Zscaler Inc. shares tumbled more than 13% in after-hours trading Tuesday, settling near $156, after the cybersecurity company's fourth-quarter revenue projection came in slightly below analysts' expectations. The weaker outlook tempered investor enthusiasm over better-than-anticipated results for the fiscal third quarter.
The San Jose-based firm forecast fourth-quarter revenue of $875 million to $878 million, with a midpoint of $876.5 million, just under the $879 million consensus estimate, according to Investor's Business Daily. This shortfall was enough to rattle investors who have grown accustomed to robust growth in the software sector, even within cybersecurity, where budgets have remained relatively resilient.
For the quarter ended April 30, Zscaler reported adjusted earnings of $1.08 per share on revenue of $850.5 million, surpassing analyst forecasts of $1.01 per share and $835.6 million in sales. Revenue grew 25% year-over-year, while annual recurring revenue also rose 25% to $3.525 billion. However, on a GAAP basis, the company's net loss widened to $13.9 million from $4.1 million a year ago. Non-GAAP operating income improved to $195.8 million.
CEO Jay Chaudhry positioned Zscaler as the "cybersecurity platform for the AI era," highlighting the platform's ability to conceal applications from attackers and restrict lateral movement once a breach occurs. CFO Kevin Rubin noted that non-GAAP operating margin reached a record 23%.
Looking ahead, Zscaler raised its full-year fiscal 2026 revenue guidance to a range of $3.3295 billion to $3.3325 billion, up from the prior range of $3.309 billion to $3.322 billion. Adjusted earnings per share guidance now stands at $4.10 to $4.11. However, the company lowered its free-cash-flow margin target to 22.8% to 23.3%, down from the earlier range of 26.5% to 27%, citing higher capital spending.
Investors focused on the cash-flow reduction. Zscaler indicated it would move some fiscal 2027 equipment purchases into the current quarter due to pricing pressures, lifting expected fiscal 2026 capital expenditure to the high single digits as a percentage of revenue.
The company is aggressively expanding into AI security as businesses seek to manage employee use of AI tools and the rise of autonomous software agents. In its shareholder letter, Zscaler noted that bookings for its AI Protect offering surpassed $100 million over the past year, while Data Security ARR exceeded $500 million.
Zscaler ended the quarter with 748 customers generating over $1 million in annual recurring revenue and 4,003 customers with ARR of $100,000 or more. The company's Z-Flex program, which allows customers to use or exchange software modules within longer contracts, recorded total contract value of just over $480 million for the quarter, fueled by larger customer commitments.
Zscaler faces stiff competition in the secure access service edge (SASE) and zero-trust security markets, going up against Palo Alto Networks, Microsoft, and Wiz, according to Investor's Business Daily. The trimmed cash-flow outlook and slightly below-consensus guidance suggest that growth may be becoming more costly for the company. In its outlook, Zscaler also flagged macroeconomic uncertainty, AI-related risks, competitive pressures, customer adoption rates, and long deal cycles as potential factors that could cause actual results to deviate from its projections.
The company is scheduled to host an analyst call at 1:30 p.m. Pacific time Tuesday to discuss the quarterly results and its outlook for the fourth quarter and full fiscal year.
