ZS Q2 2026 Earnings Call Summary

Zscaler Q2 2026 Earnings Call Summary

1. Key Financial Results and Metrics

Revenue: $816 million, up 26% year-over-year and 4% sequentially, exceeding guidance.
Annual Recurring Revenue (ARR): Total ARR reached $3.4 billion, a 25% increase year-over-year. Net new ARR was $156 million, a 19% increase.
Free Cash Flow Margin: 36%, with a free cash flow margin of 20.7%, down from 22.1% year-over-year.
Gross Margin: Non-GAAP gross margin was 80.2%.
Operating Income: Non-GAAP operating income of $181 million, a 29% increase from $140 million in the prior year.
Customer Growth: 728 customers generating over $1 million in ARR, and 3,886 customers exceeding $100,000 in ARR, both up 18% year-over-year.

2. Strategic Updates and Business Highlights

AI Security: Launched AI Protect and Agentic Operations solutions, with significant demand noted. AI Protect saw rapid adoption, including large enterprise wins.
Zero Trust Everywhere: Customer base expanded to over 550, up from 130 a year ago, demonstrating strong adoption of the Zero Trust architecture.
Z-Flex Program: Launched to provide customers flexibility with multi-year commitments, generating over $290 million in total contract value (TCV) in Q2.
Acquisitions: Closed acquisition of SquareX to enhance Zero Trust capabilities in browser security. Integration of Red Canary is ongoing, but elevated churn was noted.

3. Forward Guidance and Outlook

Q3 Revenue Guidance: Expected between $834 million and $836 million, reflecting approximately 23% year-over-year growth.
Full Year ARR Guidance: Projected ARR of $3.730 billion to $3.745 billion, indicating about 24% growth year-over-year.
Net New ARR Growth: Expected to be approximately 9.5% for the full year, excluding Red Canary contributions.

4. Bad News, Challenges, or Points of Concern

Elevated Churn: Red Canary's churn is higher than Zscaler's typical rates, which could impact ARR growth despite the overall positive outlook.
Cost Pressures: Potential future impacts from rising prices for memory, storage, and processors as they procure equipment for data centers.
Competitive Landscape: Although Zscaler is performing well, the competitive dynamics remain challenging, with other players in the market and a need to differentiate from SASE vendors.

5. Notable Q&A Insights

Competitive Dynamics: CEO Jay Chaudhry noted that Zscaler's focus on Zero Trust continues to resonate with customers, leading to a strong win rate against competitors.
Sales Cycle Dynamics: The integration of AI into projects is accelerating sales cycles, with customers increasingly seeking comprehensive security solutions.
Budget Allocations: CIOs are willing to allocate budgets for security alongside AI projects, indicating a favorable environment for Zscaler's offerings.
Z-Flex Impact: Z-Flex is expected to drive long-term customer engagement and upsell opportunities, with a significant portion of new business coming from this model.

Overall, Zscaler reported strong financial performance and strategic advancements, particularly in AI security and Zero Trust solutions, while navigating challenges related to churn and competitive pressures.

ZS — Zscaler, Inc.