10-K: Zscaler's FY25 Annual Report: Growth Amidst Net Losses

Zscaler reports significant revenue growth in fiscal 2025, driven by cloud platform adoption and AI security, despite continued net losses and increased operating expenses.

Summary

• Revenue increased by 23% to $2,673.1 million in fiscal 2025, up from $2,167.8 million in fiscal 2024.
• Net loss improved to $41.5 million in fiscal 2025, compared to $57.7 million in fiscal 2024 and $202.3 million in fiscal 2023.
• The customer base expanded to over 9,400 customers as of July 31, 2025, including approximately 40% of the Forbes Global 2000 and over 45% of Fortune 500 companies.
• Dollar-based net retention rate was 114% for the trailing 12 months ended July 31, 2025.
• The company completed the acquisition of Red Canary, Inc. on August 1, 2025, to enhance security operations offerings.
• Issued $1,725.0 million in 0.0% Convertible Senior Notes due 2028 and fully repaid the $1,150.0 million 2025 Notes.

Sentiment

Score: 7

Explanation: The company demonstrates strong revenue growth and an improving net loss trend, indicating positive operational momentum. Strategic acquisitions and a focus on AI-driven security are positive for future positioning. However, continued net losses and increasing operating expenses, along with a slight dip in net retention rate and macroeconomic headwinds, present ongoing challenges.

Positives

• Strong revenue growth of 23% year-over-year in fiscal 2025, reaching $2,673.1 million.
• Improved net loss, reducing from $57.7 million in fiscal 2024 to $41.5 million in fiscal 2025.
• Expanding customer base, growing by 9% from fiscal 2024 to fiscal 2025, with significant penetration in large enterprises (40% of Forbes Global 2000, 45% of Fortune 500).
• High dollar-based net retention rate of 114% indicates strong customer loyalty and expansion within existing accounts.
• Strategic acquisition of Red Canary, Inc. to enhance security operations and AI-driven threat detection capabilities.
• Robust and globally distributed cloud platform across over 160 public exchanges and thousands of private exchanges, blocking over 225 million threats daily.
• Continued innovation in AI and Machine Learning (ML) capabilities across the platform for threat detection, data classification, and operational efficiency.
• Strong liquidity with cash, cash equivalents, and short-term investments totaling $3,572.4 million as of July 31, 2025.
• Successful refinancing of debt by issuing $1,725.0 million in 0.0% Convertible Senior Notes due 2028 and repaying the 2025 Notes.

Negatives

• Continued net losses, with $41.5 million in fiscal 2025, and an expectation to incur losses for the foreseeable future.
• Increased operating expenses across sales and marketing, research and development, and general and administrative functions in absolute dollars.
• Gross margin slightly decreased from 78% in fiscal 2024 to 77% in fiscal 2025, primarily due to higher data center operating costs and employee-related expenses.
• Elongated sales cycles and increased scrutiny for large deals due to challenging macroeconomic conditions.
• Dollar-based net retention rate decreased from 116% in fiscal 2024 to 114% in fiscal 2025.
• Executive departures in Q4 fiscal 2025, including the former Chief Financial Officer, resulted in incremental stock-based compensation expense and reversals.

Risks

• Inability to achieve or sustain profitability in the future due to continued net losses and increasing operating expenses.
• Adverse impact on business if organizations do not widely adopt the cloud platform or if traditional on-premises solutions remain entrenched.
• Harm to future results if unable to attract new customers or if existing customers do not renew or expand subscriptions.
• Intense and increasing competition from established network and security vendors and emerging cloud-based solution providers.
• Service interruptions or delays could damage reputation and negatively impact business.
• Actual or perceived security breaches of the cloud platform or internal networks could harm reputation and financial results.
• Dependence on channel partners for revenue growth, with risks if partners are ineffective or promote competitors.
• Reliance on key technical, sales, and management personnel, with loss or inability to attract qualified staff harming the business.
• Exposure to significant risks from international operations, including political/economic uncertainty, regulatory changes, and currency fluctuations.
• Challenges in developing, using, and executing AI and ML, combined with an uncertain regulatory environment, may harm the business.
• Inability to obtain or maintain rights to third-party technology incorporated into the cloud platform.
• Risks associated with 'open source' software, including potential litigation or requirements to release proprietary code.
• Reliance on a limited number of suppliers for critical components, risking disruptions or delays.
• Claims of intellectual property infringement by others could result in significant costs and harm the business.
• Adverse economic conditions or reduced IT security spending may negatively impact revenue and profitability.
• Failure to comply with various federal, state, local, and foreign laws and regulations could lead to fines and penalties.
• Exposure to counterparty default risks with financial institutions.
• Impact of global economic disruptions and changing macroeconomic and geopolitical conditions.
• Concentration of stock ownership with insiders may limit other stockholders' influence.
• Provisions in charter documents and Delaware law could make company acquisition more difficult.
• Market price volatility of common stock.
• Sales of substantial amounts of common stock could reduce price and dilute voting power.
• No intention to pay dividends in the foreseeable future.
• Inaccurate or unfavorable research from industry or financial analysts could cause stock price decline.
• Exclusive forum provisions in charter documents could limit stockholders' ability to obtain a favorable judicial forum.
• Servicing debt (2028 Notes) requires significant cash, potentially impacting funds for other purposes.
• Capped call transactions may affect the value of common stock.
• Counterparty risk with respect to capped call transactions.
• Business subject to 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 or incidents.
• Subject to anti-corruption, anti-bribery, and similar laws, with noncompliance leading to criminal penalties or significant fines and harm to business and reputation.
• Failure to maintain an effective system of internal controls could impair ability to produce timely and accurate financial statements or comply with applicable regulations.
• Incorrect estimates or judgments relating to critical accounting policies could adversely affect results of operations.
• Reliance on third parties for certain essential financial and operational services, and a failure or disruption in these services could materially and adversely affect ability to manage business effectively.
• Involvement in litigation that may materially and adversely affect the company.

Future Outlook

We expect to continue incurring net losses for the foreseeable future due to significant investments in sales, marketing, research and development, and to address legal matters. Revenue growth rates are anticipated to decline as the revenue base increases. Customer cautiousness and elongated approval processes for large deals are expected to persist in the near term due to uncertain economic conditions. We aim to balance these growth investments with a focus on managing results and judicious spending, anticipating a slight increase in gross margin over the long term.

Management Comments

• We expect we will continue to incur net losses for the foreseeable future.
• We believe that our cloud platform offers superior protection to our customers, who are moving their applications and data to the cloud and embracing AI applications and agents.
• We believe that most organizations have yet to fully make these investments [in network and security architectures].
• 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 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

The company operates in a highly dynamic cybersecurity market characterized by rapid technological change, increasing cloud adoption, and the transformative impact of AI. Traditional perimeter security models are becoming obsolete, driving a fundamental shift towards Zero Trust architectures. Zscaler is positioning itself as a leader in this transition, particularly through its convergence of Zero Trust and AI, to address emerging cyber threats and IT challenges. The market remains intensely competitive, with both established legacy vendors and new cloud-native solutions vying for market share.

Comparison to Industry Standards

• Our cloud platform integrates many point products offered by competitors, serving as a key differentiator.
• Competitors, often with greater resources and brand recognition, may leverage existing relationships or product bundling to gain business, potentially offering services at zero or negative margins.
• Many organizations have substantial existing investments in appliance-based network security, which can create resistance to adopting new cloud-native solutions.
• New technologies, including AI-enabled solutions, could emerge from competitors at lower prices or with greater efficiency, potentially impacting our competitive standing.

Management Changes

Corporate Governance

Legal Proceedings

• We are 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 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 our future financial results or operations.
• Litigation can be time-consuming, divert management's attention and resources, cause us to incur significant expenses or liability, and/or require us to change our business practices.

Stakeholder Impact

• Shareholders: Potential for dilution from equity issuances (e.g., 2028 Notes conversion), stock price volatility, and reliance on price appreciation for returns as no dividends are planned.
• Employees: Impacted by management changes, restructuring charges, and the company's ability to attract and retain talent in a competitive market. Benefits from competitive compensation, equity incentives, and wellness programs.
• Customers: Benefit from enhanced cloud security, AI-driven threat detection, and expanded platform capabilities. May experience longer sales cycles due to macroeconomic conditions.
• Suppliers/Vendors: We rely on a limited number of suppliers for critical components, creating potential supply chain risks.
• Regulatory Bodies: We are subject to various federal, state, local, and foreign laws and regulations, including those related to privacy, data protection, and AI, requiring ongoing compliance.

Next Steps

• Continue investing in research and development to offer new solutions and enhance existing ones on the cloud platform.
• Further invest in sales and marketing to expand the customer base, broaden brand awareness, and deepen channel partner relationships.
• Integrate the Red Canary, Inc. acquisition to enhance security operations offerings and leverage the Data Fabric for Security.
• Evaluate market conditions and various financing alternatives (including equity, equity-linked, or debt securities) to enhance the capital structure.
• Complete the initial accounting for the Red Canary acquisition during the first quarter of fiscal 2026.
• Continue to evaluate the impact of the One Big Beautiful Bill Act (OBBBA) on consolidated financial statements in fiscal 2026.
• Implement new accounting standards: ASU No. 2023-09 (Income Tax Disclosures) effective in fiscal 2026, ASU No. 2025-05 (Credit Losses for Accounts Receivable and Contract Assets) effective in fiscal 2027, and ASU No. 2024-03 (Disaggregation of Income Statement Expenses) effective in fiscal 2028.

Key Dates

Recommendation

Zscaler demonstrates strong revenue growth and an improving net loss trend, indicating operational progress. The strategic focus on Zero Trust and AI, coupled with the Red Canary acquisition, positions the company well in a growing market. However, the company continues to incur net losses, faces increasing operating expenses, and a slight decline in net retention rate. Macroeconomic headwinds are also extending sales cycles. While the long-term outlook appears promising due to market trends and innovation, the current financial performance does not yet warrant a 'buy' given the continued losses and competitive pressures, but the positive trajectory and strategic moves suggest avoiding a 'sell.' A 'hold' recommendation allows investors to monitor the company's ability to translate growth into sustained profitability and manage operational costs effectively.

Keywords

Zscaler, Cybersecurity, Cloud Security, Zero Trust, AI Security, Data Security, SaaS, Network Security, SEC Filing, 10-K, Financial Report, Cloud Platform, Threat Detection, Risk Management, Corporate Governance