Zscaler Q3 Earnings Beat: Will Strong Guidance Lift the Stock Higher?

Zscaler (ZS) reported strong Q3 fiscal 2025 results, with non-GAAP EPS of $0.84 beating estimates by 12% and revenue of $678 million exceeding both consensus and management guidance. Revenue grew 23% year-over-year, driven by demand for its Zero Trust Exchange platform and AI solutions, while calculated billings increased 25% to $784.5 million. Following the strong performance, Zscaler raised its fiscal 2025 revenue guidance to $2.659-$2.661 billion and EPS guidance to $3.18-$3.19, fueling positive market sentiment as the stock has already gained 39.1% year-to-date.

Analysis

Zscaler reported robust third-quarter fiscal 2025 results, with non-GAAP earnings per share of $0.84, surpassing the Zacks Consensus Estimate by 12% and marking an 18.3% year-over-year increase, driven by higher revenues and efficient cost management. Revenues reached $678 million, a 23% year-over-year growth, exceeding both consensus estimates (by 1.8%) and management's guidance ($665-$667 million), fueled by strong customer adoption of its Zero Trust Exchange platform and AI-based solutions. The company demonstrated sustained momentum with calculated billings growing 25% year-over-year to $784.5 million and Remaining Performance Obligations (RPO) increasing 30% to $4.978 billion, underscoring a healthy future revenue pipeline. Customer expansion metrics remained strong, evidenced by a net 12-month trailing dollar-based retention rate of 114% and an increase in customers generating over $1 million in annualized recurring revenue to 642. While the non-GAAP gross margin saw a slight contraction of 100 basis points year-over-year to 80%, Zscaler maintained a stable non-GAAP operating margin at 22%, indicating effective operational leverage. Consequently, Zscaler raised its full-year fiscal 2025 guidance, now forecasting revenues between $2.659-$2.661 billion and non-GAAP earnings per share in the range of $3.18-$3.19.

Key Decisions for Investors

• Consider Zscaler's strong Q3 performance and raised FY25 guidance as indicative of sustained growth momentum and leadership in Zero Trust security and AI-based solutions.
• Monitor the non-GAAP gross margin, despite stable operating margins, alongside the continued impressive growth in billings, RPO, and high-value customer acquisition, as these are key indicators of sustained profitability and market penetration.
• Evaluate the stock's current valuation critically, considering its significant 39.1% year-to-date appreciation and current Zacks Rank #3 (Hold) status, before making new or increasing existing investment allocations.