Zscaler Growth Outlook Weighs on Shares Despite Strong Q4 and Rising AI Security Demand

Zscaler’s Strong Quarter Meets a More Cautious Growth Outlook

Zscaler (ZS) reported fiscal fourth-quarter revenue of $898.2 million, up 25% year over year and above the $877 million consensus estimate. Adjusted earnings rose 34% to $1.19 per share, topping expectations of $1.09.

Despite the beat and above-consensus first-quarter guidance, ZS stock fell about 3% to 4% Friday. Investor attention shifted toward fiscal 2027, when Zscaler expects revenue and annual recurring revenue growth to moderate to roughly 17%, while quarterly free cash flow fell sharply from a year earlier.

Key Points

• Zscaler Q4 revenue increased 25% to $898.2 million and adjusted EPS reached $1.19, both exceeding Wall Street expectations.
• ZS stock fell about 3% to 4% as fiscal 2027 guidance pointed to revenue and ARR growth of roughly 17%, down from approximately 25% growth in fiscal 2026.
• Security for AI bookings increased more than 50% sequentially and the pipeline grew 75%, but newer AI offerings are expected to make a more meaningful contribution in the second half of fiscal 2027.

Zscaler Q4 Shows Strong Revenue and ARR Growth

Zscaler closed fiscal 2026 with continued growth across several core operating metrics.

Fourth-quarter revenue increased 25% year over year to $898.2 million, above the $877 million consensus estimate. Adjusted EPS increased to $1.19 from $0.89 a year earlier, exceeding the $1.09 expected by analysts.

Annual recurring revenue, or ARR, reached $3.77 billion, up 25%. ARR measures the annualized value of recurring customer contracts and provides an indication of the scale of Zscaler’s subscription business.

Net new ARR totaled $246 million, an increase of 24% year over year. Excluding the $141 million contribution from Red Canary, ARR increased 20% to $3.63 billion and organic net new ARR rose 17% to $232 million.

Remaining performance obligations increased 27% to approximately $7.4 billion, with 45% classified as current. Deferred revenue increased 19% to $2.93 billion.

Zscaler also continued expanding its large-enterprise customer base. The company ended the quarter with 785 customers generating more than $1 million in ARR, up 18%, and 4,182 customers above $100,000, up 20%. Net revenue retention remained near 115%.

Profitability improved on an adjusted operating basis. Non-GAAP operating income reached $218.4 million, above the $207 million estimate, while non-GAAP operating margin expanded 220 basis points to 24.3%.

Free cash flow provided a contrasting signal. It fell 65% year over year to $60.8 million, below the $66.9 million estimate, with free cash flow margin at 6.8%. Zscaler accelerated purchases of data-center equipment ahead of expected increases in hardware costs.

Why Is ZS Stock Falling Despite an Earnings Beat?

The earnings reaction reflects a gap between Zscaler’s strong fourth-quarter performance and the slower growth embedded in its fiscal 2027 outlook.

For the first quarter, Zscaler expects revenue of $935 million to $939 million, above the $927 million consensus estimate and representing approximately 19% year-over-year growth. Adjusted EPS guidance of $1.15 to $1.16 also exceeds the $1.08 estimate.

The full-year outlook, however, calls for revenue of $3.908 billion to $3.938 billion, implying growth of approximately 16.6% to 17.5%. Zscaler expects fiscal 2027 ARR of $4.396 billion to $4.426 billion, representing growth of approximately 16.6% to 17.4%.

That represents a moderation from the approximately 25% revenue and ARR growth recorded in fiscal 2026.

The annual ARR outlook also implies only about 4% growth in net new ARR at the midpoint. Zscaler expects just 15% of annual net new ARR during the first quarter and 37% during the first half, making the fiscal 2027 growth profile weighted more heavily toward the second half.

Management attributed that timing partly to sales leadership transitions, slower initial ramps for newer products and continued elevated churn among standalone Red Canary customers.

Zscaler is also restructuring its workforce, with approximately 3% of employees affected. The company expects restructuring charges of $30 million to $33 million, with most of those costs expected during the first half of fiscal 2027.

AI Security Demand Expands as Zscaler Broadens Its Platform

The fiscal 2027 slowdown comes as Zscaler reports growing demand for products tied to artificial intelligence and security beyond traditional user-seat subscriptions.

Security for AI bookings increased more than 50% sequentially during the fourth quarter, while the related pipeline expanded 75%. Approximately 70% of Security for AI deals included Zscaler’s data security solution.

CEO Jay Chaudhry described AI as the company’s largest demand tailwind as enterprises contend with faster vulnerability exploitation and risks associated with autonomous agents.

Zscaler plans to launch Agentic SecOps on Sept. 9, combining its existing telemetry with Red Canary capabilities. Zero Trust Exchange for agents and Endpoint AI Security are expected to scale during the second half of fiscal 2027.

The company is also expanding beyond products priced primarily by user seats. Non-seat-based metered offerings generated approximately 30% of new and upsell annual contract value during both Q4 and fiscal 2026, while ARR associated with those products more than doubled year over year.

Z-Flex, Zscaler’s purchasing program, generated more than $770 million in total contract value during Q4 and more than $1.7 billion for fiscal 2026. Participating customers generated an average ARR increase of nearly 30%.

Management also reported its highest quarterly sales productivity in Q4 and its best annual productivity in four years. The company is adding dedicated sales executives focused on acquiring new customers while transitioning toward a more account-focused sales organization.

What It Means for Investors

The market reaction to Zscaler earnings highlights a tension between current operating momentum and expectations for slower fiscal 2027 growth.

The fourth quarter delivered 25% revenue growth, 25% ARR growth, higher net new ARR and an expanding adjusted operating margin. Enterprise penetration continued to increase, while AI security bookings and pipeline growth provided evidence of demand for newer products.

Fiscal 2027 guidance presents a different growth profile. Revenue and ARR growth are expected to moderate to approximately 17%, with only 37% of annual net new ARR expected during the first half of the year.

Free cash flow also weakened sharply during Q4, although Zscaler expects a fiscal 2027 free cash flow margin of 23% to 23.5%. Non-GAAP operating margin is expected to be approximately 23.7%.

The timing of newer products adds another measurable component. Agentic SecOps, Endpoint AI Security and Zero Trust Exchange for agents are not expected to scale meaningfully until later in fiscal 2027, while Red Canary continues to experience elevated churn as its technology is integrated into Zscaler’s broader offering.

For investors following ZS stock news, the next results can therefore be evaluated through organic ARR growth, new-customer execution, free cash flow, Red Canary retention and the conversion of growing AI security demand into recurring revenue.

Conclusion

Zscaler ended fiscal 2026 with a stronger-than-expected quarter, including 25% revenue growth, 25% ARR growth and adjusted earnings above Wall Street expectations.

The market’s focus, however, shifted toward fiscal 2027. Zscaler expects revenue and ARR growth to slow to approximately 17%, with much of its net new ARR expected later in the fiscal year. Free cash flow also fell sharply during the fourth quarter.

At the same time, Security for AI bookings increased more than 50% sequentially, the related pipeline expanded 75%, and non-seat-based offerings continued to grow rapidly.

The fiscal 2027 results will increasingly show whether those demand indicators translate into ARR growth as Zscaler works through its sales transition, integrates Red Canary and brings newer AI security products to market.

FAQs

Why is ZS stock falling after earnings?

ZS stock fell about 3% to 4% Friday despite stronger-than-expected fourth-quarter results as investors focused on slower fiscal 2027 growth. Zscaler expects full-year revenue and ARR growth of roughly 17%, compared with approximately 25% growth in fiscal 2026.

How did Zscaler perform in fiscal Q4 2026?

Zscaler reported fiscal Q4 revenue of $898.2 million, up 25% year over year and above the $877 million consensus estimate. Adjusted EPS was $1.19, compared with expectations of $1.09, while ARR reached $3.77 billion.

What is Zscaler’s fiscal 2027 guidance?

Zscaler expects fiscal 2027 revenue of $3.908 billion to $3.938 billion and ARR of $4.396 billion to $4.426 billion. Adjusted EPS is expected to range from $4.86 to $4.90, while free cash flow margin is projected at 23% to 23.5%.

How is AI affecting Zscaler’s business?

Zscaler said Security for AI bookings increased more than 50% sequentially in Q4 and its pipeline expanded 75%. Approximately 70% of Security for AI deals included the company’s data security solution.

What matters next for Zscaler?

Key operating measures include organic ARR growth, new-customer execution, Red Canary retention, free cash flow and the contribution from newer AI security offerings. Agentic SecOps and other newer AI products are expected to contribute more meaningfully during the second half of fiscal 2027.

This article was created with AI assistance and reviewed by an editor. For details, please refer to our Terms of Use.

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