating margin, indicating limited immediate financial benefit.
Q: How does Zscaler manage the expanding product portfolio and ensure sales focus, especially with the introduction of Z-Flex? A: Jay Chaudhry, CEO, explained that Zscaler uses a two-tier model where the core sales team covers all products with an account-centric approach, while specialized take-off teams focus on newer product areas. Z-Flex, a flexible purchasing program, evolved from customer demand for modularity and flexibility, allowing them to try and swap modules without repeated procurement cycles. The program has already contributed over $65 million in TCV bookings in its first quarter.
Q: How is the macroeconomic environment affecting Zscaler's business, and what trends are being observed? A: Jay Chaudhry noted that while the overall spending environment remains challenging with tight budgets, cybersecurity, particularly Zero Trust architecture and AI security, remains a priority. Zscaler did not experience a softer April, likely due to not selling security appliances. The company continues to work closely with customers to reduce costs and become a strategic partner, translating into ARR growth.
Q: Can you explain the structure and impact of Z-Flex deals on Zscaler's financial metrics? A: Remo Canessa, CFO, stated that Z-Flex deals are structured to provide customers with flexibility in adopting and swapping modules at predetermined pricing, reducing procurement cycles. These deals are typically longer in duration, moving from three to four or five years. Zscaler plans to transition from billing to ARR as a primary metric in fiscal '26, which aligns with the flexibility offered by Z-Flex.
Q: How does the acquisition of Red Canary fit into Zscaler's strategy, and what benefits does it bring? A: Jay Chaudhry highlighted that Red Canary accelerates Zscaler's vision to become a leading player in the SOC market. The acquisition brings experienced detection and threat intel engineers, sophisticated agentic AI technology, and a seasoned go-to-market team. This complements Zscaler's existing data-fabric technology and enhances its security operations solutions.
Q: What role does branch connector play in new customer wins, and how is it contributing to Zscaler's growth? A: Jay Chaudhry explained that the branch connector, now a plug-and-play appliance, simplifies branch infrastructure by integrating Zero Trust Branch connectivity and device segmentation. It has been instrumental in attracting new customers, with 59% of Zero Trust Branch buyers being new logos. The solution addresses customer pain points by eliminating the need for multiple legacy network devices.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
This article first appeared on GuruFocus.

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