Zscaler Nears $3B ARR Goal: Can It Maintain the Momentum Through FY25?

Zscaler (ZS) reported Q3 fiscal 2025 ARR of $2.9 billion, marking the third consecutive quarter of 23% year-over-year growth, and remains confident in achieving its $3 billion ARR target by the end of fiscal 2025. The company's Z-Flex program generated $65 million in TCV bookings in its first quarter, with some large clients increasing their ARR by over 40%. Zscaler's growth is also fueled by its Zero Trust Everywhere initiative, which saw a 60% increase in enterprise customers, while competitors like CyberArk and SentinelOne are also experiencing ARR growth of 50% and 24% respectively.

Analysis

Zscaler (ZS) reported robust third-quarter fiscal 2025 results, achieving $2.9 billion in annual recurring revenues (ARR), reflecting a consistent 23% year-over-year growth for the third consecutive quarter. Management expressed confidence in reaching its $3 billion ARR target by the end of fiscal 2025's fourth quarter. A significant contributor to this momentum is the newly launched Z-Flex purchasing program, which secured $65 million in total contract value (TCV) bookings in its initial quarter and enabled substantial ARR increases for large clients, exemplified by a Fortune 500 tech firm boosting its ARR by over 40% to nearly $19 million. Zscaler's strategic focus on Zero Trust Everywhere, Data Security Everywhere, and its AI-driven Agentic Operations now accounts for almost $1 billion in ARR. The Zero Trust Everywhere initiative is a standout, with enterprise customers growing 60% sequentially to over 210, and Zscaler aims to triple this customer base to over 390 by the end of fiscal 2026. The company’s strong customer expansion is further evidenced by 642 customers contributing over $1 million in ARR each and a 114% trailing 12-month net retention rate. Despite Zscaler's shares surging 66.3% year-to-date, outperforming the Zacks Security industry's 22% growth, its forward price-to-sales ratio of 15.21 is only slightly above the industry's 14.77. Competitors like CyberArk (CYBR) and SentinelOne (S) are also demonstrating significant ARR growth, with CyberArk reporting a 50% year-over-year increase to $1.215 billion in its Q1 fiscal 2025, and SentinelOne achieving 24% year-over-year growth to $948 million in its Q1 fiscal 2026. Analyst consensus for Zscaler's fiscal 2026 earnings per share is $3.18, a slight 0.31% decrease year-over-year, though this estimate has risen 3.92% in the past 30 days; fiscal 2027 EPS is projected at $3.55, an 11.86% year-over-year increase.

Key Decisions for Investors

• Investors should closely monitor Zscaler's ability to sustain its 23% ARR growth trajectory and achieve its $3 billion ARR target for fiscal 2025, especially considering the strong competitive growth from CyberArk and SentinelOne.
• The adoption rate of the Z-Flex program and continued expansion of the Zero Trust Everywhere customer base towards the fiscal 2026 target of over 390 clients are critical indicators of Zscaler's ongoing market penetration and platform success.
• While Zscaler's significant stock appreciation and premium valuation require careful consideration, the projected 11.86% earnings growth for fiscal 2027 offers a positive longer-term outlook, though the slight anticipated dip in fiscal 2026 EPS should be factored into near-term expectations.
• Evaluate Zscaler's net retention rate and growth in large customer accounts (>$1M ARR) as key metrics for assessing the effectiveness of its upselling and cross-selling strategies within its existing customer base.