10-Q: Zscaler Reports Strong Q3 FY26 Growth Amidst AI Integration

Zscaler, Inc. announced its Q3 FY26 results, showcasing a 25% year-over-year revenue increase driven by customer expansion and new client acquisition, while also detailing strategic acquisitions to bolster AI security capabilities.

Summary

• Zscaler reported a 25% year-over-year increase in revenue for the third quarter of fiscal year 2026, reaching $850.5 million, compared to $678.0 million in the prior year period.
• For the nine months ended April 30, 2026, revenue grew by 26% to $2.45 billion, up from $1.95 billion in the same period last year.
• The company experienced a net loss of $13.9 million for the third quarter, an increase from a net loss of $4.1 million in the prior year quarter.
• For the nine-month period, the net loss widened to $59.8 million from $23.9 million in the prior year.
• The company completed three strategic acquisitions in the prior fiscal year: SquareX, SPLXAI Inc., and Red Canary Inc., aimed at enhancing its AI security offerings and Zero Trust Exchange platform.
• Zscaler's cash, cash equivalents, and short-term investments totaled $3.54 billion as of April 30, 2026.
• The company announced a definitive agreement to acquire Symmetry Systems, Inc. for $175 million, expected to close in Q4 FY26.

Sentiment

Score: 6

Explanation: StockSavvy.ai views this as a mixed sentiment; while revenue growth and strategic acquisitions are positive, the widening net loss and increased operating expenses are concerns.

Positives

• Revenue increased by 25% year-over-year to $850.5 million for the three months ended April 30, 2026.
• Revenue for the nine months ended April 30, 2026, increased by 26% to $2.45 billion.
• Customer base grew by 17% year-over-year as of April 30, 2026.
• Gross margin remained stable at 77% for both the three and nine-month periods.
• Non-GAAP gross margin improved to 81% for the three months and 80% for the nine months.
• Non-GAAP operating margin was 23% for the three months and 22% for the nine months.
• Free cash flow increased to $136.0 million for the three months and $718.4 million for the nine months.
• Annual Recurring Revenue (ARR) grew to $3.53 billion as of April 30, 2026.
• Acquisitions of SquareX, SPLXAI Inc., and Red Canary Inc. are expected to enhance AI security capabilities.
• Agreement to acquire Symmetry Systems, Inc. for $175 million to further bolster AI security offerings.

Negatives

• Net loss for the three months ended April 30, 2026, was $13.9 million, compared to a net loss of $4.1 million in the prior year.
• Net loss for the nine months ended April 30, 2026, was $59.8 million, compared to a net loss of $23.9 million in the prior year.
• Operating expenses increased across all categories: sales and marketing (18%), research and development (37%), and general and administrative (32%) for the three-month period.
• Operating expenses also increased significantly for the nine-month period: sales and marketing (20%), research and development (34%), and general and administrative (26%).
• The company continues to expect net losses for the foreseeable future due to ongoing investments.
• Interest expense increased by 37% for the three months and 21% for the nine months.
• Other income (expense), net, shifted from a net gain of $0.7 million to a net expense of $4.1 million for the three-month period.

Risks

• The company has a history of losses and may not achieve or sustain profitability.
• Failure to achieve broad market acceptance of its cloud platform or keep pace with industry changes, particularly due to AI, could adversely affect business and operating results.
• Intense and increasing competition could lead to loss of market share.
• Customer cautiousness due to the uncertain economic environment may lengthen sales cycles and delay large deals.
• Failure to attract new customers or retain existing ones, or to expand their usage, could harm future results.
• Interruption or delay in the delivery of services could damage reputation and business.
• Actual or perceived failure of the cloud platform to block malware or prevent security breaches could harm reputation.
• Reliance on channel partners for a significant portion of revenue.
• Failure to develop or introduce new enhancements, including AI capabilities, could impair competitiveness.
• Potential for breaches of cloud platform or internal systems could damage reputation and financial results.
• Loss of key technical, sales, or management personnel could harm the business.
• Litigation and other lawsuits could result in significant costs and harm the business.
• Risks associated with international operations, including political and economic uncertainty.
• Repayment of debt may require significant cash, potentially impacting working capital.
• The market price of common stock may be volatile, leading to potential loss of investment.
• The company's business is subject to cybersecurity risks, including those amplified by AI.
• Evolving AI and ML regulations and ethical considerations could impact business operations and costs.
• Reliance on third-party technology and suppliers carries risks of disruption and intellectual property issues.

Future Outlook

The company expects to continue incurring net losses for the foreseeable future due to ongoing investments in sales and marketing, research and development, and potential legal matters. Management believes existing cash, cash equivalents, and short-term investments are sufficient to fund working capital, capital expenditures, and debt repayment requirements for at least the next 12 months. Future capital needs may require additional equity or debt financing.

Management Comments

• We believe that most organizations have yet to fully make these investments [in secure cloud and AI adoption]. Because our cloud platform enables organizations to securely embrace digital transformation, we believe that the imperative for organizations to securely move to the cloud and safely realize the benefits of AI will increase demand for our cloud platform and broaden our customer base.
• As a result of the challenging and uncertain economic environment, potential new customers are carefully considering purchasing decisions, particularly for large expenditures. We expect customer cautiousness to continue in the near term, elongating our sales cycles and the timing of large deals.
• While these planned investments [in sales and marketing, R&D] will increase our operating expenses in the short term, we believe that over the long term these investments will help us to expand our customer base and grow our business.
• We expect our research and development expenses to continue to increase in absolute dollars for the foreseeable future, as we continue to invest in research and development efforts to enhance the functionality of our cloud platform, improve the reliability, availability and scalability of our platform and access new customer markets.

Industry Context

StockSavvy.ai notes that Zscaler's performance aligns with the broader trend of increasing enterprise adoption of cloud-based security solutions and the growing importance of AI in cybersecurity. The company's strategic acquisitions and continued investment in R&D reflect the dynamic nature of the cybersecurity market, which is rapidly evolving with new threats and technologies.

Management Changes

Legal Proceedings

• The company is a party to various litigation matters and subject to claims arising in the ordinary course of business, including patent, commercial, product liability, employment, class action, whistleblower and other litigation and claims, as well as governmental and other regulatory investigations and proceedings.
• There is no pending or threatened legal proceeding that is likely to have a material adverse effect on future financial results or operations.

Stakeholder Impact

• Shareholders may experience dilution if the company issues additional equity or if convertible notes are converted.
• The market price of common stock may be volatile, impacting investor returns.
• Employees are subject to stock-based compensation, with some executives adopting trading arrangements.
• Customers rely on the continuous availability and security of Zscaler's cloud platform.
• Channel partners are critical to revenue generation and customer reach.

Next Steps

• Complete the acquisition of Symmetry Systems, Inc. in the fourth quarter of fiscal year 2026.
• Continue to invest in sales and marketing to drive revenue growth and market penetration.
• Continue to invest in research and development to enhance the cloud platform and integrate acquired technologies.
• Manage operating expenses while balancing investments for future growth.
• Monitor macroeconomic and geopolitical conditions and their impact on business operations and customer purchasing decisions.
• Continue to evaluate and manage risks related to cybersecurity, data privacy, and regulatory compliance.

Key Dates

Recommendation

Zscaler demonstrates strong revenue growth and strategic positioning in the cybersecurity market, particularly with its AI integration efforts. However, the widening net loss and increasing operating expenses, coupled with ongoing investments, suggest a cautious approach. While the company's long-term prospects appear solid, the current financial performance warrants a 'hold' rating until profitability improves and operating expense growth is better controlled.

Keywords

Zscaler, Form 10-Q, Quarterly Report, Cloud Security, Zero Trust, SaaS, AI Security, Cybersecurity, SEC Filing, Financial Results, Revenue Growth, Net Loss, Acquisitions, Symmetry Systems