10-Q: Zscaler Q1 FY26 Revenue Jumps 26%, Net Loss Narrows

Zscaler, Inc. reports a 26% revenue increase to $788.1 million for Q1 FY26, alongside a narrowed net loss of $11.6 million, driven by customer expansion and strategic acquisitions.

Summary

• Revenue for the three months ended October 31, 2025, was $788.1 million, a 26% increase from $628.0 million in the prior year period.
• Net loss for the three months ended October 31, 2025, was $11.6 million, compared to $12.1 million for the same period in 2024.
• Gross profit increased to $603.4 million (77% gross margin) from $486.5 million (77% gross margin) in the prior year.
• Operating expenses totaled $639.7 million, up from $517.2 million in the prior year, primarily due to increased sales and marketing, R&D, and G&A expenses.
• Cash and cash equivalents decreased to $1,338.2 million as of October 31, 2025, from $2,389.0 million as of July 31, 2025.
• Short-term investments increased to $1,983.1 million from $1,183.4 million.
• Acquired SPLXAI Inc. for $40.6 million cash on October 31, 2025, to integrate its technology with AI Security offerings.
• Acquired Red Canary Inc. for $651.4 million cash on August 1, 2025, to accelerate innovations in Agentic AI-driven security operations (SecOps).
• Dollar-based net retention rate for the trailing 12 months ended October 31, 2025, was 115%, up from 114% in the prior year. This metric will no longer be reported starting Q2 FY26.
• Annual Recurring Revenue (ARR) as of October 31, 2025, was $3,204 million, up from $2,553 million in 2024.
• Restructuring charges of $4.7 million were recognized during the quarter to streamline operations.
• The company maintains a valuation allowance on U.S. federal, state, and certain foreign jurisdiction deferred tax assets due to a history of losses in those jurisdictions.

Sentiment

Score: 6

Explanation: While revenue growth and net retention are strong, significant cash outflow from acquisitions, continued net losses, and explicit warnings about elongated sales cycles due to macroeconomic conditions temper the positive financial performance. The decision to stop reporting dollar-based net retention rate also adds a layer of uncertainty.

Positives

• Strong revenue growth of 26% year-over-year, reaching $788.1 million.
• Net loss narrowed to $11.6 million from $12.1 million in the prior year, despite significant investments.
• Dollar-based net retention rate improved to 115%, indicating strong customer expansion and retention.
• Annual Recurring Revenue (ARR) grew significantly to $3,204 million.
• Successful acquisitions of SPLXAI Inc. and Red Canary Inc. are expected to enhance AI Security and Agentic AI-driven SecOps capabilities.
• Interest income increased by 10% to $33.1 million due to a higher balance of cash equivalents and short-term investments.
• Free cash flow increased to $413.3 million from $291.9 million in the prior year, with free cash flow margin improving to 52% from 46%.
• The company's cloud platform is expanding, with over 9,400 customers in over 185 countries, including approximately 40% of the Forbes Global 2000.

Negatives

• Continued net losses, with an accumulated deficit of $1,201.2 million as of October 31, 2025.
• Operating expenses increased by 23.7% to $639.7 million, outpacing revenue growth in absolute terms, driven by sales & marketing, R&D, and G&A.
• Cash and cash equivalents decreased by over $1 billion during the quarter, primarily due to significant investing activities including business acquisitions and purchases of short-term investments.
• Other expense, net, increased significantly by 366% to $3.0 million, primarily due to fluctuations in foreign currency transactions.
• Customer scrutiny and elongated approval processes for transactions, particularly larger deals, are impacting new customer acquisition due to uncertain economic environment.
• Restructuring charges of $4.7 million were incurred for employee severance and benefit payments.
• The company will no longer report dollar-based net retention rate starting Q2 fiscal 2026, removing a key metric for investors.

Risks

• The company has a history of losses and may not be able to achieve or sustain profitability in the future, with an accumulated deficit of $1,201.2 million as of October 31, 2025.
• If organizations do not adopt the company's cloud platform, its ability to grow the business and operating results may be adversely affected, especially against entrenched on-premises solutions.
• Inability to attract new customers or retain existing ones, or expand their subscriptions, could harm future results, exacerbated by customer cautiousness and elongated sales cycles in uncertain economic conditions.
• The market for network security solutions is intensely competitive and characterized by rapid changes in technology, customer requirements, industry standards, and frequent introductions of new products and services.
• Any interruption or delay in service delivery due to platform defects, infrastructure failures, cyberattacks, or other factors could damage reputation and financial performance.
• Actual or perceived failures of the cloud platform to block malware or prevent security breaches could harm reputation, lead to customer loss, and negatively impact financial results, especially with increasing sophistication of AI-enabled cyber threats.
• Business growth relies heavily on channel partners, and their failure to effectively market, sell, or support services could adversely affect the business.
• Inability to timely develop or introduce new enhancements, especially AI-enabled technologies, could impair competitiveness.
• Damage or failure of the global network of data centers could negatively impact service provision and platform performance.
• Failure of the cloud platform to interoperate with customer network infrastructure or third-party products could reduce competitiveness.
• Inability to maintain and enhance brand reputation could adversely affect business and pricing power.
• Failure to effectively develop and expand sales and marketing capabilities, including recruiting and retaining skilled personnel, could hinder customer acquisition and sales growth.
• Sales cycles, particularly for large organizations, are long and unpredictable, requiring considerable time and expense without guaranteed sales.
• Failure to meet contractual service level commitments could lead to service credits, refunds, and reputational damage.
• Inability to provide high-quality customer support, including through channel partners, could adversely affect customer satisfaction and retention.
• Future success is substantially dependent on attracting, retaining, and motivating key management and technical personnel, including CEO Jay Chaudhry.
• Dependence on public sector sales exposes the company to unpredictable demand, lengthy procurement cycles, and stringent compliance requirements.
• Significant international presence exposes the company to political, economic, regulatory, and currency fluctuation risks, as well as challenges in enforcing contracts and protecting intellectual property.
• Future acquisitions involve risks of integration difficulties, diversion of management attention, dilution of stockholder value, and unforeseen liabilities.
• While current liquidity is deemed sufficient for 12 months, future capital needs may require additional financing, which may not be available on favorable terms or at all, potentially leading to dilution or restrictive debt terms.
• Reliance on licensed third-party software and technology, including open-source components, carries risks of infringement claims, security vulnerabilities, and inability to obtain or maintain necessary rights.
• Reliance on a limited number of suppliers for critical components exposes the company to supply chain disruptions, delays, and increased costs.
• Claims by others that the company infringes their proprietary technology or other rights, or other lawsuits asserted against it, could result in significant costs and substantially harm the business.
• Inability to adequately protect and enforce its own intellectual property rights could seriously harm the business.
• Adverse economic conditions or reduced IT security spending, including the ongoing effects of inflation and high interest rates, may adversely impact revenue and profitability.
• Failure to comply with evolving laws and regulations (privacy, data protection, cybersecurity, AI, labor, export controls) could lead to fines, penalties, and reputational harm.
• Exposure to fluctuations in currency exchange rates could negatively affect operating results, despite hedging programs.
• The company is subject to counterparty default risks with financial institutions for various arrangements.
• The company's corporate structure and intercompany arrangements are subject to the tax laws of various jurisdictions, and it could be obligated to pay additional taxes.
• The ability to use net operating loss carryforwards and certain other tax attributes may be limited.
• Taxing authorities may successfully assert that the company should have collected or in the future should collect sales and use, value added or similar taxes, leading to potential liability.
• The concentration of stock ownership with insiders will likely limit other stockholders' ability to influence corporate matters.
• Certain provisions in the company's charter documents and under Delaware law could make an acquisition of the company more difficult.
• The market price of the common stock may be volatile, and investors could lose all or part of their investment.
• Sales of substantial amounts of common stock in the public markets, or the perception that they might occur, as well as any issuances of common stock in connection with the conversion of the 2028 Notes, could reduce the price and dilute voting power.
• The company does not intend to pay dividends in the foreseeable future, so investment return depends on stock price appreciation.
• If industry or financial analysts issue inaccurate or unfavorable research regarding the common stock, the stock price and trading volume could decline.
• The company's amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States are the exclusive forums for substantially all disputes, which could limit stockholders' ability to obtain a favorable judicial forum.
• Repayment of the $1,725 million 2028 Notes will require a significant amount of cash, which may impact cash available for working capital, capital expenditures, and other corporate purposes.
• The capped call transactions related to the 2028 Notes may affect the value of the common stock and subject the company to counterparty risk.
• The business is subject to the risks of earthquakes, fire, floods, other natural catastrophic events, and man-made problems such as power disruptions, computer viruses, acts of war, international conflicts, terrorism, and security breaches.
• The company is subject to anti-corruption, anti-bribery, and similar laws, and noncompliance can subject it to criminal penalties or significant fines.
• Failure to maintain an effective system of internal controls could impair the ability to produce timely and accurate financial statements or comply with applicable regulations.
• If estimates or judgments relating to critical accounting policies prove to be incorrect or financial reporting standards or interpretations change, results of operations could be adversely affected.
• Reliance on third parties for certain essential financial and operational services, and a failure or disruption in these services, could materially and adversely affect the ability to manage the business effectively.
• The company may become involved in litigation that may materially and adversely affect it.

Future Outlook

The company expects to continue incurring net losses for the foreseeable future as it invests significantly in sales and marketing, research and development to enhance its cloud platform functionality, and addresses legal matters. It anticipates operating expenses to increase in absolute dollars but decrease as a percentage of revenue over the long term. The dollar-based net retention rate will no longer be reported starting in the second quarter of fiscal 2026. The company believes existing cash, cash equivalents, and short-term investments will be sufficient to fund working capital, capital expenditures, and convertible senior notes repayment for at least the next 12 months.

Management Comments

• We expect we will continue to incur net losses for the foreseeable future, as we continue to invest in our sales and marketing organization to maximize our market opportunity, to invest in research and development efforts to enhance the functionality of our cloud platform, and to address any legal matters and related accruals.
• We continue to see customer scrutiny of and elongated approval processes for transactions, particularly larger deals, as customers continue to carefully consider purchasing decisions and are requiring multiple approvals for large expenditures in response to the uncertain economic environment.
• We expect customer cautiousness to continue in the near term, elongating our sales cycles and the timing of large deals.
• We believe that the imperative for organizations to securely move to the cloud will increase demand for our cloud platform and broaden our customer base.
• We intend to balance these investments in future growth with a continued focus on managing our results of operations and investing judiciously.
• Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of October 31, 2025. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Industry Context

The company operates in a rapidly evolving cloud security market, driven by increasing cloud adoption, workforce mobility, and the emergence of AI. It positions its Zero Trust platform as a superior alternative to traditional perimeter security, addressing new cybersecurity threats and IT challenges posed by AI. The industry is highly competitive, with both established network and security vendors and emerging companies introducing new cloud-based solutions. Macroeconomic and geopolitical conditions are causing customer scrutiny and elongated approval processes for large deals, reflecting broader economic uncertainty impacting IT spending. The growth in state-sponsored and AI-enabled cyber activity highlights the increasing sophistication of threats, underscoring the demand for advanced security solutions.

Comparison to Industry Standards

• The dollar-based net retention rate of 115% for the trailing 12 months ended October 31, 2025, indicates strong customer value expansion, which is generally considered healthy for SaaS companies, often benchmarked against a 120% or higher rate for top performers, but still solid given current macroeconomic headwinds.
• The gross margin of 77% is competitive within the SaaS and cloud security industry, where gross margins typically range from 70-85% for software-as-a-service providers, indicating efficient delivery of services.
• The continued net losses, despite strong revenue growth, are common for high-growth technology companies like Zscaler that prioritize market share expansion and R&D investments over immediate profitability, similar to early-stage growth phases of companies like CrowdStrike or Palo Alto Networks in their respective growth cycles.
• The acquisitions of SPLXAI Inc. and Red Canary Inc. align with a broader industry trend of cybersecurity firms integrating AI and managed detection and response (MDR) capabilities to enhance threat intelligence and automate security operations, a strategy seen across major players like Microsoft (with its security suite) and SentinelOne.

Management Changes

Corporate Governance

Legal Proceedings

• The company is a party to various litigation matters from time to time, including patent, commercial, product liability, employment, class action, whistleblower, and other claims, as well as governmental and regulatory investigations.
• There is no pending or threatened legal proceeding that, in the company's opinion, is likely to have a material adverse effect on future financial results or operations.
• Litigation can have an adverse impact due to defense and settlement costs, diversion of management resources, and inherent unpredictability.

Stakeholder Impact

• Shareholders: Potential for dilution from future equity issuances or conversion of 2028 Notes; stock price volatility due to market factors and company performance; reliance on stock price appreciation for investment return as no dividends are planned.
• Employees: Restructuring plan resulted in severance and benefit payments, indicating workforce reductions; increased stock-based compensation expense benefits employees; acquisitions (Red Canary, SPLXAI) brought new employees and associated restricted share awards.
• Customers: Benefit from enhanced AI security and SecOps capabilities through recent acquisitions; potential for elongated sales cycles and increased scrutiny for large deals due to macroeconomic conditions; continued investment in R&D aims to improve platform functionality and reliability.
• Channel Partners: Continued reliance on channel partners for revenue growth; potential for increased marketing and training support from the company; performance of channel partners can impact the company's brand and reputation.
• Creditors: The issuance of $1.725 billion in 2028 Convertible Senior Notes increases debt obligations, with repayment due July 15, 2028.

Next Steps

• Integrate SPLXAI's technology with AI Security offerings.
• Accelerate innovations in Agentic AI-driven security operations (SecOps) with Red Canary's technology.
• Continue to invest significantly in sales and marketing to grow and train the sales force, broaden brand awareness, and expand channel partner relationships.
• Continue investing in research and development to enhance cloud platform functionality, improve reliability, availability, and scalability, and access new customer markets.
• Increase the size of general and administrative organizations and incur additional costs to support business growth and address legal matters.
• Evaluate market conditions, liquidity profile, and various financing alternatives (including equity, equity-linked, or debt securities) for opportunities to enhance the capital structure.
• Comply with new accounting standards: ASU No. 2025-06 (effective fiscal 2029/2030), ASU No. 2025-05 (effective fiscal 2027/2028), ASU No. 2023-09 (effective fiscal 2026), and ASU No. 2024-03 (effective fiscal 2028/2029).
• Monitor and manage risks related to international operations, including political, economic, regulatory, and currency fluctuations.
• Address potential future capital raising needs through equity or debt financing.
• Continue to manage and mitigate risks related to cybersecurity threats, including those exploiting AI technology.
• Continue to develop and maintain robust internal policies and standards for responsible and compliant development, deployment, and use of AI technologies.

Key Dates

Recommendation

Zscaler demonstrates strong revenue growth and improved net retention, indicating robust demand for its cloud security platform. Strategic acquisitions in AI security and MDR position the company for future innovation. However, continued net losses, substantial cash outflows for acquisitions, and explicit warnings about macroeconomic headwinds causing elongated sales cycles suggest ongoing operational challenges and investment-heavy growth. The decision to cease reporting dollar-based net retention rate also removes a key transparency metric. Given the mixed signals of strong growth tempered by profitability concerns and market uncertainties, a "hold" recommendation is appropriate for investors to observe how the company navigates these investments and market conditions in the coming quarters.

Keywords

Cloud Security, Zero Trust, SaaS, Cybersecurity, AI Security, Agentic AI, MDR, Network Security, Digital Transformation, SEC Filing, 10-Q, Financial Results, Revenue Growth, Net Loss, Acquisitions, SPLXAI, Red Canary, ARR, Dollar-Based Net Retention, Convertible Senior Notes, Stock-Based Compensation, Operating Expenses, Risk Factors