ZS - NASDAQ
Zscaler, Inc.
ZS·NASDAQ
$134.37
-6.8%TechnologySoftware - Infrastructure
Zscaler, Inc. operates as a cloud security company worldwide. The company provides Zscaler Internet Access solution that provides users, servers, operational technology, Internet of Things device secure access to externally managed applications, including software-as-a-service (SaaS) applications and Internet destinations; and Zscaler Private Access solution, which is designed to provide access to managed applications hosted internally in data centers, and private or public clouds. It also offers Zscaler Digital Experience that measures end-to-end user experience across business applications, as well as provides an easy to understand digital experience score for each user, application, and location within an enterprise. In addition, the company provides workload segmentation solutions comprising Zscaler Cloud Security Posture Management that identifies and remediates application misconfigurations in SaaS, infrastructure as a service, and platform as a service to reduce risk and ensure compliance with industry and organizational benchmarks; and Zscaler Cloud Workload Segmentation, which is designed to secure application-to-application communications inside public clouds and data centers to stop lateral threat movement, as well as prevents application compromise and reduces the risk of data breaches. Its platform modules include Zscaler Central Authority, Zscaler Enforcement Node, and Zscaler Log Servers. It serves customers in airlines and transportation, conglomerates, consumer goods and retail, financial services, healthcare, manufacturing, media and communications, public sector and education, technology, and telecommunications services industries. The company was formerly known as SafeChannel, Inc., and changed its name to Zscaler, Inc. in August 2008. Zscaler, Inc. was incorporated in 2007 and is headquartered in San Jose, California.
At a Glance
Live SnapshotMarket Cap$21.73B
EPS-0.2700
P/E Ratio-497.67
Earnings Date06/04/2026
Earnings Call Transcript
ZS • 2026 • Q2
Operator
Good day, and thank you for standing by. Welcome to the
Kim Watkins
Good afternoon, and thank you for joining us today. Welcome to
Jagtar Chaudhry
Thanks, Kim, and thanks to everyone for joining us today. We delivered strong Q2 results, and I couldn't be more proud of the team's execution. ARR grew 25%, reflecting continued strong demand for our platform. We are confident in our outlook for the second half of fiscal 2026. And as a result, we are increasing our guidance across the board. I'd like to zoom out for a moment and talk about what's on everyone's mind, AI. AI is the single most transformative technology of our time, and its mass adoption is only just beginning. We believe
Kevin Rubin
Thanks, Jay. We delivered strong Q2 '26 results, exceeding our targets while investing with discipline. With 26% revenue growth and a 36% free cash flow margin, we achieved Rule of 62 performance in the first half of the year, placing us among the elite companies that consistently outperform the Rule of 40. Our Q2 '26 net new ARR was $156 million, up 19%, bringing total ARR to $3.4 billion, up 25% year-over-year. Net new ARR benefited from strength in large deals and volume of deals. In particular, the Americas closed twice the number of $1 million-plus deals this year as compared to last year. Excluding the contribution from our acquisition of Red Canary, net new ARR was $139 million, up 7% year-over-year and total ARR up 21%. These results compared to an exceptionally strong 24% net new ARR growth last year. Red Canary exited Q2 with $114 million of ARR. For the first half of the year, net new ARR, excluding Red Canary, grew 10% year-over-year, accelerating from 1% last year. This quarter, our
Operator
[Operator Instructions] Our first question will come from the line of Saket Kalia of Barclays.
Saket Kalia
Thank you, team, for the increased disclosure on Red Canary. Very helpful. Jay, maybe for you. I'd love if you could talk about just the competitive backdrop a little bit and anything you can touch on in terms of competitive win rates and what you saw this quarter. I mean, clearly, this is a rising tide market, but there are other players as well. Maybe the question is, where are you winning? And what impact, if any, are they having?
Jagtar Chaudhry
Thank you, Saket. We haven't seen much change in the competitive dynamics over the past few quarters. What we saw was a record pipeline conversion for Q2, which is wonderful. And we also had a record Q2 in terms of large deal wins in Q2, and by large deal wins, I mean, over $1 million. I mean, there's a fair amount of noise the market creates out there, SASE this, SASE that. SASE is a collection of all kinds of products. In many of these SASE numbers, legacy firewalls, VPNs get thrown out. But what we are seeing in the market is our customers care about
Operator
Our next question will be coming from the line of Brad
Brad Zelnick
Congrats again on another great quarter, guys, and also appreciate the additional disclosure. Kevin, it seems you're raising your full year ARR expectation by more than your overachievement in Q2. How much might be from newer acquisitions? And are there any seasonal anomalies we should consider, perhaps slipped deals out of Q2 or anything like that?
Kevin Rubin
Thanks, Brad. I appreciate the comments and the question. First of all, just remember, our business seasonality tends to favor H2. So we are going into the second half of the year feeling confident. We do see a strong pipeline of deals going into the back half, which does give us confidence in the raise, excluding Red Canary. So I would point to strength in the overall business as well as just general seasonality that we see in the back half of the year.
Operator
Our next question will be coming from the line of Gregg Moskowitz of Mizuho.
Gregg Moskowitz
Also welcome the additional disclosure. So thank you for that. Very interesting that your non-seat-based meter usage solutions are now over 25% of new ACV. That's higher than a lot of people had thought. And with the related ARR more than doubling year-over-year, this has the potential to put some upward pressure on the growth algorithm for
Jagtar Chaudhry
Of course. Yes, we started early on with
Operator
And our next question will be coming from the line of Brian Essex of JPMorgan.
Brian Essex
Another set of kudos to Kevin for the organic versus inorganic disclosure. Maybe a question for you, Jay, and we saw this quite a lot during -- like a decade ago when digital transformation was the buzzword and a lot of different IT projects were classified as digital transformation products. Similarly, we're starting to hear of a lot of projects where executives are throwing AI on top of their projects to get more budget. And from that perspective, are you beginning to see any attach to budgets outside of security? How are CIOs thinking about funding some of these projects? And is
Jagtar Chaudhry
Yes. So we are seeing CIOs trying to really move as fast as they can to implement AI security projects. The kind of feeling is, if I'm not doing something, I'll be left behind. That's a clear thing I see as I talk to lots and lots of them. But they do all worry about cybersecurity, especially when you see all these agents showing up every other week. I mean, last night was Perplexity Computer and Claude before that and all these guys keeps on coming. They are definitely creating security issues. So our customers are asking us, what can you provide me for visibility into AI assets and risk associated with that. And then start moving around. How do we control agents? How do we have a policy that can say certain agents can access certain applications. Agents are somewhat like you. They're just more dangerous, and they're growing at a rapid pace. So there is a high degree of interest in proper security, especially
Operator
Our next question will be coming from the line of Meta Marshall of Morgan Stanley.
Meta Marshall
Maybe a question for me, kind of following up on Brian's question of just what you're seeing in terms of sales cycles once kind of a deal is encompassing more AI. I guess just how does it change the dynamic of either kind of needing to take a more holistic view or needing to include more modules? Just what are you seeing there?
Jagtar Chaudhry
Thank you. So sales cycle depends on the scope of the project. The first thing our customers are trying to do is put their hands around what do they have in AI environment, what public AI application is being used and what private AIs are being used. So for that, we offer AI asset management. Then they want to do vulnerability assessment, teaming kind of stuff. As they roll out the project, guardrails become important. Last month, we launched a very integrated AI security portfolio. The sales cycle based on what modules they're doing is generally faster, because they are not really trying to go after everything, they want to start somewhere, but they want an integrated solution. And a number of customers have told me, hey, we bought this solution from a start-up, but for 1 year, until I figure out what integrated solution can I get from a trusted vendor like
Operator
And our next question will be coming from Fatima Boolani of Citi.
Fatima Boolani
Kevin, this one is for you. I was hoping to take a step back to have you reconcile the comments around Red Canary seeing elevated churn, but also the close to 30% revision on your financial contribution expectation from Red Canary, both to ARR and top line on revenue. So just wanted to kind of better understand. I know you sort of flagged that the Red Canary business generally had much higher levels of churn relative to
Kevin Rubin
Yes, I appreciate the question. So look, I mean, there is an element here that, as we talked about when we did the acquisition, as we do secure the renewals, there is a positive impact to ARR. And so you are seeing some of that come in. My commentary just around the elevated levels of renewals is just to give color around what we are seeing. As a reminder, Red Canary was a technology and talent acquisition, and it is a core feature of the Agentic SOC that we are putting together and combining. And I mentioned that we moved into the next phase of our integration earlier this month and now consolidating those teams, which we're really excited about. So I mean, the reconciliation is really just to give you guys a sense for what we're seeing in the business and how you should think about the second half of the year.
Operator
And our next question will be coming from the line of Roger Boyd of UBS.
Roger Boyd
Jay, I want to touch on sales productivity. You've made a number of changes to the go-to-market strategy over the past year in order to really help guide customers towards more transformational projects. And I know you mentioned another improvement this quarter, but can you talk about kind of the future ramp you're expecting in terms of sales force productivity? Do you see further room to upside given the push towards more of these transformational deals that are bigger, but maybe more complex?
Jagtar Chaudhry
I'll give you a broader view, and Kevin can get into more specific stuff. With the changes we have gone through, we are driving more transformational deals, better engaging with our customers. With that, you're seeing bigger deals,
Kevin Rubin
Yes. Thanks, Jay. So I want to just kind of double-click on that last point, right? So as we engage with our customers, the account-centric model is a much different level of engagement. We're seeing a lot of interest in
Jagtar Chaudhry
And if I may add, the record pipeline conversion in Q2, as a good indication of that what we want to do is working. Record $1 million dollar deals in Q2, another indication of the results we're getting.
Operator
And our next question will be coming from Ittai Kidron of Oppenheimer & Company.
Ittai Kidron
Kevin, I wanted to dig in into your comment on the core
Kevin Rubin
Yes. Thanks, Ittai. I appreciate the question. We have seen a pretty consistent performance in
Jagtar Chaudhry
One interesting stat on
Operator
And our next question will be coming from Gray Powell of BTIG.
Gray Powell
Okay. So I want to follow up on some of the earlier questions, and I think you've hit on this somewhat. So you are seeing a lot of momentum in
Kevin Rubin
Yes. Thanks for the question. Let me maybe just orientate -- I mean, the way that we look at
Operator
And our next question will be coming from the line of Jonathan Ruykhaver of Cantor Fitzgerald.
Jonathan Ruykhaver
So I think, Jay, this is for you. Just curious, when you look at SquareX, from my understanding, you're embedding browser security via an extension rather than having a dedicated secure browser. Can you just talk about that? It seems like the flexibility could be a plus, but is there any trade-off between control and functionality between extension and full browser? And then just curious also on your view of how critical is the browser layer to winning broader
Jagtar Chaudhry
Thank you. Very good question. So we have been offering
Operator
And our next question will be coming from the line of Eric Heath of KeyBanc.
Eric Heath
Maybe I wanted to come back as an extension to Gregg's earlier question thinking about AI agents. So AI agents will drive a lot of network traffic. So Jay, Kevin, just how should we think about how you can monetize that increased traffic? And Kevin, how we should think about it impacting the model over a longer time period?
Jagtar Chaudhry
Yes. Thank you. We think these agents that are growing at a pretty rapid pace will generate a fair amount of traffic. The traffic means they're going to access application A or B, or one agent is going to talk to a second agent. In order to do that, we believe the best security is that they should be going through a zero trust exchange, so that a given agent can only talk to a given agent or applications. Otherwise, imagine one infected or hijacked agent will infect the whole enterprise. That's the biggest value we bring to the table. The more agents, the more agentic traffic, the more value we deliver, and the better revenue opportunity for us. So we look at it as probably the biggest upside for growth of
Operator
And our next question will be coming from the line of Matt Hedberg of RBC.
Matthew Hedberg
Strong results you're raising, Kevin, you said by more than the beat. But I just had a clarification on ARR. I just want to make sure that I'm not missing anything. It looks like you raised the ARR midpoint by $30 million. But it looks like in the disclosure, and maybe this is where I'm mistaken, but it looks like you took your Red Canary expectations up from $95 million to $135 million. So to me, that looks like a $35 million raise. So am I interpreting that right? Because I'm just not totally certain about what kind of the organic raise here is for the year.
Kevin Rubin
Yes. No, I appreciate the clarification. If you look at this on an organic basis, we are raising the organic net new from 6.7% as our initial raise in the beginning of the year to 9.5% growth for '26. So yes, there is some element of Red Canary that is mechanically inherent in the raise. But the underlying growth and strength in the organic business, giving us confidence to raise to 9.5% net new growth this year is what you're seeing fundamentally in the raised guidance. And keep in mind, just in the first half of this year, net new without Red Canary grew 10% against the backdrop of last year, where it grew 1%. So we are seeing very healthy acceleration in net new ARR growth, both first half and signaling for the back half.
Operator
And our next question will be coming from the line of Keith Bachman of BMO.
Keith Bachman
Okay. I broke up a little bit there, but I want to go ahead and ask a question about
Jagtar Chaudhry
Yes. So first of all, we are very pleased with the number of customers becoming
Operator
And that concludes our Q&A session. I would now like to turn the conference back to Jay Chaudhry, CEO, Chairman and Founder, for closing remarks.
Jagtar Chaudhry
Thank you for joining us. We look forward to seeing you at one of the investor conferences we'll be attending. Thanks again.
Transcript from February 27, 2026
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