Zscaler jumps 8% on strong results fueled by AI growth

Zscaler (ZS) shares surged 8% following a strong Q3 earnings report, driven by AI-related demand and zero-trust platform adoption; revenue grew 23% to $678 million, exceeding the $666 million estimate, while adjusted EPS of 84 cents beat the expected 75 cents. Billings also surpassed expectations, rising 25% to $785 million, offering a positive signal for the cybersecurity sector amid mixed performance from competitors like SentinelOne and Palo Alto Networks. The company issued optimistic adjusted EPS guidance for Q4, projecting 79-80 cents per share, above the consensus estimate of 77 cents.

Analysis

Zscaler (ZS) shares experienced an 8% uplift following its fiscal third-quarter report, which showcased stronger-than-expected results driven by heightened demand for its AI security solutions and widespread adoption of its zero-trust platform. The company reported a 23% year-over-year revenue increase to $678 million, surpassing the LSEG estimate of $666 million, and adjusted earnings per share of 84 cents, which exceeded the LSEG forecast of 75 cents. Billings also demonstrated significant momentum, growing 25% to approximately $785 million, ahead of the $760 million StreetAccount estimate. CEO Jay Chaudhry highlighted increasing investments to empower secure AI adoption for customers. This performance, which Morgan Stanley's Keith Weiss noted as beginning to prove a reacceleration narrative, offers a positive signal for the cybersecurity industry, especially when contrasted with recent weakness from competitors SentinelOne (S), which lowered its outlook, and Palo Alto Networks (PANW), which missed on gross margin. However, Zscaler did report a GAAP net loss of $4.1 million (3 cents per share) for the quarter, compared to a net income of $19.1 million (12 cents per share) in the year-ago period. Looking ahead, Zscaler provided upbeat adjusted EPS guidance for the fiscal fourth quarter, projecting between 79 and 80 cents per share, against an LSEG expectation of 77 cents. The company also announced the appointment of Kevin Rubin as its new Chief Financial Officer.

Key Decisions for Investors

• Investors could view Zscaler's strong Q3 results, positive Q4 guidance, and outperformance against peers as supportive of a continued constructive stance, while noting the reported GAAP net loss.
• Closely monitor the execution of the AI security strategy and its tangible impact on revenue growth and market penetration, as this is a key driver highlighted by management.
• Assess the company's progress towards achieving GAAP profitability in future quarters, alongside sustained growth in adjusted earnings and billings.
• Keep a vigilant eye on the competitive landscape within cybersecurity, particularly Zscaler's ability to maintain momentum against companies like SentinelOne and Palo Alto Networks, and the integration of the new CFO.