10-Q: Zscaler Q2 Revenue Soars 26% Amid Heavy AI Investments

Zscaler reports strong revenue growth and increased operating cash flow for Q2 FY26, but net losses widen significantly due to aggressive investments in R&D and acquisitions, alongside macroeconomic headwinds.

Summary

• Revenue for the three months ended January 31, 2026, increased by 26% to $815.8 million, up from $647.9 million in the prior year.
• Net loss for the three months ended January 31, 2026, significantly widened to $34.3 million, compared to a net loss of $7.7 million in the same period last year.
• For the six months ended January 31, 2026, revenue grew 26% to $1,603.9 million, while net loss increased to $45.9 million from $19.8 million in the prior year period.
• Operating expenses rose by 25.3% for the quarter and 24.5% for the six-month period, driven by increased sales and marketing, research and development, and general and administrative costs.
• Net cash provided by operating activities for the six months ended January 31, 2026, was $652.4 million, a 27.7% increase from $510.8 million in the prior year.
• Free cash flow for the six months ended January 31, 2026, was $582.4 million, up 33.8% from $435.3 million in the prior year, with a free cash flow margin of 36%.
• Annual Recurring Revenue (ARR) as of January 31, 2026, reached $3,359 million, a 25.2% increase from $2,683 million in the prior year.
• The company completed two acquisitions: SPLXAI Inc. on October 31, 2025, for $40.6 million cash, and Red Canary Inc. on August 1, 2025, for $651.4 million cash, both aimed at enhancing AI security offerings.
• A restructuring plan completed during the three months ended October 31, 2025, resulted in $4.7 million in charges for employee severance and benefits.
• As of January 31, 2026, cash, cash equivalents, and short-term investments totaled $3,512.8 million.

Sentiment

Score: 5

Explanation: StockSavvy.ai views this filing as neutral to slightly negative. While Zscaler demonstrates strong revenue and free cash flow growth, indicating robust market demand for its services, the significant increase in net losses and management's acknowledgment of elongated sales cycles due to macroeconomic conditions present concerns about near-term profitability and operational efficiency.

Positives

• Revenue increased by 26% for both the three and six months ended January 31, 2026, demonstrating strong top-line growth.
• Net cash provided by operating activities grew by 27.7% to $652.4 million for the six months ended January 31, 2026.
• Free cash flow increased by 33.8% to $582.4 million, with a healthy free cash flow margin of 36% for the six-month period.
• Annual Recurring Revenue (ARR) grew by 25.2% to $3,359 million, indicating continued strong subscription growth.
• Strategic acquisitions of SPLXAI Inc. and Red Canary Inc. are expected to integrate AI technology and accelerate Agentic AI-driven security operations.
• Interest income increased by 10% for both the three and six months, driven by a larger balance of cash equivalents and short-term investments.

Negatives

• Net loss significantly widened to $34.3 million for the three months ended January 31, 2026, compared to $7.7 million in the prior year.
• Net loss for the six months ended January 31, 2026, increased to $45.9 million from $19.8 million in the prior year period.
• Operating expenses increased substantially across all categories (Sales & Marketing +20%, R&D +34%, G&A +29% for the quarter), contributing to the increased net loss.
• Net cash used in investing activities dramatically increased to $1,863.1 million for the six months, primarily due to significant business acquisitions and purchases of short-term investments.
• Customer cautiousness and elongated approval processes for larger deals are expected to continue in the near term due to the uncertain economic environment.

Risks

• The company has a history of losses and may not achieve or sustain profitability in the future, with an accumulated deficit of $1,235.5 million as of January 31, 2026.
• Failure of organizations to adopt the cloud platform or keep pace with industry changes, particularly in artificial intelligence, could adversely affect business growth.
• Inability to attract new customers or retain existing customers, or expand their subscriptions, could harm future results of operations.
• Intense and increasing competition in the network security market, including from established vendors and new entrants leveraging AI, could lead to market share loss.
• Operating results may fluctuate significantly due to factors like market acceptance, sales cycles, operating expenses, and macroeconomic conditions.
• Any interruption or delay in the delivery of services, including due to defects, errors, or infrastructure failures, could damage reputation and business.
• Actual or perceived failure of the cloud platform to block malware or prevent security breaches could harm reputation and negatively impact financial results.
• Business and growth depend significantly on the success of relationships with channel partners, who may promote competitors or cease marketing efforts.
• Reliance on key technical, sales, and management personnel, and the inability to attract and retain qualified talent, could harm the business.
• Claims by others of intellectual property infringement or other lawsuits could result in significant costs and harm the business.
• International operations expose the company to significant risks, including political/economic uncertainty, regulatory changes, and currency fluctuations.
• Issues in the development, use, and execution of AI and ML, combined with an uncertain regulatory environment, may harm the business.
• Reliance on a limited number of suppliers for cloud platform components and systems could lead to disruptions or increased costs.
• Repayment of the $1,725.0 million Convertible Senior Notes due 2028 will require a significant amount of cash.
• Exposure to fluctuations in currency exchange rates could negatively affect operating results, despite hedging programs.
• Counterparty default risks exist with financial institutions for cash, investments, and derivative contracts.
• Corporate structure and intercompany arrangements are subject to tax laws of various jurisdictions, potentially leading to additional taxes.
• The ability to use net operating loss carryforwards and certain other tax attributes may be limited.

Future Outlook

The company expects to continue incurring net losses for the foreseeable future due to ongoing significant investments in sales and marketing, research and development, and addressing legal matters. Customer cautiousness is anticipated to persist in the near term, leading to elongated sales cycles and delays in large deals. Despite these challenges, management believes current investments will positively impact the business and results in the long term. Existing cash, cash equivalents, and short-term investments are deemed sufficient to fund operations for at least the next 12 months. The company is also monitoring the potential impact of OECD Pillar Two global minimum tax rules on its income tax provision starting in fiscal 2027.

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 intend to balance these investments in future growth with a continued focus on managing our results of operations and investing judiciously.
• We believe that our existing cash, cash equivalents and short-term investments will be sufficient to fund our working capital, capital expenditure and convertible senior notes repayment requirements for at least the next 12 months from the date of issuance of our financial statements.

Industry Context

StockSavvy.ai notes that Zscaler operates in a rapidly evolving cybersecurity landscape, driven by increasing cloud adoption, workforce mobility, and the transformative impact of AI. The company's focus on Zero Trust principles and AI-driven security operations aligns with the industry's shift away from traditional perimeter security. The growth in state-sponsored cyber activity and the increasing sophistication of AI-enabled cyber threats underscore the critical demand for advanced cloud security solutions. Regulatory changes, such as the OECD's Base Erosion and Profit Shifting recommendations and the implementation of global minimum tax rules (Pillar Two), are also shaping the operational and financial environment for global technology companies.

Legal Proceedings

• The company is a party to various litigation matters and claims arising in the ordinary course of business, including patent, commercial, product liability, employment, class action, whistleblower, and regulatory investigations.
• No pending or threatened legal proceeding is deemed likely to have a material adverse effect on future financial results or operations.
• Litigation expenses are difficult to estimate and can adversely affect results of operations.

Stakeholder Impact

• Shareholders face potential dilution from future equity raises and stock price volatility, with no dividends expected in the foreseeable future.
• Employees are impacted by ongoing investments in headcount, stock-based compensation, and potential restructuring efforts, as well as intense competition for skilled professionals.
• Customers may experience elongated sales cycles for large deals due to macroeconomic conditions and rely on the company for continuous, high-quality cloud security services.
• Channel partners are critical for revenue growth, and their performance directly impacts the company's ability to expand its customer base.
• Creditors, particularly holders of the 2028 Convertible Senior Notes, are exposed to the company's ability to generate sufficient cash for debt repayment.

Next Steps

• Complete the initial accounting for the acquisition of SquareX Holdings, Inc. during the third quarter of fiscal 2026.
• Monitor developments regarding the OECD's Pillar Two global minimum tax rules and assess their potential impact on the income tax provision beginning in fiscal 2027.
• Continue significant investments in sales and marketing to expand the customer base and market penetration.
• Continue investing in research and development to enhance cloud platform functionality, improve reliability, and access new customer markets.
• Balance future growth investments with a continued focus on managing results of operations and investing judiciously.

Key Dates

Keywords

Cloud Security, Cybersecurity, SaaS, Zero Trust, AI Security, Agentic AI, Network Security, SEC Filing, 10-Q, Zscaler, ZS