Earnings call transcript: Zscaler beats Q3 2025 expectations, stock rises

Zscaler reported a strong Q3 2025, exceeding expectations with revenue of $678 million, a 23% year-over-year increase, and EPS of $0.84, surpassing the forecast of $0.76; annual recurring revenue reached $2.9 billion, also up 23% year-over-year. The company's stock price rose by 4.53% in aftermarket trading to $262.48, reflecting investor optimism driven by the earnings beat and positive guidance, including Q4 revenue guidance between $750 million and $770 million. Zscaler also announced the acquisition of Red Canary for $675 million, aimed at expanding its security operations capabilities, and highlighted its focus on Zero Trust Everywhere and AI security as key growth drivers.

Analysis

Zscaler (ZS) reported a robust third quarter for fiscal year 2025, significantly outperforming market expectations. Revenue reached $678 million, marking a 23% year-over-year increase, while earnings per share (EPS) stood at $0.84, comfortably beating the $0.76 forecast. Annual Recurring Revenue (ARR) also grew 23% year-over-year to $2.9 billion, with the company on track to exceed $3 billion by the end of Q4. This performance was driven by strong demand for its Zero Trust platform, evidenced by 642 customers now generating over $1 million in ARR and new logo ACV growing over 40% year-over-year. The company maintains impressive gross profit margins of 77.86% and an operating margin of approximately 22%, coupled with a free cash flow margin of 18%. Zscaler's "Rule of 52" performance (revenue growth + FCF margin) has been sustained for 21 consecutive quarters. Key strategic developments include the announced acquisition of Red Canary for $675 million, expected to close in August 2025, which will bolster its security operations capabilities, particularly in Managed Detection and Response (MDR) and Threat Intel; Zscaler anticipates retaining about half of Red Canary's $140 million ARR. The new Z Flex purchasing program has already contributed over $65 million in TCV bookings in its inaugural quarter. Zscaler provided positive Q4 revenue guidance of $750 million to $770 million (19% YoY growth at midpoint) and reiterated its long-term target of $5 billion in ARR. Despite these strengths, InvestingPro data suggests the stock is trading above its fair value and exhibits overbought technical indicators. Identified risks include economic uncertainty impacting IT spending, competitive pressures, and integration challenges with Red Canary.

Key Decisions for Investors

• Investors should view Zscaler's strong Q3 results and positive guidance as supportive of a continued growth narrative, particularly given the momentum in ARR and large customer acquisition.
• Monitor the successful integration of Red Canary post-acquisition, focusing on its contribution to ARR and the stated neutrality to FY26 operating margins, as this is key to expanding into the SecOps market.
• Track the adoption and impact of the Z Flex program on TCV, ARR, and customer retention, as its flexibility could accelerate platform adoption and increase deal sizes.
• Despite strong fundamentals and bullish analyst sentiment, acknowledge InvestingPro's valuation assessment (trading above fair value, overbought conditions) and consider this when evaluating entry points or adjusting position sizes.
• Closely watch for sustained execution in key growth pillars like Zero Trust Everywhere, Data Security, and AI-driven security offerings, especially against the backdrop of cautious IT spending and competitive dynamics.