Zscaler Inc. (ZS) saw its stock drop approximately 21% in U.S. premarket trading on Wednesday after the cybersecurity firm issued fourth-quarter revenue guidance that missed analyst estimates. The shares were trading around $144.84 as of 4:02 a.m. EDT, down sharply from Tuesday's closing price of $184.60.
The sell-off came despite the company reporting fiscal third-quarter results that exceeded expectations. Zscaler reported revenue of $850.5 million for the quarter ending April 30, a 25% increase year-over-year, and adjusted earnings per share of $1.08, beating the $1.01 consensus estimate. Annual recurring revenue also grew 25% to $3.525 billion.
However, the positive quarterly performance was overshadowed by the company's outlook for the current quarter. Zscaler forecast fourth-quarter revenue in the range of $875 million to $878 million, below the $878.6 million Wall Street consensus compiled by LSEG. The company also lowered its free cash flow margin guidance to between 22.8% and 23.3%, down from the previous forecast of 26.5% to 27%, citing higher capital expenditures.
Chief Financial Officer Kevin Rubin attributed the increased capex to rising costs for memory, storage, and processors, as well as the decision to accelerate some planned fiscal 2027 data-center spending into the current quarter. He also noted that two sales leaders had recently departed, which management expects could have some disruptive impact on the sales team.
Despite the near-term headwinds, Zscaler raised its full-year revenue outlook to approximately $3.33 billion and now expects adjusted earnings per share of $4.10 to $4.11. The company continues to benefit from strong demand for cloud security solutions, particularly as enterprises grapple with threats from frontier AI models and compromised AI agents.
CEO Jay Chaudhry emphasized that Zscaler is "ideally positioned as the cybersecurity platform for the AI era." The company recently announced plans to acquire Symmetry Systems, a specialist in access-graph technology, to manage agent-to-app and agent-to-agent traffic at scale.
However, Zscaler faces intense competition from larger players like Palo Alto Networks in the Secure Access Service Edge (SASE) market, as well as from Google's recent $32 billion acquisition of cloud security firm Wiz. Macroeconomic uncertainties, extended sales cycles, and execution risks could also weigh on the stock.
The premarket decline in Zscaler shares occurred even as broader markets showed strength, with Nasdaq 100 futures rising 0.45% earlier in the session. The sharp move highlights investor sensitivity to any signs of slowing growth or margin pressure in the high-growth cybersecurity sector.
